PART
I
Unless
the context requires otherwise, references in this report to “XTL,” “we,” “us”
and “our” refer to XTL Biopharmaceuticals Ltd. and our wholly-owned
subsidiaries, XTL Biopharmaceuticals, Inc. and XTL Development, Inc. We have
prepared our consolidated financial statements in United States, or US, dollars
and in accordance with US generally accepted accounting principles, or US GAAP.
All references herein to "dollars" or "$" are to US dollars, and all references
to "Shekels" or "NIS" are to New Israeli Shekels.
ITEM
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not
applicable
ITEM
2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not
applicable
ITEM
3. KEY INFORMATION
Selected
Financial Data
The
table
below presents selected statement of operations and balance sheet data for
the
fiscal years ended and as of December 31, 2007, 2006, 2005, 2004 and 2003.
We
have derived the selected financial data for the fiscal years ended December
31,
2007, 2006, and 2005, and as of December 31, 2007 and 2006, from our audited
consolidated financial statements, included elsewhere in this report and
prepared in accordance with US GAAP. We have derived the selected financial
data
for fiscal years ended December 31, 2004 and 2003 and as of December 31, 2005,
2004 and 2003, from audited financial statements not appearing in this report,
which have been prepared in accordance with US GAAP. You should read the
selected financial data in conjunction with “Item 5. Operating and Financial
Review and Prospects,” “Item 8. Financial Information” and “Item 18. Financial
Statements.”
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|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
(In
thousands, except share and per share amounts)
|
|
|
Statements
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursed
out-of-pocket expenses
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2,743
|
|
$
|
3,269
|
|
$
|
—
|
|
|
License
|
|
|
907
|
|
|
454
|
|
|
454
|
|
|
185
|
|
|
—
|
|
|
|
|
|
907
|
|
|
454
|
|
|
3,197
|
|
|
3,454
|
|
|
—
|
|
|
Cost
of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursed
out-of-pocket expenses
|
|
|
—
|
|
|
—
|
|
|
2,743
|
|
|
3,269
|
|
|
—
|
|
|
License
(with respect to royalties)
|
|
|
110
|
|
|
54
|
|
|
54
|
|
|
32
|
|
|
—
|
|
|
|
|
|
110
|
|
|
54
|
|
|
2,797
|
|
|
3,301
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
797
|
|
|
400
|
|
|
400
|
|
|
153
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development costs
|
|
|
18,998
|
|
|
10,229
|
|
|
7,313
|
|
|
11,985
|
|
|
14,022
|
|
|
Less
participations
|
|
|
56
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,229
|
|
|
|
|
|
18,942
|
|
|
10,229
|
|
|
7,313
|
|
|
11,985
|
|
|
10,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process
research and development
|
|
|
—
|
|
|
—
|
|
|
1,783
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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General
and administrative
|
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5,582
|
|
|
5,576
|
|
|
5,457
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|
|
4,134
|
|
|
3,105
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|
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Business
development costs
|
|
|
2,008
|
|
|
641
|
|
|
227
|
|
|
810
|
|
|
664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Operating
loss
|
|
|
(25,735
|
)
|
|
(16,046
|
)
|
|
(14,380
|
)
|
|
(16,776
|
)
|
|
(14,562
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Financial
and other income, net
|
|
|
590
|
|
|
1,141
|
|
|
443
|
|
|
352
|
|
|
352
|
|
|
Income
taxes
|
|
|
206
|
|
|
(227
|
)
|
|
(78
|
)
|
|
(49
|
)
|
|
(78
|
)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Loss
for the period
|
|
$
|
(24,939
|
)
|
$
|
(15,132
|
)
|
$
|
(14,015
|
)
|
$
|
(16,473
|
)
|
$
|
(14,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per ordinary share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.11
|
)
|
$
|
(0.08
|
)
|
$
|
(0.08
|
)
|
$
|
(0.12
|
)
|
$
|
(0.13
|
)
|
|
Weighted
average shares outstanding
|
|
|
228,492,818
|
|
|
201,737,295
|
|
|
170,123,003
|
|
|
134,731,766
|
|
|
111,712,916
|
|
|
|
|
As
of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
(In
thousands)
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
cash equivalents, bank deposits and
trading
and marketable securities
|
|
$
|
12,977
|
|
$
|
25,347
|
|
$
|
13,360
|
|
$
|
22,924
|
|
$
|
22,262
|
|
|
Working
capital
|
|
|
8,532
|
|
|
22,694
|
|
|
11,385
|
|
|
20,240
|
|
|
19,967
|
|
|
Total
assets
|
|
|
14,127
|
|
|
26,900
|
|
|
15,151
|
|
|
25,624
|
|
|
24,853
|
|
|
Long-term
obligations
|
|
|
194
|
|
|
738
|
|
|
1,493
|
|
|
2,489
|
|
|
1,244
|
|
|
Total
shareholders’ equity
|
|
|
8,564
|
|
|
22,760
|
|
|
11,252
|
|
|
19,602
|
|
|
20,608
|
|
Risk
Factors
Before
you invest in our ordinary shares or American Depositary Receipts representing
American Depositary Shares, which we refer to in this report as ADRs, you should
understand the high degree of risk involved. You should carefully consider
the
risks described below and other information in this report, including our
financial statements and related notes included elsewhere in this report, before
you decide to purchase our ordinary shares or ADRs. If any of the following
risks actually occur, our business, financial condition and operating results
could be adversely affected. As a result, the trading price of our ordinary
shares or ADRs could decline and you could lose part or all of your
investment.
Risks
Related to Our Business
We
have incurred substantial operating losses since our inception. We expect to
continue to incur losses in the future and may never become profitable.
You
should consider our prospects in light of the risks and difficulties frequently
encountered by development stage companies. We have incurred operating losses
since our inception and expect to continue to incur operating losses for the
foreseeable future. As of December 31, 2007, we had an accumulated deficit
of
approximately $139.9 million. We have not yet commercialized any of our drug
candidates or technologies and cannot be sure we will ever be able to do so.
Even if we commercialize one or more of our drug candidates or technologies,
we
may not become profitable. Our ability to achieve profitability depends on
a
number of factors, including our ability to complete our development efforts,
obtain regulatory approval for our drug candidates and technologies and
successfully commercialize them.
If
we are unable to successfully complete our clinical trial programs for our
drug
candidates, or if such clinical trials take longer to complete than we project,
our ability to execute our current business strategy will be adversely affected.
Whether
or not and how quickly we complete clinical trials is dependent in part upon
the
rate at which we are able to engage clinical trial sites and, thereafter, the
rate of enrollment of patients, and the rate at which we are able to collect,
clean, lock and analyze the clinical trial database. Patient enrollment is
a
function of many factors, including the size of the patient population, the
proximity of patients to clinical sites, the eligibility criteria for the study,
the existence of competitive clinical trials, and whether existing or new drugs
are approved for the indication we are studying. We are aware that other
companies are planning clinical trials that will seek to enroll patients with
the same diseases as we are studying. In addition, the multi-national nature
of
our studies adds another level of complexity and risk as the successful
completion of those studies is subject to events affecting countries outside
the
United States. If we experience delays in identifying and contracting with
sites
and/or in patient enrollment in our clinical trial programs, we may incur
additional costs and delays in our development programs, and may not be able
to
complete our clinical trials on a cost-effective or timely basis.
If
third parties on which we rely for clinical trials do not perform as
contractually required or as we expect, we may not be able to obtain regulatory
approval for or commercialize our products.
We
depend
on independent clinical investigators, contract research organizations and
other
third-party service providers to conduct the clinical trials of our drug
candidates and technologies and expect to continue to do so. We rely heavily
on
these parties for successful execution of our clinical trials, but we do not
control many aspects of their activities. Nonetheless, we are responsible for
confirming that each of our clinical trials is conducted in accordance with
the
general investigational plan and protocol. Our reliance on these third parties
that we do not control does not relieve us of our responsibility to comply
with
the regulations and standards of the US Food and Drug Administration, or the
FDA, relating to good clinical practices. Third parties may not complete
activities on schedule or may not conduct our clinical trials in accordance
with
regulatory requirements or the applicable trial’s plans and protocols. The
failure of these third parties to carry out their obligations could delay or
prevent the development, approval and commercialization of our products or
result in enforcement action against us.
If
the clinical data related to our drug candidates and technologies do not confirm
positive early clinical data or preclinical data, our corporate strategy and
financial results will be adversely impacted.
Our
drug
candidates and technologies are either in preclinical or clinical stages.
Specifically, our lead product candidate, Bicifadine, is in a Phase 2b clinical
trial for diabetic neuropathic pain and the Diversity Oriented Synthesis, or
DOS, program has not yet been tested in humans. In order for our candidates
to
proceed to later stage clinical testing, they must show positive clinical or
preclinical data. While Bicifadine has shown promising preclinical data and
has
also shown promising clinical data in the treatment of acute pain prior to
it
being in-licensed to us, preliminary results of pre-clinical or clinical tests
do not necessarily predict the final results, and promising results in
pre-clinical or early clinical testing might not be obtained in later clinical
trials. Drug candidates in the later stages of clinical development may fail
to
show the desired safety and efficacy traits despite having progressed through
initial clinical testing. Any negative results from future tests may prevent
us
from proceeding to later stage clinical testing which would materially impact
our corporate strategy and our financial results may be adversely impacted.
We
have limited experience in conducting and managing clinical trials necessary
to
obtain regulatory approvals.
If
our drug candidates and technologies do not receive the necessary regulatory
approvals, we will be unable to commercialize our products.
We
have
not received, and may never receive, regulatory approval for commercial sale
for
any of our products. We currently do not have any drug candidates or
technologies pending approval with the FDA or with regulatory authorities of
other countries. We will need to conduct significant additional research and
human testing before we can apply for product approval with the FDA or with
regulatory authorities of other countries. Pre-clinical testing and clinical
development are long, expensive and uncertain processes. Satisfaction of
regulatory requirements typically depends on the nature, complexity and novelty
of the product and requires the expenditure of substantial resources. Regulators
may not interpret data obtained from pre-clinical and clinical tests of our
drug
candidates and technologies the same way that we do, which could delay, limit
or
prevent our receipt of regulatory approval. It may take us many years to
complete the testing of our drug candidates and technologies, and failure can
occur at any stage of this process. Negative or inconclusive results or medical
events during a clinical trial could cause us to delay or terminate our
development efforts.
Clinical
trials also have a high risk of failure. A number of companies in the
pharmaceutical industry, including biotechnology companies, have suffered
significant setbacks in clinical trials, even after achieving promising results
in earlier trials. If we experience delays in the testing or approval process,
or if we need to perform more or larger clinical trials than originally planned,
our financial results and the commercial prospects for our drug candidates
and
technologies may be materially impaired. In addition, we have limited experience
in conducting and managing the clinical trials necessary to obtain regulatory
approval in the US and abroad and, accordingly, may encounter unforeseen
problems and delays in the approval process.
Even
if
regulatory approval is obtained, our products and their manufacture will be
subject to continual review, and there can be no assurance that such approval
will not be subsequently withdrawn or restricted. Changes in applicable
legislation or regulatory policies, or discovery of problems with the products
or their manufacture, may result in the imposition of regulatory restrictions,
including withdrawal of the product from the market, or result in increased
costs to us.
Because
some of our proprietary drug candidates and technologies are licensed to us
by
third parties, termination of these license agreements could prevent us from
developing our drug candidates.
We
do not
own all of our drug candidates and technologies. We have licensed the rights,
patent or otherwise, to our drug candidates from third parties. Specifically,
we
have licensed Bicifadine from Dov Pharmaceutical, Inc., or DOV, who in turn
licensed it from Wyeth Pharmaceuticals, Inc., or Wyeth, and we have licensed
DOS
from VivoQuest, Inc. These license agreements require us to meet development
or
financing milestones and impose development and commercialization due diligence
requirements on us. In addition, under these agreements, we must pay royalties
on sales of products resulting from licensed drugs and technologies and pay
the
patent filing, prosecution and maintenance costs related to the licenses. While
we have the right to defend patent rights related to our licensed drug
candidates and technologies, we are not obligated to do so. In the event that
we
decide to defend our licensed patent rights, we will be obligated to
cover all of the expenses associated with that effort. If we do not meet
our obligations in a timely manner or if we otherwise breach the terms of our
agreements, our licensors could terminate the agreements, and we would lose
the
rights to our drug candidates and technologies. From time to time, in the
ordinary course of business, we may have disagreements with our licensors or
collaborators regarding the terms of our agreements or ownership of proprietary
rights, which could lead to delays in the research, development, collaboration
and commercialization of our drug candidates or could require or result in
litigation or arbitration, which could be time-consuming and expensive. For
a
further discussion on our license agreements, the patent rights related to
those
licenses, and the expiration dates of those patent rights, see “Item 4.
Information on the Company - Business Overview - Intellectual Property and
Patents” and “Item 4. Information on the Company - Business Overview - Licensing
Agreements and Collaborations,” below. In addition, see “- Risks Related to Our
Intellectual Property - If DOV declares bankruptcy, they may choose to repudiate
their license agreement with Wyeth which could prevent us from pursuing the
development of Bicifadine, and would have a material adverse impact on our
financial condition,” below regarding potential issues related to the use of
patents owned by third-parties.
If
we do not establish or maintain drug development and marketing arrangements
with
third parties, we may be unable to commercialize our drug candidates and
technologies into products.
We
are an
emerging company and do not possess all of the capabilities to fully
commercialize our drug candidates and technologies on our own. From time to
time, we may need to contract with third parties to:
|
|
·
|
assist
us in developing, testing and obtaining regulatory approval for some
of
our compounds and technologies;
|
|
|
·
|
manufacture
our drug candidates; and
|
|
|
·
|
market
and distribute our products.
|
For
example, on March 20, 2008, we announced that we had out-licensed the DOS
program to Presidio Pharmaceuticals, Inc, or Presidio. Under the terms of the
license agreement, Presidio becomes responsible for the development and
commercialization activities and costs related to the DOS
program.
We
can
provide no assurance that we will be able to successfully enter into agreements
with such third-parties on terms that are acceptable to us. If we are unable
to
successfully contract with third parties for these services when needed, or
if
existing arrangements for these services are terminated, whether or not through
our actions, or if such third parties do not fully perform under these
arrangements, we may have to delay, scale back or end one or more of our drug
development programs or seek to develop or commercialize our drug candidates
and
technologies independently, which could result in delays. Further, such failure
could result in the termination of license rights to one or more of our drug
candidates and technologies. Moreover, if these development or marketing
agreements take the form of a partnership or strategic alliance, such
arrangements may provide our collaborators with significant discretion in
determining the efforts and resources that they will apply to the development
and commercialization of our products. Accordingly, to the extent that we rely
on third parties to research, develop or commercialize our products, we are
unable to control whether such products will be scientifically or commercially
successful.
If
our products fail to achieve market acceptance, we will never record meaningful
revenues.
Even
if
our products are approved for sale, they may not be commercially successful
in
the marketplace. Market acceptance of our product candidates will depend on
a
number of factors, including:
|
|
·
|
perceptions
by members of the health care community, including physicians,
of the
safety and efficacy of our
products;
|
|
|
·
|
the
rates of adoption of our products by medical practitioners and
the target
populations for our products;
|
|
|
·
|
the
potential advantages that our products offer over existing
treatment
methods or other products that may be
developed;
|
|
|
·
|
the
cost-effectiveness of our products relative to competing
products;
|
|
|
·
|
the
availability of government or third-party payor reimbursement
for our
products;
|
|
|
·
|
the
side effects or unfavorable publicity concerning our
products or similar
products; and
|
|
|
·
|
the
effectiveness of our sales, marketing and distribution
efforts.
|
Because
we expect sales of our products to generate substantially all of our revenues
in
the long-term, the failure of our products to find market acceptance would
harm
our business and could require us to seek additional financing or other sources
of revenue.
If
the third parties upon whom we rely to manufacture our products do not
successfully manufacture our products, our business will be
harmed.
We
do not
currently have the ability to manufacture the compounds that we need to conduct
our clinical trials and, therefore, rely upon, and intend to continue to rely
upon, certain manufacturers to produce and supply our drug candidates for use
in
clinical trials and for future sales. See “Item 4. Information on the Company -
Business Overview - Supply and Manufacturing,” below. In order to commercialize
our products, such products will need to be manufactured in commercial
quantities while adhering to all regulatory and other local requirements, all
at
an acceptable cost. We may not be able to enter into future third-party contract
manufacturing agreements on acceptable terms, if at all.
We
believe that our agreement with DOV provides us with access to sufficient
inventory to satisfy the clinical supply needs for our ongoing Phase 2b trial
for Bicifadine and the open label safety extension study. If our contract
manufacturers or other third parties, such as DOV, fail to deliver our product
candidates for clinical use on a timely basis, with sufficient quality, and
at
commercially reasonable prices, and we fail to find replacement manufacturers,
we may be required to delay or suspend clinical trials or otherwise discontinue
development and production of our drug candidates.
Our
contract manufacturers are required to produce our clinical drug candidates
under strict compliance with current good manufacturing practices, or cGMP,
in
order to meet acceptable regulatory standards for our clinical trials. If such
standards change, the ability of contract manufacturers to produce our drug
candidates on the schedule we require for our clinical trials may be affected.
In addition, contract manufacturers may not perform their obligations under
their agreements with us or may discontinue their business before the time
required by us to successfully produce and market our drug candidates. Any
difficulties or delays in our contractors’ manufacturing and supply of drug
candidates could increase our costs, cause us to lose revenue or make us
postpone or cancel clinical trials.
In
addition, our contract manufacturers will be subject to ongoing periodic,
unannounced inspections by the FDA and corresponding foreign or local
governmental agencies to ensure strict compliance with, among other things,
cGMP, in addition to other governmental regulations and corresponding foreign
standards. We will not have control over, other than by contract, third-party
manufacturers’ compliance with these regulations and standards. No assurance can
be given that our third-party manufacturers will comply with these regulations
or other regulatory requirements now or in the future.
In
the
event that we are unable to obtain or retain third-party manufacturers, we
will
not be able to commercialize our products as planned. If third-party
manufacturers fail to deliver the required quantities of our products on a
timely basis and at commercially reasonable prices, our ability to develop
and
deliver products on a timely and competitive basis may be adversely impacted
and
our business, financial condition or results of operations will be materially
harmed.
If
our competitors develop and market products that are less expensive, more
effective or safer than our products, our commercial opportunities may be
reduced or eliminated.
The
pharmaceutical industry is highly competitive. Our commercial opportunities
may
be reduced or eliminated if our competitors develop and market products that
are
less expensive, more effective or safer than our products. Other companies
have
drug candidates in various stages of pre-clinical or clinical development to
treat diseases for which we are also seeking to discover and develop drug
candidates. For a discussion of these competitors and their drug candidates,
see
“Item 4. Information on the Company - Business Overview - Competition,” below.
Some of these potential competing drugs are already commercialized or are
further advanced in development than our drug candidates and may be
commercialized earlier. Even if we are successful in developing safe, effective
drugs, our products may not compete successfully with products produced by
our
competitors, who may be able to more effectively market their drugs.
Our
competitors include pharmaceutical companies and biotechnology companies, as
well as universities and public and private research institutions. In addition,
companies that are active in different but related fields represent substantial
competition for us. Many of our competitors have significantly greater capital
resources, larger research and development staffs and facilities and greater
experience in drug development, regulation, manufacturing and marketing than
we
do. These organizations also compete with us to recruit qualified personnel,
attract partners for joint ventures or other collaborations, and license
technologies that are competitive with ours. As a result, our competitors may
be
able to more easily develop products that could render our technologies or
our
drug candidates obsolete or noncompetitive.
If
we lose our key personnel or are unable to attract and retain additional
personnel, our business could be harmed.
As
of
February 29, 2008, we had 17 full-time employees. To successfully develop our
drug candidates and technologies, we must be able to attract and retain highly
skilled personnel. The retention of their services cannot be guaranteed. In
particular, if we lose the services of Michael S. Weiss, our Chairman, or Ron
Bentsur, our Chief Executive Officer, our ability to continue to execute on
our
business plan could be materially impaired. Our agreement with Mr. Weiss
provides that he may terminate his agreement with us upon 30 days’ prior written
notice if (i) he is not re-elected as Chairman of our Board, (ii) his fees
for
service as Chairman are reduced by more than 10%, (iii) we breach any material
term of his agreement, or (iv) there is a change of control or reorganization
of
our company. Our agreement with Mr. Bentsur provides that he may terminate
his
agreement with us upon 30 days’ prior written notice if (i) he is no longer the
highest ranking member of our company’s management team, (ii) his annual base
salary is reduced by more than 10% (except where we have made similar reductions
in the base salary of senior management throughout our company), (iii) we breach
any material term of his agreement, or (iv) there is a change of control or
reorganization of our company. We do not maintain a key man life insurance
policy covering either Mr. Weiss or Mr. Bentsur.
Any
acquisitions or in-licensing transactions we make may dilute your equity or
require a significant amount of our available cash and may not be scientifically
or commercially successful.
As
part
of our business strategy, we may effect acquisitions or in-licensing
transactions to obtain additional businesses, products, technologies,
capabilities and personnel. If we complete one or more such transactions in
which the consideration includes our ordinary shares or other securities, your
equity in us may be significantly diluted. If we complete one or more such
transactions in which the consideration includes cash, we may be required to
use
a substantial portion of our available cash.
Acquisitions
and in-licensing transactions also involve a number of operational risks,
including:
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difficulty
and expense of assimilating the operations, technology or personnel
of the
business;
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our
inability to attract and retain management, key personnel and
other
employees necessary to conduct the business;
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our
inability to maintain relationships with key third parties,
such as
alliance partners, associated with the business;
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exposure
to legal claims for activities of the business prior to
the
acquisition;
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the
diversion of our management’s attention from our core business; and
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the
potential impairment of substantial goodwill and write-off
of in-process
research and development costs, adversely affecting
our reported results
of
operations.
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In
addition, the basis for completing the acquisition or in-licensing could prove
to be unsuccessful as the drugs or processes involved could fail to be
scientifically or commercially viable. In addition, we may be required to pay
third parties substantial transaction fees, in the form of cash or ordinary
shares, in connection with such transactions.
If
any of
these risks occur, it could have an adverse effect on both the business we
acquire or in-license and our existing operations.
We
face product liability risks and may not be able to obtain adequate insurance.
The
use
of our drug candidates and technologies in clinical trials, and the sale of
any
approved products, exposes us to liability claims. Although we are not aware
of
any historical or anticipated product liability claims against us, if we cannot
successfully defend ourselves against product liability claims, we may incur
substantial liabilities or be required to cease clinical trials of our drug
candidates and technologies or limit commercialization of any approved products.
We
believe that we have obtained sufficient product liability insurance coverage
for our clinical trials. We intend to expand our insurance coverage to include
the commercial sale of any approved products if marketing approval is obtained;
however, insurance coverage is becoming increasingly expensive. We may not
be
able to maintain insurance coverage at a reasonable cost. We may not be able
to
obtain additional insurance coverage that will be adequate to cover product
liability risks that may arise. Regardless of merit or eventual outcome, product
liability claims may result in:
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decreased
demand for a product;
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injury
to our reputation;
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inability
to continue to develop a drug candidate or
technology;
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withdrawal
of clinical trial volunteers; and
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Consequently,
a product liability claim or product recall may result in material
losses.
Risks
Related to Our Financial Condition
Our
current cash, cash equivalents and bank deposits may not be adequate to support
our operations for the length of time that we have estimated. If we are unable
to obtain additional funds on terms favorable to us, or at all, we may not
be
able to continue our operations.
We
expect
to use, rather than generate, funds from operations for the foreseeable future.
We currently have an average projected burn rate of approximately $1.0 million
to $1.5 million per month in 2008, depending upon the extent to which we
are
able to enroll subjects in our clinical trials.
Based
on
our current business plan, we believe that our cash, cash equivalents and
bank
deposits as of December 31, 2007 and the upfront payment by Presidio related
to
the out-licensing of the DOS program provide us with sufficient resources
to
fund our operations for approximately the next 12 months; however, the actual
amount of funds that we will need will be determined by many factors, some
of
which are beyond our control. These factors include:
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the
progress of our development activities, specifically, the
timing of
completion and results from our clinical trials for
Bicifadine;
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the
progress of our research
activities;
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the
number and scope of our development programs;
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our
ability to establish and maintain current and
new licensing or acquisition
arrangements;
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our
ability to achieve our milestones under our
licensing
arrangements;
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the
costs involved in enforcing patent claims
and other intellectual property
rights; and
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the
costs and timing of regulatory
approvals.
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We
may
seek additional capital through a combination of public and private equity
offerings, debt financings and collaborative, strategic alliance and licensing
arrangements. We
have
made
no determination at this time as to the amount, method or timing of any such
financing.
Such
additional financing may not be available when we need it
.
If we
are unable to obtain additional funds on terms favorable to us or at all, we
may
be required to cease or reduce our operating activities or sell or license
to
third parties some or all of our technology. If we raise additional funds by
selling ordinary shares or other securities, the ownership interests of our
shareholders will be diluted. If we need to raise additional funds through
the
sale or license of our drug candidates or technology, we may be unable to do
so
on terms favorable to us.
We
are likely to be subject to taxation in the US, which could significantly
increase our tax liability in the US for which we may not be able to apply
the
net losses accumulated in Israel.
We
currently have a “permanent establishment” in the United States, or US, which
began in 2005, due to t
he
residency of the Chairman of our Board of Directors and our Chief Executive
Officer in the US, as well as other less significant contacts that we have
with
the US. As a result, any income attributable to such US permanent establishment
would be subject to US corporate income tax in the same manner as if we were
a
US corporation.
If
this
is the case, we may not be able to utilize any of the accumulated Israeli loss
carryforwards reflected on our balance sheet as of December 31, 2007 since
these
losses were not attributable to the US permanent establishment. However, we
would be able to utilize losses attributable to the US permanent establishment
to offset such US taxable income. As of December 31, 2007, we estimate that
these US net operating loss carryforwards are approximately $22.4 million.
These
losses can be carried forward to offset future US taxable income and will begin
to expire in 2025. US corporate tax rates are higher than those to which we
are
subject in the State of Israel, and if we are subject to US corporate tax,
it
would have a material adverse effect on our results of operations.
Risks
Related to Our Intellectual Property
If
we are unable to adequately protect our intellectual property, third parties
may
be able to use our technology, which could adversely affect our ability to
compete in the market.
Our
commercial success will depend in part on our ability and the ability of our
licensors to obtain and maintain patent protection on our drug products and
technologies and successfully defend these patents and technologies against
third-party challenges. As part of our business strategy, our policy is to
actively file patent applications in the US and internationally to cover methods
of use, new chemical compounds, pharmaceutical compositions and dosing of the
compounds and composition and improvements in each of these. See “Item 4.
Information on the Company - Business Overview - Intellectual Property and
Patents,” below regarding our patent position with regard to our product
candidates. Because of the extensive time required for development, testing
and
regulatory review of a potential product, it is possible that before we
commercialize any of our products, any related patent may expire or remain
in
existence for only a short period following commercialization, thus reducing
any
advantage of the patent.
The
patent positions of pharmaceutical and biotechnology companies can be highly
uncertain and involve complex legal and factual questions. No consistent policy
regarding the breadth of claims allowed in biotechnology patents has emerged
to
date. Accordingly, the patents we use may not be sufficiently broad to prevent
others from practicing our technologies or from developing competing products.
Furthermore, others may independently develop similar or alternative
technologies or design around our patented technologies. The patents we use
may
be challenged or invalidated or may fail to provide us with any competitive
advantage.
Generally,
patent applications in the US are maintained in secrecy for a period of 18
months or more. Since publication of discoveries in the scientific or patent
literature often lag behind actual discoveries, we are not certain that we
were
the first to make the inventions covered by each of our pending patent
applications or that we were the first to file those patent applications. We
cannot predict the breadth of claims allowed in biotechnology and pharmaceutical
patents, or their enforceability. Third parties or competitors may challenge
or
circumvent our patents or patent applications, if issued. If our competitors
prepare and file patent applications in the US that claim compounds or
technology also claimed by us, we may choose to participate in interference
proceedings declared by the United States Patent and Trademark Office to
determine priority of invention, which could result in substantial cost, even
if
the eventual outcome is favorable to us. While we have the right to defend
patent rights related to the licensed drug candidates and technologies, we
are
not obligated to do so. In the event that we decide to defend our licensed
patent rights, we will be obligated to cover all of the expenses associated
with that effort.
We
also
rely on trade secrets to protect technology where we believe patent protection
is not appropriate or obtainable. Trade secrets are difficult to protect. While
we require our employees, collaborators and consultants to enter into
confidentiality agreements, this may not be sufficient to adequately protect
our
trade secrets or other proprietary information. In addition, we share ownership
and publication rights to data relating to some of our drug candidates and
technologies with our research collaborators and scientific advisors. If we
cannot maintain the confidentiality of this information, our ability to receive
patent protection or protect our proprietary information will be at risk.
Specifically,
we plan to pursue patent protection in the US and in certain foreign countries
relating to our development and commercialization of Bicifadine. Bicifadine
and
its acid addition salts, including Bicifadine HCl, are disclosed in US Pat.
Nos.
4,231,935, issued November 4, 1980, and 4,196,120, issued April 1, 1980, now
expired. Currently, we are the exclusive licensee of one issued patent and
multiple patent applications filed by DOV relating to Bicifadine. See “Item 4.
Information on the Company - Business Overview - Intellectual Property and
Patents.” However, we cannot guarantee the scope of protection of any issued
patents, or that such patents will survive a validity or enforceability
challenge, or that any pending patent applications will issue as patents.
Under
the
terms of the license agreements between DOV and Wyeth and between DOV and us
relating to Bicifadine, Wyeth has retained limited rights in the Wyeth patent
rights, certain DOV patent rights, and know-how to make and develop Bicifadine
for the “treatment or amelioration of vasomotor symptoms caused by or occurring
in relation to or in connection with menopause or other female hormonal
fluctuations” (“the Wyeth Retained Field”). Under the terms of the DOV/Wyeth
agreement, Wyeth can only develop Bicifadine for use in the Wyeth Retained
Field
in collaboration with DOV, and under the license agreement between DOV and
XTL,
DOV will not conduct research or development with Wyeth for the use of
Bicifadine in the Wyeth Retained Field.
Certain
of the Wyeth patent rights and DOV patent rights may claim overlapping subject
matter which may result in the declaration of an interference proceeding before
the United States Patent and Trademark Office (USPTO). If an interference is
declared, Wyeth and DOV have agreed to meet and attempt to amicably resolve
such
interference with the goal of having a US patent issue to the assignee of the
first inventor of the invention claimed by such conflicting claims. In the
event
of an interference, we cannot predict whether Wyeth and DOV will be able to
reach agreement, or, if not, which party would prevail in such a
proceeding.
In
addition to patent protection, we may utilize certain regulatory marketing
exclusivities for our drug candidates, including
New
Drug
Product Exclusivity as provided by the Federal Food, Drug, and Cosmetic Act
under section 505(c)(3)(E) and 505(j)(5)(F). Exclusivity provides the holder
of
an approved new drug application limited protection from new competition in
the
marketplace for the innovation represented by its approved drug product. This
limited protection precludes approval of certain 505(b)(2) applications or
certain abbreviated new drug applications (ANDAs) for prescribed periods of
time. Some exclusivity provisions also provide protection from competition
by
delaying the submission of 505(b)(2) applications and ANDAs for certain periods
of time. Exclusivity is available for new chemical entities (NCEs), which by
definition are innovative, and for significant changes in already approved
drug
products, such as a new use.
If
DOV declares bankruptcy, they may choose to repudiate their license agreement
with Wyeth which could prevent us from pursuing the development of Bicifadine,
and would have a material adverse impact on our financial
condition.
In
January 2007, we entered into a license agreement with DOV covering certain
patent rights associated with the drug candidate Bicifadine. Some of the patent
rights covered by that agreement are in turn under license to DOV by Wyeth.
On
January 4, 2008, DOV notified investors that it had reduced its workforce in
order to conserve cash and to direct substantially all of its resources towards
completion of a clinical trial expected to be completed in the fourth quarter
of
2008. DOV further noted that it continues to actively seek additional capital
and to reduce expenses. DOV also noted that it will have sufficient liquidity
to
operate through August 2008, although there can be no assurance that this will
be the case. If DOV is unable to obtain additional capital, it may be forced
to
declare bankruptcy. If DOV were to declare bankruptcy, under the relevant
bankruptcy laws DOV could refuse to abide by the terms of its license agreement
with Wyeth and can repudiate the agreement thereby putting DOV’s rights, and as
a result our rights, to some of the patents covering Bicifadine in question.
While we can and will take action in any DOV bankruptcy to protect our rights
under our agreement with DOV, we cannot control any action of DOV with regard
to
their agreements with Wyeth. We have undertaken to enter into a standby license
agreement with Wyeth which would become effective if DOV in any way repudiated
their agreement with Wyeth. While we believe this will reduce the risk described
above, there can be no assurance we will be able to successfully complete an
agreement with Wyeth on terms satisfactory to us.
Litigation
or third-party claims of intellectual property infringement could require us
to
spend substantial time and money defending such claims and adversely affect
our
ability to develop and commercialize our products.
Third
parties may assert that we are using their proprietary technology without
authorization. In addition, third parties may have or obtain patents in the
future and claim that our products infringe their patents. If we are required
to
defend against patent suits brought by third parties, or if we sue third
parties
to protect our patent rights, we may be required to pay substantial litigation
costs, and our management’s attention may be diverted from operating our
business. In addition, any legal action against our licensors or us that
seeks
damages or an injunction of our commercial activities relating to the affected
products could subject us to monetary liability and require our licensors
or us
to obtain a license to continue to use the affected technologies. We cannot
predict whether our licensors or we would prevail in any of these types of
actions or that any required license would be made available on commercially
acceptable terms, if at all. In addition, any legal action against us that
seeks
damages or an injunction relating to the affected activities could subject
us to
monetary liability and/or require us to discontinue the affected technologies
or
obtain a license to continue use thereof.
In
addition, there can be no assurance that our patents or patent applications
or
those licensed to us will not become involved in opposition or revocation
proceedings instituted by third parties. If such proceedings were initiated
against one or more of our patents, or those licensed to us, the defense of
such
rights could involve substantial costs and the outcome could not be
predicted.
Competitors
or potential competitors may have filed applications for, may have been granted
patents for, or may obtain additional patents and proprietary rights that may
relate to compounds or technologies competitive with ours. If patents are
granted to other parties that contain claims having a scope that is interpreted
to cover any of our products (including the manufacture thereof), there can
be
no assurance that we will be able to obtain licenses to such patents at
reasonable cost, if at all, or be able to develop or obtain alternative
technology.
Risks
Related to Our Ordinary Shares and ADRs
Our
ADRs are traded in small volumes, limiting your ability to sell your ADRs that
represent ordinary shares at a desirable price, if at
all.
The
trading volume of our ADRs has historically been low. Even if the trading volume
of our ADRs increases, we can give no assurance that it will be maintained
or
will result in a desirable stock price. As a result of this low trading volume,
it may be difficult to identify buyers to whom you can sell your ADRs in
desirable volume and you may be unable to sell your ADRs at an established
market price, at a price that is favorable to you, or at all. A low volume
market also limits your ability to sell large blocks of our ADRs at a desirable
or stable price at any one time. You should be prepared to own our ordinary
shares and ADRs indefinitely.
Our
stock price can be volatile, which increases the risk of litigation and may
result in a significant decline in the value of your investment.
The
trading price of the ADRs representing our ordinary shares is likely to be
highly volatile and subject to wide fluctuations in price in response to various
factors, many of which are beyond our control. These factors include:
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developments
concerning our drug candidates;
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announcements
of technological innovations by us or our competitors;
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introductions
or announcements of new products by us or our
competitors;
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announcements
by us of significant acquisitions,
strategic partnerships, joint ventures
or capital commitments;
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changes
in financial estimates
by securities analysts;
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actual
or anticipated
variations in
interim operating
results;
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expiration
or
termination
of
licenses,
research
contracts
or
other
collaboration
agreements;
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conditions
or
trends
in
the
regulatory
climate
and
the
biotechnology
and
pharmaceutical
industries;
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changes
in
the
market
valuations
of
similar
companies;
and
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additions
or
departures
of
key
personnel.
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In
addition, equity markets in general, and the market for biotechnology and life
sciences companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of companies traded in those markets. These broad market and
industry factors may materially affect the market price of our ordinary shares
or ADRs, regardless of our development and operating performance. In the past,
following periods of volatility in the market price of a company’s securities,
securities class-action litigation has often been instituted against that
company. Such litigation, if instituted against us, could cause us to incur
substantial costs to defend such claims and divert management’s attention and
resources even if we prevail in the litigation, all of which could seriously
harm our business.
Future
issuances or sales of our ordinary shares could depress the market for our
ordinary shares and ADRs.
Future
issuances of a substantial number of our ordinary shares, or the perception
by
the market that those issuances could occur, could cause the market price
of our
ordinary shares or ADRs to decline or could make it more difficult for us
to
raise funds through the sale of equity in the future. We believe that our
cash,
cash equivalents and bank deposits as of December 31, 2007 and the upfront
payment by Presidio provide us with sufficient resources to fund our operations
for approximately the next 12 months; however, prior to the end of that period
it will be necessary for us to return to the capital markets through the
sale of
ADRs or ordinary shares.
Also,
if
we make one or more significant acquisitions in which the consideration includes
ordinary shares or other securities, your portion of shareholders’ equity in us
may be significantly diluted. For example, pursuant to a license agreement
with
DOV, XTL Development licensed the worldwide rights for Bicifadine, a serotonin
and norepinephrine reuptake inhibitor. Under the agreement, XTL Development,
upon achievement of certain milestones, will make payments of up to $126.5
million to DOV over the life of the license. We may elect to issue up to an
additional $121.5 million in ordinary shares to DOV in lieu of cash for such
milestone payments. In addition, XTL Development committed to pay a third party
a transaction advisory fee in the form of stock appreciation rights in an amount
equivalent to 3% of our then fully diluted ordinary shares at the close of
the
transaction, which were locked up through January 15, 2008, and an additional
7%
of our then fully diluted ordinary shares at the close of the transaction,
which
vest following the first to occur of successful Phase 3 clinical trial results
or the acquisition of our company. Payment of the stock appreciation rights
by
us can be satisfied, at our discretion, in cash and/or by issuance of our
ordinary shares. Pursuant to a license agreement with VivoQuest, Inc., or
VivoQuest, a privately held biotechnology company based in the US, we licensed
(in all fields of use) certain intellectual property and technology related
to
VivoQuest’s HCV program. Pursuant to the license agreement, we may elect to
issue up to an additional $34.6 million in ordinary shares to VivoQuest in
lieu
of cash upon achievement of certain milestones. In the future, we may enter
into
additional arrangements with other third-parties permitting us to issue ordinary
shares in lieu of certain cash payments.
In
addition, as of February 29, 2008, our principal stockholders beneficially
own,
in the aggregate, approximately 23.0% of our ordinary shares. If some or all
of
them should decide to sell a substantial number of their holdings, it could
have
a material adverse effect on the market for our ADRs or ordinary
shares.
Concentration
of ownership of our ordinary shares among our principal stockholders may prevent
new investors from influencing significant corporate
decisions.
As
of
February 29, 2008, our principal stockholders (including their affiliates)
beneficially owned, in the aggregate, approximately 23.0% of our outstanding
ordinary shares. As a result, these persons, acting together, may have the
ability to significantly influence the outcome of all matters submitted to
our
stockholders for approval, including the election and removal of directors
and
any merger, consolidation or sale of all or substantially all of our assets.
In
addition, such persons, acting together, may have the ability to effectively
control our management and affairs. Accordingly, this concentration of ownership
may depress the market price of our ADRs or ordinary shares.
Our
ordinary shares and ADRs trade on more than one market, and this may result
in
price variations.
ADRs
representing our ordinary shares are quoted on the NASDAQ Capital Market and
our
ordinary shares are traded on the Tel Aviv Stock Exchange. Trading in our
securities on these markets is made in different currencies and at different
times, including as a result of different time zones, different trading days
and
different public holidays in the US and Israel. Consequently, the effective
trading prices of our shares on these two markets may differ. Any decrease
in
the trading price of our securities on one of these markets could cause a
decrease in the trading price of our securities on the other
market.
Holders
of our ordinary shares or ADRs who are US residents may be required to pay
additional income taxes.
There
is
a risk that we will be classified as a passive foreign investment company
(“PFIC”) for certain tax years. If we are classified as a PFIC, a US holder of
our ordinary shares or ADRs representing our ordinary shares will be subject
to
special federal income tax rules that determine the amount of federal income
tax
imposed on income derived with respect to the PFIC shares. We will be a PFIC
if
either 75% or more of our gross income in a tax year is passive income or
the
average percentage of our assets (by value) that produce or are held for
the
production of passive income in a tax year is at least 50%. The risk that
we
will be classified as a PFIC arises because cash balances, even if held as
working capital, are considered to be assets that produce passive income.
Therefore, any determination of PFIC status will depend upon the sources
of our
income and the relative values of passive and non-passive assets, including
goodwill. A determination as to a corporation’s status as a PFIC must be made
annually. We believe that we were likely not a PFIC for the taxable year
ended
December 31, 2005. However, we believe that we were a PFIC for the taxable
years
ended December 31, 2006 and 2007. Although such a determination is fundamentally
factual in nature and generally cannot be made until the close of the applicable
taxable year, based on our current operations, we believe that we may be
classified as a PFIC in the 2008 taxable year and possibly in subsequent
years.
In
view
of the complexity of the issues regarding our treatment as a PFIC, US
shareholders are urged to consult their own tax advisors for guidance as to
our
status as a PFIC. For further discussion of tax consequences of being a PFIC,
see US Federal Income Tax Considerations - Tax Consequences If We Are A Passive
Foreign Investment Company,” below.
Provisions
of Israeli corporate law may delay, prevent or affect a potential acquisition
of
all or a significant portion of our shares or assets and therefore depress
the
price of our ordinary shares.
We
are
incorporated in the State of Israel. Israeli corporate law regulates
acquisitions of shares through tender offers. It requires special approvals
for
transactions involving significant shareholders and regulates other matters
that
may be relevant to these types of transactions. The provisions of Israeli law
may delay or prevent an acquisition, or make it less desirable to a potential
acquirer and therefore depress the price of our shares. Further, Israeli tax
considerations may make potential transactions undesirable to us or to some
of
our shareholders.
Israeli
corporate law provides that an acquisition of shares in a public company must
be
made by means of a tender offer if, as a result of such acquisition, the
purchaser would become a 25% or greater shareholder of the company. This rule
does not apply if there is already another 25% or greater shareholder of the
company. Similarly, Israeli corporate law provides that an acquisition of shares
in a public company must be made by means of a tender offer if, as a result
of
the acquisition, the purchaser's shareholdings would entitle the purchaser
to
over 45% of the shares in the company, unless there is a shareholder with 45%
or
more of the shares in the company. These requirements do not apply if, in
general, the acquisition (1) was made in a private placement that received
the
approval of the company’s shareholders; (2) was from a 25% or greater
shareholder of the company which resulted in the purchaser becoming a 25% or
greater shareholder of the company, or (3) was from a 45% or greater shareholder
of the company which resulted in the acquirer becoming a 45% or greater
shareholder of the company. These rules do not apply if the acquisition is
made
by way of a merger. Regulations promulgated under Israeli corporate law provide
that these tender offer requirements do not apply to companies whose shares
are
listed for trading outside of Israel if, according to the law in the country
in
which the shares are traded, including the rules and regulations of the stock
exchange or which the shares are traded, either:
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there
is a limitation on acquisition of any level of control of the company;
or
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the
acquisition of any level of control requires the purchaser
to do so by
means of a tender offer to the
public.
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Finally,
in general, Israeli tax law treats specified acquisitions less favorably than
does US tax law. See “Item 10. Additional Information - Taxation - Israeli Tax
Considerations,” below.
Our
ADR holders are not shareholders and do not have shareholder
rights.
The
Bank
of New York, as depositary, executes and delivers our ADRs on our behalf. Each
ADR is a certificate evidencing a specific number of ADSs. Our ADR holders
will
not be treated as shareholders and do not have the rights of shareholders.
The
depositary will be the holder of the shares underlying our ADRs. Holders of
our
ADRs will have ADR holder rights. A deposit agreement among us, the depositary
and our ADR holders, and the beneficial owners of ADRs, sets out ADR holder
rights as well as the rights and obligations of the depositary. New York law
governs the deposit agreement and the ADRs. Our shareholders have shareholder
rights. Israeli law and our Articles of Association, or Articles, govern
shareholder rights. Our ADR holders do not have the same voting rights as our
shareholders. Shareholders are entitled to our notices of general meetings
and
to attend and vote at our general meetings of shareholders. At a general
meeting, every shareholder present (in person or by proxy, attorney or
representative) and entitled to vote has one vote on a show of hands. Every
shareholder present (in person or by proxy, attorney or representative) and
entitled to vote has one vote per fully paid ordinary share on a poll. This
is
subject to any other rights or restrictions which may be attached to any shares.
Our ADR holders may instruct the depositary to vote the ordinary shares
underlying their ADRs, but only if we ask the depositary to ask for their
instructions. If we do not ask the depositary to ask for the instructions,
our
ADR holders are not entitled to receive our notices of general meeting or
instruct the depositary how to vote. Our ADR holders will not be entitled to
attend and vote at a general meeting unless they withdraw the ordinary shares
from the depository. However, our ADR holders may not know about the meeting
enough in advance to withdraw the ordinary shares. If we ask for our ADR
holders’ instructions, the depositary will notify our ADR holders of the
upcoming vote and arrange to deliver our voting materials and form of notice
to
them. The depositary will try, as far as practical, subject to the provisions
of
the deposit agreement, to vote the shares as our ADR holders instruct. The
depositary will not vote or attempt to exercise the right to vote other than
in
accordance with the instructions of the ADR holders. We cannot assure our ADR
holders that they will receive the voting materials in time to ensure that
they
can instruct the depositary to vote their shares. In addition, there may be
other circumstances in which our ADR holders may not be able to exercise voting
rights.
Our
ADR
holders do not have the same rights to receive dividends or other distributions
as our shareholders. Subject to any special rights or restrictions attached
to a
share, the directors may determine that a dividend will be payable on a share
and fix the amount, the time for payment and the method for payment (although
we
have never declared or paid any cash dividends on our ordinary stock and we
do
not anticipate paying any cash dividends in the foreseeable future). Dividends
may be paid on shares of one class but not another and at different rates for
different classes. Dividends and other distributions payable to our shareholders
with respect to our ordinary shares generally will be payable directly to them.
Any dividends or distributions payable with respect to ordinary shares will
be
paid to the depositary, which has agreed to pay to our ADR holders the cash
dividends or other distributions it or the custodian receives on shares or
other
deposited securities, after deducting its fees and expenses. Our ADR holders
will receive these distributions in proportion to the number of shares their
ADRs represent. In addition, there may be certain circumstances in which the
depositary may not pay to our ADR holders amounts distributed by us as a
dividend or distribution. See the risk factor “- There are circumstances where
it may be unlawful or impractical to make distributions to the holders of our
ADRs,” below.
There
are circumstances where it may be unlawful or impractical to make distributions
to the holders of our ADRs.
The
deposit agreement with the depositary allows the depositary to distribute
foreign currency only to those ADR holders to whom it is possible to do so.
If a
distribution is payable by us in New Israeli Shekels, the depositary will hold
the foreign currency it cannot convert for the account of the ADR holders who
have not been paid. It will not invest the foreign currency and it will not
be
liable for any interest. If the exchange rates fluctuate during a time when
the
depositary cannot convert the foreign currency, our ADR holders may lose some
of
the value of the distribution.
The
depositary is not responsible if it decides that it is unlawful or impractical
to make a distribution available to any ADR holders. This means that our ADR
holders may not receive the distributions we make on our shares or any value
for
them if it is illegal or impractical for the depository to make such
distributions available to them.
Risks
Relating to Operations in Israel
Conditions
in the Middle East and in Israel may harm our
operations.
Certain
of our facilities and some of our clinical sites and suppliers are located
in
Israel. Political, economic and military conditions in Israel directly affect
our operations. Since the establishment of the State of Israel in 1948, a number
of armed conflicts have taken place between Israel and its Arab neighbors,
as
well as incidents of civil unrest, military conflicts and terrorist actions.
There has been a significant increase in violence since September 2000, which
has continued with varying levels of severity through to the present. This
state
of hostility has caused security and economic problems for Israel. To date,
we
do not believe that the political and security situation has had a material
adverse impact on our business, but we cannot give any assurance that this
will
continue to be the case. Any hostilities involving Israel or the interruption
or
curtailment of trade between Israel and its present trading partners could
adversely affect our operations and could make it more difficult for us to
raise
capital.
Our
commercial insurance does not cover losses that may occur as a result of events
associated with the security situation in the Middle East. Although the Israeli
government currently covers the reinstatement value of direct damages that
are
caused by terrorist attacks or acts of war, we cannot assure you that this
government coverage will be maintained. Any losses or damages incurred by us
could have a material adverse effect on our business. Any armed conflicts or
political instability in the region would likely negatively affect business
conditions and could harm our results of operations.
Further,
in the past, the State of Israel and Israeli companies have been subjected
to an
economic boycott. Several countries still restrict business with the State
of
Israel and with Israeli companies. These restrictive laws and policies may
have
an adverse impact on our operating results, financial condition or the expansion
of our business.
Our
results of operations may be adversely affected by inflation and foreign
currency fluctuations.
We
generate all of our revenues and hold most of our cash, cash equivalents, bank
deposits and marketable securities in US dollars. While a substantial amount
of
our operating expenses are in US dollars (approximately 95% in 2007), we incur
a
portion of our expenses in New Israeli Shekels and in certain other local
currencies. In addition, we also pay for some of our services and supplies
in
the local currencies of our suppliers. As a result, we are exposed to the risk
that the US dollar will be devalued against the New Israeli Shekel or other
currencies, and as result our financial results could be harmed if we are unable
to guard against currency fluctuations in Israel or other countries in which
services and supplies are obtained in the future. Accordingly, we may in the
future enter into currency hedging transactions to decrease the risk of
financial exposure from fluctuations in the exchange rates of currencies. These
measures, however, may not adequately protect us from the adverse effects of
inflation in Israel. In addition, we are exposed to the risk that the rate
of
inflation in Israel will exceed the rate of devaluation of the New Israeli
Shekel in relation to the dollar or that the timing of any devaluation may
lag
behind inflation in Israel.
It
may be difficult to enforce a US judgment against us, our officers or our
directors or to assert US securities law claims in
Israel.
Service
of process upon us, since we are incorporated in Israel, and upon our directors
and officers and our Israeli auditors, some of whom reside outside the US,
may
be difficult to obtain within the US. In addition, because substantially all
of
our assets and some of our directors and officers are located outside the US,
any judgment obtained in the US against us or any of our directors and officers
may not be collectible within the US. There is a doubt as to the enforceability
of civil liabilities under the Securities Act or the Exchange Act pursuant
to
original actions instituted in Israel. Subject to particular time limitations
and provided certain conditions are met, executory judgments of a US court
for
monetary damages in civil matters may be enforced by an Israeli court. For
more
information regarding the enforceability of civil liabilities against us, our
directors and our executive officers, see “Item 10. Additional Information -
Memorandum and Articles of Association - Enforceability of Civil Liabilities,”
below.
ITEM
4. INFORMATION ON THE COMPANY
History
and Development of
XTL
We
are a
biopharmaceutical company engaged in the acquisition and development of
pharmaceutical products for the treatment of unmet medical needs, particularly
the treatment of diabetic neuropathic pain and hepatitis C.
Our
lead
compound is Bicifadine, a serotonin and norepineprine reuptake inhibitor that
we
are developing for the treatment of diabetic neuropathic pain, a chronic
condition resulting from damage to peripheral nerves. We in-licensed Bicifadine
from DOV in January 2007, and in September 2007, we initiated a Phase 2b
clinical trial with Bicifadine for the treatment of diabetic neuropathic pain.
Our
second program is the Diversity Oriented Synthesis, or DOS, program, which
is
focused on the development of novel pre-clinical hepatitis C small molecule
inhibitors. On March 20, 2008, we announced that we had out-licensed the
DOS
program to Presidio.
Our
legal
and commercial name is XTL Biopharmaceuticals Ltd. We were established as a
private company limited by shares under the laws of the State of Israel on
March
9, 1993, under the name Xenograft Technologies Ltd. We re-registered as a public
company on June 7, 1993, in Israel, and changed our name to XTL
Biopharmaceuticals Ltd. on July 3, 1995. We commenced operations to use and
commercialize technology developed at the Weizmann Institute, in Rehovot,
Israel. Until 1999, our therapeutic focus was on the development of human
monoclonal antibodies to treat viral, autoimmune and oncological diseases.
Our
first therapeutic program
s
focused
on antibodies against the hepatitis B virus, interferon - γ and the hepatitis C
virus.
During
2007, our legacy hepatitis C clinical programs, XTL-6865 and XTL-2125, were
terminated, and in July 2007, Cubist Pharmaceuticals terminated their license
agreement with us for HepeX-B for the treatment of hepatitis B. On December
31,
2007, the Yeda Research and Development Company Ltd. (“Yeda”), the commercial
arm of the Weizmann Institute, and XTL mutually terminated our research and
license agreement dated April 7, 1993, as amended, and subject to certain
closing conditions which were completed in March 2008, all rights in and to
the
licensed technology and patents reverted to Yeda.
Our
ADRs
are quoted on the NASDAQ Capital Market under the symbol “XTLB.” Our ordinary
shares are traded on the Tel Aviv Stock Exchange under the symbol “XTL.” We
operate under the laws of the State of Israel, under the Israeli Companies
Act,
and in the US, the Securities Act, the Exchange Act and the regulations of
the
NASDAQ Capital Market.
Our
principal offices are located at 711 Executive Blvd., Suite Q, Valley Cottage,
NY 10989, and our telephone number is (845) 267-0707. The principal offices
of
XTL Biopharmaceuticals, Inc., our wholly-owned US subsidiary and agent for
service of process in the US, are located at 711 Executive Blvd., Suite Q,
Valley Cottage, NY 10989, and its telephone number is (845) 267-0707. Our
primary internet address is www.xtlbio.com. None of the information on our
website is incorporated by reference into this annual report.
On
November 20, 2007, we completed a private placement of 72,485,020 ordinary
shares (equivalent to 7,248,502 ADRs) at $0.135 per ordinary share (equivalent
to $1.35 per ADR). Total proceeds to us from this private placement were
approximately $8.8 million, net of offering expenses of approximately $1.0
million. In addition, on March 22, 2006, we completed a private placement of
46,666,670 ordinary shares (equivalent to 4,666,667 ADRs) at $0.60 per share
($6.00 per ADR), together with warrants for the purchase of an aggregate of
23,333,335 ordinary shares (equivalent to 2,333,333.5 ADRs) at an exercise
price
of $0.875 ($8.75 per ADR). Total proceeds to us from this private placement
were
approximately $24.4 million, net of offering expenses of approximately $3.6
million. The private placement closed on May 25, 2006. Since inception, we
have
raised net proceeds of approximately $137.5 million to fund our activities,
including the net proceeds from our 2007 and 2006 private placements.
For
the
years ended December 31, 2007, 2006, and 2005 our capital expenditures were
$65,000, $21,000 and $38,000, respectively. During 2007, we completed the
disposition of certain unused assets (primarily lab equipment) which were held
for sale during 2007, with $308,000 in proceeds from disposals of property
and
equipment in 2007. There were no material divestitures during the years ended
December 31, 2006 and 2005.
In
March
2008, we signed an agreement to out-license our DOS program to Presidio,
a
specialty pharmaceutical company focused on the discovery, in-licensing,
development and commercialization of novel therapeutics for viral infections,
including HIV and HCV
.
Under
the terms of the license agreement, Presidio becomes responsible for all
further
development and commercialization activities and costs relating to the DOS
program. In accordance with the terms of the license agreement, we received
a $4
million, non-refundable, upfront payment in cash from Presidio and will receive
up to an additional $104 million upon reaching certain development and
commercialization milestones. In addition, we will receive a royalty on direct
product sales by Presidio, and a percentage of Presidio’s income if the DOS
program is sublicensed by Presidio to a third party.
In
January 2007, XTL Development, Inc., or XTL Development, our wholly-owned
subsidiary, signed an agreement with DOV to in-license the worldwide rights
for
Bicifadine, a serotonin and norepinephrine reuptake inhibitor. XTL Development
is developing Bicifadine for the treatment of diabetic neuropathic pain,
a
chronic condition resulting from damage to peripheral nerves. In accordance
with
the terms of the license agreement, XTL Development made an initial up-front
license payment of $7.5 million in cash. In addition, XTL Development will
make
milestone payments of up to $126.5 million over the life of the license,
of
which up to $115 million will be due upon or after regulatory approval of
the
product. These milestone payments may be made in either cash and/or our ordinary
shares, at our election, with the exception of $5 million in cash, due upon
or
after regulatory approval of the product. XTL Development is also obligated
to
pay royalties to DOV on net sales of Bicifadine. In connection with the license
agreement, XTL Development committed to pay a transaction advisory fee to
certain third party intermediaries. The transaction advisory fee was structured
in the form of stock appreciation rights (“SARs”) in the amount equivalent to
(i) 3% of our fully diluted ordinary shares at the close of the transaction
(representing 8,299,723 ordinary shares), vesting immediately and exercisable
one year after the close of the transaction, and (ii) 7% of our fully diluted
ordinary shares at the close of the transaction (representing 19,366,019
ordinary shares), vesting following the first to occur of successful Phase
3
clinical trial results or the acquisition of our company. Payment of the
SARs by
XTL Development can be satisfied, at our discretion, in cash and/or by issuance
of our registered ordinary shares. Upon the exercise of a SAR, the amount
paid
by XTL Development will be an amount equal to the amount by which the fair
market value of one ordinary share of our company on the exercise date exceeds
the $0.34 grant price for such SAR (fair market value equals (i) the greater
of
the closing price of an ADR on the exercise date, divided by ten, or (ii)
the
preceding five day ADR closing price average, divided by ten). The SARs expire
on January 15, 2017. In the event of the termination of the license agreement,
any unvested SARs will expire.
Business
Overview
Introduction
We
are a
biopharmaceutical company engaged in the acquisition and development of
pharmaceutical products for the treatment of unmet medical needs, particularly
the treatment of diabetic neuropathic pain and hepatitis C.
Our
lead
compound is Bicifadine. We are developing Bicifadine for the treatment of
diabetic neuropathic pain, a chronic condition resulting from damage to
peripheral nerves. In September 2007, we initiated a Phase 2b trial that is
aimed at demonstrating the efficacy of Bicifadine in diabetic neuropathic pain.
Bicifadine is a serotonin and norepinephrine reuptake inhibitor, or SNRI.
Compared to the currently approved SNRI’s, Bicifadine has a unique ratio of
serotonin versus norepinephrine reuptake inhibition, which is weighted toward
norepinephrine reuptake inhibition, thereby providing a strong scientific
rationale for testing Bicifadine for the treatment neuropathic pain indications.
Prior to it being in-licensed, Bicifadine was extensively tested in more than
15
clinical trials involving over 3,000 patients, and has been shown to be safe
and
generally well tolerated. Bicifadine was evaluated in various acute pain
indications, including two large, randomized clinical trials (n=750 and n=540)
in patients suffering from acute post dental surgery pain, where Bicifadine
demonstrated statistically significant efficacy. Bicifadine was also studied
in
chronic lower back pain studies, where it did not demonstrate statistically
meaningful improvement in pain scores. Given the heterogeneity of the patient
population, the diversity of sources of pain, and the significant psychological
component, chronic lower back pain is considered a highly challenging pain
model. XTL believes that a positive statistical and clinical benefit can be
shown by assessing the drug’s effect in a more homogenous and well-studied model
such as diabetic neuropathic pain in which other SNRIs have been shown to be
effective.
Our
second program is the Diversity Oriented Synthesis, or DOS, program, which
is
focused on the development of novel pre-clinical hepatitis C small molecule
inhibitors. Compounds developed to date inhibit HCV replication in a
pre-clinical cell-based assay with potencies comparable to clinical stage
drugs.
On March 20, 2008, we announced that we had out-licensed the DOS program
to
Presidio.
To
date,
we have not received approval for the sale of any of our drug candidates in
any
market and, therefore, have not generated any commercial revenues from the
sales
of our drug candidates. Moreover, preliminary results of our pre-clinical or
clinical tests do not necessarily predict the final results, and acceptable
results in early preclinical or clinical testing might not be obtained in later
clinical trials. Drug candidates in the later stages of clinical development
may
fail to show the desired safety and efficacy traits despite having progressed
through initial clinical testing.
Our
Strategy
Under
our
current strategy, we plan to:
|
|
·
|
complete
our Phase 2b program for Bicifadine for the treatment of diabetic
neuropathic pain;
|
|
|
·
|
advance
the development of Bicifadine towards approval
in
diabetic neuropathic pain and
possibly
in
other
related indications
either alone or with a corporate partner;
and
|
|
|
·
|
seek
to in-license or acquire additional
candidates.
|
Products
Under Development
Bicifadine
Market
Opportunity
We
intend
to develop Bicifadine for the treatment of neuropathic pain - a chronic
condition resulting from damage to peripheral nerves. According to Datamonitor,
there are over 15 million people suffering from neuropathic pain in the United
States alone. With limited treatment options available, neuropathic pain
represents a significant unmet medical need. According to Datamonitor, the
global market for neuropathic pain drugs is expected to grow from $3.6 billion
in 2006 to over $7 billion by 2016.
In
September 2007, we initiated a Phase 2b clinical trial for the treatment of
diabetic neuropathic pain. Diabetic neuropathic pain is a chronic pain condition
resulting from damage to nerves in patients with diabetes. Diabetic neuropathic
pain, which manifests itself primarily in the feet, can often be debilitating
thus preventing patients from carrying out their normal day-to-day activities.
In the US, it is estimated that approximately 4.5 million patients with diabetes
suffer from diabetic neuropathic pain. Diabetic neuropathic pain is the largest
segment in the rapidly growing market for neuropathic pain drugs. Only two
oral
drugs have been approved to date by the FDA for the treatment of diabetic
neuropathic pain (Eli Lilly’s Cymbalta®, an SNRI, and Pfizer’s
Lyrica
®
);
however, the response rates to these drugs are limited. Consequently, millions
of patients remain without adequate treatment options and seek new drugs that
could provide better relief for their chronic pain.
As
the
treatment paradigm in neuropathic pain involves switching patients among drugs
(both within the same drug class, as well as among drug classes), in order to
find the specific drug to which the patient responds best, Bicifadine should
offer a unique alternative to patients who do not adequately respond to the
currently approved drugs. Furthermore, if clinical trials demonstrate that
Bicifadine has an advantage over the currently approved drugs in overall
efficacy rates, safety profile, or onset of action, it has the potential to
become a first-line treatment for diabetic neuropathic pain.
Scientific
Background
Bicifadine
is a serotonin and norepinephrine reuptake inhibitor. Serotonin and
Norepinephrine Reuptake Inhibitors (SNRI’s) are drugs that increase the levels
of serotonin and norepinephrine in the brain, thus blocking pain signals. SNRI
is a proven drug class in diabetic neuropathic pain as well as Major Depressive
Disorder. One SNRI (Eli Lilly’s Cymbalta®) is already approved for the treatment
of diabetic neuropathic pain, while a second SNRI (Wyeth’s Effexor®) has
demonstrated efficacy in treatment of diabetic neuropathic pain in large,
randomized and placebo-controlled studies. Both Cymbalta® and Effexor® are also
approved for depression. A third SNRI (Cypress’ Milnacipran®) recently
demonstrated efficacy in a Phase 3 trial in a related neuropathic pain
indication (fibromyalgia), providing further evidence of the efficacy of the
SNRI class in neuropathic pain.
Activity
on norepinephrine reuptake is thought to be necessary for anti-depressants
to be
effective in neuropathic pain. Compared to the currently approved SNRI’s,
Bicifadine has a unique ratio of serotonin versus norepinephrine reuptake
inhibition, which is weighted toward norepinephrine reuptake inhibition,
providing a strong scientific rationale for using Bicifadine for the treatment
neuropathic pain indications.
Clinical
Data
Four
Phase 1 clinical trials and 14 Phase 2 clinical trials involving more than
1,000
patients have been conducted with an immediate release, or IR, formulation
of
Bicifadine for the treatment of acute pain. In five exploratory double-blind,
placebo-controlled Phase 2 clinical trials of the IR formulation, Bicifadine
demonstrated a statistically significant reduction in pain versus placebo,
in
some cases with an outcome suggesting it might be comparable to or better than
positive controls such as codeine. In addition to these trials with the IR
formulation, eight Phase 1 clinical trials using the sustained release, or
SR,
formulation of Bicifadine have been conducted. SR is a formulation that
generally permits less frequent daily dosing and improves tolerability. We
intend to use the SR formulation in future clinical development and for
commercial use of Bicifadine.
In
two
additional larger (n=750 and n=540) single-dose, double-blind,
placebo-controlled clinical trials with Bicifadine in the treatment of moderate
to severe post-surgical acute dental pain, Bicifadine produced a highly
statistically significant, dose-related reduction in pain compared to placebo,
and which was comparable to a positive control arm (codeine or Tramadol). Both
trials demonstrated Bicifadine to be safe and generally well-tolerated without
producing any serious adverse events.
In
a
Phase 3 double-blind, placebo-controlled, clinical trial (n=325) with Bicifadine
in the treatment of moderate to severe acute pain following bunionectomy
surgery, statistically significant increases in analgesia were measured as
early
as 30 minutes after administration and these effects were sustained for the
balance of the eight-hour measurement period. In this study, Bicifadine was
safe
and generally well-tolerated. The complete assessment of the analgesic action
of
Bicifadine under repeat dosing conditions could not be fully elucidated due
to
the high level of “rescue” analgesic medication used in both the placebo and
active drug groups.
Due
to
the highly competitive nature of the market for acute pain drugs, and the FDA
requirement to complete two repeat-dosing clinical trials in two different
acute
pain indications, no further studies in acute pain are planned.
Bicifadine
has been further evaluated in three Phase 3 trials in chronic lower back pain,
or CLBP. The primary efficacy endpoint in these trials was the change in pain
severity rating score between baseline and the end of dosing. In these trials,
Bicifadine was safe and generally well tolerated, but did not show a
statistically significant effect relative to placebo on the primary endpoint
of
the study at any of the doses tested.
We
believe that the failure of Bicifadine in the CLBP trials was a result of the
inherent heterogeneity of the studied patient population (i.e. the varying
causes of CLBP pain), uncontrolled physical activities in what is largely an
activity-dependent pain indication, and a high placebo response.
We
believe that by re-directing the development of Bicifadine away from the novel
indications in acute and chronic pain toward a proven area of efficacy of SNRI’s
in the treatment of neuropathic pain, Bicifadine could be successfully developed
for neuropathic pain, possibly offering a differentiated efficacy and safety
profile based on the drug’s emphasis on norepinephrine reuptake
inhibition.
Development
Status
The
Phase
2b trial that was initiated in September 2007 is aimed at demonstrating the
efficacy of Bicifadine in diabetic neuropathic pain, using a study design that
is similar to the successful registration trials of Cymbalta®, a member of the
SNRI class that is approved for this indication, and other approved agents
for
neuropathic pain.
The
Phase
2b study is a randomized, double-blind, placebo-controlled study comparing
200mg
3x/day (tid) and 400mg 3x/day (tid) of Bicifadine versus placebo, with a 1:1:1
randomization between the three arms, in patients with diabetic neuropathic
pain. The Phase 2b study is designed to enroll approximately 336 patients.
Approximately 45 clinical centers in the United States, Europe, Israel and
India
are participating in the study. Following randomization, all patients enter
a
two week titration period to allow them to gradually escalate up to their target
treatment dose. This is then followed by a twelve week steady-state treatment
period at the target treatment dose. The primary endpoint of the study is to
compare the efficacy of each of the two active doses of Bicifadine (200mg tid
and 400mg tid) versus placebo in reduction of pain associated with diabetic
neuropathy, at baseline (at the time of randomization) versus week 14 (week
twelve of the steady-state phase). Pain will be measured based on a 24-hour
pain
rating using the eleven point Pain Intensity Numeric Rating Scale (formerly
referred to as the LIKERT scale).
In
addition, in January 2008, we initiated an open-label variable-dose trial
assessing the safety of Bicifadine in patients with diabetic neuropathic pain
(the “open label study”). Eligible patients for the open label study will have
completed all study visits of the Phase 2b clinical trial. Subjects who satisfy
all inclusion and exclusion criteria will be titrated to a dosage of
600 mg/day (200 mg tid). Depending upon efficacy and tolerability the
dosage can be progressively increased to 1200 mg/day (400 mg tid). The
dosage can be altered throughout the trial but may not go below 600 mg/day
(200 tid) or above 1200 mg/day (400 tid). The open label study is
designed to enroll approximately 240 patients.
DOS
Market
Opportunity
We
have
been developing the DOS program for the treatment of hepatitis C. Chronic
hepatitis C is a serious life-threatening disease which affects around 170
to
200 million people worldwide, according to a Datamonitor report from April
2005.
We estimate that between eight to 10 million of these people reside in the
US,
Europe and Japan. According to the BioSeeker Group, 20% to 30% of chronic
hepatitis patients will eventually develop progressive liver disease that may
lead to decomposition of the liver or hepatocellular carcinoma (liver cancer).
According to the National Digestive Diseases Information Clearing House, each
year 10,000 to 12,000 people die from HCV in the US alone. The Centers for
Disease Control, or CDC, predicts, that by the end of this decade, the number
of
deaths due to HCV in the US will surpass the number of deaths due to
AIDS.
According
to the PharmaDD, the worldwide market for the treatment of chronic HCV in 2005
was estimated at $3 billion and consists entirely of Interferon-based
treatments. Interferon alpha was first approved for use against chronic
hepatitis C in 1991. At present, the optimal regimen appears to be a 24 or
48
week course of the combination of Pegylated-Interferon and Ribavirin. In studies
done at the St. Louis University School of Medicine, a 24 week course of this
combination therapy yields a sustained response rate of approximately 40% to
45%
in patients with genotype 1 (the most prevalent genotype in the western world
according to the CDC) and a better sustained response with a 48 week course.
Given
the
limited efficacy of the present standard of care and significant side effects
associated with it, there is a clear need for novel treatments for Hepatitis
C.
Development
Status
DOS
is a
pre-clinical program focused on the development of novel hepatitis C small
molecule inhibitors. DOS applies proprietary, fully synthetic chemistry
methodologies to rapidly synthesize and diversify complex chemical compounds
such as natural products. Compounds in each family inhibited HCV replication
in
a pre-clinical cell-based assay with potencies against the most prevalent
HCV
genotypes comparable or superior to clinical stage drugs. They also retained
their potency against isolates that are resistant to clinical stage drugs.
In
March 2008, we signed an agreement to out-license our DOS program to Presidio.
Under the terms of the license agreement, Presidio becomes responsible for
all
further development and commercialization activities and costs relating to
the
DOS program.
We
gained
access to the DOS program through a license and asset purchase agreement with
VivoQuest that was completed in September 2005. Under this agreement, we
licensed lead HCV molecules, a proprietary compound library and medicinal
chemistry technologies. The DOS small molecule chemistry
technology developed at VivoQuest was used to create these molecules. See
“Item 10. Additional Information -Material Contracts.”
Intellectual
Property and Patents
General
Patents
and other proprietary rights are very important to the development of our
business. We will be able to protect our proprietary technologies from
unauthorized use by third parties only to the extent that our proprietary rights
are covered by valid and enforceable patents or are effectively maintained
as
trade secrets. It is our intention to seek and maintain patent and trade secret
protection for our drug candidates and our proprietary technologies. As part
of
our business strategy, our policy is to actively file patent applications in
the
US and internationally to cover methods of use, new chemical compounds,
pharmaceutical compositions and dosing of the compounds and compositions and
improvements in each of these. We also rely on trade secret information,
technical know-how, innovation and agreements with third parties to continuously
expand and protect our competitive position. Because of the extensive time
required for development, testing and regulatory review of a potential product,
it is possible that before we commercialize any of our products, any related
patent may expire or remain in existence for only a short period following
commercialization, thus reducing any commercial advantage or financial value
attributable to the patent.
Generally,
patent applications in the US are maintained in secrecy for a period of
18 months or more. Since publication of discoveries in the scientific or
patent literature often lag behind actual discoveries, we are not certain that
we were the first to make the inventions covered by each of our pending patent
applications or that we were the first to file those patent applications. The
patent positions of biotechnology and pharmaceutical companies are highly
uncertain and involve complex legal and factual questions. Therefore, we cannot
predict the breadth of claims allowed in biotechnology and pharmaceutical
patents, or their enforceability. To date, there has been no consistent policy
regarding the breadth of claims allowed in biotechnology patents. Third parties
or competitors may challenge or circumvent our patents or patent applications,
if issued. Granted patents can be challenged and ruled invalid at any time,
therefore the grant of a patent is not of itself sufficient to demonstrate
our
entitlement to a proprietary right. The disallowance of a claim or invalidation
of a patent in any one territory can have adverse commercial consequences in
other territories.
If
our
competitors prepare and file patent applications in the US that claim technology
also claimed by us, we may choose to participate in interference proceedings
declared by the US Patent and Trademark Office to determine priority of
invention, which could result in substantial cost, even if the eventual outcome
is favorable to us. While we have the right to defend patent rights related
to
our licensed drug candidates and technologies, we are not obligated to do so.
In
the event that we decide to defend our licensed patent rights, we will be
obligated to cover all of the expenses associated with that effort.
If
a
patent is issued to a third party containing one or more preclusive or
conflicting claims, and those claims are ultimately determined to be valid
and
enforceable, we may be required to obtain a license under such patent or to
develop or obtain alternative technology. In the event of a litigation involving
a third party claim, an adverse outcome in the litigation could subject us
to
significant liabilities to such third party, require us to seek a license for
the disputed rights from such third party, and/or require us to cease use of
the
technology. Further, our breach of an existing license or failure to obtain
a
license to technology required to commercialize our products may seriously
harm
our business. We also may need to commence litigation to enforce any patents
issued to us or to determine the scope, validity and/or enforceability of
third-party proprietary rights. Litigation would involve substantial costs.
Bicifadine
There
are
currently several patent families filed by DOV relating to Bicifadine: (i)
methods and compositions containing Bicifadine for the treatment and prevention
of hyperthermia; (ii) solid compositions containing the polymorph Form B of
Bicifadine as characterized by certain infrared peaks and a distinct x-ray
powder diffraction (XPRD) profile, and methods of treating pain in mammals
using
the same; (iii) methods and compositions employing a therapeutically effective
amount of Bicifadine for preventing and treating a condition or symptom of
acute
pain, chronic pain, and/or a neuropathic disorder in mammalian subjects; (iv)
methods and compositions containing Bicifadine HCl to prevent or treat
neuropathic disorders in mammals, including, but not limited to, diabetic
neuropathy; (v) methods and compositions containing Bicifadine for the
prevention and treatment of lower urinary tract disorders; (vi) methods of
making Bicifadine; (vii) methods and compositions for preventing or treating
chronic pain comprising Bicifadine in combination with a non-steroidal
anti-inflammatory drug (NSAID).
Of
these
eight patent families, there is one issued patent, U.S. Patent No. 7,094,799,
generally directed to solid compositions containing the polymorph Form B of
Bicifadine and “substantially free” of polymorph Form A. Pending patent
applications filed by DOV in 2006 include:
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A
patent application directed to sustained release formulations of
Bicifadine.
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A
patent application directed to the use of Bicifadine for treating
a
disability or reducing a functional impairment associated with acute
pain,
chronic pain, and/or neuropathic
disorders.
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A
patent application directed to the use of Bicifadine for preventing
and
treating neuropathic disorders, including, but not limited to, diabetic
neuropathy, diabetic peripheral neuropathy, and neuropathy associated
with
alcoholism, sciatica, multiple sclerosis, spinal cord injury, chronic
low
back pain, HIV, cancer, etc.
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In
addition, there is one issued patent to Wyeth directed to a method of treating
an addictive, compulsive disorder caused by alcohol or cocaine abuse using
Bicifadine HCl. There are also three pending US applications filed by Wyeth
in
2005 directed to methods for treating neuropathic disorders or conditions.
At
least one of these patent applications covers the use of Bicifadine in the
treatment of neuropathic pain.
Under
the
license agreement with DOV, we have exclusive worldwide rights to the above
patents and patent applications for all therapeutic uses, with the exception
of
the the Wyeth Retained Field. Under the terms of the DOV/Wyeth agreement, Wyeth
can only develop Bicifadine for use in the Wyeth Retained Field in collaboration
with DOV, and under the license agreement between DOV and XTL Development,
DOV
will not conduct research or development with Wyeth for the use of Bicifadine
in
the Wyeth Retained Field. See “Item 3. Key Information-Risk Factors-Risks
Related to Our Intellectual Property.”
DOS
The
lead
molecules that are included in the VivoQuest license are covered by two issued
patents and four patent applications. The patent applications describe both
the
structure of the compounds and their use for treating HCV infection. The two
issued VivoQuest patents will expire in 2023. Additional patent applications,
if
issued, will expire in 2023, 2024 and 2025. We have also filed additional patent
applications that cover the lead compounds discovered since the licensing of
the
DOS from VivoQuest. These additional patent applications, if issued, will expire
in 2026 and 2027. Based on the provisions of the Patent Term Extension Act,
we
currently believe that we would qualify for certain patent term extensions.
We
believe that Presidio will have sufficient time to commercially utilize the
inventions from our small molecule development program directed to the treatment
and prevention of hepatitis C infection.
Other
Intellectual Property Rights
We
depend
upon trademarks, trade secrets, know-how and continuing technological advances
to develop and maintain our competitive position. To maintain the
confidentiality of trade secrets and proprietary information, we require our
employees, scientific advisors, consultants and collaborators, upon commencement
of a relationship with us, to execute confidentiality agreements and, in the
case of parties other than our research and development collaborators, to agree
to assign their inventions to us. These agreements are designed to protect
our
proprietary information and to grant us ownership of technologies that are
developed in connection with their relationship with us. These agreements may
not, however, provide protection for our trade secrets in the event of
unauthorized disclosure of such information.
Licensing
Agreements and Collaborations
We
have
formed strategic alliances with a number of companies for the production and
commercialization of our drug candidates. Our current key strategic alliances
are discussed below. See “Item 5. Operating and Financial Review and Prospects -
Obligations and Commitments” which describes contingent milestone payments we
have undertaken to make to certain licensors over the life of the licenses
described below.
Bicifadine
License
In
January 2007, XTL Development signed an agreement with DOV to in-license the
worldwide rights for Bicifadine, a serotonin and norepinephrine reuptake
inhibitor. XTL Development intends to develop Bicifadine for the treatment
of
diabetic neuropathic pain, a chronic condition resulting from damage to
peripheral nerves. In accordance with the terms of the license agreement, XTL
Development paid an initial up-front license fee of $7.5 million in cash. In
addition, XTL Development will make milestone payments of up to $126.5 million
over the life of the license, of which up to $115 million will be due upon
or
after regulatory approval of the product. These milestone payments may be made
in either cash and/or our ordinary shares, at our election, with the exception
of $5 million in cash, due upon or after regulatory approval of the product.
XTL
Development is also obligated to pay royalties to DOV on net sales of the
product.
VivoQuest
License
In
August
2005, we entered into a license agreement with VivoQuest covering a proprietary
compound library, including certain HCV compounds. Under the terms of the
license agreement, we have exclusive worldwide rights to VivoQuest’s
intellectual property and technology in all fields of use. To date we have
made
approximately $0.9 million in license payments to VivoQuest under the license
agreement. The license agreement also provides for additional milestone payments
triggered by certain regulatory and sales targets. These additional milestone
payments total $34.6 million, $25.0 million of which will be due upon or
following regulatory approval or actual product sales, and are payable in cash
or ordinary shares at our election. In addition, the license agreement requires
that we make royalty payments to VivoQuest on product sales.
Presidio
License
In
March
2008, we signed an agreement to out-license our DOS program to Presidio.
Under
the terms of the license agreement, Presidio becomes responsible for all
further
development and commercialization activities and costs relating to the DOS
program. In accordance with the terms of the license agreement, we received
a $4
million, non-refundable, upfront payment in cash from Presidio and will
receive up to an additional $104 million upon reaching certain development
and
commercialization milestones. In addition, we will receive a royalty on direct
product sales by Presidio, and a percentage of Presidio’s income if the DOS
program is sublicensed by Presidio to a third party.
Competition
Competition
in the pharmaceutical and biotechnology industries is intense. Our competitors
include pharmaceutical companies and biotechnology companies, as well as
universities and public and private research institutions. In addition,
companies that are active in different but related fields represent substantial
competition for us. Many of our competitors have significantly greater capital
resources, larger research and development staffs and facilities and greater
experience in drug development, regulation, manufacturing and marketing than
we
do. These organizations also compete with us to recruit qualified personnel,
attract partners for joint ventures or other collaborations, and license
technologies that are competitive with ours. To compete successfully in this
industry we must identify novel and unique drugs or methods of treatment and
then complete the development of those drugs as treatments in advance of our
competitors.
The
drugs
that we are attempting to develop will have to compete with existing therapies.
In addition, a large number of companies are pursuing the development of
pharmaceuticals that target the same diseases and conditions that we are
targeting. Other
companies have products
or
drug
candidates in various stages of pre-clinical or clinical development to treat
diseases for which we are also seeking to discover and develop drug candidates.
Some of these potential competing drugs are further advanced in development
than
our drug candidates and may be commercialized earlier.
Competing
Products for Treatment of Neuropathic Pain
Three
oral drugs have been approved by the FDA for the treatment of neuropathic pain:
Gabapentin
®
(developed by Pfizer Inc.) which is approved for the treatment of post herpetic
neuralgia; Pregabalin
®
(developed by Pfizer Inc.) which is approved for post herpetic neuralgia and
diabetic neuropathic pain; and Cymbalta
®
(developed by Eli Lilly and Company) which is approved for diabetic neuropathic
pain.
Several
other drugs are in late-stage clinical trials for the treatment of neuropathic
pain: Milnacipran
®
(developed by Cypress Bioscience Inc.) is presently is Phase 3 clinical trials
for the treatment of fibromyalgia, and desvenlafaxin (developed by Wyeth
Pharmaceuticals Inc.) is presently in Phase 3 clinical trials for the treatment
of neuropathic pain. Wyeth has also filed a new drug application, or NDA, with
the FDA, seeking approval of desvenlafaxin in depression.
Several
additional companies are developing drugs for neuropathic pain including:
Vernalis plc, Endo Pharmaceuticals Inc., GlaxoSmithKline plc, Avanir
Pharmaceuticals, and UCB.
Competing
Products for Treatment of Chronic Hepatitis C
We
believe that a certain number of the drugs that are currently under development
will become available in the future for the treatment of hepatitis C. At
present, the only approved therapies for treatment of chronic HCV are
Interferon-based. There are multiple drugs presently under development for
the
treatment of HCV, most of which are in the pre-clinical or early stage of
clinical development. These compounds are being developed by both established
pharmaceutical companies, as well as by biotech companies. Examples of such
companies are: Anadys Pharmaceuticals, Inc., F. Hoffman-LaRoche & Co.,
Intercell AG, Schering-Plough Corporation, Gilead Sciences, Inc., Idenix
Pharmaceuticals, Inc., InterMune, Inc., Pharmasset, Ltd., Vertex Pharmaceuticals
Incorporated and Viropharma Incorporated. Many of these companies and
organizations, either alone or with their collaborative partners, have
substantially greater financial, technical and human resources than we do.
Supply
and Manufacturing
We
currently have no manufacturing capabilities and do not intend to establish
any
such capabilities.
Bicifadine
As
part
of our license agreement with DOV, we have the right to purchase certain
inventories of Bicifadine that have been produced for DOV. We believe that
the
present Bicifadine inventories owned by DOV will be adequate to satisfy our
current clinical supply needs. For further late stage trials, we intend to
utilize DOV’s existing Bicifadine inventory so long as it meets the relevant
specifications and quality control requirements. In the event that the inventory
does not meet the proper specifications, or if DOV should fail to provide us
with adequate supplies of the inventory, then we will contract with a
manufacturer to supply us with our additional clinical needs. For commercial
supply of Bicifadine, we intend to contract with the drug’s existing
manufacturers or other drug manufacturers to produce drug supply in sufficient
quantity for launch and commercialization. See “Item 3. Key Information-Risk
Factors-Risks Related to Our Intellectual Property.”
DOS
Under
the
terms of the license agreement, Presidio becomes responsible for all further
development and commercialization activities and costs relating to the DOS
program.
General
At
the
time of commercial sale, to the extent possible and commercially practicable,
we
plan to engage a back-up supplier for each of our product candidates. Until
such
time, we expect that we will rely on a single contract manufacturer to produce
each of our product candidates under cGMP regulations. Our third-party
manufacturers have a limited numbers of facilities in which our product
candidates can be produced and will have limited experience in manufacturing
our
product candidates in quantities sufficient for conducting clinical trials
or
for commercialization. Our third-party manufacturers will have other clients
and
may have other priorities that could affect our contractor’s ability to perform
the work satisfactorily and/or on a timely basis. Both of these occurrences
would be beyond our control. We anticipate that we will similarly rely on
contract manufacturers for our future proprietary product candidates.
We
expect
to similarly rely on contract manufacturing relationships for any products
that
we may in-license or acquire in the future. However, there can be no assurance
that we will be able to successfully contract with such manufacturers on terms
acceptable to us, or at all.
Contract
manufacturers are subject to ongoing periodic inspections by the FDA, the US
Drug Enforcement Agency and corresponding state and local agencies to ensure
strict compliance with cGMP and other state and federal regulations. We do
not
have control over third-party manufacturers’ compliance with these regulations
and standards, other than through contractual obligations.
If
we
need to change manufacturers, the FDA and corresponding foreign regulatory
agencies must approve these new manufacturers in advance, which will involve
testing and additional inspections to ensure compliance with FDA regulations
and
standards and may require significant lead times and delay. Furthermore,
switching manufacturers may be difficult because the number of potential
manufacturers is limited. It may be difficult or impossible for us to find
a
replacement manufacturer quickly or on terms acceptable to us, or at
all.
Government
and Industry Regulation
Numerous
governmental authorities, principally the FDA and corresponding state and
foreign regulatory agencies, impose substantial regulations upon the clinical
development, manufacture and marketing of our drug candidates and technologies,
as well as our ongoing research and development activities. None of our drug
candidates have been approved for sale in any market in which we have marketing
rights. Before marketing in the US, any drug that we develop must undergo
rigorous pre-clinical testing and clinical trials and an extensive regulatory
approval process implemented by the FDA, under the Federal Food, Drug and
Cosmetic Act
of 1938,
as amended
.
The FDA
regulates, among other things, the pre-clinical and clinical testing, safety,
efficacy, approval, manufacturing, record keeping, adverse event reporting,
packaging, labeling, storage, advertising, promotion, export, sale and
distribution of biopharmaceutical products.
The
regulatory review and approval process is lengthy, expensive and uncertain.
We
are required to submit extensive pre-clinical and clinical data and supporting
information to the FDA for each indication or use to establish a drug
candidate’s safety and efficacy before we can secure FDA approval. The approval
process takes many years, requires the expenditure of substantial resources
and
may involve ongoing requirements for post-marketing studies or surveillance.
Before commencing clinical trials in humans, we must submit an IND to the FDA
containing, among other things, pre-clinical data, chemistry, manufacturing
and
control information, and an investigative plan. Our submission of an IND may
not
result in FDA authorization to commence a clinical trial.
The
FDA
may permit expedited development, evaluation, and marketing of new therapies
intended to treat persons with serious or life-threatening conditions for which
there is an unmet medical need under its fast track drug development programs.
A
sponsor can apply for fast track designation at the time of submission of an
IND, or at any time prior to receiving marketing approval of the NDA. To receive
fast track designation, an applicant must demonstrate that the
drug:
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is
intended to treat a serious or life-threatening
condition;
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·
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is
intended to treat a serious aspect of the condition;
and
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has
the potential to address unmet medical needs, and this potential
is being
evaluated in the planned drug development
program.
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Clinical
testing must meet requirements for institutional review board oversight,
informed consent and good clinical practices, and must be conducted pursuant
to
an IND, unless exempted.
For
purposes of NDA approval, clinical trials are typically conducted in the
following sequential phases:
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Phase
1
:
The drug is administered to a small group of humans, either healthy
volunteers or patients, to test for safety, dosage tolerance, absorption,
metabolism, excretion, and clinical pharmacology.
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·
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Phase
2
:
Studies are conducted on a larger number of patients to assess the
efficacy of the product, to ascertain dose tolerance and the optimal
dose
range, and to gather additional data relating to safety and potential
adverse events.
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Phase
3
:
Studies establish safety and efficacy in an expanded patient population.
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Phase
4
:
The FDA may require Phase 4 post-marketing studies to find out more
about
the drug’s long-term risks, benefits, and optimal use, or to test the drug
in different populations, such as
children.
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The
length of time necessary to complete clinical trials varies significantly and
may be difficult to predict. Clinical results are frequently susceptible to
varying interpretations that may delay, limit or prevent regulatory approvals.
Additional factors that can cause delay or termination of our clinical trials,
or that may increase the costs of these trials, include:
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slow
patient enrollment due to the nature of the clinical trial plan,
the
proximity of patients to clinical sites, the eligibility criteria
for
participation in the study or other
factors;
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inadequately
trained or insufficient personnel at the study site to assist in
overseeing and monitoring clinical trials or delays in approvals
from a
study site’s review board;
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longer
treatment time required to demonstrate efficacy or determine the
appropriate product dose;
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insufficient
supply of the drug candidates;
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adverse
medical events or side effects in treated patients;
and
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ineffectiveness
of the drug candidates.
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In
addition, the FDA may place a clinical trial on hold or terminate it if it
concludes that subjects are being exposed to an unacceptable health risk. Any
drug is likely to produce some toxicity or undesirable side effects when
administered at sufficiently high doses and/or for a sufficiently long period
of
time. Unacceptable toxicity or side effects may occur at any dose level at
any
time in the course of studies designed to identify unacceptable effects of
a
drug candidate, known as toxicological studies, or clinical trials of drug
candidates. The appearance of any unacceptable toxicity or side effect could
cause us or regulatory authorities to interrupt, limit, delay or abort the
development of any of our drug candidates and could ultimately prevent approval
by the FDA or foreign regulatory authorities for any or all targeted
indications.
Before
receiving FDA approval to market a product, we must demonstrate that the product
is safe and effective for its intended use by submitting to the FDA an NDA
containing the pre-clinical and clinical data that have been accumulated,
together with chemistry and manufacturing and controls specifications and
information, and proposed labeling, among other things. The FDA may refuse
to
accept an NDA for filing if certain content criteria are not met and, even
after
accepting an NDA, the FDA may often require additional information, including
clinical data, before approval of marketing a product.
As
part
of the approval process, the FDA must inspect and approve each manufacturing
facility. Among the conditions of approval is the requirement that a
manufacturer’s quality control and manufacturing procedures conform to cGMP.
Manufacturers must expend time, money and effort to ensure compliance with
cGMP,
and the FDA conducts periodic inspections to certify compliance. It may be
difficult for our manufacturers or us to comply with the applicable cGMP and
other FDA regulatory requirements. If we or our contract manufacturers fail
to
comply, then the FDA will not allow us to market products that have been
affected by the failure.
If
the
FDA grants approval, the approval will be limited to those disease states,
conditions and patient populations for which the product is safe and effective,
as demonstrated through clinical studies. Further, a product may be marketed
only in those dosage forms and for those indications approved in the NDA.
Certain changes to an approved NDA, including, with certain exceptions, any
changes to labeling, require approval of a supplemental application before
the
drug may be marketed as changed. Any products that we manufacture or distribute
pursuant to FDA approvals are subject to continuing regulation by the FDA,
including compliance with cGMP and the reporting of adverse experiences with
the
drugs. The nature of marketing claims that the FDA will permit us to make in
the
labeling and advertising of our products will be limited to those specified
in
an FDA approval, and the advertising of our products will be subject to
comprehensive regulation by the FDA. Claims exceeding those that are approved
will constitute a violation of the Federal Food, Drug, and Cosmetic Act.
Violations of the Federal Food, Drug, and Cosmetic Act or regulatory
requirements at any time during the product development process, approval
process, or after approval may result in agency enforcement actions, including
withdrawal of approval, recall, seizure of products, injunctions, fines and/or
civil or criminal penalties. Any agency enforcement action could have a material
adverse effect on our business.
Should
we
wish to market our products outside the US, we must receive marketing
authorization from the appropriate foreign regulatory authorities. The
requirements governing the conduct of clinical trials, marketing authorization,
pricing and reimbursement vary widely from country to country. At present,
companies are typically required to apply for foreign marketing authorizations
at a national level. However, within the EU, registration procedures are
available to companies wishing to market a product in more than one EU member
state. Typically, if the regulatory authority is satisfied that a company has
presented adequate evidence of safety, quality and efficacy, then the regulatory
authority will grant a marketing authorization. This foreign regulatory approval
process, however, involves risks similar or identical to the risks associated
with FDA approval discussed above, and therefore we cannot guarantee that we
will be able to obtain the appropriate marketing authorization for any product
in any particular country. Our current development strategy calls for us to
seek
marketing authorization for our drug candidates outside the United
States.
Failure
to comply with applicable federal, state and foreign laws and regulations would
likely have a material adverse effect on our business. In addition, federal,
state and foreign laws and regulations regarding the manufacture and sale of
new
drugs are subject to future changes. We cannot predict the likelihood, nature,
effect or extent of adverse governmental regulation that might arise from future
legislative or administrative action, either in the US or abroad.
Organizational
structure
Our
wholly-owned subsidiaries, XTL Biopharmaceuticals, Inc. and XTL Development,
Inc., are each incorporated in Delaware and each has its principal place of
business in Valley Cottage, New York.
Property,
Plants and Equipment
We
lease
an aggregate of approximately 414 square meters in Rehovot, Israel, expiring
in
April 2009. We also lease approximately 3,000 square meters of office and
laboratory facilities in Valley Cottage, New York, expiring in November 2009.
We
have an option to renew our lease agreement in Valley Cottage.
We
anticipate that these facilities will be sufficient for our needs for the
foreseeable future. To our knowledge, there are no environmental issues that
affect our use of the properties that we lease.
There
are
no encumbrances on our rights in these leased properties or on any of the
equipment that we own. However, to secure the lease agreements in Israel, we
provided a bank guarantee in the amount of approximately $64,000, linked to
the
Israeli Consumer Price Index. As of December 31, 2007, the guarantee is secured
by pledge on a restricted deposit amounting to $61,000, which is included in
the
balance sheet as a restricted deposit.
ITEM
4A. UNRESOLVED STAFF COMMENTS
None.
ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The
following discussion and analysis contains forward-looking statements about
our
plans and expectations of what may happen in the future. Forward-looking
statements are based on a number of assumptions and estimates that are
inherently subject to significant risks and uncertainties, and our results
could
differ materially from the results anticipated by our forward-looking statements
as a result of many known or unknown factors, including, but not limited to,
those factors discussed in “Item 3. Key Information-Risk Factors” and “Item 4.
Information on the Company.” See also the “Special Cautionary Notice Regarding
Forward-Looking Statements” set forth above.
You
should read the following discussion and analysis in conjunction with our
audited consolidated financial statements, including the related notes, prepared
in accordance with US GAAP for the years ended December 31, 2007, 2006 and
2005,
and as of December 31, 2007 and 2006, contained in “Item 18. Financial
Statements” and with any other selected financial data included elsewhere in
this annual report.
Selected
Financial Data
The
table
below presents selected statement of operations and balance sheet data for
the
fiscal years ended and as of December 31, 2007, 2006, 2005, 2004 and 2003.
We
have derived the selected financial data for the fiscal years ended December
31,
2007, 2006, and 2005, and as of December 31, 2007 and 2006, from our audited
consolidated financial statements, included elsewhere in this annual report
and
prepared in accordance with US GAAP. We have derived the selected financial
data
for fiscal years ended December 31, 2004 and 2003 and as of December 31, 2005,
2004 and 2003, from audited financial statements not appearing in this annual
report, which have been prepared in accordance with US GAAP. You should read
the
selected financial data in conjunction with “Item 5. Operating and Financial
Review and Prospects,” “Item 8. Financial Information” and “Item 18. Financial
Statements,” including the related notes.
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Year
Ended December 31,
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2007
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2006
|
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2005
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2004
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2003
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(In
thousands, except share and per share amounts)
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Statements
of Operations Data:
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Revenues
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Reimbursed
out-of-pocket expenses
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$
|
—
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$
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$
|
2,743
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|
$
|
3,269
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$
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License
|
|
|
907
|
|
|
454
|
|
|
454
|
|
|
185
|
|
|
|
|
|
|
|
|
907
|
|
|
454
|
|
|
3,197
|
|
|
3,454
|
|
|
|
|
|
Cost
of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursed
out-of-pocket expenses
|
|
|
|
|
|
|
|
|
2,743
|
|
|
3,269
|
|
|
|
|
|
License
(with respect to royalties)
|
|
|
110
|
|
|
54
|
|
|
54
|
|
|
32
|
|
|
|
|
|
|
|
|
110
|
|
|
54
|
|
|
2,797
|
|
|
3,301
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
797
|
|
|
400
|
|
|
400
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development costs
|
|
|
18,998
|
|
|
10,229
|
|
|
7,313
|
|
|
11,985
|
|
|
14,022
|
|
|
Less
participations
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
3,229
|
|
|
|
|
|
18,942
|
|
|
10,229
|
|
|
7,313
|
|
|
11,985
|
|
|
10,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process
research and development
|
|
|
|
|
|
|
|
|
1,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
5,582
|
|
|
5,576
|
|
|
5,457
|
|
|
4,134
|
|
|
3,105
|
|
|
Business
development costs
|
|
|
2,008
|
|
|
641
|
|
|
227
|
|
|
810
|
|
|
664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(25,735
|
)
|
|
(16,046
|
)
|
|
(14,380
|
)
|
|
(16,776
|
)
|
|
(14,562
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
and other income, net
|
|
|
590
|
|
|
1,141
|
|
|
443
|
|
|
352
|
|
|
352
|
|
|
Income
taxes
|
|
|
206
|
|
|
(227
|
)
|
|
(78
|
)
|
|
(49
|
)
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
for the period
|
|
$
|
(24,939
|
)
|
$
|
(15,132
|
)
|
$
|
(14,015
|
)
|
$
|
(16,473
|
)
|
$
|
(14,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per ordinary share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.11
|
)
|
$
|
(0.08
|
)
|
$
|
(0.08
|
)
|
$
|
(0.12
|
)
|
$
|
(0.13
|
)
|
|
Weighted
average shares outstanding
|
|
|
228,492,818
|
|
|
201,737,295
|
|
|
170,123,003
|
|
|
134,731,766
|
|
|
111,712,916
|
|
|
|
|
As
of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
(In
thousands)
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
cash equivalents, bank deposits and
trading
and marketable securities
|
|
$
|
12,977
|
|
$
|
25,347
|
|
$
|
13,360
|
|
$
|
22,924
|
|
$
|
22,262
|
|
|
Working
capital
|
|
|
8,532
|
|
|
22,694
|
|
|
11,385
|
|
|
20,240
|
|
|
19,967
|
|
|
Total
assets
|
|
|
14,127
|
|
|
26,900
|
|
|
15,151
|
|
|
25,624
|
|
|
24,853
|
|
|
Long-term
obligations
|
|
|
194
|
|
|
738
|
|
|
1,493
|
|
|
2,489
|
|
|
1,244
|
|
|
Total
shareholders’ equity
|
|
|
8,564
|
|
|
22,760
|
|
|
11,252
|
|
|
19,602
|
|
|
20,608
|
|
Overview
We
are a
biopharmaceutical company engaged in the acquisition and development of
pharmaceutical products for the treatment of unmet medical needs, particularly
the treatment of diabetic neuropathic pain and hepatitis C. To date, we have
not
received approval for the sale of any of our drug candidates in any market
and,
therefore, have not generated any commercial revenues from the sales of our
drug
candidates.
We
were
established as a corporation under the laws of the State of Israel in 1993,
and
commenced operations to use and commercialize technology developed at the
Weizmann Institute, in Rehovot, Israel. Since commencing operations, our
activities have been primarily devoted to developing our technologies and drug
candidates, acquiring pre-clinical and clinical-stage compounds, raising
capital, purchasing assets for our facilities, and recruiting personnel. We
are
a development stage company and have had no product sales to date. Our major
sources of working capital have been proceeds from various private placements
of
equity securities, option and warrant exercises, from our initial public
offering and from our placing and open offer transaction.
We
have
incurred negative cash flow from operations each year since our inception and
we
anticipate incurring negative cash flows from operating activities for the
foreseeable future. We have spent, and expect to continue to spend, substantial
amounts in connection with implementing our business strategy, including our
planned product development efforts, our clinical trials and potential
in-licensing and acquisition opportunities.
Our
revenues have consisted of license fees and reimbursed out of pocket expenses
from Cubist. We recognized the license fee revenues from our agreement with
Cubist for HepeX-B ratably over the expected life of the arrangement;
un-amortized amounts were recorded as deferred revenues. We also recognized
revenue related to reimbursed out of pocket expenses at the time that we
provided development services to Cubist. In July 2007, Cubist terminated the
license agreement with us. See “Item 4. Information on the Company - History and
Development of XTL.”
Our
cost
of revenues consisted of costs associated with the Cubist program for HepeX-B
which consisted primarily of salaries and related personnel costs, fees paid
to
consultants and other third-parties for clinical and laboratory development,
facilities-related and other expenses relating to the design, development,
testing, and enhancement of our former product candidate out-licensed to Cubist.
In addition, we recognized license fee expenses associated with our agreement
with Yeda proportional to our license fee agreement with Cubist, with
unamortized amounts recorded as deferred expenses. On December 31, 2007, we
mutually terminated the research and license agreement with Yeda. See “Item 4.
Information on the Company - History and Development of XTL.”
Our
research and development costs consist primarily of salaries and related
personnel costs, fees paid to consultants and other third-parties for clinical
and laboratory development, license and milestone fees, facilities-related
and
other expenses relating to the design, development, testing, and enhancement
of
our product candidates. We expense our research and development costs as they
are incurred.
Our
historical participations consist primarily of grants received from the Israeli
government in support of our legacy research and development activities, which
are no longer being developed by us. These grants are recognized as a reduction
of expense as the related costs are incurred. See “- Research and Development,
Patents and Licenses - Israeli Government Research and Development Grants,”
below.
Our
general and administrative expenses consist primarily of salaries and related
expenses for executive, finance and other administrative personnel, professional
fees, director fees and other corporate expenses, including investor relations,
and facilities related expenses. We expense our general and administrative
expenses as they are incurred.
Our
business development costs consist primarily of salaries and related expenses
for business development personnel, travel, professional fees and transaction
advisory fees to third party intermediaries. Our business development activities
are related to partnering activities for our drug programs, seeking new
development collaborations and in-licensing opportunities. We expense our
business development expenses as they are incurred. The transaction advisory
fee
in the form of a SAR will be revalued, based on the then current fair value,
at
each subsequent reporting date, until payment of the stock appreciation rights
have been satisfied.
Our
results of operations include non-cash compensation expense as a result of
the
grants of stock options. Compensation expense for awards of options granted
to
employees and directors represents the fair value of the award recorded over
the
respective vesting periods of the individual stock options. The expense is
included in the respective categories of expense in the statement of operations.
We experienced a significant increase in non-cash compensation in the fiscal
year ended December 31, 2005, and continue to expect to incur significant
non-cash compensation as a result of adopting Statement of Financial Accounting
Standards, or SFAS, No. 123, “Share Based Payment,” or SFAS 123R, on January 1,
2005.
For
awards of options and warrants to consultants and other third-parties,
compensation expense is determined at the “measurement date.” The expense is
recognized over the vesting period for the award. Until the measurement date
is
reached, the total amount of compensation expense remains uncertain. We record
compensation expense based on the fair value of the award at the reporting
date.
Unvested
options are revalued at every reporting period and amortized over the vesting
period in order to determine the compensation expense.
Our
ongoing clinical trials will be lengthy and expensive. Even if these trials
show
that our drug candidates are effective in treating certain indications, there
is
no guarantee that we will be able to record commercial sales of any of our
product candidates in the near future. In addition, we expect losses to continue
as we continue to fund development of our drug candidates. As we continue our
development efforts, we may enter into additional third-party collaborative
agreements and may incur additional expenses, such as licensing fees and
milestone payments. As a result, our periodical results may fluctuate and a
period-by-period comparison of our operating results may not be a meaningful
indication of our future performance.
Results
of Operations
Years
Ended December 31, 2007 and 2006
Revenues.
Revenues
for the year ended December 31, 2007, increased by $453,000 to $907,000,
as
compared to revenues of $454,000 for the year ended December 31, 2006. The
increase in revenues for the year ended December 31, 2007, was due to the
recognition of unamortized deferred revenue upon termination of the HepeX-B
license by Cubist in July 2007. We currently expect to record license revenue
as
a result of the license agreement signed with Presidio in March 2008 (see
“Item
10. Additional Information -Material Contracts” and “Item 4. Information on the
Company”).
Cost
of Revenues
.
Cost of
revenues for the year ended December 31, 2007, increased by $56,000 to $110,000,
as compared to cost of revenues of $54,000, for the year ended December 31,
2006. The increase in cost of revenues was due to the recognition of unamortized
license fees that were recorded as deferred expenses upon termination of the
HepeX-B license by Cubist in July 2007.
Research
and Development Costs
.
Research and development costs net of participations increased by $8,713,000
to
$18,942,000 for the year ended December 31, 2007, as compared to $10,229,000
for
the year ended December 31, 2006. The increase in research and development
costs
was due primarily to an increase of $13,476,000 in expenses related to our
Bicifadine clinical program (including the $7.5 million initial upfront license
fee to DOV) (see “Item 10. Additional Information -Material Contracts” and “Item
4. Information on the Company”), offset by a decrease of $4,166,000 in expenses
related to our legacy programs XTL-6865 and XTL-2125, that were terminated
in
2007, and also due to a $597,000 decrease in expenses associated with our
preclinical DOS program.
We
expect
our overall research and development expenses to decrease in 2008 due to
reduced
costs associated with our DOS program, which we out-licensed in March 2008,
offset by
increased costs associated with our Bicifadine clinical
program. Specifically, excluding the impact of the $7.5 million initial upfront
license fee paid in 2007, we expect our Bicifadine clinical program expenses
to
increase in 2008 due to the Phase 2b trial initiated in September 2007
(including any milestone payments that may become due upon completion of
this
study payable in cash or ordinary shares at our discretion) and also due
to the
open label study initiated in January 2008. As a result of the license
agreement, Presidio becomes responsible for all further development and
commercialization activities and costs related to the DOS program. See also
“Item 10. Additional Information -Material Contracts” and “Item 4. Information
on the Company.” In addition, in January 2008, we terminated seven employees in
the DOS program and recorded a severance charge of approximately
$100,000.
General
and Administrative Expenses
.
General
and administrative expenses increased by $6,000 to $5,582,000 for the year
ended
December 31, 2007, as compared to expenses of $5,576,000 for the year ended
December 31, 2006. The increase in general and administrative expenses was
due
primarily to an increase in legal and patent related expenses as well as
Sarbanes-Oxley compliance costs, offset by a decrease of $208,000 in non-cash
compensation costs related to option grants. Excluding non-cash compensation
costs, we expect a modest decline in our level of our general and administrative
costs during 2008.
Business
Development Costs
.
Business development costs increased by $1,367,000 to $2,008,000 for the year
ended December 31, 2007, as compared to expenses of $641,000 for the year ended
December 31, 2006. The increase in business developments costs was due primarily
to $1,560,000 in transaction advisory fees in the form of stock appreciation
rights associated with the in-licensing of Bicifadine offset by reduced legal
and due diligence expenses in 2007 as compared to 2006. The transaction advisory
fee in the form of a SAR will be revalued, based on the then current fair value,
at each subsequent reporting date, until payment of the stock appreciation
rights have been satisfied (see “Item 10. Additional Information -Material
Contracts” and “Item 4. Information on the Company”).
Financial
and Other Income
.
Financial and other income for the year ended December 31, 2007, decreased
by
$551,000 to $590,000, as compared to financial and other income of $1,141,000
for the year ended December 31, 2006. The decrease in financial and other income
was due primarily to a lower level of invested funds when compared to the
comparable period last year.
Income
Taxes
.
Income
tax expense decreased by $433,000 to a negative expense, or income, of $206,000
for the year ended December 31, 2007, as compared to expenses of $227,000 for
year ended December 31, 2006. For the year ended December 31, 2007,
t
he
US
consolidated tax group consisting of XTL Biopharmaceuticals, Inc. and XTL
Development incurred net operating losses. The group will file a carryback
claim
for those losses to the years ended December 31, 2006 and December 31, 2005
in
order to receive a refund for US federal income taxes paid for those years.
Our
income tax expense (income) is attributable to taxable income (losses) from
the
continuing operations of our subsidiaries in the US. This income is eliminated
upon consolidation of our financial statements.
Years
Ended December 31, 2006 and 2005
Revenues.
Revenues
for the year ended December 31, 2006, decreased by $2,743,000 to $454,000,
as
compared to revenues of $3,197,000 for the year ended December 31, 2005. The
decrease in revenues for the year ended December 31, 2006, was due to the
absence of reimbursed out of pocket expenses from Cubist, pursuant to our
agreement with Cubist, under which we transferred full responsibility for
completing the development of HepeX-B to Cubist.
Cost
of Revenues
.
Cost of
revenues for the year ended December 31, 2006, decreased by $2,743,000 to
$54,000, as compared to cost of revenues of $2,797,000, for the year ended
December 31, 2005. The decrease in cost of revenues was due to the absence
of
development expenses for HepeX-B that were incurred pursuant to our licensing
agreement with Cubist, as described above.
Research
and Development Costs
.
Research and development costs increased by $2,916,000 to $10,229,000 for the
year ended December 31, 2006, as compared to $7,313,000 for the year ended
December 31, 2005. The increase in research and development costs was due
primarily to an increase of $3,413,000 in expenses related to the inclusion
of a
full year of DOS which was acquired from VivoQuest in September 2005 (see “Item
10. Additional Information -Material Contracts” and “Item 4. Information on the
Company”), offset by a decrease of approximately $66,000 and $431,000 in
expenses related to the XTL-6865 and XTL-2125 development and clinical programs,
respectively. The decreased expenses associated with our clinical programs
were
due to the benefit in 2006 of cost reductions associated with our 2005
restructuring (see “2005 Restructuring,” below).
In-Process
Research and Development
.
We did
not record a charge for the year ended December 31, 2006. For the year ended
December 31, 2005, we incurred a charge of $1,783,000 for the estimate of the
portion of the VivoQuest transaction purchase price allocated to in-process
research and development.
General
and Administrative Expenses
.
General
and administrative expenses increased by $119,000 to $5,576,000 for the year
ended December 31, 2006, as compared to expenses of $5,457,000 for the year
ended December 31, 2005. The increase in general and administrative expenses
was
due primarily to increased expenses associated with the hiring of our Chief
Executive Officer in 2006 and with being a US public company, offset by a
decrease of $649,000 in non-cash compensation costs, related to option grants.
In 2005 a market capitalization-based milestone, associated with certain grants
made to our Chairman and to one of our non-executive directors in 2005 (see
“Item 6. Directors, Senior Management and Employees - Employment Agreements”)
was achieved; in 2006, no such milestone was achieved, resulting in a decrease
in non-cash compensation expense in 2006 as compared to 2005.
Business
Development Costs
.
Business development costs increased by approximately $414,000 to $641,000
for
the year ended December 31, 2006, as compared to expenses of $227,000 for the
year ended December 31, 2005. The increase in business developments costs was
due primarily to increased expenses associated with our acquisition and
in-licensing program, which included legal and due diligence expenses associated
with the recent in-licensing of Bicifadine.
Financial
and Other Income
.
Financial and other income for the year ended December 31, 2006, increased
by
$698,000 to $1,141,000, as compared to financial income of $443,000 for the
year
ended December 31, 2005. The increase in financial and other income was due
primarily to a higher level of invested funds due to the completion of the
private placement that closed in May 2006, as well as due to the general
increase in short-term market interest rates when compared to the comparable
period last year.
Income
Taxes
.
Income
tax expense increased by $149,000 to $227,000 for the year ended December 31,
2006, as compared to expenses of $78,000 for year ended December 31, 2005.
Our
income tax expense is attributable to taxable income from the continuing
operations of our subsidiary in the US. This income is eliminated upon
consolidation of our financial statements.
2005
Restructuring
In
2005,
we implemented a restructuring plan designed to focus our resources on the
development of our then lead programs, which we refer to as the 2005
Restructuring, with the goal of moving those programs through to clinical proof
of concept. The 2005 Restructuring included a 32 person reduction in our
workforce, 31 of whom were in research and development and one of whom was
in
general and administrative. As part of the 2005 Restructuring, we took a charge
in 2005 of $168,000, relating to employee dismissal costs, $163,000 of which
was
included in research and development costs and $5,000 of which was included
in
general and administrative expenses. The 2005 Restructuring was completed in
early 2006, with the $168,000 of dismissal costs paid as of December 31, 2006.
In December 2005, as a result of the 2005 Restructuring, and in accordance
with
the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” or SFAS 144, we reviewed the carrying value of certain lab
equipment assets, and recorded an impairment charge in research and development
costs in an amount of $26,000 in 2005.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations
is
based upon our consolidated financial statements, which have been prepared
in
accordance with US GAAP. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amount of assets
and
liabilities and related disclosure of contingent assets and liabilities at
the
date of our financial statements and the reported amounts of revenues and
expenses during the applicable period. Actual results may differ from these
estimates under different assumptions or conditions.
We
define
critical accounting policies as those that are reflective of significant
judgments and uncertainties and which may potentially result in materially
different results under different assumptions and conditions. In applying these
critical accounting policies, our management uses its judgment to determine
the
appropriate assumptions to be used in making certain estimates. These estimates
are subject to an inherent degree of uncertainty. Our critical accounting
policies include the following:
Stock
Compensation
.
We have
granted options to employees, directors and consultants, as well as warrants
to
other third parties. SFAS No. 123R “Share - Based Payment,” or SFAS 123R,
addresses the accounting for share-based payment transactions in which a company
obtains employee services in exchange for (a) equity instruments of a company
or
(b) liabilities that are based on the fair value of a company’s equity
instruments or that may be settled by the issuance of such equity instruments.
The
fair
value of
stock
options
granted
with service conditions was determined using the Black-Scholes valuation model.
Such value is recognized as an expense over the service period, net of estimated
forfeitures, using the straight-line method under SFAS 123R. The fair value
of
stock options granted with market conditions was determined using a Monte Carlo
Simulation method. Such value is recognized as an expense using the accelerated
method under SFAS 123R.
We
account for equity instruments issued to third party service providers
(non-employees) in accordance with the fair value method prescribed by SFAS
123R, and the provisions of Emerging Issues Task Force Issue No 96-18,
“Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services,” or EITF 96-18.
Until the vesting date is reached, the total amount of compensation expense
remains uncertain. We record option compensation based on the fair value of
the
options at the reporting date. Unvested options are then revalued, or the
compensation is recalculated based on the then current fair value, at each
subsequent reporting date and are amortized over the vesting period in order
to
determine the compensation expense. This may result in a change to the amount
previously recorded in respect of the option grant, and additional expense
or a
negative expense may be recorded in subsequent periods based on changes in
the
assumptions used to calculate fair value, until the measurement date is reached
and the compensation expense is finalized.
The
estimation of stock awards that will ultimately vest requires significant
judgment, and to the extent actual results or updated estimates differ from
our
current estimates, such amounts will be recorded as a cumulative adjustment
in
the period those estimates are revised. We consider many factors when estimating
expected forfeitures, including types of awards, employee class, and historical
experience. Actual results, and future changes in estimates, may differ
substantially from our current estimates.
Accruals
for Clinical Research Organization and Clinical Site Costs.
We make
estimates of costs incurred to date in relation to external clinical research
organizations, or CROs, and clinical site costs. We analyze the progress of
clinical trials, including levels of patient enrollment, invoices received
and
contracted costs when evaluating the adequacy of the amount expensed and the
related prepaid asset and accrued liability. Significant judgments and estimates
must be made and used in determining the accrued balance in any accounting
period. With respect to clinical site costs, the financial terms of these
agreements are subject to negotiation and vary from contract to contract.
Payments under these contracts may be uneven, and depend on factors such as
the
achievement of certain events, the successful accrual of patients, the
completion of portions of the clinical trial or similar conditions. The
objective of our policy is to match the recording of expenses in our financial
statements to the actual services received and efforts expended. As such,
expense accruals related to clinical site costs are recognized based on our
estimate of the degree of completion of the event or events specified in the
specific clinical study or trial contract.
Impairment
.
Pursuant to SFAS 144, long-lived assets, including certain intangible assets,
to
be held and used by an entity are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may
not
be recoverable. Under SFAS 144, if the sum of the estimated future cash flows
(undiscounted and without interest charges) of the long-lived assets held and
used is less than the carrying amount of such assets, an impairment loss would
be recognized, and the assets are written down to their estimated fair values.
Assets “held for sale” are reported at the lower of their carrying amount or
fair value less estimated costs to sell.
Accounting
Related to the Valuation of In-Process Research and Development.
In
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” or SFAS
142, we recorded a charge of $1,783,000 in 2005 for the amount allocated to
in-process research and development in the VivoQuest transaction. In-process
research and development costs represent the relative fair value of purchased
in-process research and development costs that, as of the transaction date,
have
not reached technological feasibility and have no proven alternative future
use.
As VivoQuest is a development stage enterprise that had not yet commenced its
planned principal operations, we accounted for the transaction as an acquisition
of assets pursuant to the provisions of SFAS 142. Accordingly, the purchase
price was allocated to the individual assets acquired, based on their relative
fair values, and no goodwill was recorded.
The
fair
value of the in-process research and development acquired was estimated by
management with the assistance of an independent third-party appraiser, using
the “income approach.” In the income approach, fair value is dependent on the
present value of future economic benefits to be derived from ownership of an
asset. Central to this approach is an analysis of the earnings potential
represented by an asset and of the underlying risks associated with obtaining
those earnings. Fair value is calculated by discounting future net cash flows
available for distribution to their present value at a rate of return, which
reflects the time value of money and business risk. In order to apply this
approach, the expected cash flow approach was used. Expected cash flow is
measured as the sum of the average, or mean, probability-weighted amounts in
a
range of estimated cash flows. The expected cash flow approach focuses on the
amount and timing of estimated cash flows and their relative probability of
occurrence under different scenarios. The probability weighted expected cash
flow estimates are discounted to their present value using the risk free rate
of
return, since the business risk is incorporated in adjusting the projected
cash
flows to the probabilities for each scenario. The valuation was based on
information that was available to us as of the transaction date and the
expectations and assumptions deemed reasonable by our management. No assurance
can be given, however, that the underlying assumptions or events associated
with
such assets will occur as projected.
Recently
Issued Accounting Standards
SFAS
No. 141 (revised 2007), “Business Combinations,” or SFAS 141R.
In
December 2007, the FASB issued SFAS No. 141R, which replaces SFAS No 141. SFAS
141R changes the accounting for business combinations, including the measurement
of acquirer shares issued in consideration for a business combination, the
recognition of contingent consideration, the accounting for contingencies,
the
recognition of capitalized in-process research and development, the accounting
for acquisition-related restructuring cost accruals, the treatment of
acquisition related transaction costs and the recognition of changes in the
acquirer’s income tax valuation allowance and income tax uncertainties. SFAS
141R applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008, and interim periods within those fiscal years
(January 1, 2009, for us). Early application is prohibited.
SFAS
No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an
amendment of ARB 51,” or SFAS 160.
In
December 2007, the FASB issued SFAS No. 160, which changes the accounting
and reporting for minority interests. Minority interests will be recharacterized
as noncontrolling interests and will be reported as a component of equity
separate from the parent’s equity, and purchases or sales of equity interests
that do not result in a change in control will be accounted for as equity
transactions. In addition, net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income
statement and, upon a loss of control, the interest sold, as well as any
interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. SFAS 160 is effective for fiscal years (including
interim periods within those fiscal years) beginning on or after December 15,
2008 (January 1, 2009, for us). Earlier adoption is prohibited. The statement
shall be applied prospectively as of the beginning of the fiscal year in which
it is initially applied, except for the presentation and disclosure requirement
which shall be applied retrospectively for all periods presented. As of December
31, 2007, our consolidated financial statements did not include any minority
interests.
EITF
Issue No. 07-1, “Accounting for Collaborative Arrangements,” or EITF 07-1.
In
December 2007, the FASB ratified EITF 07-1, which defines collaborative
arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the
arrangement and third parties. EITF 07-1 also establishes the appropriate income
statement presentation and classification for joint operating activities and
payments between participants, as well as the sufficiency of the disclosures
related to these arrangements. EITF 07-1 is effective for fiscal years beginning
after December 15, 2008 (January 1, 2009, for us). EITF 07-1 shall be
applied using a modified version of retrospective transition for those
arrangements in place at the effective date. Companies are required to report
the effects of applying EITF-07-1 as a change in accounting principle through
retrospective application to all prior periods presented for all arrangements
existing as of the effective date, unless it is impracticable to apply the
effects the change retrospectively. We are currently assessing the impact that
EITF 07-1 may have on our results of operations and financial position.
EITF
Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or
Services Received to Be Used in Future Research and Development
Activities,”
or
EITF 07-3.
In
June
2007, the EITF reached a consensus on EITF 07-3, which requires that
nonrefundable advance payments for goods or services that will be used or
rendered for future research and development activities be deferred and
amortized over the period that the goods are delivered or the related services
are performed, subject to an assessment of recoverability. The provisions of
EITF 07-3 will be effective for financial statements issued for fiscal years
beginning after December 15, 2007, and interim periods within those fiscal
years
(January 1, 2008, for us). Early application is prohibited. The provisions
of
EITF 07-3 are applicable for new contracts entered into on or after the
effective date.
SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities -
including an amendment of FASB Statement No. 115,” or SFAS 159.
In
February 2007, the FASB issued SFAS 159, which is expected to expand the use
of
fair value accounting, but does not affect existing standards which require
certain assets or liabilities to be carried at fair value. The objective of
SFAS
159 is to improve financial reporting by providing companies with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex
hedge
accounting provisions. Under SFAS 159, a company may choose, at its initial
application or at other specified election dates, to measure eligible items
at
fair value and report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting date.
SFAS 159 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years (January
1, 2008, for us). Were we to elect the fair value option for our existing assets
and liabilities, the effect as of the adoption date, shall be reported as a
cumulative-effect adjustment to the opening balance of comprehensive loss.
SFAS
No. 157, “Fair Value Measurements,” or SFAS 157.
In
September 2006, the FASB issued SFAS No. 157, which provides guidance for using
fair value to measure assets and liabilities. SFAS 157 will apply whenever
another standard requires (or permits) assets or liabilities to be measured
at
fair value. The standard does not expand the use of fair value to any new
circumstances. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007 (January 1, 2008 for us), and interim
periods within those fiscal years. Subsequent to the issuance of SFAS 157,
the
FASB issued FSP No. 157-1, “Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13,” or FSP 157-1, and FSP No. 157-2 “Effective Date of FASB Statement
No. 157,” or FSP 157-2. FSP 157-1 excludes, in certain circumstances, SFAS No.
13 “Accounting for Leases” and other accounting pronouncements that address fair
value measurements for purposes of lease classification or measurement under
statement 13 from the provision of SFAS 157. FSP 157-2 delays the effective
date
of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial statements
on a
recurring basis (at least annually). FSP 157-2 defers the effective date of
SFAS
157 for such instruments to fiscal years beginning after November 15, 2008,
and
interim periods within those fiscal years (January 1, 2009, for us). We do
not
expect the adoption of SFAS 157 to have a material impact on its results of
operations and financial position.
Impact
of Inflation and Currency Fluctuations
We
generate all of our revenues and hold most of our cash, cash equivalents and
bank deposits in US dollars. While a substantial amount of our operating
expenses are in US dollars, we incur a portion of our expenses in New Israeli
Shekels. In addition, we also pay for some of our services and supplies in
the
local currencies of our suppliers. As a result, we are exposed to the risk
that
the US dollar will be devalued against the New Israeli Shekel or other
currencies, and as result our financial results could be harmed if we are unable
to guard against currency fluctuations in Israel or other countries in which
services and supplies are obtained in the future. Accordingly, we may enter
into
currency hedging transactions to decrease the risk of financial exposure from
fluctuations in the exchange rates of currencies. These measures, however,
may
not adequately protect us from the adverse effects of inflation in Israel.
In
addition, we are exposed to the risk that the rate of inflation in Israel will
exceed the rate of devaluation of the New Israeli Shekel in relation to the
dollar or that the timing of any devaluation may lag behind inflation in Israel.
To date, our business has not been materially adversely affected by changes
in
the US dollar exchange rate or by effects of inflation in Israel.
Governmental
Economic, Fiscal, Monetary or Political Policies that Materially Affected or
Could Materially Affect Our Operations
Israeli
companies are generally subject to income tax at the corporate tax rate of
29%
in 2007 (31% in 2006), which will be reduced as follows: 2008 - 27%, 2009-26%,
2010 and after - 25%. However, we had been granted “approved enterprise” status
under the Israeli Law for Encouragement of Capital Investments, 1959. Subject
to
compliance with applicable requirements, the portion of our undistributed
profits derived from the approved enterprise program was to be tax-exempt for
a
period of two years commencing in the first year in which we generated taxable
income and was to be subject, for a period of five to eight years, to a reduced
corporate tax of between 10% and 25%, depending on the percentage of non-Israeli
investors holding our ordinary shares. In order to receive these benefits,
we
were required to fulfill the conditions stipulated by the law, regulations
published thereunder and the instruments of approval for the specific investment
in approved enterprise. During 2007, we disposed of certain unused assets
(primarily lab equipment) in the Israeli facility. As a result of this
disposition, we have failed to comply with these conditions. As of the date
hereof, we have not received any benefits from approved enterprise, nor do
we
expect to in the future.
As
of
December 31, 2007, XTL Biopharmaceuticals Ltd. did not have any taxable income.
As of December 31, 2007, our net operating loss carryforwards for Israeli tax
purposes amounted to approximately $145.0 million. Under Israeli law, these
net-operating losses may be carried forward indefinitely and offset against
future taxable income, including capital gains from the sale of assets used
in
the business, with no expiration date.
We
currently have a “permanent establishment” in the US which began in 2005, due to
t
he
residency of the Chairman of our Board of Directors and our Chief Executive
Officer in the US, as well as other less significant contacts that we have
with
the US. As a result, any income attributable to such US permanent establishment
would be subject to US corporate income tax in the same manner as if we were
a
US corporation.
If
this
is the case, we may not be able to utilize any of the accumulated Israeli loss
carryforwards reflected on our balance sheet as of December 31, 2007 since
these
losses were not attributable to the US permanent establishment.
The
maximum US corporate income tax rate (not including applicable state and local
tax rates) is currently at 35%. In addition, we may be subject to an additional
branch profits tax of 30% on our US effectively connected earnings and profits,
subject to adjustment, for that taxable year if certain conditions occur, unless
we qualify for the reduced 12.5% US branch profits tax rate pursuant to the
United States-Israel tax treaty. We would be potentially able to credit foreign
taxes against our US tax liability in connection with income attributable to
our
US permanent establishment and subject to US and foreign income tax. At present,
we do not earn any taxable income for US tax purposes. If we eventually earn
taxable income attributable to our US permanent establishment, we would be
able
to utilize accumulated loss carryforwards to offset such income only to the
extent these carryforwards were attributable to its US permanent establishment.
As
of
December 31, 2007, we estimate that these US net operating loss carryforwards
are approximately $22.4 million. These losses can be carried forward to offset
future US taxable income and will begin to expire in 2025.
Liquidity
and Capital Resources
We
have
financed our operations from inception primarily through various private
placement transactions, our initial public offering, a placing and open offer
transaction, and option and warrant exercises. As of December 31, 2007, we
had
received net proceeds of approximately $76.4 million from various private
placement transactions, including the November 2007 private placement, net
proceeds of $45.7 million from our initial public offering, net proceeds of
$15.4 million from the 2004 placing and open offer transaction, and proceeds
of
$2.1 million from the exercise of options and warrants.
As
of
December 31, 2007, we had $13.0 million in cash, cash equivalents, and
short-term bank deposits, a decrease of $12.3 million from December 31, 2006.
Cash used in operating activities for the year ended December 31, 2007, was
$21.4 million, as compared to $12.6 million for the year ended December 31,
2006. This increase in cash used in operating activities was due primarily
to
increased expenditures associated with the execution of our business plan as
well as the
$7.5
million initial upfront license fee for Bicifadine
.
For the
year ended December 31, 2007, the net cash provided by investing activities
of
$10.6 million, as compared to net cash used in investing activities of $20.8
million for the year ended December 31, 2006, was primarily the result of the
maturity of short-term bank deposits. For the year ended December 31, 2007,
net
cash provided by financing activities of $8.8 million, as compared to $24.5
million for the year ended December 31, 2006, was the result of our $8.8 million
private placement that closed in November 2007.
Our
cash
and cash equivalents, as of December 31, 2007, were invested in highly liquid
investments such as cash and short-term bank deposits. As of December 31, 2007,
we are unaware of any known trends or any known demands, commitments, events,
or
uncertainties that will, or that are reasonably likely to, result in a material
increase or decrease in our required liquidity. We expect that our liquidity
needs during 2008 will continue to be funded from existing cash, cash
equivalents, and short-term bank deposits.
We
believe that our cash, cash equivalents and bank deposits as of December
31,
2007 and the upfront payment by Presidio will be sufficient to enable us
to meet
our planned operating needs and capital expenditures for approximately the
next
12 months.
We
do
believe, however, that we will likely seek additional capital during the
next 12
months through public or private equity offerings, debt financings and/or
collaborative, strategic alliance and licensing arrangements. We
have
made no determination at this time as to the amount, method or timing of
any
such financing.
Such
additional financing may not be available when we need it
.
Our
forecast of the period of time through which our cash, cash equivalents and
short-term investments will be adequate to support our operations is a
forward-looking statement that involves risks and uncertainties. The actual
amount of funds we will need to operate is subject to many factors, some of
which are beyond our control. These factors include the following:
|
|
·
|
the
timing of expenses associated with product development and manufacturing
of the proprietary drug candidates within our portfolio and those
that may
be in-licensed, partnered or acquired, and specifically, the timing
of
completion and results from our clinical trials for Bicifadine;
|
|
|
·
|
our
ability to achieve our milestones under licensing
arrangements;
|
|
|
·
|
the
timing of the in-licensing, partnering and acquisition of new product
opportunities; and
|
|
|
·
|
the
costs involved in prosecuting and enforcing patent claims and other
intellectual property rights.
|
We
have
based our estimate on assumptions that may prove to be inaccurate. We may need
to obtain additional funds sooner or in greater amounts than we currently
anticipate. Potential sources of financing may be obtained through strategic
relationships, public or private sales of our equity or debt securities, and
other sources. We may seek to access the public or private equity markets when
conditions are favorable due to our long-term capital requirements. We do not
have any committed sources of financing at this time, and it is uncertain
whether additional funding will be available when we need it on terms that
will
be acceptable to us, or at all. If we raise funds by selling additional shares
of our ordinary shares or other securities convertible into shares of our
ordinary shares, the ownership interest of our existing shareholders will be
diluted. If we are not able to obtain financing when needed, we may be unable
to
carry out our business plan. As a result, we may have to significantly limit
our
operations, and our business, financial condition and results of operations
would be materially harmed. See “Item 3. Key Information - Risk Factors - Risks
Related to Our Financial Condition.”
Off-Balance
Sheet Arrangements
We
have
not entered into any transactions with unconsolidated entities whereby we have
financial guarantees, subordinated retained interests, derivative instruments
or
other contingent arrangements that expose us to material continuing risks,
contingent liabilities, or any other obligations under a variable interest
in an
unconsolidated entity that provides us with financing, liquidity, market risk
or
credit risk support.
Obligations
and Commitments
As
of
December 31, 2007, we had known contractual obligations, commitments and
contingencies of $6,744,000. Of this amount, $5,754,000 relates to research
and
development agreements, of which $5,747,000 is due within the next year, with
the remaining balance due as per the schedule below. The additional $990,000
relates to our operating lease obligations, of which $527,000 is due within
the
next year, with the remaining balance due as per the schedule
below.
|
|
|
Payment
due by period
|
|
|
Contractual
obligations
|
|
Total
|
|
Less
than
1
year
|
|
1-3
years
|
|
3-5
years
|
|
More
than
5
years
|
|
|
Research
& development agreements
|
|
$
|
5,754,000
|
|
$
|
5,747,000
|
|
$
|
7,000
|
|
$
|
—
|
|
$
|
|
|
|
Operating
leases
|
|
|
990,000
|
|
|
527,000
|
|
|
463,000
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,744,000
|
|
$
|
6,274,000
|
|
$
|
470,000
|
|
$
|
|
|
$
|
|
|
Additionally,
we have undertaken to make contingent milestone payments to certain licensors
of
up to approximately $161.1 million over the life of the licenses, of which
approximately $140.0 million will be due upon or following regulatory approval
of the drugs. These milestone payments may be made in either cash and/or our
ordinary shares, at our election, with the exception of $5 million in cash,
which would due upon or after regulatory approval. We are also obligated to
make
royalty payments on future product sales net sales. See “Item 4. Information on
the Company - Business Overview - Licensing Agreements and Collaborations”
above.
In
addition, XTL Development committed to pay a transaction advisory fee to certain
third party intermediaries in connection with the in-license of Bicifadine
from
DOV. The transaction advisory fee was structured in the form of SARs in the
amount equivalent to (i) 3% of our fully diluted ordinary shares at the close
of
the transaction (representing 8,299,723 ordinary shares), vesting immediately
and exercisable one year after the close of the transaction, and (ii) 7% of
our
fully diluted ordinary shares at the close of the transaction (representing
19,366,019 ordinary shares), vesting following the first to occur of successful
Phase 3 clinical trial results or the acquisition of our company. Payment of
the
SARs by XTL Development can be satisfied, at our discretion, in cash and/or
by
issuance of our registered ordinary shares. Upon the exercise of a SAR, the
amount paid by XTL Development will be an amount equal to the amount by which
the fair market value of one ordinary share of our company on the exercise
date
exceeds the $0.34 grant price for such SAR (fair market value equals (i) the
greater of the closing price of an ADR on the exercise date, divided by ten,
or
(ii) the preceding five day ADR closing price average, divided by ten). The
SARs
expire on January 15, 2017. In the event of the termination of the license
agreement, any unvested SARs will expire. See “Item 10. Additional Information -
Material Contracts.”
We
also had a commitment to make contingent payments to the Office of the Chief
Scientist, or OCS, of up to approximately $17.4 million, all of which is due
from royalties of approximately 3%-5% from proceeds from net sales of products
in the research and development of which the Israeli government participated
in
by way of grants. On December 31, 2007, we and Yeda mutually terminated the
Research and License agreement dated April 7, 1993, as amended. As of December
31, 2007, and subject to certain closing conditions which were completed in
March 2008, all rights in and to the licensed technology and patents reverted
to
Yeda. Under the terms of the mutual termination agreement with Yeda, as the
assignee of the rights under any program funded by the OCS, Yeda shall be
obligated to pay any royalties relating to the sale of any products under such
programs from December 31, 2007.
Research
and Development, Patents and Licenses
Research
and development costs consist primarily
of
salaries and related personnel costs, fees paid to consultants and other
third-parties for clinical and laboratory development, license and milestone
fees, and facilities-related and other expenses relating to the design,
development, testing, and enhancement of product candidates
.
The
information below provides estimates regarding the costs associated with the
completion of the current development phase and our current estimated range
of
the time that will be necessary to complete that development phase for
Bicifadine. We also have provided information with respect to our other drug
candidates. We also direct your attention to the risk factors which could
significantly affect our ability to meet these cost and time estimates found
in
this report in Item 3 under the heading “Risk Factors-Risks Related to our
Business.”
Bicifadine
is currently undergoing a Phase 2b study and an open label safety trial. We
estimate that the cost to complete the Phase 2b study and the open label trial
will be approximately $12 million. We believe that the Phase 2b study will
be
completed in the fourth quarter of 2008 and that the open label trial will
be
completed in late 2009. Our estimates regarding the expected completion of
these
studies are based on patient enrollment, and the potential need for increases
in
the number of patients included, among other factors. Due to the nature of
clinical studies and our inability to predict the results of such studies,
we
cannot estimate when such clinical development will end, and it is equally
difficult to project the cost to complete such development.
The
DOS
program is currently in preclinical development. The timing and results of
pre-clinical studies are highly unpredictable. Due to the nature of pre-clinical
studies and our inability to predict the results of such studies, we cannot
estimate when such pre-clinical development will end. Under the terms of
the
license agreement, Presidio becomes responsible for all further development
and
commercialization activities and costs relating to the DOS program.
The
following table sets forth the research and development costs for our current
and legacy clinical-stage projects, our pre-clinical activities, and all other
research and development programs for the periods presented. Whether or not
and
how quickly we complete development of our clinical stage projects is dependent
on a variety of factors, including the rate at which we are able to engage
clinical trial sites and the rate of enrollment of patients. As such, the costs
associated with the development of our drug candidates may change significantly.
For
a
further discussion of factors that may affect our research and development,
see
“Item 3. Risk Factors - Risks Related to Our Business,” and “Item 4. Information
on the Company - Business Overview - Products Under Development” above.
|
|
|
Years
ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Cumulative,
as of December 31, 2007
|
|
|
Bicifadine
(includes
$7.5 million initial upfront license fee)
|
|
$
|
13,476,000
|
|
$
|
|
|
$
|
|
|
$
|
13,476,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DOS
|
|
|
4,056,000
|
|
|
4,653,000
|
|
|
1,240,000
|
|
|
9,949,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy
programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
XTL-2125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development costs
|
|
|
753,000
|
|
|
2,936,000
|
|
|
3,367,000
|
|
|
13,054,000
|
|
|
Less
participations
|
|
|
—
|
|
|
|
|
|
|
|
|
(168,000
|
)
|
|
|
|
|
753,000
|
|
|
2,936,000
|
|
|
3,367,000
|
|
|
12,886,000
|
|
|
XTL-6865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development costs
|
|
|
713,000
|
|
|
2,640,000
|
|
|
2,706,000
|
|
|
24,972,000
|
|
|
Less
participations
|
|
|
(56,000
|
)
|
|
|
|
|
|
|
|
(2,596,000
|
)
|
|
|
|
|
657,000
|
|
|
2,640,000
|
|
|
2,706,000
|
|
|
22,376,000
|
|
|
HepeX-B
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development costs
|
|
|
|
|
|
|
|
|
2,743,000
|
|
|
26,985,000
|
|
|
Less
participations
|
|
|
|
|
|
|
|
|
(2,743,000
|
)
|
|
(10,173,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,812,000
|
|
|
Other
research and development programs
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development costs
|
|
|
|
|
|
|
|
|
|
|
|
29,693,000
|
|
|
Less
participations
|
|
|
|
|
|
|
|
|
|
|
|
(4,081,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,612,000
|
|
|
Total
legacy programs
|
|
|
1,410,000
|
|
|
5,576,000
|
|
|
6,073,000
|
|
|
77,686,000
|
|
|
Total
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development costs
|
|
|
18,998,000
|
|
|
10,229,000
|
|
|
10,056,000
|
|
|
118,129,000
|
|
|
Less
participations
|
|
|
(56,000
|
)
|
|
|
|
|
(2,743,000
|
)
|
|
(17,018,000
|
)
|
|
|
|
|
18,942,000
|
|
|
10,229,000
|
|
|
7,313,000
|
|
|
101,111,000
|
|
1
Includes
$6,012,000 in development costs for HepeX-B incurred from June 2004, the date
we
out-licensed HepeX-B to Cubist, for which we were subsequently reimbursed by
Cubist pursuant to our license agreement. The amount was classified in revenues
and cost of revenues in our statement of operations.
2
Other
research and development programs includes early stage discovery research
activities that ceased in 2003.
Trend
Information
Please
see “Item 5. Operating and Financial Review and Prospects” and “Item 4.
Information on the Company” for trend information.
ITEM
6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors
and Senior Management
The
following sets forth information with respect to our directors and executive
officers as of February 29, 2008. Except as noted, the business address for
each
of the following is 711 Executive Blvd., Suite Q, Valley Cottage, NY 10989,
USA.
|
Name
|
|
Age
|
|
Position
|
|
Michael
S. Weiss
|
|
42
|
|
Chairman
of the Board of Directors
|
|
William
J. Kennedy, Ph.D
|
|
63
|
|
Non
Executive Director
|
|
Ido
Seltenreich
(1)
|
|
36
|
|
Non
Executive and External Director
|
|
Vered
Shany, D.M.D
(1)
|
|
43
|
|
Non
Executive and External Director
|
|
Ben
Zion Weiner, Ph.D
(1)
|
|
63
|
|
Non
Executive Director
|
|
Ron
Bentsur
|
|
42
|
|
Chief
Executive Officer
|
|
Bill
Kessler
(1)
|
|
42
|
|
Director
of Finance
|
(1)
Business
address is Kiryat Weizmann Science Park, Building 3, POB 370, Rehovot 76100,
Israel.
Michael
S. Weiss has served as a director of our company since November 2004, and was
appointed interim Chairman of the Board in March 2005 and Chairman of the Board
in August 2005. Mr. Weiss is currently the Chairman and CEO of Keryx
Biopharmaceuticals, Inc. (NASDAQ: KERX). Prior to that, from 1999-2002,
Mr.
Weiss
served as CEO and Chairman, and later as the Executive Chairman, of ACCESS
Oncology, Inc. a private biotechnology company
subsequently
acquired by Keryx. Prior to that, Mr. Weiss
served
as
Senior Managing Director of Paramount Capital, Inc., a broker-dealer registered
with the National Association of Securities Dealers.
From
1991-1993, Mr. Weiss was an attorney at Cravath, Swaine & Moore. Mr. Weiss
received his B.A., magna cum laude from State University of New York at Albany
and was awarded a Juris Doctorate degree from Columbia University Law School.
William
J. Kennedy has served as a director of our company since February 2005. Dr.
Kennedy retired as Vice President, Drug Regulatory Affairs, for Zeneca
Pharmaceuticals Group in October 1999, and since that time has served as a
regulatory consultant to the pharmaceutical industry. Prior to joining Zeneca
Pharmaceuticals in 1986, Dr. Kennedy worked in regulatory affairs at G.D. Searle
& Co., Kalipharma Inc., Berlex Laboratories, Inc. and Pfizer
Pharmaceuticals, Inc. Dr. Kennedy earned a B.S. from Siena College, a M.A.
from
Clark University and a Ph.D in Pharmacology from SUNY, Buffalo. Prior to joining
the industry in 1977, he was an Associate Research Professor at Yale University
conducting research in Molecular Biology and Recombinant DNA.
Ido
Seltenreich has served as a director of our company since August 2005. Mr.
Seltenreich is currently the financial representative in Bulgaria, of Cinema
City International N.V., or CCI, (Polish Stock Exchange - CCIINT) and of OCIF
Investment & Development LTD (TASE - OCIF). Prior to that, from October 1999
to September 2006, Mr. Seltenreich was the representative of CCI in the Czech
Republic, for which he had served as the Managing and Financing Director.
From July 2003 to August 2005, Mr. Seltenreich also served as a member of the
Board of Directors of an intragroup company of CCI, a development company that
operated in the Bulgarian market. Prior to that, from 1996-1999, Mr. Seltenreich
worked at Luboshits Kasirer, a member of Ernst & Young. Mr. Seltenreich
received his B.A. in economics and accounting from Haifa University and has
an
Israeli CPA license.
Vered
Shany has served as a director of our company since August 2005. Since September
2006, Dr. Shany has served as the founder, Chairman and CEO of Lotus Bio Inc.,
a
private medical diagnostics company. Since March 2002, Dr. Shany has managed
Tashik Consultants, providing strategic consulting and corporate analysis for
Israeli and international corporations and investment management in life
sciences companies. Previously, Dr. Shany served as managing director of Up-Tech
Ventures Ltd, a subsidiary of the Africa-Israel Investments Group from May
2000
to March 2002, as a member of the Board of Directors of the Weizmann Science
Park Incubator from May 2000 to March 2002, and as vice president of marketing
for Arad Technological Incubator from 1995 to 1999. Dr. Shany is currently
an
external director of Capital Point Ltd., since August 2006, and in Simigon
Ltd.,
since September 2006. Dr. Shany served as an external director in Lahak Mutual
Funds of Bank Hapoalim, from October 2000 to September 2006, and in SFKT -
Shrem
Fudim Kellner Technologies, from September 2000 to September 2006. Dr. Shany
holds an M.A. in business administration from Heriot - Watt University,
Edinburgh Business School, and she completed her D.M.D., Doctor of Medical
Dentistry, and her B.Med.Sc, from Hebrew University of Jerusalem.
Ben
Zion
Weiner has served as a director of our company since February 2005. Dr. Weiner
has been with Teva Pharmaceutical Industries Ltd. since 1975, after a Post
Doctorate fellowship at Schering-Plough in the U.S. He received his Ph.D in
Chemistry from the Hebrew University of Jerusalem. In January 2006, Dr. Weiner
joined the Office of the CEO and assumed the role of Chief R&D Officer at
Teva. Dr. Weiner served as Group Vice President—Global Products from April 2002
until January 2006, responsible for Global Generic Research and Development,
Global Innovative Research and Development and innovative products marketing.
Dr. Weiner is a member of Teva's Core Management Committee. He was granted
twice
the Rothschild Prize for Innovation/Export, in 1989 for the development of
alpha
D3 for Dialysis and Osteoporosis and in 1999 for the development of Copaxone®
for Multiple Sclerosis.
Ron
Bentsur has served as our Chief Executive Officer since January 2006. From
June
2003 until January 2006, Mr. Bentsur served as Vice President, Finance and
Investor Relations of Keryx Biopharmaceuticals, Inc. From October 2000 to June
2003, Mr. Bentsur served as Director of Investor Relations at Keryx. From July
1998 to October 2000, he served as Director of Technology Investment Banking
at
Leumi Underwriters, where he was responsible for all technology/biotechnology
private placement and advisory transactions. From June 1994 to July 1998, Mr.
Bentsur worked as an investment banker at ING Barings Furman Selz in New York
City. Mr. Bentsur holds a B.A. in Economics and Business Administration with
distinction from the Hebrew University of Jerusalem, Israel and an M.B.A.,
Magna
Cum Laude, from New York University’s Stern Graduate School of
Business.
Bill
Kessler has served as our Director of Finance since January 2006 and as our
principal finance and accounting officer since July 2006. Mr. Kessler has over
15 years of corporate and Wall Street experience, working with publicly-traded
and private companies in Israel and the United States. During 2005, Mr. Kessler
served as a consultant to our company, where he spearheaded the process of
listing XTL for trading on NASDAQ. From October 2003 until December 2005, Mr.
Kessler served as a financial consultant to Keryx, and from April 2001 until
September 2003, Mr. Kessler served as the controller of Keryx. From 1996-2000,
Mr. Kessler served as Chief Financial Officer for TICI Software Systems Ltd.,
an
Israeli based software development and consulting company. From 1990-1993,
Mr.
Kessler worked as a research analyst at Wertheim Schroder & Co., covering
media and entertainment companies. Mr. Kessler holds a B.A., Magna Cum Laude,
from Yeshiva University, and an M.B.A., from Columbia University.
Employment
Agreements
We
have
an employment agreement dated as of January 3, 2006, with Ron Bentsur, Chief
Executive Officer. Mr. Bentsur is currently entitled to an annual base salary
of
$250,000. He is entitled to receive discretionary bonus payments of up to 100%
of his annual base salary on achievement of certain milestones recommended
by
the Remuneration Committee and set by our Board of Directors. In January 2008,
our Board of Directors granted options to Mr. Bentsur to purchase a total of
2,500,000 ordinary shares at an exercise price equal to $0.315 per share (equal
to the closing price of our ADRs on the NASDAQ Stock Market on the date of
grant
divided by ten). These options vest over a four-year period, with 25% having
vested on grant date, and with the remainder vesting equally on each of the
one-, two- and three-year anniversaries of the issuance of the options. The
options are exercisable for a period of ten years from the date of issuance,
and
were granted under the Share Option Plan 2001. In March 2006, Mr. Bentsur was
also granted options to purchase a total of 7,000,000 ordinary shares at an
exercise price equal to $0.774 per share (the closing price of our ADRs on
the
NASDAQ Stock Market on January 2, 2006, divided by ten). These options are
exercisable for a period of ten years from the date of issuance, and granted
under the same terms and conditions as the 2001 Share Option Plan (see “- Share
Ownership - Share Option Plans” below) and the specific terms of any option
agreement entered into with Mr. Bentsur. Of these, 2,333,334 options shall
vest
as follows: 777,782 options on the one-year anniversary of the issuance of
the
options and 194,444 options at the end of each quarter thereafter for the
following two years. The balance of options shall vest upon achievement of
certain milestones (2,333,333 upon the achievement of $350 million market
capitalization or $75 million in working capital, as set out in the agreement
and 2,333,333 upon the achievement of $550 million market capitalization or
$125
million in working capital, as set out in the agreement). We may terminate
the
agreement without cause (as defined in the agreement) on 30 days’ prior notice
to Mr. Bentsur, and immediately and without prior notice for cause. Mr. Bentsur
may terminate the agreement with good reason (as defined in the agreement)
on 30
days’ prior notice to us. In addition, in the event of a merger, acquisition or
other change of control or in the event that we terminate Mr. Bentsur, either
without cause or as a result of his death or disability, or Mr. Bentsur
terminates his agreement for good reason, any outstanding but unvested options
granted to Mr. Bentsur under the agreement will immediately vest and the period
during which he may exercise such options shall be the earlier of two years
from
the effective date of his termination or ten years from the date he commenced
employment. Additionally, our Board of Directors shall have the discretion
to
accelerate all or a portion of Mr. Bentsur’s options at any time. If we choose
to terminate the agreement for cause, Mr. Bentsur will not be owed any benefits,
with the exception of any unpaid remuneration that would have accrued up to
his
date of termination.
We
have
an employment agreement dated February 10, 2006, and effective as of January
1,
2006, with Bill Kessler, our Director of Finance. Mr. Kessler is currently
entitled to an annual base salary of $135,000. He is entitled to receive bonus
payments at the discretion of the Chief Executive Officer and as set by our
Board of Directors. Mr. Kessler shall also be entitled to receive one or more
grants of options to purchase our ordinary shares, on terms and conditions
set
by our Board of Directors. Mr. Kessler is also entitled to receive benefits
comprised of managers' insurance (pension and disability insurance), a
continuing education plan, and the use of a company car. There is a non-compete
clause surviving one year after termination of employment, preventing Mr.
Kessler from competing directly with us. The employment agreement may be
terminated by either party on three months prior written notice. In January
2008, our Board of Directors granted options to Mr. Kessler to purchase a total
of 500,000 ordinary shares at an exercise price equal to $0.315 per share (equal
to the closing price of our ADRs on the NASDAQ Stock Market on the date of
grant
divided by ten). These options vest over a four-year period, with 25% having
vested on grant date, and with the remainder vesting equally on each of the
one-, two- and three-year anniversaries of the issuance of the options. The
options are exercisable for a period of ten years from the date of issuance,
and
were granted under the Share Option Plan 2001. In June 2006, our Board of
Directors granted options to Mr. Kessler to purchase a total of 500,000 ordinary
shares at an exercise price equal to $0.60 per share (the price of our ADRs
in
the private placement that we completed on March 22, 2006 and which closed
on
May 25, 2006, divided by ten, which was above the market price of our ADRs
on
the NASDAQ Stock Market on such date divided by ten). These options vest over
a
four-year period and are exercisable for a period of ten years from the date
of
issuance, and were granted under the Share Option Plan 2001.
We
have
an agreement dated August 1, 2005, with Michael S. Weiss, our non-Executive
Chairman of the Board of Directors. Mr. Weiss is entitled to annual remuneration
of $150,000. He was granted options to purchase a total of 9,250,000 ordinary
shares at an exercise price equal to $0.354 per share (which was below the
market price of our ordinary shares on the date of grant) (the “Original
Options”). These Original Options were exercisable for a period of five years
from the date of issuance, and were granted under the same terms and conditions
as our 2001 Share Option Plan. The Original Options vest upon achievement of
certain market capitalization based milestones (1/3 upon the achievement of
$150
million market capitalization, as set out in the agreement, 1/3 upon the
achievement of $250 million market capitalization, as set out in the agreement,
and 1/3 upon the achievement of $350 million market capitalization, as set
out
in the agreement). In December 2007, we canceled the Original Options, and
granted Mr. Weiss 9,250,000 options (the “New Options”) on the exact same terms
and conditions as the Original Options (including the remainder of the exercise
period of the Original Options), with the exception of the exercise price,
which
is equal to $0.36 per option (a price greater than the closing price on the
date
of grant of the New Options). As of December 31, 2007, 3,083,333 options that
were granted to Mr. Weiss are vested. We may terminate the agreement without
cause (as defined in the agreement) on 30 days’ prior notice to Mr. Weiss, and
immediately and without prior notice for cause. Mr. Weiss may terminate the
agreement with good reason (as defined in the agreement) on 30 days prior notice
to us. In the event that the agreement is terminated without cause (in our
case)
or with good reason (in the case of Mr. Weiss), any outstanding but unvested
options granted to Mr. Weiss under the agreement will immediately vest and
the
period during which he may exercise such options will be extended. If we choose
to terminate the agreement for cause, Mr. Weiss will not be owed any benefits,
with the exception of any unpaid remuneration that would have accrued through
his date of termination.
We
have
three types of service agreements with our non-executive directors, other than
our agreement with our non-Executive Chairman. The first type, entered into
with
Ben Zion Weiner on August 1, 2005, provides for a grant of 2,000,000 options
having an exercise price equal to $0.354 per share (which was below the market
price of our ordinary shares on the date of grant), exercisable for a period
of
five years and vesting upon achievement of certain market capitalization based
milestones. As of December 31, 2006, 666,667 options that were granted to Mr.
Weiner are vested. The second type of director service agreement, entered into
with William Kennedy on August 1, 2005, provides for a grant of 60,000 options
having an exercise price equal $0.853 (equal to the average price per share,
as
derived from the Daily Official List of the London Stock Exchange, in the three
days preceding the date of such grant), vesting over the three years from the
date of grant. In addition, the second type of director service agreement
provides for three annual grants of 20,000 options each, at an exercise price
equivalent to the then current closing price of our ADRs on the NASDAQ Stock
Market (subject to the ordinary share-ADR ratio). The third type, entered into
with Ido Seltenreich and Vered Shany, on August 1, 2005, respectively, does
not
provide for option grants, and has a term of 36 months, unless terminated by
the
director upon two months’ written notice to us. Each of the three types of
director service agreements provides for an annual salary of $20,000, payments
of $2,000 for attendance at each board meeting, $500 for attendance at each
committee meeting, $500 for attendance at a board meeting held by
teleconference, reimbursement of reasonable out-of-pocket expenses, and
termination by the director on two months’ written notice to us.
Compensation
The
aggregate compensation paid by us and by our wholly-owned subsidiary to all
persons who served as directors or officers for the year 2007 (seven persons)
was approximately $0.9 million. This amount includes payments made for social
security, pension, disability insurance and health insurance premiums of
approximately $0.1 million, as well as bonus accruals, payments made in lieu
of
statutory severance, payments for continuing education plans, payments made
for
the redemption of accrued vacation, and amounts expended by us for automobiles
made available to our officers.
During
2007, we granted a total of 20,000 options to William Kennedy, our non-executive
director, which are exercisable at $0.204 per ordinary share (the closing price
of our ADRs on the NASDAQ Stock Market on the date of grant divided by ten),
and
expire ten years after date of grant (see “- Employment Agreements
above”).
In
March
2006, after obtaining the approval of the Audit Committee, the Board of
Directors approved grants of a total of 9,898,719 options to our non-executive
Chairman and 750,000 options to one of our non-executive directors, Ben Zion
Weiner. These options are exercisable at an exercise price of $0.713 per share
(the volume weighted average price per share of the ADRs on the NASDAQ Stock
Market during the thirty trading days prior to the Board of Directors’ approval
divided by ten). The options vest as follows: (i) 1/3 of such options vest
over
three years, of which amounts, 1/3 vest and become exercisable upon the first
anniversary of the issuance of the options and the remainder vest and become
exercisable on a quarterly basis; (ii) 1/3 of such options vest and become
exercisable upon our achieving a total market capitalization on a fully diluted
basis of more than $350 million; and (iii) 1/3 of such options vest upon our
achieving a total market capitalization on a fully diluted basis of more than
$550 million. The options can be exercised for a period of ten years. The grant
of such options is conditional upon approval of the shareholders at a duly
convened shareholder meeting. During 2007 and 2006, we did not seek shareholder
approval, so the options had not been granted as of the date
hereof.
All
members of our Board of Directors who are not our employees are reimbursed
for
their expenses for each meeting attended. Our directors who are not external
directors as defined by the Israeli Companies Act are eligible to receive share
options under our share option plans. Non-executive directors do not receive
any
remuneration from us other than their fees for services as members of the board,
additional fees if they serve on committees of the board and expense
reimbursement.
In
accordance with the requirements of Israeli Law, we determine our directors’
compensation in the following manner:
|
|
·
|
first,
our audit committee reviews the proposal for
compensation;
|
|
|
·
|
second,
provided that the audit committee approves the proposed compensation,
the
proposal is then submitted to our Board of Directors for review,
except
that a director who is the beneficiary of the proposed compensation
does
not participate in any discussion or voting with respect to such
proposal;
and
|
|
|
·
|
finally,
if our Board of Directors approves the proposal, it must then submit
its
recommendation to our shareholders, which is usually done in connection
with our shareholders’ general
meeting.
|
The
approval of a majority of the shareholders voting at a duly convened
shareholders meeting is required to implement any such compensation
proposal.
Board
practices
Election
of Directors and Terms of Office
Our
Board
of Directors currently consists of five members, including our non-executive
Chairman. Other than our two external directors, our directors are elected
by an
ordinary resolution at the annual general meeting of our shareholders. The
nomination of our directors is proposed by a nomination committee of our Board
of Directors, whose proposal is then approved by the board. The current members
of the nomination committee are William Kennedy, (chairman of the nomination
committee), Ido Seltenreich and Vered Shany. Our board, following receipt of
a
proposal of the nomination committee, has the authority to add additional
directors up to the maximum number of 12 directors allowed under our Articles.
Such directors appointed by the board serve until the next annual general
meeting of the shareholders. Unless they resign before the end of their term
or
are removed in accordance with our Articles, all of our directors, other than
our external directors, will serve as directors until our next annual general
meeting of shareholders. In October 2007, at the annual general meeting of
our
shareholders, Michael Weiss, Ben Zion Weiner and William Kennedy were re-elected
to serve as directors of our company. Ido Seltenreich and Vered Shany were
elected to serve as external directors of our company at the annual general
meeting that took place in August 2005. Ido Seltenreich and Vered Shany are
serving as external directors pursuant to the provisions of the Israeli
Companies Law for a three-year term ending in August 2008, as more fully
described below. After this date, their term of service may be renewed for
an
additional three-year term.
None
of
our directors or officers have any family relationship with any other director
or officer.
None
of
our directors are entitled to receive any severance or similar benefits upon
termination of his or her service, except for our chairman, as more fully
described above in “ - Employment Agreements” above.
Our
Articles permit us to maintain directors and officers’ liability insurance and
to indemnify our directors and officers for actions performed on behalf of
us,
subject to specified limitations. We maintain a directors and officers insurance
policy which covers the liability of our directors and officers as allowed
under
Israeli Companies Law.
External
and Independent Directors
The
Israeli Companies Law requires Israeli companies with shares that have been
offered to the public either in or outside of Israel to appoint two external
directors. No person may be appointed as an external director if that person
or
that person’s relative, partner, employer or any entity under the person’s
control, has or had, on or within the two years preceding the date of that
person's appointment to serve as an external director, any affiliation with
the
company or any entity controlling, controlled by or under common control with
the company. The term affiliation includes:
|
|
·
|
an
employment relationship;
|
|
|
·
|
a
business or professional relationship maintained on a regular
basis;
|
|
|
·
|
service
as an office holder, other than service as an officer for a period
of not
more than three months, during which the company first offered shares
to
the public.
|
No
person
may serve as an external director if that person’s position or business
activities create, or may create, a conflict of interest with that person's
responsibilities as an external director or may otherwise interfere with his/her
ability to serve as an external director. If, at the time external directors
are
to be appointed, all current members of the Board of Directors are of the same
gender, then at least one external director must be of the other gender. A
director in one company shall not be appointed as an external director in
another company if at that time a director of the other company serves as an
external director in the first company. In addition, no person may be appointed
as an external director if he/she is a member or employee of the Israeli
Security Authority, and also not if he/she is a member of the Board of Directors
or an employee of a stock exchange in Israel.
External
directors are to be elected by a majority vote at a shareholders' meeting,
provided that either:
|
|
·
|
the
majority of shares voted at the meeting, including at least one-third
of
the shares held by non-controlling shareholders voted at the meeting,
vote
in favor of election of the director, with abstaining votes not being
counted in this vote; or
|
|
|
·
|
the
total number of shares held by non-controlling shareholders voted
against
the election of the director does not exceed one percent of the aggregate
voting rights in the company.
|
The
initial term of an external director is three years and may be extended for
an
additional three-year term. An external director may be removed only by the
same
percentage of shareholders as is required for their election, or by a court,
and
then only if such external director ceases to meet the statutory qualifications
for their appointment or violates his or her duty of loyalty to the company.
At
least one external director must serve on every committee that is empowered
to
exercise one of the functions of the Board of Directors.
An
external director is entitled to compensation as provided in regulations adopted
under the Israeli Companies Law and is otherwise prohibited from receiving
any
other compensation, directly or indirectly, in connection with service provided
as an external director.
Ido
Seltenreich and Vered Shany serve as external directors pursuant to the
provisions of the Israeli Companies Law. They both serve on our audit committee,
our nomination committee and our compensation committee.
Subject
to certain exceptions, issuers that list on NASDAQ must have boards of directors
including a majority of independent directors, as such term is defined by
NASDAQ. We are in compliance with the independence requirements of both the
SEC
and NASDAQ.
Audit
Committee
The
Israeli Companies Law requires public companies to appoint an audit committee.
The responsibilities of the audit committee include identifying irregularities
in the management of the company’s business and approving related party
transactions as required by law. An audit committee must consist of at least
three directors, including all of its external directors. The chairman of the
Board of Directors, any director employed by or otherwise providing services
to
the company, and a controlling shareholder or any relative of a controlling
shareholder, may not be a member of the audit committee. An audit committee
may
not approve an action or a transaction with a controlling shareholder, or with
an office holder, unless at the time of approval two external directors are
serving as members of the audit committee and at least one of the external
directors was present at the meeting in which an approval was granted.
Our
audit
committee is currently comprised of three independent non-executive directors.
The audit committee is chaired by Ido Seltenreich, who serves as the audit
committee financial expert, with William Kennedy and Vered Shany as members.
The
audit committee meets at least twice a year and monitors the adequacy of our
internal controls, accounting policies and financial reporting. It regularly
reviews the results of the ongoing risk self-assessment process, which we
undertake, and our interim and annual reports prior to their submission for
approval by the full Board of Directors. The audit committee oversees the
activities of the internal auditor, sets its annual tasks and goals and reviews
its reports. The audit committee reviews the objectivity and independence of
the
external auditors and also considers the scope of their work and fees. In
accordance with the NASDAQ requirements, our audit committee is directly
responsible for the appointment, compensation and oversight of our independent
auditors.
We
have
adopted a written charter for our audit committee, setting forth its
responsibilities as outlined by NASDAQ rules and the regulations of the SEC.
In
addition, our audit committee has adopted procedures for the receipt, retention
and treatment of complaints we may receive regarding accounting, internal
accounting controls, or auditing matters and the submission by our employees
of
concerns regarding questionable accounting or auditing matters. In addition,
both SEC and NASDAQ rules mandate that the audit committee of a listed issuer
consist of at least three members, all of whom must be independent, as such
term
is defined by rules and regulations promulgated by the SEC. We are in compliance
with the independence requirements of both the SEC and NASDAQ.
Approval
of Compensation to Our Officers
The
Israeli Companies Law prescribes that compensation to officers must be approved
by a company's Board of Directors. NASDAQ corporate governance rules require
that compensation of the chief executive officer and other executive officers
be
determined, or recommended to the Board of Directors, by a majority of the
independent directors or by a compensation committee comprised solely of
independent directors. We have established a compensation committee in
compliance with the Israeli Companies Law and NASDAQ rules.
Our
compensation committee consists of three independent directors: Vered Shany
(chairman of the compensation committee), William Kennedy and Ido Seltenreich.
The responsibilities of the compensation committee are to set our overall policy
on executive remuneration and to decide the specific remuneration, benefits
and
terms of employment for each senior manager, including the Chief Executive
Officer.
The
objectives of the compensation committee’s policies are that senior managers
should receive compensation which is appropriate given their performance, level
of responsibility and experience. Compensation packages should also allow us
to
attract and retain executives of the necessary caliber while, at the same time,
motivating them to achieve the highest level of corporate performance in line
with the best interests of shareholders. In order to determine the elements
and
level of remuneration appropriate to each executive director, the compensation
committee reviews surveys on executive pay, obtains external professional advice
and considers individual performance.
Research
and Development Committee
Our
research and development committee is currently comprised of three external
directors, Ben-Zion Weiner, William Kennedy and Michael Weiss. The research
and
development committee oversees our current and proposed research and development
activities in an advisory role and is only authorized to make recommendations
to
our Board of Directors.
Internal
Auditor
Under
the
Israeli Companies Law, the board of directors must appoint an internal auditor,
nominated by the audit committee. The role of the internal auditor is to
examine, among other matters, whether the company's actions comply with the
law
and orderly business procedure. Under the Israeli Companies Law, the internal
auditor cannot be an office holder, an interested party or a relative of an
office holder or interested party, and he or she may not be the company's
independent accountant or its representative. We comply with the requirement
of
the Israeli Companies Law relating to internal auditors. Our internal auditors
examine whether our various activities comply with the law and orderly business
procedure.
Compliance
with NASDAQ Corporate Governance Requirements
Under
the
NASDAQ corporate governance rules, foreign private issuers are exempt from
many
of the requirements if they instead elect to comply with home country practices
and disclose where they have elected to do so. As noted above, we are currently
in compliance with NASDAQ rules relating to the independence of our Board of
Directors and its committees, however, as discussed below, we may in the future
elect to comply with the practice required under Israeli law.
Pursuant
to NASDAQ Marketplace Rule 4350(a)(i), foreign private issuers may elect to
follow home country practices in lieu of certain NASDAQ corporate governance
requirements by submitting to NASDAQ a written statement from an independent
counsel in the company's home country, certifying that the company's practices
are not prohibited by the home country's laws. This letter is only required
once, at the time of listing. We previously submitted to NASDAQ such a letter
from our legal counsel in Israel in connection with the September 1, 2005,
application for our ADRs to trade on the NASDAQ Stock Market under the symbol
“XTLB.”
On
November 20, 2007, we completed a private placement of ordinary shares for
an
aggregate consideration of approximately $9.8 million in gross proceeds. In
connection with the private placement, we relied on the exemption afforded
by
NASDAQ Marketplace Rule 4350(a)(i) from the requirements of NASDAQ Marketplace
Rule 4350(i)(D), which requires that an issuer receive shareholder approval
prior to an issuance of shares (or securities convertible into or exercisable
for shares) which together with any sales by officers, directors or substantial
shareholders of the company equals 20% or more of the shares or the voting
power
outstanding before the issuance.
Employees
As
of
February 29, 2008, we had 17 full-time equivalent employees. In January 2008,
we
terminated seven employees in the DOS program concurrent with our plans to
out-license the program in 2008.We and our Israeli employees are subject, by
an
extension order of the Israeli Ministry of Welfare, to a few provisions of
collective bargaining agreements between the Histadrut, the General Federation
of Labor Unions in Israel and the Coordination Bureau of Economic Organizations,
including the Industrialists Associations. These provisions principally address
cost of living increases, recreation pay, travel expenses, vacation pay and
other conditions of employment. We provide our employees with benefits and
working conditions equal to or above the required minimum. Other than those
provisions, our employees are not represented by a labor union. We have written
employment contracts with our employees, and we believe that our relations
with
our employees are good.
For
the
years ended December 31, 2007, 2006 and 2005, the number of our employees
engaged in the specified activities, by geographic location, are presented
in
the table below.
|
|
|
Year
ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Research
and Development
|
|
|
|
|
|
|
|
|
|
|
|
Israel
|
|
|
2
|
|
|
8
|
|
|
22
|
|
|
US
|
|
|
16
|
|
|
18
|
|
|
19
|
|
|
|
|
|
18
|
|
|
26
|
|
|
41
|
|
|
Financial
and general management
|
|
|
|
|
|
|
|
|
|
|
|
Israel
|
|
|
4
|
|
|
4
|
|
|
4
|
|
|
US
|
|
|
2
|
|
|
2
|
|
|
|
|
|
|
|
|
6
|
|
|
6
|
|
|
4
|
|
|
Business
development
|
|
|
|
|
|
|
|
|
|
|
|
Israel
|
|
|
—
|
|
|
|
|
|
|
|
|
US
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
Total
|
|
|
25
|
|
|
33
|
|
|
46
|
|
|
Average
number of full-time employees
|
|
|
29
|
|
|
40
|
|
|
54
|
|
Share
Ownership
The
following table sets forth certain information as of February 29, 2008,
regarding the beneficial ownership by our directors and executive officers.
All
numbers quoted in the table are inclusive of options to purchase shares that
are
exercisable within 60 days of February 29, 2008.
|
|
|
Amount
and nature of beneficial ownership
|
|
|
|
|
Ordinary
shares
beneficially
owned
excluding
options
|
|
Options
1
exercisable
within
60 days
of
February
29,
2008
|
|
Total
ordinary
shares
beneficially
owned
|
|
Percent
of
ordinary
shares
beneficially
owned
|
|
|
Michael
S. Weiss
Chairman
of the Board
|
|
|
|
|
|
3,083,333
|
2
|
|
3,083,333
|
|
|
1.0
|
%
|
|
William
Kennedy
Director
|
|
|
|
|
|
56,667
|
3
|
|
56,667
|
|
|
*
|
|
|
Ben
Zion Weiner
Director
|
|
|
|
|
|
666,667
|
4
|
|
666,667
|
|
|
*
|
|
|
Ido
Seltenreich
Director
|
|
|
250,000
5
|
|
|
|
|
|
250,000
|
|
|
*
|
|
|
Vered
Shany
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ron
Bentsur
Chief
Executive Officer
|
|
|
201,010
|
|
|
2,180,558
|
6
|
|
2,381,568
|
|
|
*
|
|
|
Bill
Kessler
Director
of Finance
|
|
|
50,000
|
|
|
250,000
|
7
|
|
300,000
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
directors and executive officers as a group
(7 persons)
|
|
|
501,010
|
|
|
6,237,225
|
|
|
6,738,235
|
|
|
2.3
|
%
|
|
|
(1)
|
Options
to purchase ordinary shares.
|
|
|
(2)
|
At
an exercise price of $0.36 per ordinary share, expiring July 31,
2010.
|
|
|
(3)
|
40,000
options at an exercise price of $0.853 per ordinary share, expiring
July
31, 2015; 11,667 options at an exercise price of $0.325 per ordinary
share, expiring July 31, 2016; and 5,000 options at an exercise price
of
$0.204, expiring on July 31, 2007.
|
|
|
(4)
|
At
an exercise price of $0.354 per ordinary share, expiring July 31,
2010.
|
|
|
(5)
|
Held
under a blind trusteeship arrangement with a
third-party.
|
|
|
(6)
|
1,555,558
options at an exercise price of $0.774 per ordinary share, expiring
March
15, 2016; and 625,000 options at an exercise price of $0.315, expiring
January 14, 2018.
|
|
|
(7)
|
125,000
options at an exercise price of $0.60 per ordinary share, expiring
June
18, 2016; and 125,000 options at an exercise price of $0.315, expiring
January 14, 2018.
|
|
|
*
|
Represents
Less than 1% of ordinary shares
outstanding.
|
Share
Option Plans
We
maintain the following share option plans for our and our subsidiary’s
employees, directors and consultants. In addition to the discussion below,
see
Note 7 of our consolidated financial statements, included at “Item 18. Financial
Statements.”
Our
Board
of Directors administers our share option plans and has the authority to
designate all terms of the options granted under our plans including the
grantees, exercise prices, grant dates, vesting schedules and expiration dates,
which may be no more than ten years after the grant date. Options may not be
granted with an exercise price of less than the fair market value of our
ordinary shares on the date of grant, unless otherwise determined by our Board
of Directors.
As
of
December 31, 2007, we have granted to employees, directors and consultants
options that are outstanding to purchase up to 29,167,655 ordinary shares,
pursuant to four share option plans and pursuant to certain grants apart from
these plans also discussed below under Non-Plan Share Options.
1998
Share Option Plan
Under
a
share option plan established in 1998, we granted options to our employees
which
were held by a trustee under section 3(i) of the Israeli tax ordinance, or
the
Tax Ordinance, of which 2,145,000 were outstanding and exercisable as of
December 31, 2007, at an exercise price of $0.497 per ordinary share and were
non-transferable. The options granted thereunder expired in January 2008. There
are no options available for grant under this plan.
1999
Share Option Plan
Under
a
share option plan established in 1999, we granted options to our employees
which
are held by a trustee under section 3(i) of the Tax Ordinance, of which 698,820
are outstanding and exercisable as of December 31, 2007, at an exercise price
of
$0.497 per ordinary share. The options are non-transferable.
The
option term is for a period of ten years from the grant date. If the options
are
not exercised and the shares not paid for by such date, all interests and rights
of any grantee will expire. There are no options available for grant under
this
plan.
2000
Share Option Plan
Under
a
share option plan established in 2000, we granted options to our employees
which
are held by a trustee under section 3(i) of the Tax Ordinance, of which 669,800
are outstanding and exercisable as of December 31, 2007, at an exercise price
of
$1.10 per ordinary share. The options are non-transferable.
The
option term is for a period of ten years from grant date. If the options are
not
exercised and the shares not paid for by such date, all interests and rights
of
any grantee will expire. There are no options available for grant under this
plan.
2001
Share Option Plan
Under
a
share option plan established in 2001, referred to as the 2001 Plan, we granted
options during 2001-2007, at an exercise price between $0.106 and $0.931 per
ordinary share. Up to 11,000,000 options were available to be granted under
the
2001 Plan, of which 5,114,035 are outstanding. Options granted to Israeli
employees were in accordance with section 102 of the Tax Ordinance, under the
capital gains option set out in section 102(b)(2) of the ordinance. The options
are non-transferable.
The
option term is for a period of ten years from the grant date. The options were
granted for no consideration. The options vest over a four year period. As
of
December 31, 2007, 2,120,285 options are fully vested. As of December 31, 2007,
the remaining number of options available for future grants under the 2001
Plan
is 5,354,956.
On
January 15, 2008, we granted 4,615,300 options pursuant to the 2001 Plan to
employees and consultants at an exercise price of $0.315 per ordinary share
(a
price equal to the closing price of our ADRs on the NASDAQ Stock Market on
the
grant date, divided by ten).
Non-Plan
Share Options
In
addition to the options granted under our share option plans, there are
20,540,000 outstanding options, and 7,351,114 exercisable options, as of
December 31, 2007, which were granted to employees, directors and consultants
not under an option plan during 1997-2007. The options were granted at an
exercise price between $0.20 and $2.11 per ordinary share. The options expire
between 2008 and 2017.
This
figure includes 9,250,000 and 2,000,000 options that were granted to our
Chairman and Ben Zion Weiner, a non-executive director, respectively, at an
exercise price equal to $0.36 and $0.354 per ordinary share, respectively,
in
December 2007 and August 2005, respectively, and are exercisable through July
31, 2010, and vest upon achievement of certain market capitalization based
milestones (see “-Employment Agreements,” above).
This
figure also includes 7,000,000 options that were granted to our CEO, and are
exercisable for a period of ten years from the date of issuance at an exercise
price equal to $0.774 per ordinary share. Of these, 2,333,334 options vest
over
a three year period and the balance of options vest upon achievement of certain
market capitalization based or working capital based milestones (see
“-Employment Agreements above”).
In
addition, this figure also includes options granted to former consultants in
conjunction with a licensing agreement, which was subsequently terminated in
July 2007, to purchase a total of up to 150,000 of our ordinary shares at an
exercise price per share of $0.20. These options expire on July 12,
2008.
ITEM
7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
The
following table sets forth certain information regarding beneficial ownership
of
our ordinary shares as of February 29, 2008, by each person who is known by
us
to own beneficially more than 5% of our outstanding ordinary shares. The voting
rights of our major shareholders do not differ from the voting rights of other
holders of our ordinary shares.
|
Beneficial
owner
|
|
Number
of ordinary shares beneficially owned
|
|
Percent
of
ownership
|
|
|
Perceptive
Life Sciences Master Fund Ltd.
1
|
|
|
52,383,260
|
|
|
17.9
|
%
|
|
1
Pursuant to a Form 4 filed with the SEC on
2/29/08.
|
As
of
February 29, 2008, there were 22,304,283 ADRs outstanding, held by approximately
8 record holders, whose holdings represented approximately 76% of the total
outstanding ordinary shares, of which 6 record holders were in the US.
Related
Party Transactions
We
did
not have any transactions or loans with related parties during the fiscal year
ended December 31, 2005. For the years ended December 31, 2007 and 2006 we
leased approximately 100 meters of office space from Keryx subject to a rent
sharing agreement for $4,500 and $15,000, respectively. The rent sharing
agreement was terminated as of March 31, 2007. In addition, our Chief Executive
Officer had provided consulting services to Keryx through January 2008, and
our
Director of Finance provides consulting services to Keryx; however, the amount
of their time devoted to this endeavor and the compensation they receive, if
any, is immaterial. During 2007, a company controlled by one of our directors
purchased $6,500 in lab equipment that we had disposed of in our Israeli
facility.
ITEM
8. FINANCIAL INFORMATION
Consolidated
Statements and Other Financial Information
Our
audited consolidated financial statements are included on pages F-1 through
F-41
of this annual report.
Legal
Proceedings
Neither
we nor our subsidiaries are a party to, and our property is not the subject
of,
any material pending legal proceedings.
Dividend
Distributions
We
have
never declared or paid any cash dividends on our ordinary shares and do not
anticipate paying any such cash dividends in the foreseeable future. Any future
determination to pay dividends will be at the discretion of our Board of
Directors. Cash dividends may be paid by an Israeli company only out of retained
earnings as calculated under Israeli law. We currently have no retained earnings
and do not expect to have any retained earnings in the foreseeable
future.
Significant
Changes
In
March
2008, we signed an agreement to out-license our DOS program to Presidio,
a
specialty pharmaceutical company focused on the discovery, in-licensing,
development and commercialization of novel therapeutics for viral infections,
including HIV and HCV
.
Under
the terms of the license agreement, Presidio becomes responsible for all
further
development and commercialization activities and costs relating to the DOS
program. In accordance with the terms of the license agreement, we received
a $4
million, non-refundable, upfront payment in cash from Presidio and will
receive up to an additional $104 million upon reaching certain development
and
commercialization milestones. In addition, we will receive a royalty on direct
product sales by Presidio, and a percentage of Presidio’s income if the DOS
program is sublicensed by Presidio to a third party.
ITEM
9. THE OFFER AND LISTING
Markets
and Share Price History
The
primary trading market for our securities is the NASDAQ Capital Market. Since
September 1, 2005, our ADRs have been traded on the NASDAQ Stock Market under
the symbol “XTLB,” with each ADR representing ten ordinary shares. As of July
12, 2005, our ordinary shares are also listed on the Tel Aviv Stock Exchange
under the symbol “XTL.”
In
the
past, our primary trading market was the London Stock Exchange, or LSE, where
our shares were listed and traded under the symbol “XTL” since our initial
public offering in September of 2000.
On
October 31, 2007, our ordinary shares were delisted from the LSE, pursuant
to
the October 2, 2007 vote at our extraordinary general meeting of
shareholders.
American
Depositary Shares
The
following table presents, for the periods indicated, the high and low market
prices for our ADRs as reported on the NASDAQ Stock Market
1
since
September 1, 2005, the date on which our ADRs were initially quoted. Prior
to
the initial quotation of our ADRs on the NASDAQ Stock Market on September 1,
2005, our ADRs were not traded in any organized market and were not
liquid.
|
|
|
US
Dollar
|
|
|
Last
Six Calendar Months
|
|
High
|
|
Low
|
|
|
February
2008
|
|
|
4.24
|
|
|
3.56
|
|
|
January
2008
|
|
|
3.59
|
|
|
2.91
|
|
|
December
2007
|
|
|
2.85
|
|
|
1.86
|
|
|
November
2007
|
|
|
2.13
|
|
|
1.66
|
|
|
October
2007
|
|
|
2.03
|
|
|
1.51
|
|
|
September
2007
|
|
|
2.44
|
|
|
1.25
|
|
|
Financial
Quarters During the Past Two Full Fiscal Years
|
|
|
|
|
|
|
|
|
Fourth
Quarter of 2007
|
|
|
2.85
|
|
|
1.51
|
|
|
Third
Quarter of 2007
|
|
|
2.64
|
|
|
1.24
|
|
|
Second
Quarter of 2007
|
|
|
4.07
|
|
|
2.29
|
|
|
First
Quarter of 2007
|
|
|
4.99
|
|
|
2.71
|
|
|
Fourth
Quarter of 2006
|
|
|
3.69
|
|
|
2.22
|
|
|
Third
Quarter of 2006
|
|
|
4.54
|
|
|
2.08
|
|
|
Second
Quarter of 2006
|
|
|
7.50
|
|
|
4.40
|
|
|
First
Quarter of 2006
|
|
|
8.12
|
|
|
6.13
|
|
|
Full
Financial Years Since Listing
|
|
|
|
|
|
|
|
|
2007
|
|
|
4.99
|
|
|
1.24
|
|
|
2006
|
|
|
8.12
|
|
|
2.08
|
|
|
1
|
Our
ADRs have been quoted on the NASDAQ Capital Market since December
3, 2007
and prior to that were quoted on the NASDAQ Global
Market.
|
The
following table sets forth, for the periods indicated, the high and low sales
prices of the ordinary shares on the Tel Aviv Stock Exchange. For comparative
purposes only, we have also provided such figures translated into US Dollars
at
an exchange rate of 3.635 New Israeli Shekel per US Dollar, as reported by
the
Bank of Israel on February 29, 2008.
|
|
|
New
Israeli Shekel
|
|
US
Dollar
|
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
|
Last
Six Calendar Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
2008
|
|
|
1.47
|
|
|
1.32
|
|
|
0.40
|
|
|
0.36
|
|
|
January
2008
|
|
|
1.40
|
|
|
0.97
|
|
|
0.39
|
|
|
0.27
|
|
|
December
2007
|
|
|
0.99
|
|
|
0.73
|
|
|
0.27
|
|
|
0.20
|
|
|
November
2007
|
|
|
0.79
|
|
|
0.64
|
|
|
0.22
|
|
|
0.18
|
|
|
October
2007
|
|
|
0.78
|
|
|
0.67
|
|
|
0.21
|
|
|
0.18
|
|
|
September
2007
|
|
|
0.92
|
|
|
0.55
|
|
|
0.25
|
|
|
0.15
|
|
|
Financial
Quarters During the Past Two Full Fiscal Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter of 2007
|
|
|
0.99
|
|
|
0.64
|
|
|
0.27
|
|
|
0.18
|
|
|
Third
Quarter of 2007
|
|
|
1.06
|
|
|
0.48
|
|
|
0.29
|
|
|
0.13
|
|
|
Second
Quarter of 2007
|
|
|
1.62
|
|
|
1.00
|
|
|
0.45
|
|
|
0.28
|
|
|
First
Quarter of 2007
|
|
|
2.02
|
|
|
1.12
|
|
|
0.56
|
|
|
0.31
|
|
|
Fourth
Quarter of 2006
|
|
|
1.57
|
|
|
0.96
|
|
|
0.43
|
|
|
0.26
|
|
|
Third
Quarter of 2006
|
|
|
2.03
|
|
|
1.04
|
|
|
0.56
|
|
|
0.29
|
|
|
Second
Quarter of 2006
|
|
|
3.37
|
|
|
2.03
|
|
|
0.93
|
|
|
0.56
|
|
|
First
Quarter of 2006
|
|
|
3.66
|
|
|
2.86
|
|
|
1.01
|
|
|
0.79
|
|
|
Full
Financial Years Since Listing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2.02
|
|
|
0.48
|
|
|
0.56
|
|
|
0.13
|
|
|
2006
|
|
|
3.66
|
|
|
0.96
|
|
|
1.01
|
|
|
0.26
|
|
ITEM
10. ADDITIONAL INFORMATION
Memorandum
and Articles of Association
Objects
and Purposes of the Company
Pursuant
to Part B, Section 3 of our Articles of Association, we may undertake any lawful
activity.
Powers
and Obligations of the Directors
Pursuant
to the Israeli Companies Law and our Articles of Association, a director is
not
permitted to vote on a proposal, arrangement or contract in which he or she
has
a personal interest. Also, the directors may not vote compensation to themselves
or any members of their body, as that term is defined under Israeli law, without
the approval of our audit committee and our shareholders at a general meeting.
The requirements for approval of certain transactions are set forth below in
“Item 10. Additional Information - Memorandum and Articles of
Association-Approval of Certain Transactions.” The power of our directors to
enter into borrowing arrangements on our behalf is limited to the same extent
as
any other transaction by us.
The
Israeli Companies Law codifies the fiduciary duties that office holders,
including directors and executive officers, owe to a company. An office holder’s
fiduciary duties consist of a duty of care and a duty of loyalty. The duty
of
care generally requires an office holder to act with the same level of care
as a
reasonable office holder in the same position would employ under the same
circumstances. The duty of loyalty includes avoiding any conflict of interest
between the office holder’s position in the company and such person’s personal
affairs, avoiding any competition with the company, avoiding exploiting any
corporate opportunity of the company in order to receive personal advantage
for
such person or others, and revealing to the company any information or documents
relating to the company’s affairs which the office holder has received due to
his or her position as an office holder.
Indemnification
of Directors and Officers; Limitations on Liability
Israeli
law permits a company to insure an office holder in respect of liabilities
incurred by him or her as a result of an act or omission in the capacity of
an
office holder for:
|
|
·
|
a
breach of the office holder’s duty of care to the company or to another
person;
|
|
|
·
|
a
breach of the office holder’s fiduciary duty to the company, provided that
he or she acted in good faith and had reasonable cause to believe
that the
act would not prejudice the company;
and
|
|
|
·
|
a
financial liability imposed upon the office holder in favor of another
person.
|
Moreover,
a company can indemnify an office holder for any of the following obligations
or
expenses incurred in connection with the acts or omissions of such person in
his
or her capacity as an office holder:
|
|
·
|
monetary
liability imposed upon him or her in favor of a third party by a
judgment,
including a settlement or an arbitral award confirmed by the court;
and
|
|
|
·
|
reasonable
litigation expenses, including attorneys’ fees, actually incurred by the
office holder or imposed upon him or her by a court, in a proceeding
brought against him or her by or on behalf of the company or by a
third
party, or in a criminal action in which he or she was acquitted,
or in a
criminal action which does not require criminal intent in which he
or she
was convicted; furthermore, a company can, with a limited exception,
exculpate an office holder in advance, in whole or in part, from
liability
for damages sustained by a breach of duty of care to the
company.
|
Our
Articles of Association allow for insurance, exculpation and indemnification
of
office holders to the fullest extent permitted by law. We have entered into
indemnification, insurance and exculpation agreements with our directors and
executive officers, following shareholder approval of these agreements. We
have
directors’ and officers’ liability insurance covering our officers and directors
for a claim imposed upon them as a result of an action carried out while serving
as an officer or director, for (a) the breach of duty of care towards us or
towards another person, (b) the breach of fiduciary duty towards us, provided
that the officer or director acted in good faith and had reasonable grounds
to
assume that the action would not harm our interests, and (c) a monetary
liability imposed upon him in favor of a third party.
Approval
of Certain Transactions
The
Israeli Companies Law codifies the fiduciary duties that office holders,
including directors and executive officers, owe to a company. An office holder,
as defined in the Israeli Companies Law, is a director, general manager, chief
business manager, deputy general manager, vice general manager, executive vice
president, vice president, other manager directly subordinate to the managing
director or any other person assuming the responsibilities of any of the
foregoing positions without regard to such person's title. An office holder's
fiduciary duties consist of a duty of care and a duty of loyalty. The duty
of
loyalty includes avoiding any conflict of interest between the office holder's
position in the company and his personal affairs, avoiding any competition
with
the company, avoiding exploiting any business opportunity of the company in
order to receive personal advantage for himself or others, and revealing to
the
company any information or documents relating to the company's affairs which
the
office holder has received due to his position as an office holder. Each person
listed in the table under “Directors and Senior Management,” which is displayed
under “Item 6. Directors, Senior Management and Employees - Directors and Senior
Management,” holds such office in our Company. Under the Israeli Companies Law,
all arrangements as to compensation of office holders who are not directors
require approval of the Board of Directors, or a committee thereof. Arrangements
regarding the compensation of directors also require audit committee and
shareholders approval, with the exception of compensation to external directors
in the amounts specified in the regulations discussed in “Item 6. Directors,
Senior Management and Employees - Directors and Senior Management -
Compensation.”
The
Israeli Companies Law requires that an office holder promptly discloses any
personal interest that he or she may have, and all related material information
known to him or her, in connection with any existing or proposed transaction
by
the company. The disclosure must be made to our Board of Directors or
shareholders without delay and prior to the meeting at which the transaction
is
to be discussed. In addition, if the transaction is an extraordinary
transaction, as defined under the Israeli Companies Law, the office holder
must
also disclose any personal interest held by the office holder's spouse,
siblings, parents, grandparents, descendants, spouse's descendants and the
spouses of any of the foregoing, or by any corporation in which the office
holder is a 5% or greater shareholder, or holder of 5% or more of the voting
power, director or general manager or in which he or she has the right to
appoint at least one director or the general manager. An extraordinary
transaction is defined as a transaction not in the ordinary course of business,
not on market terms, or that is likely to have a material impact on the
company's profitability, assets or liabilities.
In
the
case of a transaction which is not an extraordinary transaction (other than
transactions relating to a director’s conditions of service), after the office
holder complies with the above disclosure requirement, only board approval
is
required unless the Articles of Association of the company provides otherwise.
The transaction must not be adverse to the company's interest. If the
transaction is an extraordinary transaction, then, in addition to any approval
required by the Articles of Association, the transaction must also be approved
by the audit committee and by the Board of Directors, and under specified
circumstances, by a meeting of the shareholders. An office holder who has a
personal interest in a matter that is considered at a meeting of the Board
of
Directors or the audit committee may not be present at this meeting or vote
on
this matter.
The
Israeli Companies Law applies the same disclosure requirements to a controlling
shareholder of a public company, which is defined as a shareholder who has
the
ability to direct the activities of a company, other than in circumstances
where
this power derives solely from the shareholder’s position on the Board or any
other position with the company, and includes a shareholder that holds 25%
or
more of the voting rights if no other shareholder owns more than 50% of the
voting rights in the company. Extraordinary transactions with a controlling
shareholder or in which a controlling shareholder has a personal interest,
and
the terms of compensation of a controlling shareholder who is an office holder,
require the approval of the audit committee, the Board of Directors and the
shareholders of the company. The shareholders’ approval must either include at
least one-third of the disinterested shareholders who are present, in person
or
by proxy, at the meeting, or, alternatively, the total shareholdings of the
disinterested shareholders who vote against the transaction must not represent
more than one percent of the voting rights in the company.
In
addition, a private placement of securities that will increase the relative
holdings of a shareholder that holds 5% or more of the company’s outstanding
share capital, assuming the exercise by such person of all of the convertible
securities into shares held by that person, or that will cause any person to
become a holder of more than 5% of the company’s outstanding share capital,
requires approval by the Board of Directors and the shareholders of the company.
However, subject to certain exceptions under regulations adopted under the
Israeli Companies Law, shareholder approval will not be required if the
aggregate number of shares issued pursuant to such private placement, assuming
the exercise of all of the convertible securities into shares being sold in
such
a private placement, comprises less than 20% of the voting rights in a company
prior to the consummation of the private placement.
Under
the
Israeli Companies Law, a shareholder has a duty to act in good faith towards
the
company and other shareholders and refrain from abusing his power in the
company, including, among other things, voting in the general meeting of
shareholders on the following matters:
|
|
·
|
any
amendment to the Articles of
Association;
|
|
|
·
|
an
increase of the company's authorized share
capital;
|
|
|
·
|
approval
of interested party transactions that require shareholders
approval.
|
In
addition, any controlling shareholder, any shareholder who knows it can
determine the outcome of a shareholders vote and any shareholder who, under
a
company’s Articles of Association, can appoint or prevent the appointment of an
office holder, is under a duty to act with fairness towards the company. The
Israeli Companies Law does not describe the substance of this duty. The Israeli
Companies Law requires that specified types of transactions, actions and
arrangements be approved as provided for in a company’s articles of association
and in some circumstances by the audit committee, by the Board of Directors
and
by the shareholders. In general, the vote required by the audit committee and
the Board of Directors for approval of these matters, in each case, is a
majority of the disinterested directors participating in a duly convened
meeting.
Rights
Attached to Ordinary Shares
Our
authorized share capital consists of 500,000,000 ordinary shares, par value
NIS
0.02 per share.
Holders
of ordinary shares have one vote per share, and are entitled to participate
equally in the payment of dividends and share distributions and, in the event
of
our liquidation, in the distribution of assets after satisfaction of liabilities
to creditors. No preferred shares are currently authorized. All outstanding
ordinary shares are validly issued and fully paid.
Transfer
of Shares
Fully
paid ordinary shares are issued in registered form and may be freely transferred
under our Articles of Association unless the transfer is restricted or
prohibited by another instrument or applicable securities laws.
Dividend
and Liquidation Rights
We
may
declare a dividend to be paid to the holders of ordinary shares according to
their rights and interests in our profits. In the event of our liquidation,
after satisfaction of liabilities to creditors, our assets will be distributed
to the holders of ordinary shares in proportion to the nominal value of their
holdings.
This
right may be affected by the grant of preferential dividend or distribution
rights, to the holders of a class of shares with preferential rights that may
be
authorized in the future. Under the Israeli Companies Law, the declaration
of a
dividend does not require the approval of the shareholders of the company,
unless the company's articles of association require otherwise. Our Articles
provide that the Board of Directors may declare and distribute dividends without
the approval of the shareholders.
Annual
and Extraordinary General Meetings
We
must
hold our annual general meeting of shareholders each year no later than 15
months from the last annual meeting, at a time and place determined by the
Board
of Directors, upon at least 21 days’ prior notice to our shareholders to which
we need to add additional three days for notices sent outside of Israel. A
special meeting may be convened by request of two directors, 25% of the
directors then in office, one or more shareholders holding at least 5% of our
issued share capital and at least 1% of our issued voting rights, or one or
more
shareholders holding at least 5% of our issued voting rights. Notice of a
general meeting must set forth the date, time and place of the meeting. Such
notice must be given at least 21 days but not more than 45 days prior to the
general meeting. The quorum required for a meeting of shareholders consists
of
at least two shareholders present in person or by proxy who hold or represent
between them at least one-third of the voting rights in the company. A meeting
adjourned for lack of a quorum generally is adjourned to the same day in the
following week at the same time and place (with no need for any notice to the
shareholders) or until such other later time if such time is specified in the
original notice convening the general meeting, or if we serve notice to the
shareholders no less than seven days before the date fixed for the adjourned
meeting. If at an adjourned meeting there is no quorum present half an hour
after the time set for the meeting, any number participating in the meeting
shall represent a quorum and shall be entitled to discuss the matters set down
on the agenda for the original meeting. All shareholders who are registered
in
our registrar on the record date, or who will provide us with proof of ownership
on that date as applicable to the relevant registered shareholder, are entitled
to participate in a general meeting and may vote as described in “Voting Rights”
and “Voting by Proxy and in Other Manners,” below.
Voting
Rights
Our
ordinary shares do not have cumulative voting rights in the election of
directors. As a result, the holders of ordinary shares that represent more
than
50% of the voting power represented at a shareholders meeting in which a quorum
is present have the power to elect all of our directors, except the external
directors whose election requires a special majority as described under the
section entitled “Item 6. Directors, Senior Management and Employees - Board
Practices - External and Independent Directors.”
Holders
of ordinary shares have one vote for each ordinary share held on all matters
submitted to a vote of shareholders. Shareholders may vote in person or by
proxy. These voting rights may be affected by the grant of any special voting
rights to the holders of a class of shares with preferential rights that may
be
authorized in the future.
Under
the
Israeli Companies Law, unless otherwise provided in the Articles of Association
or by applicable law, all resolutions of the shareholders require a simple
majority. Our Articles of Association provide that all decisions may be made
by
a simple majority. See “-Approval of Certain Transactions” above for certain
duties of shareholders towards the company.
Voting
by Proxy and in Other Manners
Our
Articles of Association enable a shareholder to appoint a proxy, who need not
be
a shareholder, to vote at any shareholders meeting. We require that the
appointment of a proxy be in writing signed by the person making the appointment
or by an attorney authorized for this purpose, and if the person making the
appointment is a corporation, by a person or persons authorized to bind the
corporation. In the document appointing a proxy, each shareholder may specify
how the proxy should vote on any matter presented at a shareholders meeting.
The
document appointing the proxy shall be deposited in our offices or at such
other
address as shall be specified in the notice of the meeting not less than 48
hours before the time of the meeting at which the person specified in the
appointment is due to vote.
The
Israeli Companies Law and our Articles of Association do not permit resolutions
of the shareholders to be adopted by way of written consent, for as long as
our
ordinary shares are publicly traded.
Limitations
on the Rights to Own Securities
The
ownership or voting of ordinary shares by non-residents of Israel is not
restricted in any way by our Articles of Association or the laws of the State
of
Israel, except that nationals of countries which are, or have been, in a state
of war with Israel may not be recognized as owners of ordinary
shares.
Anti-Takeover
Provisions under Israeli Law
The
Israeli Companies Law permits merger transactions with the approval of each
party’s board of directors and shareholders. In accordance with the Israeli
Companies Law, a merger may be approved at a shareholders meeting by a majority
of the voting power represented at the meeting, in person or by proxy, and
voting on that resolution. In determining whether the required majority has
approved the merger, shares held by the other party to the merger, any person
holding at least 25% of the outstanding voting shares or means of appointing
the
board of directors of the other party to the merger, or the relatives or
companies controlled by these persons, are excluded from the vote.
Under
the
Israeli Companies Law, a merging company must inform its creditors of the
proposed merger. Any creditor of a party to the merger may seek a court order
blocking the merger, if there is a reasonable concern that the surviving company
will not be able to satisfy all of the obligations of the parties to the merger.
Moreover, a merger may not be completed until at least 30 days have passed
from
the time the merger was approved in a general meeting of each of the merging
companies, and at least 50 days have passed from the time that a merger proposal
was filed with the Israeli Registrar of Companies.
Israeli
corporate law provides that an acquisition of shares in a public company must
be
made by means of a tender offer if, as a result of such acquisition, the
purchaser would become a 25% or greater shareholder of the company. This rule
does not apply if there is already another shareholder with 25% or greater
shares in the company. Similarly, Israeli corporate law provides that an
acquisition of shares in a public company must be made by means of a tender
offer if, as a result of the acquisition, the purchaser's shareholdings would
entitle the purchaser to over 45% of the shares in the company, unless there
is
a shareholder with 45% or more of the shares in the company. These requirements
do not apply if, in general, the acquisition (1) was made in a private placement
that received the approval of the company’s shareholders; (2) was from a 25% or
greater shareholder of the company which resulted in the purchaser becoming
a
25% or greater shareholder of the company, or (3) was from a 45% or greater
shareholder of the company which resulted in the acquirer becoming a 45% or
greater shareholder of the company. These rules do not apply if the acquisition
is made by way of a merger. Regulations promulgated under the Israeli Companies
Law provide that these tender offer requirements do not apply to companies
whose
shares are listed for trading external of Israel if, according to the law in
the
country in which the shares are traded, including the rules and regulations
of
the stock exchange or which the shares are traded, either:
|
|
·
|
there
is a limitation on acquisition of any level of control of the company;
or
|
|
|
·
|
the
acquisition of any level of control requires the purchaser to do
so by
means of a tender offer to the
public.
|
The
Israeli Companies Law provides specific rules and procedures for the acquisition
of shares held by minority shareholders, if the majority shareholder holds
more
than 90% of the outstanding shares. If, as a result of an acquisition of shares,
the purchaser will hold more than 90% of a company’s outstanding shares, the
acquisition must be made by means of a tender offer for all of the outstanding
shares. If less than 5% of the outstanding shares are not tendered in the tender
offer, all the shares that the purchaser offered to purchase will be transferred
to it. The Israeli Companies Law provides for appraisal rights if any
shareholder files a request in court within three months following the
consummation of a full tender offer. If more than 5% of the outstanding shares
are not tendered in the tender offer, then the purchaser may not acquire shares
in the tender offer that will cause his shareholding to exceed 90% of the
outstanding shares of the company. Israeli tax law treats specified
acquisitions, including a stock-for-stock swap between an Israeli company and
a
foreign company, less favorably than does US tax law. These laws may have the
effect of delaying or deterring a change in control of us, thereby limiting
the
opportunity for shareholders to receive a premium for their shares and possibly
affecting the price that some investors are willing to pay for our
securities.
Rights
of Shareholders
Under
the
Israeli Companies Law, our shareholders have the right to inspect certain
documents and registers including the minutes of general meetings, the register
of shareholders and the register of substantial shareholders, any document
held
by us that relates to an act or transaction requiring the consent of the general
meeting as stated above under “-Approval of Certain Transactions,” our Articles
of Association and our financial statements, and any other document which we
are
required to file under the Israeli Companies Law or under any law with the
Registrar of Companies or the Israeli Securities Authority, and is available
for
public inspection at the Registrar of Companies or the Securities Authority,
as
the case may be.
If
the
document required for inspection by one of our shareholders relates to an act
or
transaction requiring the consent of the general meeting as stated above, we
may
refuse the request of the shareholder if in our opinion the request was not
made
in good faith, the documents requested contain a commercial secret or a patent,
or disclosure of the documents could prejudice our good in some other
way.
The
Israeli Companies Law provides that with the approval of the court any of our
shareholders or directors may file a derivative action on our behalf if the
court finds the action is a priori, to our benefit, and the person demanding
the
action is acting in good faith. The demand to take action can be filed with
the
court only after it is serviced to us, and we decline or omit to act in
accordance to this demand.
Enforceability
of Civil Liabilities
We
are
incorporated in Israel and some of our directors and officers and the Israeli
experts named in this report reside outside the US. Service of process upon
them
may be difficult to effect within the US. Furthermore, because substantially
all
of our assets, and those of our non-US directors and officers and the Israeli
experts named herein, are located outside the US, any judgment obtained in
the
US against us or any of these persons may not be collectible within the US.
We
have
been informed by our legal counsel in Israel, Kantor & Co., that there is
doubt as to the enforceability of civil liabilities under the Securities Act
or
the Exchange Act, pursuant to original actions instituted in Israel. However,
subject to particular time limitations, executory judgments of a US court for
monetary damages in civil matters may be enforced by an Israeli court, provided
that:
|
|
·
|
the
judgment was obtained after due process before a court of competent
jurisdiction, that recognizes and enforces similar judgments of Israeli
courts, and the court had authority according to the rules of private
international law currently prevailing in
Israel;
|
|
|
·
|
adequate
service of process was effected and the defendant had a reasonable
opportunity to be heard;
|
|
|
·
|
the
judgment is not contrary to the law, public policy, security or
sovereignty of the State of Israel and its enforcement is not contrary
to
the laws governing enforcement of
judgments;
|
|
|
·
|
the
judgment was not obtained by fraud and does not conflict with any
other
valid judgment in the same matter between the same
parties;
|
|
|
·
|
the
judgment is no longer appealable;
and
|
|
|
·
|
an
action between the same parties in the same matter is not pending
in any
Israeli court at the time the lawsuit is instituted in the foreign
court.
|
We
have
irrevocably appointed XTL Biopharmaceuticals, Inc., our US subsidiary, as our
agent to receive service of process in any action against us in any US federal
court or the courts of the State of New York.
Foreign
judgments enforced by Israeli courts generally will be payable in Israeli
currency. The usual practice in an action before an Israeli court to recover
an
amount in a non-Israeli currency is for the Israeli court to render judgment
for
the equivalent amount in Israeli currency at the rate of exchange in force
on
the date of the judgment. Under existing Israeli law, a foreign judgment payable
in foreign currency may be paid in Israeli currency at the rate of exchange
for
the foreign currency published on the day before date of payment. Current
Israeli exchange control regulations also permit a judgment debtor to make
payment in foreign currency. Pending collection, the amount of the judgment
of
an Israeli court stated in Israeli currency ordinarily may be linked to Israel’s
consumer price index plus interest at the annual statutory rate set by Israeli
regulations prevailing at that time. Judgment creditors must bear the risk
of
unfavorable exchange rates.
Material
Contracts
Bicifadine
License
In
January 2007, XTL Development, our wholly owned subsidiary, signed an agreement
with DOV to in-license the worldwide rights for Bicifadine, a serotonin and
norepinephrine reuptake inhibitor (SNRI). XTL Development intends to develop
Bicifadine for the treatment of diabetic neuropathic pain, a chronic condition
resulting from damage to peripheral nerves. In accordance with the terms of
the
license agreement, XTL Development paid an initial up-front license fee of
$7.5
million in cash. In addition, XTL Development will make milestone payments
of up
to $126.5 million over the life of the license, of which up to $115 million
will
be due upon or after regulatory approval of the product. These milestone
payments may be made in either cash and/or our ordinary shares, at our election,
with the exception of $5 million in cash, due upon or after regulatory approval
of the product. XTL Development is also obligated to pay royalties to DOV on
net
sales of Bicifadine.
In
addition, XTL Development committed to pay a transaction advisory fee to certain
third party intermediaries in connection with the in-license of Bicifadine
from
DOV. See “Item 5 - Operating and Financial Review and Prospects - Obligations
and Commitments.”
VivoQuest
Inc.
In
August
2005, we entered into an asset purchase agreement with VivoQuest, a privately
held biotechnology company based in the US, pursuant to which we agreed to
purchase from VivoQuest certain assets, including VivoQuest’s laboratory
equipment, and to assume VivoQuest’s lease of its laboratory space. In
consideration, we paid $450,000 to VivoQuest, which payment was satisfied by
the
issuance of ordinary shares having a fair market value in the same amount as
of
the closing date. In addition, we entered into a license agreement with
VivoQuest pursuant to which we acquired exclusive worldwide rights to
VivoQuest’s intellectual property and technology. The license covers a
proprietary compound library, including VivoQuest’s lead HCV compounds, that was
developed through the use of Diversity Oriented Synthesis, or DOS, technology.
The terms of the license agreement include an initial upfront license fee of
approximately $941,000 that was paid in our ordinary shares. The license
agreement also provides for additional milestone payments triggered by certain
regulatory and sales targets. These milestone payments total $34.6 million,
$25.0 million of which will be due upon or following regulatory approval or
actual product sales, and are payable in cash or ordinary shares at our
election. In addition, the license agreement requires that we make royalty
payments on product sales. The asset purchase agreement and the license
agreement with VivoQuest were completed in September 2005.
Presidio
Pharmaceuticals, Inc.
In
March
2008, we signed an agreement to out-license our DOS program to Presidio.
Under
the terms of the license agreement, Presidio becomes responsible for all
further
development and commercialization activities and costs relating to the DOS
program. In accordance with the terms of the license agreement, we received
a $4
million, non-refundable, upfront payment in cash from Presidio and will receive
up to an additional $104 million upon reaching certain development and
commercialization milestones. In addition, we will receive a royalty on direct
product sales by Presidio, and a percentage of Presidio’s income if the DOS
program is sublicensed by Presidio to a third party.
Exchange
Controls
Under
Israeli Law, Israeli non-residents who purchase ordinary shares with certain
non-Israeli currencies (including dollars) may freely repatriate in such
non-Israeli currencies all amounts received in Israeli currency in respect
of
the ordinary shares, whether as a dividend, as a liquidating distribution,
or as
proceeds from any sale in Israel of the ordinary shares, provided in each case
that any applicable Israeli income tax is paid or withheld on such amounts.
The
conversion into the non-Israeli currency must be made at the rate of exchange
prevailing at the time of conversion.
Taxation
The
following discussion of Israeli and US tax consequences material to our
shareholders is not intended and should not be construed as legal or
professional tax advice and does not exhaust all possible tax considerations.
To
the extent that the discussion is based on new tax legislation, which has not
been subject to judicial or administrative interpretation, the views expressed
in the discussion might not be accepted by the tax authorities in question.
This
summary does not purport to be a complete analysis of all potential tax
consequences of owning ordinary shares or ADRs. In particular, this discussion
does not take into account the specific circumstances of any particular
shareholder (such as tax-exempt entities, certain financial companies,
broker-dealers, shareholders subject to Alternative Minimum Tax, shareholders
that actually or constructively own 10% or more of our voting securities,
shareholders that hold ordinary shares or ADRs as part of straddle or hedging
or
conversion transaction, traders in securities that elect mark to market, banks
and other financial institutions or shareholders whose functional currency
is
not the US dollar), some of which may be subject to special rules.
We
urge shareholders to consult their own tax advisors as to the US, Israeli,
or
other tax consequences of the purchase, ownership and disposition of ordinary
shares and ADRs, including, in particular, the effect of any foreign, state
or
local taxes. For purposes of the entire Taxation discussion, we refer to
ordinary shares and ADRs collectively as ordinary shares.
Israeli
Tax Considerations
The
following discussion refers to the current tax law applicable to companies
in
Israel, with special reference to its effect on us. This discussion also
includes specified Israeli tax consequences to holders of our ordinary shares
and Israeli Government programs benefiting us.
Tax
Reforms
On
January 1, 2003 a comprehensive tax reform took effect in Israel (the Law for
Amendment of the Income Tax Ordinance (Amendment No. 132), 5762-2002, as
amended) (which we refer to as “the 2003 Reform”). Pursuant to the 2003 Reform,
resident companies are subject to Israeli tax on income on a worldwide basis.
In
addition, the concept of controlled foreign corporation was introduced according
to which an Israeli company may become subject to Israeli taxes on certain
income of a non-Israeli subsidiary if the subsidiary’s primary source of income
is passive income (such as interest, dividends, royalties, rental income or
certain capital gains). An Israeli company that is subject to Israeli taxes
on
the income of its non-Israeli subsidiaries will receive a credit for income
tax
paid by the subsidiary in its country of resident subject to certain
limitations. The 2003 Reform also substantially changed the system of taxation
of capital gains.
On
July
25, 2005 an additional tax reform took effect in Israel (the Law for Amendment
of the Income Tax Ordinance (Amendment No. 147)), which we refer to as “the 2005
Reform”. In general terms, pursuant to the 2005 Reform, and generally effective
from January 1, 2006, the Israeli corporate tax rates were and will be further
reduced, the capital gains tax rate that applies to Israeli individuals on
the
disposition of traded securities was increased and the tax rates that apply
to
dividends distributed by an Israeli company was partly reduced.
Corporate
Tax Rate
The
regular tax rate in Israel in 2007 is 29% (2006-31%). This rate is currently
scheduled to decrease as follows: in 2008 - 27%, 2009 - 26%, 2010 and after
-
25%.
Tax
Benefits for Research and Development
Israeli
tax law allows, under specific conditions, a tax deduction in the year incurred
for expenditures, including capital expenditures, relating to scientific
research and development projects, if the expenditures are approved by the
relevant Israeli government ministry, determined by the field of research,
and
the research and development is for the promotion of the company and is carried
out by or on behalf of the company seeking the deduction. Expenditures not
so
approved are deductible over a three-year period. In the past, expenditures
that
were made out of proceeds made available to us through government grants were
automatically deducted during a one year period.
Special
Provisions Relating to Taxation under Inflationary
Conditions
The
Income Tax Law (Inflationary Adjustments), 1985, generally referred to as the
Inflationary Adjustments Law, represents an attempt to overcome the problems
presented to a traditional tax system by an economy undergoing rapid inflation.
The Inflationary Adjustments Law is highly complex. Its features, which are
material to us, can be described as follows:
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where
a company's equity, as defined in the law, exceeds the cost of fixed
assets as defined in the Inflationary Adjustments Law, a deduction
from
taxable income that takes into account the effect of the applicable
annual
rate of inflation on the excess is allowed up to a ceiling of 70%
of
taxable income in any single tax year, with the unused portion permitted
to be carried forward on a linked basis. If the cost of fixed assets,
as
defined in the Inflationary Adjustments Law, exceeds a company's
equity,
then the excess multiplied by the applicable annual rate of inflation
is
added to taxable income; and
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subject
to specified limitations, depreciation deductions on fixed assets
and
losses carried forward are adjusted for inflation based on the increase
in
the consumer price index.
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In
February 2008, the Knesset (the Israeli parliament), cancelled the provisions
of
the Inflationary Adjustments Law, and as a result it will no longer apply to
us
in 2008 and thereafter.
Israeli
Estate and Gift Taxes
Generally,
Israel does not currently impose taxes on inheritance or bona fide gifts. For
transfer of assets by inheritance or gift that would normally be subject to
capital gains tax or land appreciation tax, the recipient’s tax cost basis and
date of purchase are generally deemed to be the same as those for the transferor
of the property.
Capital
Gains Tax on Sale of our Ordinary Shares by Both Residents and Non-Residents
of
Israel
Israeli
law generally imposes a capital gains tax on the sale of capital assets located
in Israel, including shares in Israeli resident companies, by both residents
and
non-residents of Israel, unless a specific exemption is available or unless
a
treaty between Israel and the country of the non-resident provides otherwise.
The law distinguishes between the inflationary surplus and the real gain. The
inflationary surplus is the portion of the total capital gain, which is
equivalent to the increase of the relevant asset’s purchase price attributable
to the increase in the Israeli consumer price index from the date of purchase
to
the date of sale. The real gain is the excess of the total capital gain over
the
inflationary surplus. A non resident that invests in taxable assets with foreign
currency may elect to calculate the inflationary amount by using such foreign
currency.
Non-Israeli
residents will be exempt from Israeli capital gains tax on any gains derived
from the sale of shares publicly traded on a stock exchange recognized by the
Israeli Ministry of Finance (including the Tel-Aviv Stock Exchange and NASDAQ),
provided such shareholders did not acquire their shares prior to an initial
public offering and that such capital gains are not derived by a permanent
establishment of the foreign resident in Israel. Notwithstanding the foregoing,
dealers in securities in Israel are taxed at the regular tax rates applicable
to
business income. However, Non-Israeli corporations will not be entitled to
such
exemption if an Israeli resident (1) has a controlling interest of 25% or more
in such non-Israeli corporation, or (2) is the beneficiary of, or is entitled
to, 25% or more of the revenue or profits of such non-Israeli corporation,
whether directly or indirectly. In any event, the provisions of the tax reform
shall not affect the exemption from capital gains tax for gains accrued before
January 1, 2003, as described in the previous paragraph.
On
July
25, 2005, the 2005 Reform came into effect. Pursuant to the 2005 Reform,
effective January 1, 2006, the capital gains tax imposed on Israeli tax resident
individuals on the sale of securities is 20%. With respect to an Israeli tax
resident individual who is a “substantial shareholder” on the date of sale of
the securities or at any time during the 12 months preceding such sale, the
capital gains tax rate was increased to 25%. A “substantial shareholder” is
defined as someone who alone, or together with another person, holds, directly
or indirectly, at least 10 % in one or all of any of the means of control in
the
corporation. With respect to Israeli tax resident corporate investors, effective
January 1, 2006 capital gains tax at the regular corporate rate will be imposed
on such taxpayers on the sale of traded shares.
In
addition, pursuant to the Convention Between the Government of the United States
of America and the Government of Israel with Respect to Taxes on Income, as
amended (the “United States- Israel Tax Treaty”), the sale, exchange or
disposition of ordinary shares by a person who qualifies as a resident of the
US
within the meaning of the United States-Israel Tax Treaty and who is entitled
to
claim the benefits afforded to such person by the United States- Israel Tax
Treaty (a “Treaty United States Resident”) generally will not be subject to the
Israeli capital gains tax unless such “Treaty United States Resident” holds,
directly or indirectly, shares representing 10% or more of our voting power
during any part of the twelve- month period preceding such sale, exchange or
disposition, subject to certain conditions or if the capital gains from such
sale are considered as business income attributable to a permanent establishment
of the US resident in Israel. However, under the United States-Israel Tax
Treaty, such “Treaty United States Resident” would be permitted to claim a
credit for such taxes against the US federal income tax imposed with respect
to
such sale, exchange or disposition, subject to the limitations in US laws
applicable to foreign tax credits.
Taxation
of Dividends
Non-residents
of Israel are subject to income tax on income accrued or derived from sources
in
Israel.
Pursuant
to the 2005 Reform, effective January 1, 2006, the tax rate imposed on dividends
distributed by an Israeli company to Israeli tax resident individuals or to
non-Israeli residents was reduced to a tax at a rate of 20%. With respect to
“substantial shareholders,” as defined above, the applicable tax rate remains
25%. The taxation of dividends distributed by an Israeli company to another
Israeli corporate tax resident remains unchanged.
Notwithstanding,
dividends distributed by an Israeli company to Israeli tax resident individuals
or to non-Israeli residents are subject to a 20% withholding tax (15% in the
case of dividends distributed from the taxable income attributable to an
Approved Enterprise), unless a lower rate is provided in a treaty between Israel
and the shareholder’s country of residence. Dividends distributed by an Israeli
company to another Israeli tax resident company are generally exempt, unless
such dividends are distributed from taxable income attributable to an Approved
Enterprise, in which case such dividends are taxed at a rate of 15%, or unless
such dividends are distributed from income that was not taxed in Israel, in
which case such dividends are taxed at a rate of 25%.
In
any
case, dividends distributed from the taxable income attributable to an Approved
Enterprise, to both Israeli tax residents and non-Israeli residents remains
subject to a 15% tax rate.
Under
the
US-Israel Tax Treaty, the maximum Israeli tax and withholding tax on dividends
paid to a holder of ordinary shares who is a resident of the US is generally
25%, but is reduced to 12.5% if the dividends are paid to a corporation that
holds in excess of 10% of the voting rights of company during the company’s
taxable year preceding the distribution of the Dividend and the portion of
the
company’s taxable year in which the dividend was distributed. Dividends of an
Israeli company derived from the income of an Approved Enterprise will still
be
subject to a 15% dividend withholding tax; if the dividend is attributable
partly to income derived from an Approved Enterprise, and partly to other
sources of income, the withholding rate will be a blended rate reflecting the
relative portions of the two types of income. A non-resident of Israel who
has
dividend income derived from or accrued in Israel, from which tax was withheld
at the source, is generally exempt from the duty to file tax returns in Israel
in respect of such income, provided such income was not derived from a business
conducted in Israel by the taxpayer.
US
Federal Income Tax Considerations
The
following discusses the material US federal income tax consequences to a holder
of our ordinary shares who qualifies as a US holder, which is defined
as:
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a
citizen or resident of the US;
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a
corporation created or organized under the laws of the US, the District
of
Columbia, or any state; or
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a
trust or estate, treated, for US federal income tax purposes, as
a
domestic trust or estate.
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This
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended, which we refer to as the Code, current and proposed Treasury
regulations promulgated under the Code, and administrative and judicial
decisions as of the date of this report, all of which are subject to change,
possibly on a retroactive basis. This discussion does not address any aspect
of
state, local or non-US tax laws. Except where noted, this discussion addresses
only those holders who hold our shares as capital assets. This discussion does
not purport to be a comprehensive description of all of the tax considerations
that may be relevant to US holders entitled to special treatment under US
federal income tax laws, for example, financial institutions, insurance
companies, tax-exempt organizations and broker/dealers, and it does not address
all aspects of US federal income taxation that may be relevant to any particular
shareholder based on the shareholder's individual circumstances. In particular,
this discussion does not address the potential application of the alternative
minimum tax, or the special US federal income tax rules applicable in special
circumstances, including to US holders who:
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have
elected mark-to-market accounting;
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hold
our ordinary shares as part of a straddle, hedge or conversion transaction
with other investments;
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own
directly, indirectly or by attribution at least 10% of our voting
power;
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are
tax exempt entities;
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are
persons who acquire shares in connection with employment or other
performance of services; and
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have
a functional currency that is not the US
dollar.
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Additionally,
this discussion does not consider the tax treatment of partnerships or persons
who hold ordinary shares through a partnership or other pass-through entity
or
the possible application of US federal gift or estate taxes. Material aspects
of
US federal income tax relevant to a holder other than a US holder are also
described below.
Each
shareholder should consult its tax advisor regarding the particular tax
consequences to such holder of ownership and disposition of our shares, as
well
as any tax consequences that may arise under the laws of any other relevant
foreign, state, local, or other taxing jurisdiction.
Taxation
of Dividends Paid on Ordinary Shares
Subject
to the description of the passive foreign investment company rules below, a
US
holder will be required to include in gross income as ordinary income the amount
of any distribution paid on ordinary shares, including any Israeli taxes
withheld from the amount paid, to the extent the distribution is paid out of
our
current or accumulated earnings and profits as determined for US federal income
tax purposes. Distributions in excess of these earnings and profits will be
applied against and will reduce the US holder’s basis in the ordinary shares
and, to the extent in excess of this basis, will be treated as gain from the
sale or exchange of ordinary shares.
Certain
dividend income may be eligible for a reduced rate of taxation. Dividend income
will be taxed to a non-corporate holder at the applicable long-term capital
gains rate if the dividend is received from a “qualified foreign corporation,”
and the shareholder of such foreign corporation holds such stock for more than
60 days during the 121 day period that begins on the date that is 60 days before
the ex-dividend date for the stock. The holding period is tolled for any days
on
which the shareholder has reduced his risk of loss. A “qualified foreign
corporation” is either a corporation that is eligible for the benefits of a
comprehensive income tax treaty with the US or a corporation whose stock, the
shares of which are with respect to any dividend paid by such corporation,
is
readily tradable on an established securities market in the United States.
However, a foreign corporation will not be treated as qualified if it is a
passive foreign investment company (as discussed below) for the year in which
the dividend was paid or the preceding year. Distributions of current or
accumulated earnings and profits paid in foreign currency to a US holder will
be
includible in the income of a US holder in a US dollar amount calculated by
reference to the exchange rate on the day the distribution is received. A US
holder that receives a foreign currency distribution and converts the foreign
currency into US dollars subsequent to receipt will have foreign exchange gain
or loss based on any appreciation or depreciation in the value of the foreign
currency against the US dollar, which will generally be US source ordinary
income or loss.
As
described above, we will generally be required to withhold Israeli income tax
from any dividends paid to holders who are not resident in Israel. See “-
Israeli Tax Considerations—Taxation of Dividends” above. If a US holder receives
a dividend from us that is subject to Israeli withholding, the following would
apply:
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You
must include the gross amount of the dividend, not reduced by the
amount
of Israeli tax withheld, in your US taxable
income.
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You
may be able to claim the Israeli tax withheld as a foreign tax credit
against your US income tax liability. However, to the extent that
25% or
more of our gross income from all sources was effectively connected
with
the conduct of a trade or business in the US (or treated as effectively
connected, with limited exceptions) for a three-year period ending
with
the close of the taxable year preceding the year in which the dividends
are declared, a portion of this dividend will be treated as US source
income, possibly reducing the allowable foreign
tax.
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The
foreign tax credit is subject to significant and complex limitations.
Generally, the credit can offset only the part of your US tax attributable
to your net foreign source passive income. Additionally, if we pay
dividends at a time when 50% or more of our stock is owned by US
persons,
you may be required to treat the part of the dividend attributable
to US
source earnings and profits as US source income, possibly reducing
the
allowable credit.
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A
US holder will be denied a foreign tax credit with respect to Israeli
income tax withheld from dividends received on the ordinary shares
to the
extent the US holder has not held the ordinary shares for at least
16 days
of the 31-day period beginning on the date which is 15 days before
the
ex-dividend date or, alternatively, to the extent the US holder is
under
an obligation to make related payments with respect to substantially
similar or related property. Any days during which a US holder has
substantially diminished its risk of loss on the ordinary shares
are not
counted toward meeting the 16-day holding period required by the
statute.
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If
you do not elect to claim foreign taxes as a credit, you will be
entitled
to deduct the Israeli income tax withheld from your XTL dividends
in
determining your taxable income.
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Individuals
who do not claim itemized deductions, but instead utilize the standard
deduction, may not claim a deduction for the amount of the Israeli
income
taxes withheld.
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If
you are a US corporation holding our stock, the general rule is that
you
cannot claim the dividends-received deduction with respect to our
dividends. There is an exception to this rule if you own at least
10% of
our ordinary shares (by vote) and certain conditions are
met.
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Special
rules, described below, apply if we are a passive foreign investment
company.
Taxation
of the Disposition of Ordinary Shares
Subject
to the description of the passive foreign investment company rules below, upon
the sale, exchange or other disposition of our ordinary shares, a US holder
will
recognize capital gain or loss in an amount equal to the difference between
the
US holder's basis in the ordinary shares, which is usually the cost of these
shares, and the amount realized on the disposition. Capital gain from the sale,
exchange or other disposition of ordinary shares held more than one year is
long-term capital gain and is eligible for a reduced rate of taxation for
non-corporate holders. In general, gain realized by a US holder on a sale,
exchange or other disposition of ordinary shares generally will be treated
as US
source income for US foreign tax credit purposes. A loss realized by a US holder
on the sale, exchange or other disposition of ordinary shares is generally
allocated to US source income. However, regulations require the loss to be
allocated to foreign source income to the extent certain dividends were received
by the taxpayer within the 24-month period preceding the date on which the
taxpayer recognized the loss. The deductibility of a loss realized on the sale,
exchange or other disposition of ordinary shares is subject to limitations
for
both corporate and individual shareholders.
A
US
holder that uses the cash method of accounting calculates the US dollar value
of
the proceeds received from a sale of ordinary shares as of the date that the
sale settles, and will generally have no additional foreign currency gain or
loss on the sale, while a US holder that uses the accrual method of accounting
is required to calculate the value of the proceeds of the sale as of the trade
date and may therefore realize foreign currency gain or loss, unless the US
holder has elected to use the settlement date to determine its proceeds of
sale
for purposes of calculating this foreign currency gain or loss. In addition,
a
US holder that receives foreign currency upon disposition of our ordinary shares
and converts the foreign currency into US dollars subsequent to receipt will
have foreign exchange gain or loss based on any appreciation or depreciation
in
the value of the foreign currency against the US dollar, which will generally
be
US source ordinary income or loss.
Tax
Consequences If We Are A Passive Foreign Investment
Company
Special
tax rules apply to the timing and character of income received by a US holder
of
a PFIC. We will be a PFIC if either 75% or more of our gross income in a
tax
year is passive income or the average percentage of our assets (by value)
that
produce or are held for the production of passive income in a tax year is
at
least 50%. The IRS, has indicated that cash balances, even if held as working
capital, are considered to be assets that produce passive income. Therefore,
any
determination of PFIC status will depend upon the sources of our income,
and the
relative values of passive and non- passive assets, including goodwill.
Furthermore, because the goodwill of a publicly-traded corporation such as
us is
largely a function of the trading price of its shares, the valuation of that
goodwill is subject to significant change throughout each year. A determination
as to a corporation’s status as a PFIC must be made annually. We believe that we
were likely not a PFIC for the taxable years ended December 31, 2005 and
2004.
However, we believe that we were a PFIC for the taxable years ended December
31,
2007 and 2006. Although such a determination is fundamentally factual in
nature
and generally cannot be made until the close of the applicable taxable year,
based on our current operations, we believe that we may be classified as
a PFIC
in the 2008 taxable year and possibly in subsequent years.
If
we are
classified as a PFIC, a special tax regime would apply to both (a) any “excess
distribution” by us (generally, the US holder's ratable share of distributions
in any year that are greater than 125% of the average annual distributions
received by such US holder in the three preceding years or its holding period,
if shorter) and (b) any gain recognized on the sale or other disposition of
your
ordinary shares. Under this special regime, any excess distribution and
recognized gain would be treated as ordinary income and the federal income
tax
on such ordinary income is determined under the following steps: (i) the amount
of the excess distribution or gain is allocated ratably over the US holder's
holding period for our ordinary shares; (ii) tax is determined for amounts
allocated to the first year in the holding period in which we were classified
as
a PFIC and all subsequent years (except the year in which the excess
distribution was received or the sale occurred) by applying the highest
applicable tax rate in effect in the year to which the income was allocated;
(iii) an interest charge is added to this tax calculated by applying the
underpayment interest rate to the tax for each year determined under the
preceding sentence from the due date of the income tax return for such year
to
the due date of the return for the year in which the excess distribution or
sale
occurs; and (iv) amounts allocated to a year prior to the first year in the
US
holder’s holding period in which we were classified as a PFIC or to the year in
which the excess distribution or the disposition occurred are taxed as ordinary
income and no interest charge applies.
A
US
holder may generally avoid the PFIC regime by electing to treat his PFIC shares
as a “qualified electing fund.” If a US holder elects to treat PFIC shares as a
qualified electing fund, also known as a “QEF Election,” the US holder must
include annually in gross income (for each year in which PFIC status is met)
his
pro
rata
share of
the PFIC’s ordinary earnings and net capital gains, whether or not such amounts
are actually distributed to the US holder. A US holder may make a QEF Election
with respect to a PFIC for any taxable year in which he was a shareholder.
A QEF
Election is effective for the year in which the election is made and all
subsequent taxable years of the US holder. Procedures exist for both retroactive
elections and the filing of protective statements. A US holder making the QEF
Election must make the election on or before the due date, as extended, for
the
filing of the US holder's income tax return for the first taxable year to which
the election will apply.
A
QEF
Election is made on a shareholder-by-shareholder basis. A US holder must make
a
QEF Election by completing Form 8621, Return by a Shareholder of a Passive
Foreign Investment Company or Qualified Electing Fund, and attaching it to
the
holder’s timely filed US federal income tax return. We have complied with the
record-keeping and reporting requirements that are a prerequisite for US holders
to make a QEF Election for the 2007 and 2006 tax years. For this purpose, we
have made our 2007 and 2006 PFIC annual information statement available under
a
link entitled “PFIC Annual Information Statement” under the “Investor
Information” section on our corporate website, which you may access at
www.xtlbio.com
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While
we plan to continue to comply with such requirements, if, in the future, meeting
those record-keeping and reporting requirements becomes onerous, we may decide,
in our sole discretion, that such compliance is impractical and will so notify
US holders.
Alternatively,
a US holder may also generally avoid the PFIC regime by making a so-called
"mark-to-market" election. Such an election may be made by a US holder with
respect to ordinary shares owned at the close of such holder's taxable year,
provided that we are a PFIC and the ordinary shares are considered “marketable
stock.” The ordinary shares will be marketable stock if they are regularly
traded on a national securities exchange that is registered with the Securities
and Exchange Commission, or the national market system established pursuant
to
section 11A of the Securities and Exchange Act of 1934, or an equivalent
regulated and supervised foreign securities exchange.
If
a US
holder were to make a mark-to-market election with respect to ordinary shares,
such holder generally will be required to include in its annual gross income
the
excess of the fair market value of the
PFIC
shares at year-end over such shareholder’s adjusted tax basis in the ordinary
shares. Such amounts will be taxable to the US holder as ordinary income, and
will increase the holder’s tax basis in the ordinary shares. Alternatively, if
in any year, a United States holder’s tax basis exceeds the fair market value of
the ordinary shares at year-end, then the US holder generally may
take
an
ordinary loss deduction
to the
extent of the aggregate amount of ordinary income inclusions for prior years
not
previously recovered through loss deductions and any loss deductions taken
will
reduce the shareholder’s tax basis in the ordinary shares.
Gains
from an actual sale or other disposition of the ordinary shares with a
“mark-to-market” election will be treated as ordinary income, and any losses
incurred on an actual sale or other disposition of the ordinary shares will
be
treated as an ordinary loss to the extent of any prior “unreversed inclusions”
as defined in Section 1296(d) of the Code.
The
mark-to-market election is made on a shareholder-by-shareholder basis. The
mark-to-market election is made by completing Form 8621, Return by a Shareholder
of a Passive Foreign Investment Company or Qualified Electing Fund, and
attaching it to the holder’s timely filed US federal income tax return for the
year of election. Such election
is
effective for the taxable year for which made and all subsequent years until
either (a) the ordinary shares cease to be marketable stock or (b) the election
is revoked with the consent of the IRS.
A
US
holder who did not make an election either to (i) treat us as a “qualified
electing fund,” or (ii) mark our ordinary shares to market, will be subject to
the following:
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gain
recognized by the US holder upon the disposition of, as well as income
recognized upon receiving certain excess distributions on the ordinary
shares would be taxable as ordinary
income;
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the
US holder would be required to allocate the excess distribution and/or
disposition gain ratably over such US holder's entire holding period
for
such ordinary shares;
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the
amount allocated to each year other than the year of the excess
distribution or disposition and pre-PFIC years would be subject to
tax at
the highest applicable tax rate, and an interest charge would be
imposed
with respect to the resulting tax
liability;
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the
US holder would be required to file an annual return on IRS Form
8621 for
the years in which distributions were received on and gain was recognized
on dispositions of, our ordinary shares;
and
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any
US holder who acquired the ordinary shares upon the death of the
shareholder would not receive a step-up to market value of his income
tax
basis for such ordinary shares. Instead such US holder beneficiary
would
have a tax basis equal to the decedent's basis, if
lower.
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In
view of the complexity of the issues regarding our treatment as a PFIC, US
shareholders are urged to consult their own tax advisors for guidance as to
our
status as a PFIC.
US
Federal Income Tax Consequences for Non-US holders of Ordinary
Shares
Except
as
described in "Information Reporting and Back-up Withholding" below, a Non-US
holder of ordinary shares will not be subject to US federal income or
withholding tax on the payment of dividends on, and the proceeds from the
disposition of, ordinary shares, unless:
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·
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the
item is effectively connected with the conduct by the Non-US holder
of a
trade or business in the US and, in the case of a resident of a country
which has a tax treaty with the US, the item is attributable to a
permanent establishment in the US;
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the
Non-US holder is subject to tax under the provisions of US tax law
applicable to US expatriates; or
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the
individual non-US holder is present in the US for 183 days or more
in the
taxable year of the disposition and certain other conditions are
met.
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Information
Reporting and Back-Up Withholding
US
holders generally are subject to information reporting requirements with respect
to dividends paid in the US on ordinary shares. Existing regulations impose
back-up withholding on dividends paid in the US on ordinary shares unless the
US
holder provides IRS Form W-9 or otherwise establishes an exemption. US holders
are subject to information reporting and back-up withholding on proceeds paid
from the disposition of ordinary shares unless the US holder provides IRS Form
W-9 or otherwise establishes an exemption.
Non-US
holders generally are not subject to information reporting or back-up
withholding with respect to dividends paid on, or upon the disposition of,
ordinary shares, provided that the non-US holder provides a taxpayer
identification number, certifies to its foreign status, or otherwise establishes
an exemption to the US financial institution holding the ordinary shares.
Prospective
investors should consult their tax advisors concerning the effect, if any,
of
these Treasury regulations on an investment in ordinary shares. Back-up
withholding is not an additional tax. The amount of any back-up withholding
will
be allowed as a credit against a holder's US federal income tax liability and
may entitle the holder to a refund, provided that specified required information
is furnished to the IRS on a timely basis.
US
Federal Income Tax Consequences for XTL
We
currently have a “permanent establishment” in the United States, or US, which
began in 2005, due to t
he
residency of the Chairman of our Board of Directors and our Chief Executive
Officer in the US, as well as other less significant contacts that we have
with
the US. As a result, any income attributable to such US permanent establishment
would be subject to US corporate income tax in the same manner as if we were
a
US corporation. The maximum US corporate income tax rate (not including
applicable state and local tax rates) is currently at 35%. In addition, we
may
be subject to an additional branch profits tax of 30% on our US effectively
connected earnings and profits, subject to adjustment, for that taxable year
if
certain conditions occur, unless we qualify for the reduced 12.5% US branch
profits tax rate pursuant to the United States-Israel tax treaty. We would
be
potentially able to credit foreign taxes against our US tax liability in
connection with income attributable to our US permanent establishment and
subject to US and foreign income tax.
At
present, the parent company, XTL Biopharmaceuticals Ltd., does not earn any
taxable income for US tax purposes. If we do eventually earn taxable income
attributable to our US permanent establishment, w
e
may not
be able to utilize any of the accumulated Israeli loss carryforwards reflected
on our balance sheet as of December 31, 2007 since these losses were not
attributable to the US permanent establishment. However,
we
would
be able to utilize accumulated loss carryforwards to offset such US taxable
income only to the extent these carryforwards were attributable to our US
permanent establishment
.
As of
December 31, 2007, we estimate that these US net operating loss carryforwards
are approximately $22.4 million. These losses can be carried forward to offset
future US taxable income and will begin to expire in 2025. US corporate tax
rates are higher than those to which we are subject in the State of Israel,
and
if we are subject to US corporate tax, it would have a material adverse effect
on our results of operations
.
The
above comments are intended as a general guide to the current position. Any
person who is in any doubt as to his or her taxation position, and who requires
more detailed information than the general outline above or who is subject
to
tax in a jurisdiction other than the United States should consult professional
advisers.
Documents
on Display
We
are
required to file reports and other information with the SEC under the Exchange
Act and the regulations thereunder applicable to foreign private issuers. You
may inspect and copy reports and other information filed by us with the SEC
at
the SEC’s public reference facilities described below. Although as a foreign
private issuer we are not required to file periodic information as frequently
or
as promptly as US companies, we generally announce publicly our interim and
year-end results promptly and will file that periodic information with the
SEC
under cover of Form 6-K. As a foreign private issuer, we are also exempt from
the rules under the Exchange Act prescribing the furnishing and content of
proxy
statements, and our officers, directors and principal shareholders are exempt
from the reporting and other provisions in Section 16 of the Exchange
Act.
You
may
review and obtain copies of our filings with the SEC, including any exhibits
and
schedules, at the SEC’s public reference facilities in Room 1580, 100 F. Street,
N.E., Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our periodic filings will also be
available on the SEC’s website at www.sec.gov. These SEC filings are also
available to the public from commercial document retrieval services. Any
statement in this annual report about any of our contracts or other documents
is
not necessarily complete. If the contract or document is filed as an exhibit
to
this annual report, the contract or document is deemed to modify the description
contained in this annual report. We urge you to review the exhibits themselves
for a complete description of the contract or document.
ITEM
11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Interest
Rate Risk.
The
primary objective of our investment activities is to preserve principal while
maximizing our income from investments and minimizing our market risk. We invest
in government, investment-grade corporate debt securities, and bank deposits
in
accordance with our investment policy. Some of these instruments in which we
invest may have market risk. This means that a change in prevailing interest
rates may cause the principal amount of the investment to fluctuate. For
example, if we hold a security that was issued with a fixed interest rate at
the
then-prevailing rate and the prevailing interest rate later rises, the principal
amount of our investment will probably decline. As of December 31, 2007, our
portfolio of financial instruments consists of cash equivalents and short-term
bank deposits with multiple institutions. The average duration of all of our
investments held as of December 31, 2007, was less than one year. Due to the
short-term nature of these investments, we believe we have no material exposure
to interest rate risk arising from our investments.
Foreign
Currency and Inflation Risk.
We
generate all of our revenues and hold most of our cash, cash equivalents and
bank deposits in US dollars. While a substantial amount of our operating
expenses are in US dollars, we incur a portion of our expenses in New Israeli
Shekels. In addition, we also pay for some of our services and supplies in
the
local currencies of our suppliers. As a result, we are exposed to the risk
that
the US dollar will be devalued against the New Israeli Shekel or other
currencies, and as result our financial results could be harmed if we are unable
to guard against currency fluctuations in Israel or other countries in which
services and supplies are obtained in the future. Accordingly, we may enter
into
currency hedging transactions to decrease the risk of financial exposure from
fluctuations in the exchange rates of currencies. These measures, however,
may
not adequately protect us from the adverse effects of inflation in Israel.
In
addition, we are exposed to the risk that the rate of inflation in Israel will
exceed the rate of devaluation of the New Israeli Shekel in relation to the
dollar or that the timing of any devaluation may lag behind inflation in
Israel.
ITEM
12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not
applicable.