(Mark One) (Mark One) | | | ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | For the fiscal year ended December 31, 20172019 | or | | ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | | For the transition period from to |
Commission File Number 001-33299001-36621
Foamix Pharmaceuticals Ltd. (Exact name of registrant as specified in its charter)
Israel (State or other jurisdiction of incorporation or organization) | | Not Applicable (I.R.S. Employer Identification Number) |
2 Holzman Street, Weizmann Science Park Rehovot 7670402, Israel (Address of principal executive offices, including zip code)
+972-8-9316233 (Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class: | Trading Symbol(s) | Name of Each Exchange on Which Registered: | | Ordinary shares, par value NIS 0.16 per share | FOMX | NASDAQ GlobalThe Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes Yes☐☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,,” “smaller reporting company,,” and “emerging growth company”company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☒ | Non-accelerated filer ☐ (Do not check if a smaller reporting company) | Smaller reporting company ☐☒ | | | Emerging growth company ☒☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes ☐No ☒
The aggregate market value of the registrant’s ordinary shares, par value NIS 0.16 per share, held by non-affiliates of the registrant on June 30, 2017,28, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $121$129.2 million (based on the closing sales price of the registrant’s ordinary shares on that date). Ordinary shares held by each director and executive officer of the registrant, as well as shares held by each holder of more than 10% of the ordinary shares known to the registrant, have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The total number of shares outstanding of the registrant’s ordinary shares, par value NIS 0.16 per share, as of February 26, 2018,March 1, 2020, was 37,551,199.61,634,707.
Foamix Pharmaceuticals Ltd. meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE
None
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EXPLANATORY NOTE
This Amendment No. 1 (this “Amendment”) on Form 10-K/A amends the Annual Report on Form 10-K of Foamix Pharmaceuticals Ltd. for the year ended December 31, 2017 as originally filed with the Securities and Exchange Commission on February 27, 2018 (the “Original Filing”), to correct (i) an inadvertent reversal between the numerical data in the two columns labeled “Bonus” and “Non-Equity Incentive Plan Compensation” in the table titled “Summary Compensation Table” in “Item 11—Executive Compensation”, (ii) a clerical error in the amount of “All Other Compensation” of Mr. Yohan Hazot in the same table, and (iii) an inadvertent omission of the reference to “emerging growth company” in the paragraph in the cover page preceding the list of types of filers.
Except as described above, this Amendment does not amend or otherwise update any other information in the Original Filing. For the convenience of the reader, this Amendment restates in its entirety our Original Filing. This Amendment is presented as of the filing date of the Original Filing and does not reflect events occurring subsequent to the date of the Original Filing.
We have also updated the signature page, the consent of our independent registered public accounting firm in Exhibit 23.1 and the certifications of our Principal Executive Officer and Principal Financial Officer in Exhibits 31 and 32.
FOAMIX PHARMACEUTICALS LTD. FORM 10-K TABLE OF CONTENTS
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EXPLANATORY NOTE
On November 10, 2019, Foamix Pharmaceuticals Ltd. (“Foamix”) entered into an Agreement and Plan of Merger (as amended by Amendment No. 1 to the Agreement and Plan of Merger, dated as of December 4, 2019, the “Merger Agreement”) with Menlo Therapeutics Inc. (“Menlo”), a Delaware corporation, and Giants Merger Subsidiary Ltd. (“Merger Sub”), a direct and wholly-owned Israeli subsidiary of Menlo, whereby Merger Sub agreed to merge with and into Foamix, with Foamix continuing as the surviving corporation and a wholly-owned subsidiary of Menlo (the “Merger”). On March 9, 2020, the Merger was completed, and, as of the date of this Annual Report on Form 10-K (this “Annual Report”), Foamix is a wholly-owned subsidiary of Menlo.
This Annual Report only includes information with respect to Foamix and does not include a description of the business of Foamix and Menlo as a combined company, nor does it include any financial information about the combined company. We urge Foamix shareholders to review Menlo’s filings made with the SEC, including Menlo’s most recent Annual Report on Form 10-K filed on March 3, 2020 for a description of Menlo’s business and risks associated therewith. In particular, Foamix shareholders should review Menlo’s risk factors that discuss their ongoing clinical trials with respect to serlopitant.
DEFINITIONS
Unless otherwise indicated, all references to the “company,“Company,” “we,” “us,” “our” and “Foamix” refer to Foamix Pharmaceuticals Ltd. and its subsidiary, Foamix Pharmaceuticals Inc., a Delaware corporation.
References to the “Board” or the “board of directors” are to the Company’s board of directors;
References to the “Companies Law” are to Israel’s Companies Law, 5759-1999, as currently amended;
References to the “Efficacy Determination” means (i) the top-line primary endpoint results of both Phase III PN Trials as delivered in the form set forth (and subject to the terms and conditions set forth) in Exhibit 2.4(g)(ii) of the Merger Agreement by QST Consultations, LTD to Menlo and Foamix; or (ii) if the top-line primary endpoint results of only one Phase III PN Trial is delivered in the form set forth (and subject to the terms and conditions set forth) in Exhibit 2.4(g)(ii) of the Merger Agreement by QST Consultations, LTD to Menlo and Foamix on or before May 31, 2020, such results as delivered in such form.
References to the “Exchange Act” are to the Securities Exchange Act of 1934, as amended;
References to the “FDA” are to the United States Food and Drug Administration;
References to “NASDAQ”“Menlo” are to Menlo Therapeutics Inc.;
References to the “Merger Agreement” mean the Agreement and Plan of Merger, dated as of November 10, 2019, by and among Foamix, Menlo and Merger Sub, as amended by Amendment No. 1 to the Agreement and Plan of Merger, dated as of December 4, 2019;
References to “Nasdaq” are to the NASDAQNasdaq Global Stock Market;
References to “ordinary shares” are to our ordinary shares, par value of NIS 0.16 per share;
References to “Phase III PN Trials” mean the Phase III double-blinded, placebo-controlled trials for the treatment of pruritus associated with prurigo nodularis, referenced by Protocol Numbers MTI-105 (United States) and MTI-106 (Europe), and being conducted by Synteract, Inc. and TFS International AB, respectively;
References to the “SEC” are to the United States Securities and Exchange Commission;
References to the “Securities Act” are to the Securities Act of 1933, as amended; and
References to “U.S. dollars” and “$” are to currency of the United States of America, and references to “NIS” are to New Israeli Shekels.
USE OF TRADEMARKS
“Foamix”,Foamix,” the Foamix logo and other trademarks or service marks of Foamix, or AMZEEQ and MST that identify our recently FDA-approved topical product for acne vulgaris and its delivery technology, appearing in this Annual Report on Form 10-K, are the property of Foamix. This Form 10-KAnnual Report also contains trade names, trademarks and service marks of others, which are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.
FORWARD-LOOKING STATEMENTS
This annual reportAnnual Report contains express or implied “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and other U.S. Federal securities laws.
These forward-looking statements include, but are not limited to, statements regarding the following matters:
| - | U.S. Food and Drug Administration, or FDA, approval of, or other regulatory action in the U.S. and elsewhere with respect to, our product candidates; |
FDA approval of, or other regulatory action in the United States and elsewhere with respect to, our product candidates;
the commercialization of AMZEEQ and current or future product candidates;
our ability to achieve favorable pricing for AMZEEQ and product candidates;
our expectations regarding the commercial supply of AMZEEQ and product candidates;
third-party payor reimbursement for AMZEEQ and product candidates;
our estimates regarding anticipated expenses, capital requirements and needs for additional financing;
the potential market size of treatments for any diseases and market adoption of our products by physicians and patients;
the timing, cost or other aspects of the commercialization of AMZEEQ and product candidates;
the completion of, and receiving favorable results of, clinical trials for our product candidates;
application for and issuance of patents to us by the United States Patent and Trademark Office, or USPTO, and other governmental patent agencies;
the timing, costs or results of litigation to protect our intellectual property portfolio;
development and approval of the use of our product candidates for additional indications;
our expectations regarding licensing, business transactions and strategic operations; and
the ability to successfully integrate our business with Menlo.
| - | the commercial launch of current or future product candidates; |
| - | our ability to achieve favorable pricing for our product candidates; |
| - | our expectations regarding the commercial supply of our product candidates; |
| - | third-party payor reimbursement for our product candidates; |
| - | our estimates regarding anticipated expenses, capital requirements and needs for additional financing; |
| - | the patient market size of any diseases and market adoption of our products by physicians and patients; |
| - | the timing, cost or other aspects of the commercialization of our product candidates; |
| - | the completion of, and receiving favorable results of, clinical trials for our product candidates; |
| - | application for and issuance of patents to us by the United States Patent and Trademark Office, or U.S. PTO, and other governmental patent agencies; |
| - | development and approval of the use of our product candidates for additional indications; and |
| - | our expectations regarding licensing, business transactions and strategic operations. |
In some cases, forward-looking statements are identified by terminology such as “may,” “will,” “could,” “should,” “expects,” “plans,” “anticipates,” “believes,” “intends,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results or performance to differ materially from those projected. These statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. In addition, historic results of scientific research and clinical and preclinical trials do not guarantee that the conclusions of future research or trials would not be different, and historic results referred to in this Annual Report on Form 10-K may be interpreted differently in light of additional research and clinical and preclinical trials results. The forward-looking statements contained in this annual report are subject to risks and uncertainties, including those discussed under “Item 1A—Risk“Risk Factors” and in our other filings with the Securities and Exchange Commission, or the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we are under no duty to (and expressly disclaim any such obligation to) update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this annual report.
STATEMENTS BY RESEARCH OR FORECAST FIRMS
We do not endorse or adopt any third-partythird party research or forecast firms’ statements or reports referred to in this annual report and assume no responsibility for the contents or opinions represented in such statements or reports, nor for the updating of any information contained therein.
Overview of Foamix’s Business
We are a clinical-stage specialty pharmaceutical company focused on developingthe development and commercializingcommercialization of innovative therapies in dermatology. Utilizing our proprietaryexpertise in the development of topical minocycline, we are working to develop and commercialize topical drugs for dermatological therapy, including the first topical minocycline products in the United States. On October 18, 2019, the FDA approved our first drug product, AMZEEQTM (minocycline) topical foam, 4%, formerly known as FMX101 (“AMZEEQ”), a once-daily topical antibiotic for the treatment of acne, rosacea and other skin conditions. Our lead product candidates, FMX101 forinflammatory lesions of non-nodular moderate-to-severe acne vulgaris in patients 9 years of age and older. AMZEEQ is the first topical minocycline to be approved by the FDA for any condition. AMZEEQ became available for prescribing on January 13, 2020.
Consummation of the Merger with Menlo Therapeutics Inc.
On November 10, 2019, we entered into the Merger Agreement with Menlo and Merger Sub whereby Merger Sub agreed to merge with and into Foamix, with Foamix continuing as the surviving corporation and a wholly-owned subsidiary of Menlo. Menlo, which completed its initial public offering in January 2018 and is listed on the Nasdaq Global Select Market under the symbol “MNLO”, is a late-stage biopharmaceutical company focused on the development and commercialization of serlopitant, an NK1 receptor antagonist given as a once-daily oral tablet for the treatment of pruritus, or itch, associated with various conditions such as prurigo nodularis (“PN”) and psoriasis. Menlo’s clinical development program for serlopitant includes two ongoing Phase III clinical trials for the treatment of pruritus associated with PN and a Phase III-ready clinical program for the treatment of pruritus associated with psoriasis. On March 9, 2020 (the “Effective Date”), the Merger was completed and Foamix is now a wholly-owned subsidiary of Menlo. Foamix will cease to be a reporting company as of March 19, 2020 and all future filings of the combined company will be made by Menlo.
On the Effective Date, each ordinary share of Foamix was exchanged for 0.5924 shares of common stock of Menlo (the “Exchange Ratio”). In addition, on the Effective Date, Foamix shareholders received one contingent stock right (a “CSR”) for each Foamix ordinary share held by them. The CSRs are governed by the Contingent Stock Rights Agreement (the “CSR Agreement”), dated as of March 9, 2020, by and between Menlo and American Stock Transfer & Trust Company, LLC, and represent the non-transferable contractual right to receive shares of common stock of Menlo if specified events occur within agreed time periods. Pursuant to the CSR Agreement, each CSR may become convertible upon the occurrence of the events described below, and, if so converted, will entitle its holder to receive from Menlo additional shares of Menlo common stock. The CSR events relate to Menlo’s Phase III PN Trials. The CSRs may become convertible and additional shares of Menlo common stock may become payable to the rights agent, for subsequent distribution to the holders of the CSRs, upon the occurrence of the following events:
if, on or prior to May 31, 2020, the Efficacy Determination reports that proof of statistically significant superiority of serlopitant treatment over placebo treatment on the primary endpoint, as set out in the Merger Agreement (“Serlopitant Significance”), was achieved in one Phase III PN Trial but was not achieved (or has not been determined) in the other Phase III PN Trial, each CSR will be converted into 0.6815 shares of Menlo common stock pursuant to the terms and conditions of the CSR Agreement. Following such Efficacy Determination, the effective Exchange Ratio in the Merger will be 1.2739 shares of Menlo common stock for each Foamix ordinary share, increasing the former Foamix shareholders’ ownership of the outstanding share capital of the combined company to approximately 76% and correspondingly decreasing the pre-Merger Menlo stockholders’ ownership of the outstanding share capital of the combined company to approximately 24%, each calculated on a fully diluted basis (with such percentages calculated as if the CSR conversion to additional shares occurred on the Effective Date); and
if, on or prior to May 31, 2020, the Efficacy Determination reports that Serlopitant Significance was not achieved in either of the Phase III PN Trials, or if the Efficacy Determination has not been delivered on or before May 31, 2020, each CSR will be converted into 1.2082 shares of Menlo common stock pursuant to the terms and conditions of the CSR Agreement. Following such Efficacy Determination, the effective Exchange Ratio in the Merger will be 1.8006 shares of Menlo common stock for each Foamix ordinary share, increasing the former Foamix shareholders’ ownership of the outstanding share capital of the combined company to approximately 82% and correspondingly decreasing the pre-Merger Menlo stockholders’ ownership of the outstanding share capital of the combined company to approximately 18%, each calculated on a fully diluted basis (with such percentages calculated as if the CSR conversion to additional shares occurred on the Effective Date).
If the Efficacy Determination reports that Serlopitant Significance was demonstrated in both Phase III PN Trials, the CSRs will automatically be terminated, and their holders will not be entitled to any additional shares of Menlo common stock pursuant to the CSR or the CSR Agreement. The effective Exchange Ratio in the Merger will remain 0.5924 shares of Menlo common stock for each Foamix ordinary share and former Foamix shareholders will maintain their ownership of approximately 59% of the outstanding share capital of the combined company, with the Menlo stockholders owning the remaining 41% of the outstanding share capital of the combined company, each calculated on a fully diluted basis.
This Annual Report only includes information with respect to Foamix and does not include a description of the business of Foamix and Menlo as a combined company, nor does it include any financial information about the combined company. We urge Foamix shareholders to review Menlo’s filings made with the SEC, including Menlo’s most recent Annual Report on Form 10-K filed on March 3, 2020 for a description of Menlo’s business and risks associated therewith. In particular, Foamix shareholders should review Menlo’s risk factors that discuss their ongoing clinical trials with respect to serlopitant.
Foamix Product Pipeline
In October 2019, we announced that the FDA accepted our New Drug Application, or NDA, and set a target Prescription Drug User Fee ACT, or PDUFA, action date of June 2, 2020 for our late-stage drug product candidate, FMX103 (1.5% minocycline foam), for the treatment of moderate-to-severe papulopustular rosacea are novel topical foam formulationsin adults. In November 2018, we announced that both of the antibiotic minocycline. Based on the results demonstrated in our Phase II and Phase III clinical trials for FMX101FMX103 (Studies FX2016-11 and our Phase II clinical trial for FMX103, we believe these product candidates have the potential to provide a fast, effective and well-tolerated treatment forFX2016-12) met each of their respective indications, which are currently underserved and commonly treated by oral prescription products such as oral minocycline, oral doxycycline and various other non-foam topical therapies. We are currently investing the majority of our efforts and resources to advance our third pivotal Phase III clinical trial (Study 22) for FMX101 in the U.S. We announced the first patient enrolled in this trial on August 3, 2017. We expect to have top-line results from this trial in the third quarter of 2018. In March of 2017, we announced the results of the double-blind stage of our two initial Phase III clinical trials. Statistical significance was demonstrated in both co-primary efficacy endpoints in one study (Study 05), however, statistical significance was demonstrated in only one of the co-primary efficacy endpoints in the second study (Study 04). Statistical significance was also demonstrated for FMX101 compared to vehicle in the pooled analysis of the co-primary endpoints, as well as key secondary endpoints. The third trial was initiated followingdemonstrating a Type B meeting conducted with the FDA in June of 2017. During this meeting, we confirmed that achieving statistically significant results for FMX101 versus vehiclereduction in both co-primary efficacy endpointsinflammatory lesion counts and IGA treatment success, as assessed by Investigator’s Global Assessment, or IGA, scores of approximately 50% from baseline. There were very few reported adverse events and no treatment-related serious adverse events observed in a third independent clinical trial would be sufficient for establishing an efficacy claim. A previous Phase II clinical trial of FMX101 also demonstrated clinically and statistically significant results in all primary and secondary endpoints. In January 2018, we announced the completion of a long-term safety study that was an extension of our two initialthese Phase III clinical trials, for FMX101. The results from the study showed FMX101 to be well-tolerated and to have an acceptable safety profile.
We are also investing significant efforts and resources to advance our two pivotal Phase III clinical trialsas well as in the U.S.40-week open label safety extension (Study FX2016-13) that was completed in February 2019. We cannot provide any assurances or predict with any certainty the schedule for which we will receive approval for FMX103, if at all.
Both AMZEEQ and FMX103 were developed using our Molecule Stabilizing Technology (MST™) vehicle, a proprietary foam platform designed to optimize the topical delivery of minocycline, foam for moderate-to-severe papulopustular rosacea, after our Phase II clinical trial for FMX103 demonstrated clinically and statistically significant resultsan active pharmaceutical ingredient, or API, that was commercially available only in all primary and secondary endpoints. We announcedoral form until the enrollmentFDA’s approval of the first patient in our Phase III trials on June 12, 2017. We expect to have top-line results from the blinded stage of both trials by the end of the third quarter or in the beginning of the fourth quarter of 2018, and to complete the trials, including a long-term safety extension study, in 2019.AMZEEQ. In addition, we successfully completed a Phase II clinical trial with FDX104, ourhave proprietary doxycycline foam for the managementdelivery technologies in development that enable topical delivery of moderate-to-severe rash associated with epidermal growth factor receptor inhibitor (EGFRI) anticancer treatments, and we are currently assessing our various options with regard to this product candidate, including seeking out licensing opportunities for it. We have also successfully completed a Phase II clinical trial of FMX102, our minocycline foam for the treatment of impetigo, including impetigo caused by methicillin-resistant staphylococcus aureus, or MRSA. However, as described in previous reports, we have been contemplating the commercial viability of this product candidate for some time, given its limited market dominated by generic products, and following additional analysis of its potential we have recently decided to discontinue its further development in light of our current priorities and our other ongoing research and development efforts. We developed FMX101, FMX102, FMX103 and FDX104 using our proprietary technology, which includes our foam-based platforms. This technology enables us to formulate and stabilize a wide variety of drugs and deliver them directly to their target site. We have independently developed a series of proprietary foam platforms,APIs, each having unique pharmacological features and characteristics. Our foamcharacteristics designed to keep the API stable when delivered and directed to the target site. We believe our MST vehicle and other topical delivery platforms may offer significant advantages over alternative delivery options and are suitablecan be generally applicable for multiple application sites. We believe our proprietary foam-based platform may serve as a foundation in developing a potential pipeline of productssites across a range of conditions.
Beside our in-house development projects, we have entered into development and license agreements relating to our technology with various pharmaceutical companies such as Bayer HealthCare AG, Mylan N.V. and Actavis Laboratories. Our total revenues from such agreements from our inception through December 31, 2017 were approximately $28.1 million.
In the third quarter of 2015, Bayer began selling Finacea® Foam (azelaic acid) 15%, or Finacea, for the treatment of rosacea in the U.S. Finacea is a prescription foam product which was developed as part of a research and development collaboration between Foamix and Bayer, utilizing one of Foamix’s proprietary foam technology platforms. According to our license agreement with Bayer, we are entitled to royalties and certain contingent payments upon the commercialization of Finacea based on Bayer’s net sales of Finacea. In 2017 we were entitled to receive royalty payments from Bayer in a total amount of $3.5 million for sales of Finacea. In January 2018, we filed a Complaint along with Bayer AG and Bayer HealthCare Pharmaceuticals Inc., alleging patent infringement under the patent laws of the United States arising out of the submission by defendant Teva Pharmaceuticals USA, Inc. of an Abbreviated New Drug Application, or ANDA, to the FDA, seeking approval to manufacture and sell a generic version of Bayer’s Finacea. In February 2018, Bayer and Foamix filed a Complaint alleging patent infringement under the patent laws of the United States arising out of the submission by defendant Perrigo UK FINCO Limited Partnership, or Perrigo, of an ANDA to the FDA, seeking approval to manufacture and sell a generic version of Bayer’s Finacea. See also “Item 1A—Risk Factors—Risks Related to Our Intellectual Property—We have received notice letters of ANDAs submitted for drug products that are generic versions of Finacea and we are involved in lawsuits to protect or enforce our patents, which could be expensive, time consuming and unsuccessful.”
Product Candidates and Pipeline
The following chart provides a summary of the developmental pipeline for our lead product candidates:
Product Candidate
| Preclinical
| Phase II
| Phase III
| Planned Milestones
| FMX101 (4%) for Moderate-Severe Acne | | Study 04 / 05 top-line results announced
Long-term safety study completed
3rd Phase III initiated August 2017
Top-line results – Q3 / Q4 2018
NDA filing – H2 2018
| FMX103 (1.5%) for Moderate-Severe Rosacea | | Phase II completed
Phase III initiated June 2017
Top-line results – end of Q3 or beginning of Q4 2018
NDA filing – 2019
|
FMX101 for moderate-to-severe acne
Our leadWe are currently developing a pipeline of other innovative product candidate, FMX101,candidates to enhance our minocycline foam 4%, isplatform, including FCD105, a novel topical combination foam formulation of minocycline for the treatment of moderate-to-severe acne.
Market opportunity
Acne is characterized by areas of scaly red skin, non-inflammatory blackheadsacne vulgaris, comprising minocycline 3% and whiteheads, inflammatory lesions, papules and pustules and occasionally boils and scarring. It affects approximately 40 to 50 million people in the U.S. alone, of whom approximately 10 million suffer from moderate-to-severe acne. For most people, acne diminishes over time and tends to disappear or decrease, by age 25. However, some individuals continue to suffer from acne well into their 30s, 40s and later.
The current U.S. market size for acne is considerable and estimated at approximately $3 billion, presenting significant unmet needs of patients and healthcare providers to be addressed. We believe that our FMX101 product candidate for this indication, if approved, may provide a new treatment alternative for patients and healthcare providers who are unsatisfied with their current therapies.
Limitations of oral minocycline for acne
Oral minocycline, such as Solodyn, has been widely prescribed for the treatment of moderate-to-severe acne. According to the product label of Solodyn, inflammatory lesions were reduced by 44% at week 12, and a positive effect on the reduction of non-inflammatory acne lesions versus vehicle was not demonstrated. According to its product label, the most common adverse systemic side effects of Solodyn include diarrhea, dizziness, drowsiness, indigestion, lightheadedness, loss of appetite, nausea, sore mouth, throat or tongue and vomiting.
In 2009, the FDA added oral minocycline to its Adverse Event Reporting System, a list of medications under investigation by the FDA, due to its severe side effects. In 2011, we conducted a blind survey of 40 U.S. dermatologists. The results of the survey revealed that 90% of the dermatologists surveyed who prescribed oral minocycline were concerned about its side effects, and 76% of these dermatologists stated they would prefer prescribing a topical minocycline product over an existing oral medication, assuming the topical treatment was safe, effective and approved by the FDA.
FMX101 clinical trials
FMX101 Phase II clinical trial
We conducted a randomized, double-blind, dose-ranging, controlled Phase II clinical trial in Israel over 12 weeks with 150 patients between 12 and 25 years old with a mean age of approximately 16.5 years, each presenting with a minimum of 20 inflammatory and 25 non-inflammatory facial acne lesions. The patients were randomly divided into three groups of 50 patients each, with one group receiving a 1% concentration of our minocycline foam, a second group receiving a 4% concentration and a third control group receiving our foam vehicle without minocycline, which we refer to as the vehicle. Each patient received one application daily before bedtime.
The primary efficacy endpoints of the trial were:
| · | the reduction in inflammatory and non-inflammatory lesions (as well as the total counts of facial lesions) over the course of the 12-week treatment period; |
| · | improvement in the investigator’s global assessment, or IGA, based on the uniform graded scale adopted for the trial, ranging from “clear” skin with no inflammatory or non-inflammatory lesions to “severe acne”, as well as safety and tolerability. |
The trial was completed in 2013 and showed a dose-dependent effect that was statistically significant for both primary endpoints of the trial. Notably, the effect on inflammatory lesions became statistically significant in the 4% dosage group versus the vehicle-only treatment group after just three weeks of therapy, and there was an approximate 72% reduction in inflammatory lesions reached in the 4% dosage group after 12 weeks of treatment. Additionally, for the patients in the 4% dosage group, the effect on non-inflammatory lesions also became statistically significant versus the vehicle-only group after twelve weeks of therapy, with approximately a 73% reduction in non-inflammatory lesions.
The percent of patients with IGA improvement of at least two grades and a grading of clear or almost clear (score of 0 or1) at the completion of the trial was 20% in the 4% dosage group, compared with 4% in the 1% dosage group and 2% in the vehicle-only treatment.
The safety and tolerability profile of the drug was also favorable, with no serious adverse events and no reported drug-related systemic side effects. The cases of skin reaction in the trial were few, mild and transient, with all reactions subsiding by week 12 of treatment, and there was similar incidence of skin reaction in all three groups.
The following charts show the reduction of inflammatory lesion count from baseline and over the trial period for the 4% dosage, 1% dosage and vehicle treatment groups and the percentage of patients who met the IGA success criterion:
 While we did not file a formal application for an IND with the FDA in connection with the FMX101 Phase II clinical trial, the trial was conducted in compliance with the International Conference of Harmonization, or ICH, good clinical practice, or GCP, guidelines and applicable Israel Ministry of Health regulations. The trial protocol complied with the procedures, criteria and endpoints specified by the FDA’s 2005 draft industry guidance for acne trials. Because minocycline, the active ingredient in FMX101, is a well-known drug with an established safety profile, the ethical committee for our Phase II clinical trial and the Israeli Ministry of Health allowed us to conduct the Phase II clinical trial of FMX101 without having first conducted a Phase I clinical trial.
We completed a Phase I maximum use pharmacokinetics study of FMX101, intended to characterize the systemic absorption of minocycline after repeated maximum-dose applications in patients with moderate-to-severe acne, and to assess the relative bioavailability of topically-applied FMX101 compared to orally-administered Solodyn (minocycline HCl). The study enrolled 30 patients with moderate-to-severe acne on their face and on two or more other regions (neck, upper chest, upper back or arms) in a single-center, nonrandomized, open-label, active-controlled, two-period and two-treatment evaluation. Each of the patients received a single dose of Solodyn, 1 mg/kg in accordance with its approved instructions for use, and one week later received 4 grams of FMX101 applied topically once daily for 21 days. The study showed that the bioavailability, or systemic exposure, of minocycline following topical FMX101 administration was approximately 700 times lower than that of Solodyn, and that FMX101 was well-tolerated with no serious adverse events being reported.
In addition, we completed a single-center, non-randomized, open-label study to evaluate multiple dose topical administration of FMX101 4% minocycline foam in 20 subjects with ages ranging from 9 years to 16 years 11 months years of age with moderate to severe acne vulgaris. The objectives were to characterize minocycline pharmacokinetics after administration of FMX101 4% once daily for 7 days under maximal use conditions and to evaluate the safety and tolerability.
The levels of minocycline were relatively constant over the entire sampling interval on day 7. The overall average plasma concentration of minocycline, across all age ranges, was comparable with the equivalent adult study. Concentrations tended to be slightly higher in the subjects aged 9 to 11 years (approximately 3.5 ng/mL) and subjects aged 12 to 14 years (approximately 2.5 ng/mL) than the subjects aged 15 years to 16 years 11 months (approximately 1.7 ng/mL). Similar to the study in adult patients, FMX101 was well-tolerated with no serious adverse events being reported.
A series of Phase I human dermal safety studies, were completed in 2016. Results of these trials were as expected and no safety signals were detected.
As part of our overall development plan for FMX101, we have conducted a series of animal safety studies, which revealed no signs of toxicity. We completed a long-term, 39-week dermal toxicity study in mini pigs, which included concentrations of our minocycline foam up to 16%. Results from this study also reflect no toxicity associated with our drug product.
We also held an End of Phase II meeting with the FDA to review the clinical development plan for FMX101, and implemented the comments we received from the FDA regarding overall study design, primary efficacy endpoints, and safety assessments in the FMX101 Phase III program.
FMX101 initial two Phase III clinical trials
Based on the results of the Phase II clinical trial, as described above, and guidance from the FDA in a pre-IND meeting, we conducted two multi-center pivotal Phase III clinical trials in the U.S. for FMX101 (minocycline foam 4%) in moderate-to severe acne, known as Studies 04 and 05.
In November 2016 we completed patient enrollment resulting in an intent-to-treat population of 961 patients with moderate-to-severe acne enrolled between the two trials. Patients were randomized on a 2:1 basis (active compound versus vehicle-only), initially into a 12-week double-blind phase where they were treated topically once daily with either FMX101 (minocycline foam 4%) or the respective foam vehicle. The two co-primary efficacy endpoints of both trials were: (1) the absolute change from baseline in inflammatory lesion counts in each treatment group at week 12; and (2) the proportion of patients achieving success at week 12 as defined by an IGA score of 0 “clear” or 1 “almost clear” and at least a two-grade improvement from baseline at week 12. Safety evaluation includes reported adverse events, assessments of tolerability, clinical laboratory tests and vital signs. Patients who completed the 12-week double-blind portion of the trials had the option to continue in a long-term open-label safety extension, aimed at evaluating the safety of intermittent use of FMX101 for up to nine additional months.
On March 27, 2017 we announced top-line data from our two Phase III clinical trials for FMX101. In the intent-to-treat analysis, FMX101 demonstrated statistical significance compared to vehicle on both co-primary endpoints in Study 05 (specifically the absolute reduction in inflammatory lesions at week 12, and investigator global assessment treatment success (IGA0/1) at week 12 compared to baseline)adapalene 0.3%. In Study 04, statistical significance was demonstrated for FMX101 compared to vehicle in the co-primary endpoint of absolute reduction in inflammatory lesions. However, statistical significance was not achieved in the co-primary endpoint of IGA0/1.
On May 3, 2017 we provided new data from our two Phase III clinical trials for FMX101, including a pooled analysis of our co-primary endpoints and certain secondary clinical endpoints (absolute reduction of non-inflammatory lesions at week 12; and percent change in inflammatory lesions at weeks 3, 6, 9 and 12). Statistical significance was demonstrated for FMX101 compared to vehicle in the pooled analysis of the co-primary endpoints as well as the secondary endpoints presented.
The following charts show the reduction of inflammatory lesion count from baseline for FMX101 4% and vehicle treatment groups in each of Studies 04 and 05 and on a pooled basis at week 12:
The following charts show the percentage of patients who met the IGA treatment success criterion at week 12 (defined as at least a 2 grade point reduction from baseline IGA score and a final score of “clear” (0) or “almost clear” (1)) for FMX101 4% and vehicle treatment groups in each of Studies 04 and 05 and on a pooled basis at week 12:
FMX101 third Phase III clinical trial
On June 21, 2017, following the top-line data from Studies 04 and 05, we held a Type B Meeting with the FDA, during which we confirmed that statistically significant findings from a third study would constitute replication of the Study 05 results and would be sufficient for establishing an efficacy claim. This confirmation reaffirmed our plans for conducting a third Phase III trial for FMX101.
On August 3, 2017 we announced the dosing of the first patient in our third Phase III acne clinical trial, known as Study 22, which is designed as a double-blind, vehicle-controlled, multi-center trial conducted at approximately 80 sites throughout the U.S. that will enroll a target number of 1,500 patients with moderate-to-severe acne. Patients are randomized 1:1 to either FMX101 4% dosage or vehicle, with once daily treatment for 12 weeks. The primary endpoints are identical to the primary endpoints in Studies 04 and 05.
We selected Premier Research International LLC, or Premier Research, as our designated clinical research organization (CRO) for the execution of our third Phase III trial in acne. Premier Research has significant experience in the execution of global clinical trial programs and is a recognized leader in clinical trial management within the field of dermatology. We expect to have top-line results from the trial in the third quarter of 2018 and to complete the trial by the end of 2018.
FMX101 open-label safety extension study
On January 4, 2018, we announced positive safety data for our Phase III open-label safety extension study, evaluating FMX101 in moderate-to-severe acne for a treatment period of up to one year. The open-label safety extension enrolled a total of 657 patients, all of whom had completed 12 weeks of FMX101 or vehicle treatment in the preceding double-blind phase of Studies 04 and 05. Patients continued open-label treatment with FMX101 for up to an additional 40 weeks. 291 patients completed a total of 52 weeks on FMX101 therapy, which exceeds the subject sample size requirements specified in the regulatory guidance for this type of safety evaluation (ICH E1A, 1995). No serious drug-related adverse events were reported in this comprehensive safety evaluation, which validated earlier data demonstrating that FMX101 appears to be well-tolerated and has an acceptable safety profile. More specifically, the study found that:
| · | non-dermal adverse events were comparable in type and frequency with those reported during the double-blinded portion of Studies 04 and 05, with the most frequently reported treatment-emergent adverse event being nasopharyngitis, or common cold. Three patients discontinued the study for non-dermal adverse events, two of them for abdominal pain and one for back pain; |
| · | application-site adverse events occurred in less than 2% of patients during the additional 40 weeks of open-label treatment. Four patients discontinued the study for an application-site adverse event – two patients for worsening of acne, one for contact dermatitis and one for localized facial edema. In the assessment of facial dermal tolerability at week 52, more than 95% of patients had “none” or “mild” signs and symptoms such as erythema, dryness, hyperpigmentation, peeling, and itching, and no severe local tolerability scores were recorded; |
| · | subject satisfaction with FMX101 treatment remained high when re-assessed at week 52, which was consistent with scores obtained at the end of the double-blind phase of Studies 04 and 05 at week 12. |
Efficacy was also measured as a secondary endpoint in the open-label study for FMX101, and was based on summary statistics from observed cases. During the study, patients were allowed to discontinue therapy with FMX101 if they believed their acne was under control. Patients could re-start therapy as needed and were also allowed to use other acne medications concomitantly. As a result, no claim of statistical difference was made between any of the treatment arms, however notable findings were observed:
| · | At week 52, 37.7% of patients from Study 04 had an Investigator’s Global Assessment (IGA) score of 0 (clear) or 1 (almost clear) and 50.3% of subjects from Study 05 had an IGA score of 0 or 1. |
| · | At week 52, patients from Study 04 had a 64.3% reduction in inflammatory lesions and patients from Study 05 had a 78% reduction in inflammatory lesions. |
| · | At week 52, patients from Study 04 had a 52.5% reduction in non-inflammatory lesions and patients from Study 05 had a 59.6% reduction in non-inflammatory lesions. |
Next steps
We expect to develop FMX101 through the FDA’s 505(b)(2) regulatory pathway, which permits the filing of a new drug application where at least some of the information required for approval comes from studies that were not conducted by or for the applicant, and for which the applicant has not received a right of reference. This approach could expedite the development program for FMX101 by potentially decreasing the amount of clinical data that we would need to generate in order to obtain FDA approval. For additional information see “Item 1A—Risk Factors—Risks Related to Our Business and Industry—If the FDA does not conclude that FMX101 or FMX103 satisfy the requirements under Section 505(b)(2) of the Federal Food Drug and Cosmetics Act, or Section 505(b)(2), or if the requirements for this product candidate under Section 505(b)(2) are not as we expect, the approval pathway for this product candidate will likely take significantly longer, cost significantly more and entail significantly greater complications and risks than anticipated, and in either case may not be successful.”
FMX103 for moderate-to-severe papulopustular rosacea
Our product candidate, FMX103, minocycline foam 1.5%, is a novel topical foam formulation of minocycline for the treatment of moderate-to-severe papulopustular rosacea.
Market opportunity
Papulopustular rosacea is a chronic skin disease causing inflammatory lesions (papules and pustules) on the face. It can create psychosocial burdens, such as embarrassment, anxiety and low self-esteem that adversely affect quality of life. Rosacea is most frequently seen in adults between 30 and 50 years of age and affects more than 16 million people in the U.S. alone. There is no known cure for rosacea and the exact root cause of the disease remains unknown as well, though both genetic and environmental factors are thought to have an impact on its outbreak. Mild papulopustular rosacea is currently treated by topical antimicrobials (such as metronidazole, clindamycin and ivermectin) or azelaic acid, while the mainstay for the treatment of moderate-to-severe rosacea are systemic antibiotics such as minocycline and doxycycline.
The current U.S. market size for rosacea is estimated to be approximately $1.0 billion, and we believe that our FMX103 product candidate for this indication, if approved, can offer advantages over other currently available products.
FMX103 clinical trials
FMX103 Phase II clinical trials
In the third quarter of 2016 we announced positive top-line results from our Phase II trial evaluating FMX103. The double-blind, randomized, vehicle-controlled Phase II trial was conducted in 18 sites in Germany and included 233 patients with moderate-to-severe rosacea. Patients were randomized to receive either one of two doses of FMX103 minocycline foam (3% or 1.5%) or vehicle foam once daily over 12 weeks, followed up by a four-week post-treatment evaluation. The efficacy endpoints were (a) the absolute change in the number of inflammatory lesions – papules and pustules (primary endpoint), and (b) improvement of the IGA (first secondary endpoint). Safety and tolerability were also evaluated. The mean baseline lesion count for all groups ranged from 30.6 to 34.5 and the IGA scores were all moderate (score 3) or severe (score 4) with approximately 50-60% of the subjects having a severe rating.
At week 12, statistically significant results were demonstrated in the reduction of inflammatory lesions (papules and pustules) versus vehicle in both the 1.5% and 3% doses of FMX103. The mean reduction in lesion count of each treatment group versus its baseline was 21.1 for the 1.5% dose, 19.9 for the 3% dose and 7.8 for vehicle. The corresponding percent reductions were 61.4% and 55.5% for the FMX103 1.5% and 3% groups, respectively, and 29.7% for the vehicle. The trial further showed a significant improvement in IGA scores. Both the 1.5% and 3% doses of FMX103 were significantly better compared to vehicle alone in reducing the IGA score by two grades and in reaching a “clear” (score=0) or “almost clear” (score=1) rating at week 12 (p<0.01 and p<0.05, respectively). The percentage of subjects achieving IGA success, defined as at least a two-grade point reduction and a rating of clear or almost clear (score of 0 or 1), was 25.3 for the 1.5% dose, 17.3 for the 3% dose, and 7.7 for vehicle. Both the 1.5% and 3% doses were efficacious and there was no statistically significant difference between these two doses.
The following charts show the percent reduction of inflammatory lesions (papules & pustules) and the percentage of patients who met the IGA success criterion:
FMX103 also appeared to be generally safe and well-tolerated. During the Phase II trial, there were no serious adverse events and no drug related systemic adverse events were reported. A few patients overall exhibited treatment-related dermal adverse events (four in the 3% group, five in the vehicle group and none in the 1.5% group). Four patients discontinued the trial due to an adverse event – three in the 3% group and one in the vehicle group.
FMX103 Phase III clinical trials
In December 2016, we conducted a pre-IND meeting with the FDA to confirm that our clinical and non-clinical programs outlined were sufficient to submit an IND and to begin our Phase III clinical trials, utilizing the results of toxicology, pharmacology and human safety studies that were completed for FMX101.
On June 12, 2017September 2019, we announced that the first patient had been dosedwas enrolled in our Phase III programII clinical trial (Study FX2016-40) to evaluate the efficacy and safety of our topical minocycline foam 1.5% FMX103FCD105. In November 2019, we announced that enrollment had been completed for the treatment of moderate-to-severe rosacea. The Phase III program consists of two multi-center trials, (referred to as Studies 11 and 12) conducted at approximately 80 sites throughout the U.S., implementing protocols and endpoints in accordance with the FDA’s guidance as provided in the pre-IND meeting. Each trial is expected to enroll approximately 750 patients with moderate-to-severe papulopustular rosacea into a 12-week double-blind, vehicle-controlled phase. Patients are randomized on a 2:1 basis (1.5% minocycline foam versus vehicle) and treated once daily for 12 weeks in the initial double-blind portions of the trials. The primary efficacy endpoints are (a) the dichotomized IGA score where treatment success is defined as at least a 2-step improvement resulting in a 0 (clear) or 1 (almost clear) score at week 12 compared to day 0 / baseline, and (b) the absolute change in the inflammatory lesion count at week 12 compared to day 0 / baseline. Safety evaluation will include reported adverse events, assessments of tolerability, clinical laboratory tests and vital signs. The two double-blinded efficacy trials will be followed by an open-label safety extension study (Study 13) to evaluate the safety of FMX103 for up to an additional 40 weeks.
As in our third Phase III trial in acne, we selected Premier Research as our designated CRO for the execution of our two Phase III trials in rosacea as well as the open-level safety extension study. We expect to have top-line results from the blinded stage of the trials by the end of the third quarter or in the beginning of the fourth quarter of 2018 and to complete these trials in 2019.
FDX104 for chemotherapy-induced rash
FDX104 is a topical foam formulation of the antibiotic doxycycline for the treatment of severe acne-like rashes induced by chemotherapy.
EGFRI induced-rash and lack of designated treatment
Between 45% and 95% of cancer patients taking epidermal growth-factor receptor inhibitors (EGRFI), such as cetuximab (Erbitux®, Eli Lilly), panitumumab (Vectibix®, Amgen) and erlotinib (Tarceva®, Genentech) are affected by these severe acne-like rashes, which typically occur in cosmetically sensitive areas such as the face and upper trunk. These symptoms can lead to patients modifying their dosage of EGFRI drugs and potentially stop treatment altogether. While there are no approved drugs for the treatment of these rashes, oral doxycycline and minocycline are often used to treat these conditions, but they have significant shortcomings, including systemic side effects such as diarrhea, nausea and skin redness.
FDX104 Phase II clinical trial
In the fourth quarter of 2015, we completed a Phase IIthis clinical trial, for FDX104 on patients with metastatic colon cancer who were treated with cetuximab or panitumumab, to prevent the serious rash-like dermal side effects that can be induced by these chemotherapeutic agents. The results showed a statistically significant effect of FDX104 in reducing the severity of these dermal effects, although our assessment of the limited commercial potential of the product in combination with our current priorities has caused us to re-assess our near term efforts with regard to the product.
Twenty-four patients were enrolled and received trial drug in a multicenter, randomized, double-blind, placebo-controlled trial, to evaluate the safety and efficacy of FDX104. Each patient acted as his or her own control by treating one side of the face with FDX104 and the other side with the matching foam vehicle in a blinded and randomized manner. Photographs of the face were taken at each trial visit and were used for the grading of rash severity in a blinded manner by an independent dermatologist at the end of the trial (general rash severity score, or GSS). Rash severity was also performed at each visit by the investigator (modified MASCC EGFR inhibitor papulopustular eruption grading scale, or MESTT). The GSS ratings of rash severity were: none = 0, mild = 1, moderate = 2 and severe = 3. The key findings were:
| · | The severity of rash on the FDX104 treatment side of the face was overall better than in the vehicle-treated side when analyzed in the ITT population (N=24 patients); |
| · | the mean maximal rash severity in the ITT population was 1.33 and 1.71 in the FDX104-treated and placebo-treated sides respectively; and |
| · | 9 of the 24 patients in the trial (37.5%) developed severe (grade 3) rash during the study on the vehicle-treated side, while only 4 of the 24 patients in the study (16.7%) developed severe rash on the FDX104-treated side. |
Comparison of the two treatments (FDX104 and vehicle) on the prevention of rash based on clinical importance reached statistical significance (p<0.05, Wilcoxon Signed-Rank test). MESTT-based analyses had similar but non-statistically significant results. FDX104 was well-tolerated during the study. No drug-related systemic adverse events were recorded. Local reactions were noted in 5 patients, all were mild and 4 were resolved before the end of the study.
While the results of the FDX104 Phase II clinical trial were generally positive, we are assessing our various options with regard to FDX104 in light of our current focus and priorities. This includes seeking out licensing opportunities for the product and discontinuing its further in-house clinical development in the near term so as to better focus on additional research and development efforts.
FMX102 for impetigo
FMX102 is a formulation of our minocycline foam currently being developed for the treatment of impetigo.
Impetigo and limitations of current standard of care
Impetigo is a highly contagious bacterial skin infection that primarily afflicts preschool-aged children, and is typically caused by staphylococcus aureus, including methicillin-resistant staphylococcus aureus, or MRSA. It usually results in red sores and lesions on the face, neck, arms and legs. The topical antibiotic Bactroban and other mupirocin-based topical products are the current standard of care for the treatment of impetigo. According to its product label, Bactroban achieves a clinical efficacy rate of between 71% and 96% for impetigo after eight to 12 days of three-times daily treatment. According to the product label for Altabax, the most recently approved topical treatment for impetigo, it achieves a success rate of 89% for impetigo after five days of twice-daily treatment.
FMX102 Phase II clinical trial
We conducted a randomized, double-blindexpect topline data from this Phase II clinical trial in Israel over seven days with 32 pediatric patients ages twothe second quarter of 2020. Pending a successful development program, we intend to 15 with at least two impetigo lesions. Of these patients, 32% were diagnosed with MRSA infection. The patients were randomly divided into two groups of 16 patients each, with one group receiving a 1% concentration of our minocycline foam and the other group receiving a 4% concentration of our minocycline foam, applied to each patient twice a day. No vehicle-only control was used, as ethical guidelinesfile an NDA for pediatric trials in Israel do not permit the use of control groups.
The primary efficacy endpoints of the trial were (a) clinical success, defined as a total absence of treated lesions or certain specific improvements in the lesions during the trial and the continuous absence of the treated lesions or certain specific improvements in the lesions at follow-up; (b) bacteriological success, measured by elimination of the bacteria in the lesion as shown by a bacterial culture at end of treatment or follow-up or by the lack of any material to culture as a result of the lesion healing; and (c) safety and tolerability.
The trial was completed in 2012 and showed that approximately 80% of the patients in both groups met the clinical success criteria after three days of treatment. Clinical response at the end of the treatment (on day 7) was 92% for the 1% dosage and 100% for the 4% dosage, and all patients (100%) showed success by the fourteenth day of the trial. In a post-hoc analysis of the clinical trial results, eleven of the patients in this trial were also diagnosed with methicillin-resistant staphylococcus aureus (MRSA). Bacteriological success was reached in all 11 patients by the end of the trial and no presence of MRSA was detected. The safety and tolerability profile of the drug was favorable, and no drug-related side effects were reported during the trial.
In October 2015 we held a Pre-IND meeting withFCD105 under the FDA to seek guidance with regards to505(b)(2) regulatory pathway, which is the preclinicalsame regulatory pathway we have pursued for AMZEEQ and clinical activities that are required to advance the development program of FMX102. The FDA requested that we conduct a photo-safety study prior to further evaluation of our clinical development plan. We began this photo-safety study in 2016. In 2017, further work on FMX102 was de-prioritized as we focused on our clinical development workpursuing for FMX101 and FMX103. Following our further evaluation of the clinical development plan this year and the potential market for FMX102 in the U.S., and considering the treatment currently available for impetigo, we concluded that the business opportunity presented by this product is insufficient to justify further investment of our resources in its advancement at this time, and have discontinued its development.
Development and License Agreements
Parallel to the development of our product candidates, we have entered into development and license agreements with various pharmaceutical companies, including Bayer HealthCare AG,LEO Pharma A/S, or LEO, Mylan N.V. and Actavis Laboratories,plc, combining our emulsion-based foam technology with drugs selected by the licensee to create new product offerings for patients. This licensed technology is different from the technology used in AMZEEQ and in our pipeline products. Each license agreement entitles us to service payments, contingent payments and royalties from sales of any new products that are commercialized. Each agreement is exclusive only to the specific drug that is licensed, leaving us the rights to commercialize and develop products with other drugs for the same indications using our proprietary foam technology while also allowing the licensee to apply the new products to any indication with its specific drug.
In September 2015, Bayer HealthCare AG, or Bayer, began selling Finacea® Foam (azelaic acid) 15%, or Finacea, in the U.S.United States a product branded Finacea, based on our foam technology. Finacea is a prescription topical drug which was developed through a collaboration between Bayer and Foamix. It is the first prescription product developed using our proprietary technology that has been approved by the FDA for sale in the U.S.United States. Bayer listed in the Orange Book several patents that were licensed from Foamixus in connection with the development of Finacea Foam.Finacea. According to our initial license agreement with Bayer, we are entitled to receive royalties and certain contingent payments upon the commercialization of Finacea. On September 4, 2018, LEO acquired Finacea from Bayer. As part of the acquisition, our license agreement with Bayer with respect to Finacea was assigned to LEO. LEO has assumed all of the rights and responsibilities of Bayer under the license agreement as it relates to Finacea, including the payment of royalties to us and rights and obligations related to patent litigation matters.
In 2017April 2019, our partner, LEO, informed us that the batches of API intended for use in Finacea and produced by a contract manufacturer had failed to meet the required specifications for the finished product and has been unable to manufacture the Finacea product for sale, which, in turn, reduced the royalty payments from LEO to us since that time. LEO has informed us that they are working diligently to address the issue in order to be able to produce sufficient supply of the finished product to meet the demand for Finacea in the market. We do not know when the production of Finacea will resume, if at all. This supply chain issue for Finacea is unrelated to our manufacturing, production or supply of AMZEEQ, FMX103 or any of our other product candidates. In 2019, we werereceived (or became entitled to receive) a total of $3.5$0.4 million from Bayer in royalties from sales of Finacea. In January 2018 Bayer and Foamix filed a complaint alleging patentFinacea from LEO.
Together with LEO, we are litigating against Taro Pharmaceuticals Industries Ltd., or Taro, for its alleged infringement under the patent laws of the United States that arises outcertain of the submission by defendant Teva of an ANDA to the FDA seeking approval to manufacture and sell a generic version of Bayer’s Finacea Foam. In February 2018 Bayer and Foamix filed a complaint alleging patent infringement under U.S. patent law arising from Perrigo’s our patents following Taro’s submission of an ANDA to the FDA seeking approval to manufacture and sell a generic version of Bayer’s Finacea. See also “Item1A—Risk“Risk Factors—Risks Related to Our Intellectual Property—We have received notice letters of ANDAs submitted for drug products that are generic versions of Finacea Foamfoam and we are involved in lawsuits to protect orand enforce our patents, which could beare expensive, time consuming and unsuccessful”.may be unsuccessful.” In 2019, we, together with LEO, separately settled similar patent litigation with affiliates of Perrigo Company plc and Teva Pharmaceuticals Industries Ltd.
Our total revenues from all development and license agreements from our inception to December 31, 2017 were approximately $28.1 million.
Additional Research and Development
In addition to FMX101 for the treatment of moderate-to-severe acne, FMX103 for the treatment of moderate-to-severe rosacea and licensed products resulting from our development and license agreements with various pharmaceutical companies, we are developing a series of product candidates for various indications to which we own worldwide rights, and which are all based on formulations and adaptations of our patented, versatile foam platforms or other dosage forms.
We intend to selectively proceed into clinical trials with these formulations under the FDA’s 505(b)(2) regulatory pathway wherever possible, and according to our identification of unmet needs and potential market opportunities.
Our research and development expenses totaled $57.8 million, $25.9 million and $10.7 million in 2017, 2016 and 2015, respectively. In the ordinary course of business we enter into agreements with third parties such as contract research organizations, or CROs, medical institutions, clinical investigators and contract laboratories, to conduct our clinical trials and aspects of our research and preclinical testing. These CROs and other third parties provide us with project management, monitoring, regulatory consulting and investigative services, and their fees are part of our research and development expenses.
Intellectual Property
Our intellectual property and proprietary technology are essential to the development, manufacture, and sale of FMX101AMZEEQ and FMX103 and our future pipeline products.product candidates. We seekare committed to protectprotecting our intellectual property rights, core technologies and other know-how, through a combination of patents, trademarks, trade secrets, non-disclosure and confidentiality agreements, licenses, assignments of invention and other contractual arrangements with our employees, consultants, partners, suppliers, customers and others. Additionally, we rely on our research and development program, clinical trials, know-how and marketing and distribution programs to advance our products.
We submit applications directly or under the Patent Cooperation Treaty, or PCT, which is an international patent law treaty that provides a unified procedure for filing a single initial patent application to seek patent protection for an invention simultaneously in any one of the designated member states. Although a PCT application does not issue as a patent, it allows the applicant to seek protection in any of the member states through national-phase applications.Competition
We also submit applications for a single European patent application covering member states. If granted, the European patent must be validated in each national member state in which the patent is to continue and becomes a bundle of individual national patents.
Our most important patents are several U.S. patents relating to our lead product candidates, FMX101 and FMX103 which are expected to remain in effect until 2030. These patents relate to a composition of matter comprising a claim to a formulation of a tetracycline antibiotic, which can include minocycline or doxycycline and therefore may be less protective than patents that claim a new drug. We also have patent applications claiming compositions of matter, which relate to FMX101 and FMX103 pending in each of the following international markets: Canada, the European Union, India and Mexico.
Our other patents granted in the U.S. have claims relating to certain formulations of our foam platforms and other technology, including emulsion foams, hydrophobic foams, hydroalcoholic and aqueous foams.
As of December 31, 2017 we had a patent portfolio of 165 granted patents in certain countries worldwide, including 62 granted patents in the U.S. Additionally, as of December 31, 2017 we had over 40 pending patent applications worldwide, of which over 30 are pending in the U.S., describing and claiming our various foam based platforms and other technology. Our other pending applications relate to various foam platforms such as emulsion foam, hydrophobic foam, hydro-alcoholic foam and water-free foams, as well as specialty foams (such as potent solvent foams).
Competition
The medical and pharmaceutical industries in which we operate are intensely competitive and subject to significant technological change and changes in practice. While we believe that our innovative technology, knowledge, experience and resources provide us with competitive advantages, we face and may face competition from many different sources with respect to FMX101,AMZEEQ, which is available for purchase, our Phase III product candidate FMX103 and our other pipeline products or any product candidates that we may seek to develop or commercialize in the future. Possible competitors may include pharmaceutical companies, academic and medical institutions, governmental agencies and public and private research institutions. These prospective competitors have the ability to effectively discover, develop, test and obtain regulatory approvals for products that compete with ours, as well as the ability to effectively commercialize, market and promote approved products, including communicating the effectiveness, safety and value of products to actual and prospective customers and medical staff.
At the end of 2014 we became awareCurrently marketed products that a privately-held active pharmaceutical ingredientmay compete with AMZEEQ include: (a) oral products such as Solodyn (minocycline, Bausch Health), Doryx (doxycycline, Mayne Pharmaceuticals), Targadox (doxycycline, Journey), Acticlate (docycycline, Almirall), Seysara (sarecycline, Almirall) and drug(b) topical products such as Epiduo (adapalene + benzoyl peroxide (“BPO”), Galderma), Aczone (dapsone, Almirall), Retin-A (tretinoin, Bausch Health), Onexton-Acanya (clindamycin + BPO, Bausch Health) and Tazorac (tazarotene, Almirall).
Currently marketed products that may compete with our FMX103 product intermediate manufacturer, Hovione, had submitted an IND for Phase Icandidate include: (a) branded and II clinical trials of a new topical gel suspensiongeneric oral products containing minocycline non-hydrochloride(off-label), Oracea (doxycycline, Galderma) and (b) topical products such as all forms of metrogel/metronidazole available as a branded or generic product, Soolantra (ivermectin, Galderma) and Finacea (azaleic acid, LEO).
In addition, new products are currently being developed that may compete with AMZEEQ and our FMX103 product candidate, if approved, including: generic versions of any of the above on-marketed products and, specifically for the treatmentacne: Twyneo (tretinoin + BPO, Sol-Gel) and Clascoterone (Cassiopea) and specifically for papulopustular rosacea: Epsolay (BPO, Sol-Gel). In September 2019 – Hovione Farmaciencia SA announced details of inflammatory skin disease, including acne and rosacea. On December 4 2017, Hovione announced the commencement of aits planned Minocycline Against Rosacea Study, Phase II clinical trialIII development program for the treatment of moderate to severe inflammatory rosacea with HY01 a 3% topical gel suspension containing minocycline non-hydrochloride. In January 2020, BioPharmX Corporation entered into a Merger Agreement with Timber Pharmaceuticals LLC. and says that following the merger the combined company will “evaluate BioPharmX's Phase III ready proprietary topical minocycline gel programs” This product has previously been studied by BioPharmX in the treatment of inflammatory lesions of acne vulgaris and papulopustular rosacea. In 2015 we became aware that another company, BioPharmX Corporation (NYSE MKT: BPMX), was developing a topical hydrophilic gel containing minocycline hydrochloride for the treatment of acne, known as BPX-01. BioPharmX announced the results of its Phase IIa and Phase IIb clinical trials for BPX-01 in April 2016 and May 2017, respectively, and in November 2017 it announced that it had gained concurrence with FDA on the design of a planned2019, Sol-Gel completed Phase III clinical trialstudies for BPX-01EPSOLAY® (microencapsulated benzoyl peroxide cream, 5%) for treatmentinflammatory lesions of acne. Earlier that year, in September 2017, BioPharmX announced interim results of a feasibility study with BPX-01Rosacea, and for treatment of rosacea, later renamed BPX-04. TWYNEO® (microencapsulated benzoyl peroxide, 3% and microencapsulated tretinoin, 0.1%) for Acne Vulgaris. If ultimately approved and launched in the U.S.,United States, these products would becomecandidates could be direct competitors to FMX101AMZEEQ and FMX103.
Further, we are developing certain topical products with various licensees combining our proprietary technology withFollowing the consummation of the Merger on the Effective Date, Foamix became a drug selected by the licensee. While the licenses we grant are exclusive with respect to the specific drug whichwholly-owned subsidiary of Menlo. The combined company is licensed, our agreements with these licensees allow them to commercialize the licensed developed products for any topical dermatological application, not just for the specific indication for which each product was originally intended. If any such licensed product proves to be effective for moderate-to severe acne, impetigo, rosacea, chemotherapy-induced rash, or any other indication that we are pursuing with FMX101, FMX103 or our other product candidates, we may face competition from these licensees, as they are not bound by non-compete restrictions. Although we believe that FMX101, FMX103 and our other product candidates can outperform the licensed productsincorporated in the specific indications our product candidates are targeting, such licensed products may nevertheless pose a competitive challenge, as they will have the benefit of our foam technology coupled with the licensees’ greater resources, experience and brand recognition, extensive marketing channels and other capabilities, and possibly the advantage of entering the market before us.
Delaware. In addition, to products that are currently available, other products may be introduced to treat acne, rosacea, impetigo and other skin disorders during the time that we engage in necessary development. Accordingly, if one of our pipeline products is approved, our main challenge in the market would be to convince dermatologists, pediatricians or other physicians seeking alternatives to oral or other existing treatments to use our product instead. While we are still in the preliminary stages, based on our studies, we believe that our pipeline products could be more effective than the current non-topical alternatives and exhibit significantly less adverse side effects. Government Regulation
Our business is subject to extensive government regulation. Regulation by governmental authorities in the U.S. and other jurisdictions is a significant factor in the development, manufacture and marketing of our foam delivered treatments and in our ongoing research and development activities.
Product approval process in the U.S.
Review and approval of drugs
In the U.S., the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act and implementing regulations and other laws, including the Public Health Service Act. Drugs require the submission of an NDA, and approval by the FDA prior to being marketed in the U.S. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations requires the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval may subject an applicant to a variety of administrative or judicial sanctions and enforcement actions brought by the FDA, the Department of Justice or other governmental entities. Possible sanctions may include the FDA’s refusal to approve pending NDAs, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement and civil or criminal penalties.
The process required by the FDA prior to marketing and distributing a drug in the U.S. generally involves the following:
| · | completion of laboratory tests, animal studies and formulation studies in compliance with the FDA’s good laboratory practice, or GLP, or other applicable regulations; |
| · | submission to the FDA of an application for an investigational new drug, or IND designation, which must become effective before human clinical trials may begin; |
| · | approval by an independent institutional review board, or IRB, at each clinical site before each trial may be initiated; |
| · | performance of adequate and well-controlled human clinical trials in accordance with good clinical practice, or GCP, to establish the safety and efficacy of the proposed drug for its intended use; |
| · | preparation and submission to the FDA of an NDA or supplemental NDA; |
| · | satisfactory completion of an FDA advisory committee review, if applicable; |
| · | satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities at which the product or components thereof are produced, to assess compliance with current good manufacturing processes, or cGMP, and to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity; and |
| · | payment of user fees and FDA review and approval of the NDA. |
Preclinical studies
Preclinical studies include laboratory evaluation,Menlo will continue as well as animal studies to assess the potential safety and efficacy of the product candidate. Preclinical safety tests must be conducted in compliance with the FDA’s GLP regulations. The results of the preclinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND which must become effective before clinical trials may be commenced.
Clinical trials in support of an NDA
Clinical trials involve the administration of an investigational product to human subjects under the supervision of qualified investigators in accordance with GCP requirements, which include, among other things, the requirement that all research subjects provide their informed consent in writing before their participation in any clinical trial. Clinical trials are conducted under written trial protocols detailing, among other things, the objectives of the trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. An IND becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to a proposed clinical trial and places the trial on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin.
In addition, an IRB representing each institution participating in the clinical trial must review and approve the plan for any clinical trial before it commences at that institution, and the IRB must conduct continuing review and reapprove the trial at least annually. The IRB must review and approve, among other things, the trial protocol and informed consent information to be provided to trial subjects. An IRB must operate in compliance with FDA regulations. Information about certain clinical trials must be submitted within specific timeframes to the National Institutes of Health for public dissemination on their ClinicalTrials.gov website.
Clinical trials are typically conducted in three sequential phases, which may overlap or be combined:
| · | Phase I: The drug is initially introduced into healthy human subjects or patients with the target disease or condition and tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an early indication of its effectiveness and to determine optimal dosage. |
| · | Phase II: The drug is administered to a limited patient population to identify possible short-term adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage. |
| · | Phase III: The drug is administered to an expanded patient population, generally at geographically dispersed clinical trial sites, in well-controlled clinical trials to generate enough data to statistically evaluate the efficacy and safety of the product for approval, to establish the overall risk-benefit profile of the product, and to provide adequate information for the labeling of the product. |
Submission of an NDA to the FDA
The results of the preclinical studies and clinical trials, together with other detailed information, including information on the manufacture, control and composition of the product, are submitted to the FDA as part of an NDA requesting approval to market the product candidate for a proposed indication. Under the Prescription Drug User Fee Act, as amended, applicants are required to pay fees to the FDA for reviewing an NDA. These user fees, as well as the annual fees required for commercial manufacturing establishments and for approved products, can be substantial. The NDA review fee alone exceeded $2,038,000 for fiscal year 2017, subject to certain limited deferrals, waivers and reductions that may be available. The manufacturer or sponsor under an approved NDA are also subject to annual product and establishment user fees, currently exceeding $97,000 per product and $512,000 per establishment for fiscal year 2017. Although these fees were reduced from fiscal year 2016, they are typically increased annually. Each NDA submitted to the FDA for approval is typically reviewed for administrative completeness and reviewability within 45 to 60 days following submission of the application. If found complete, the FDA will “file” the NDA, thus triggering a full review of the application. The FDA may refuse to file any NDA that it deems incomplete or not properly reviewable at the time of submission.
Before approving an NDA, the FDA may inspect the facilities at which the product is manufactured or facilities that are significantly involved in the product development and distribution process, and will not approve the product unless cGMP compliance is satisfactory. The FDA may deny approval of an NDA if applicable statutory or regulatory criteria are not satisfied, or may require additional testing or information, which can delay the approval process. FDA approval of any application may include many delays or may never be granted. If a product is approved, the approval will impose limitations on the indicated uses for which the product may be marketed, may require that warning statements be included in the product labeling, may require that additional studies or trials be conducted following approval as a condition of the approval, may impose restrictions and conditions on product distribution, prescribing or dispensing in the form of a risk management plan, or impose other limitations.
Once a product is approved, marketing the product for other indicated uses or making certain manufacturing or other changes requires FDA review and approval of a supplement NDA or a new NDA, which may require additional clinical data and review fees. In addition, further post-marketing testing and surveillance to monitor the safety or efficacy of a product may be required. Also, product approvals may be withdrawn if compliance with regulatory standards is not maintained or if safety or manufacturing problems occur following initial marketing. In addition, new government requirements may be established that could delay or prevent regulatory approval of our product candidate under development.
505(b)(2) NDAs
As an alternative path to FDA approval for modifications to formulations or uses of products previously approved by the FDA, an applicant may submit an NDA under Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act, or FDCA. Section 505(b)(2) was enacted as part of the Hatch-Waxman Amendments and permits the filing of an NDA where at least some of the information required for approval comes from studies or trials not conducted by or for the applicant. If the 505(b)(2) applicant can establish that reliance on FDA’s previous findings of safety and effectiveness is scientifically appropriate, it may eliminate the need to conduct certain preclinical studies or clinical trials of the new product. The FDA may also require companies to perform additional studies or measurements, including clinical trials, to support the change from the approved reference, or “listed” drug. The FDA may then approve the new product candidate for all, or some, of the label indications for which the reference drug has been approved, as well as for any new indication sought by the 505(b)(2) applicant.
To the extent that a Section 505(b)(2) NDA relies on clinical trials conducted for a previously approved drug product or the FDA’s prior findings of safety and effectiveness for a previously approved drug product, the Section 505(b)(2) applicant must submit patent certifications in its Section 505(b)(2) application with respect to any patents for the previously approved product on which the applicant’s application relies that are listed in the FDA’s Publication of Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the ‘Orange Book’. Specifically, the applicant must certify for each listed patent that, in relevant part, (i) the required patent information has not been filed; (ii) the listed patent has expired; (iii) the listed patent has not expired, but will expire on a particular date and approval is not sought until after patent expiration; or (iv) the listed patent is invalid, unenforceable or will not be infringed by the proposed new product.
A certification that the new product will not infringe the previously approved product’s listed patent or that such patent is invalid or unenforceable is known as a Paragraph IV certification. If the applicant does not challenge one or more listed patents through a Paragraph IV certification, the FDA will not approve the Section 505(b)(2) NDA application until all the listed patents claiming the referenced product have expired. Further, the FDA will also not approve, as applicable, a Section 505(b)(2) NDA application until any non-patent exclusivity, such as, for example, five-year exclusivity for obtaining approval of a new chemical entity, three-year exclusivity for an approval based on new clinical trials, or pediatric exclusivity, listed in the Orange Book for the referenced product, has expired.
If the Section 505(b)(2) NDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the owner of the referenced NDA for the previously approved product and relevant patent holders within 20 days after the Section 505(b)(2) NDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement suit against the Section 505(b)(2) applicant. Under the FDCA, the filing of a patent infringement lawsuit within 45 days of receipt of the notification regarding a Paragraph IV certification automatically prevents the FDA from approving the Section 505(b)(2) NDA until the earliest to occur of 30 months beginning on the date the patent holder receives notice, expiration of the patent, settlement of the lawsuit, or until a court deems the patent unenforceable, invalid or not infringed. Even if a patent infringement claim is not brought within the 45-day period, a patent infringement claim may be brought under traditional patent law, but it does not invoke the 30-month stay.
Moreover, in cases where a Section 505(b)(2) application containing a Paragraph IV certification is submitted after the fourth year of a previously approved drug’s five-year exclusivity period and the patent holder brings suit within 45 days of notice of certification, the 30-month period is automatically extended to prevent approval of the Section 505(b)(2) application until the date that is seven and one-half years after approval of the previously approved reference product. The court also has the ability to shorten or lengthen either the 30 month or the seven and one-half year period if either party is found not to be reasonably cooperating in expediting the litigation.
In addition to patent protections applicable to a listed drug, a Section 505(b)(2) application may be subject to periods of statutory market exclusivity afforded to an approved new drug. Statutory market exclusivity provides the holder of an approved NDA limited protection from new competition in the marketplace for the innovation represented by its approved drug product, and precludes approval of certain 505(b)(2) applications for prescribed periods of time. Exclusivity is available for new chemical entities, as well as for significant changes in already approved drug products, such as a new use. FDA may refuse to approve a Section 505(b)(2) application to the extent it is subject to the market exclusivity.
Notwithstanding the approval of many products by the FDA pursuant to Section 505(b)(2), over the last few years, some pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA changes its interpretation of Section 505(b)(2), or if the FDA’s interpretation is successfully challenged in court, this could delay or even prevent the FDA from approving any Section 505(b)(2) NDA that we submit.
The FDA regulations and other applicable regulations and policies provide incentives to manufacturers to create modified, non-infringing versions of a drug to facilitate the approval of an ANDA or other application for generic substitutes.
Post-approval requirements
Any drug products for which we receive FDA approval will be subject to continuing regulation by the FDA. Certain requirements include, among other things, record-keeping requirements, reporting of adverse experiences with the product, providing the FDA with updated safety and efficacy information on an annual basis or more frequently for specific events, product sampling and distribution requirements, complying with certain electronic records and signature requirements and complying with FDA promotion and advertising requirements. These promotion and advertising requirements include, among others, standards for direct-to-consumer advertising, prohibitions against promoting drugs for uses or patient populations that are not described in the drug’s approved labeling, known as “off-label use,” and other promotional activities, such as those considered to be false or misleading. Failure to comply with FDA requirements can have negative consequences, including the immediate discontinuation of noncomplying materials, adverse publicity, enforcement letters from the FDA, mandated corrective advertising or communications with doctors, and civil or criminal penalties. Such enforcement may also lead to scrutiny and enforcement by other government and regulatory bodies.
Although physicians may prescribe legally available drugs for off-label uses, manufacturers may not encourage, market or promote such off-label uses. As a result, “off-label promotion” has formed the basis for litigation under the Federal False Claims Act, violations of which are subject to significant civil fines and penalties. In addition, manufacturers of prescription products are required to disclose annually to the Center for Medicaid and Medicare any payments made to physicians and teaching hospitals in the U.S. under the federal Physician Payment Sunshine Act. Reportable payments may be direct or indirect, in cash or kind, for any reason, and are required to be disclosed even if the payments are not related to the approved product. Failure to fully disclose or not in time reporting could lead to penalties up to $1.15 million per year.
The manufacturing of any of our products will be required to comply with applicable FDA manufacturing requirements contained in the FDA’s cGMP regulations. The FDA’s cGMP regulations require, among other things, quality control and quality assurance, as well as the corresponding maintenance of comprehensive records and documentation. Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are also required to register their establishments and list any products they make with the FDA and to comply with related requirements in certain states. These entities are further subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain cGMP compliance.
Discovery of problems with a product after approval may result in serious and extensive restrictions on a product, manufacturer or holder of an approved NDA, as well as lead to potential market disruptions. These restrictions may include recalls, suspension of a product until the FDA is assured that quality standards can be met, and continuing oversight of manufacturing by the FDA under a “consent decree,” which frequently includes the imposition of costs and continuing inspections over a period of many years, as well as possible withdrawal of the product from the market. In addition, changes to the manufacturing process generally require prior FDA approval before being implemented. Other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to further FDA review and approval.
The FDA also may require post-marketing testing, or Phase IV testing, as well as risk minimization action plans and surveillance to monitor the effects of an approved product or place conditions on an approval that could otherwise restrict the distribution or use of our products.
Pediatric trials and exclusivity
Even when not pursuing a pediatric indication, under the Pediatric Research Equity Act of 2003, an NDA or supplement thereto must contain data that are adequate to assess the safety and effectiveness of the drug product for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. With enactment of the Food and Drug Administration Safety and Innovation Act, or the FDASIA, in 2012, sponsors must also submit pediatric trial plans prior to the assessment data. Those plans must contain an outline of the proposed pediatric trials the applicant plans to conduct, including trial objectives and design, any deferral or waiver requests, and other information required by regulation. The applicant, the FDA, and the FDA’s internal review committee must then review the information submitted, consult with each other, and agree upon a final plan. The FDA or the applicant may request an amendment to the plan at any time.
The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatric data requirements. Additional requirements and procedures relating to deferral requests and requests for extension of deferrals are contained in the FDASIA.
Separately, in the event the FDA makes a written request for pediatric data relating to a drug product, an NDA sponsor who submits such data may be entitled to pediatric exclusivity. Pediatric exclusivity is another type of non-patent marketing exclusivity in the U.S. and, if granted, provides for the attachment of an additional 6 months of marketing protection to the term of any existing regulatory exclusivity, including the non-patent and orphan exclusivity.
Patent term restoration and extension
A patent claiming a new drug product may be eligible for a limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the “Hatch-Waxman Act,” which permits a patent restoration of up to five years for patent term lost during product development and the FDA regulatory review. The restoration period granted is typically one-half the time between the effective date of an IND and the submission date of an NDA, plus the time between the submission date of a NDA and the ultimate approval date. Patent term restoration cannot be used to extend the remaining term of a patent past a total of 14 years from the product’s approval date. Only one patent applicable to an approved drug product is eligible for the extension, and the application for the extension must be submitted prior to the expiration of the patent in question. A patent that covers multiple drugs for which approval is sought can only be extended in connection with one of the approvals. The U.S. Patent and Trademark Office reviews and approves the application for any patent term extension or restoration in consultation with the FDA. Since the active pharmaceutical ingredients of FMX101, FMX102, FMX103 and FDX104 are already known and marketed in tablet form, these products may not be eligible for the said patent term extension, if applicable.
Orphan drug designation
Orphan drug designation in the U.S. is designed to encourage sponsors to develop drugs intended for rare diseases or conditions. In the U.S., a rare disease or condition is statutorily defined as a condition that affects fewer than 200,000 individuals in the U.S. or that affects more than 200,000 individuals in the U.S. and for which there is no reasonable expectation that the cost of developing and making available the drug for the disease or condition will be recovered from sales of the drug in the U.S.
Orphan drug designation qualifies a company for tax credits and market exclusivity for seven years following the date of the drug’s marketing approval, if granted by the FDA. An application for designation as an orphan product can be made any time prior to the filing of an application for approval to market the product. A drug becomes an orphan when it receives orphan drug designation from the Office of Orphan Products Development, or OOPD, at the FDA based on acceptable confidential requests made under the regulatory provisions. The drug must then go through the new drug approval process like any other drug. Orphan drug designations are decided solely by the OOPD staff, but the OOPD occasionally will request opinions from the Center for Drug Evaluation and Research, especially when dealing with issues such as the appropriateness of the requested indication or the scientific rationale described by the sponsor.
A sponsor may request orphan drug designation of a previously unapproved drug or new orphan indication for an already marketed drug. In addition, a sponsor of a drug that is otherwise the same drug as an already approved orphan drug may seek and obtain orphan drug designation for the subsequent drug for the same rare disease or condition if it can present a plausible hypothesis that its drug may be clinically superior to the first drug. More than one sponsor may receive orphan drug designation for the same drug for the same rare disease or condition, but each sponsor seeking orphan drug designation must file a complete request for designation.
The period of exclusivity begins on the date that the marketing application is approved by the FDA and applies only to the indication for which the drug has been designated. The FDA could approve a second application for the same drug for a different use or a second application for a clinically superior version of the drug for the same use. The FDA cannot, however, approve the same drug made by another manufacturer for the same indication during the market exclusivity period unless it has the consent of the sponsor or the sponsor is unable to provide sufficient quantities.
Review and approval of drug products outside the U.S.
In addition to regulations in the U.S., we will be subject to a variety of foreign regulations governing manufacturing, clinical trials, commercial sales and distribution of our future products. Whether or not we obtain FDA approval for a product candidate, we must obtain approval of the product by the comparable regulatory authorities of foreign countries before commencing clinical trials or marketing in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.
Under European Union regulatory systems, marketing authorizations may be submitted either under a centralized, decentralized or mutual recognition procedure. The centralized procedure provides for the grant of a single marketing authorization that is valid for all European Union member states. The decentralized procedure includes selecting one “reference member state,” or RMS, and submitting to more than one member state at the same time. The RMS National Competent Authority conducts a detailed review and prepares an assessment report, to which concerned member states provide comment. The mutual recognition procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marketing authorization may submit an application to the remaining member states post-initial approval. Within 90 days of receiving the applications and assessment report, each member state must decide whether to recognize the approval.
Pharmaceutical coverage, pricing and reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we obtain regulatory approval. In the U.S. and other markets, sales of any products for which we receive regulatory approval for commercial sale will depend in part on the availability of reimbursement from third-party payers. Third-party payers include government health administrative authorities, managed care providers, private health insurers and other organizations. The process for determining whether a payer will provide coverage for a drug product may be separate from the process for setting the price or reimbursement rate that the payer will pay for the drug product. Third-party payers may limit coverage to specific drug products on an approved list, or formulary, which might not include all of the FDA-approved drug products for a particular indication.
Third-party payers are increasingly challenging the price and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of FMX101 and FMX103, in addition to the costs required to obtain the FDA approvals. Additionally, FMX101 and FMX103 may not be considered medically necessary or cost-effective. A payer’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.
In March 2010, the President of the U.S. signed one of the most significant healthcare reform measures in decades. The healthcare reform law, also known as the Affordable Care Act, or ACA, substantially changes the way healthcare will be financed by both governmental and private insurers, and significantly impacts the pharmaceutical industry. This comprehensive legislative overhaul was expected to extend coverage to approximately 36 million previously uninsured Americans. However, the individual mandate was recently repealed by Congress in the tax reform bill that was signed into law in December 2017. The Joint Committee on Taxation estimates that the repeal will result in over 13 million Americans losing their health insurance coverage over the next ten years and is likely to lead to increases in insurance premiums.
The ACA requires the pharmaceutical industry to share in the costs of reform by increasing Medicaid rebates and expanding Medicaid rebates to cover Medicaid managed care programs, among other things. The ACA also includes funding of pharmaceutical costs for Medicare patients in excess of the prescription drug coverage limit and below the catastrophic coverage threshold. Under the ACA, pharmaceutical companies are obligated to fund 50% of the patient obligation for branded prescription pharmaceuticals in this gap, or “donut hole.” Additionally, an excise tax was levied against certain branded pharmaceutical products. The tax is specified by statute to be approximately $3.5 billion in 2017, $4.2 billion in 2018 and $2.8 billion each year thereafter. The tax is to be apportioned to qualifying pharmaceutical companies based on an allocation of their governmental programs as a portion of total pharmaceutical government programs. The Administration is currently looking at Medicare parts B and D in terms of policy changes in the next session of Congress.
The Centers for Medicare & Medicaid Services (“CMS”) administer the Medicaid drug rebate program, in which pharmaceutical manufacturers pay quarterly rebates to each state Medicaid agency. Generally, for branded prescription drugs marketed under NDAs, as our product candidates are expected to be, manufacturers are required to rebate the greater of 23.1% of the average manufacturer price or the difference between such price and the best price during a specified period. An additional rebate for products marketed under NDAs is payable if the average manufacturer price increases at a rate higher than inflation, and other methodologies apply to new formulations of existing drugs. In addition, the ACA revised certain definitions used for purposes of calculating the rebates, including the definition of “average manufacturer price.” The Comprehensive Addiction and Recovery Act of 2016 contains language intended to exempt certain abuse-deterrent formulations of a drug from the definition of line extension for purposes of the program. Various state Medicaid programs have implemented voluntary supplemental drug rebate programs that may provide states with additional manufacturer rebates in exchange for preferred status on a state’s formulary or for patient populations that are not included in the traditional Medicaid drug benefit coverage.
In the European Union, pricing and reimbursement schemes vary widely from country to country. Some countries provide that drug products may be marketed only after a reimbursement price has been agreed. Some countries may require the completion of additional studies or trials that compare the cost-effectiveness of a particular drug candidate to currently available therapies. For example, the European Union provides options for its member states to restrict the range of drug products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. European Union member states may approve a specific price for a drug product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the drug product on the market. Other member states allow companies to fix their own prices for drug products, but monitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs, has become intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert competitive pressure that may reduce pricing within a country. Any country that has price controls or reimbursement limitations for drug products may not allow favorable reimbursement and pricing arrangements.
Healthcare laws and regulations
Healthcare providers, physicians and third-party payers play a primary role in the recommendation and prescription of drug products that are granted marketing approval. Arrangements with healthcare providers, third-party payers and other customers are subject to broadly applicable fraud and abuse and other healthcare laws and regulations. Such restrictions under applicable federal and state healthcare laws and regulations include the following:
| · | the federal healthcare Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare; |
| · | the federal False Claims Act imposes civil penalties, and provides for civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government; |
| · | the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters; |
| · | HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information; |
| · | the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services; |
| · | the federal transparency requirements under the Health Care Reform Law require manufacturers of drugs, devices and medical supplies to report to the Department of Health and Human Services information related to payments and other transfers of value to physicians and teaching hospitals and physician ownership and investment interests; and |
| · | analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payers, including private insurers. |
Some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other health care providers or marketing expenditures. State and foreign laws also govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
Manufacturing, Supply and Production
We do not own or operate manufacturing facilities for the production of our product candidates, nor do we have plans to develop our own manufacturing operations in the foreseeable future. We currently rely on third-party contract manufacturers for all of our required raw materials, active ingredients and finished products for our preclinical research and clinical trials, including the Phase III clinical trials for FMX101, FMX103 and our additional product candidates, as applicable. We have contractual relationships for the manufacture of clinical supplies of FMX101 and FMX103, and for commercial supplies if these products are approved. If FMX101, FMX103 or any of our other product candidates are approved by any regulatory agency, we intend to enter into additional agreements with one or more third-party contract manufacturers as secondary manufacturers for the commercial production of these products. We, and our contract manufacturers, are developing the validation processes, methods, tests and or controls suitable for commercial scale manufacturing of our various product candidates and for defining their properties. Changes in manufacturing scale or the manufacturer may require changes to processes, methods, tests and or controls, which may take time to develop, validate and implement.
Development stage and commercial quantities of any products that we develop will need to be manufactured in facilities, and by processes, that comply with the requirements of the FDA and the regulatory agencies of other jurisdictions in which we are seeking approval. We currently employ internal and external resources to manage our manufacturing contractors. The relevant manufacturers of our drug products for our current preclinical and clinical trials have advised us that they are compliant with both Good Laboratory Practices, or GLP, and current Good Manufacturing Practices, or cGMP.
Our product candidates, if approved, may not be producible in sufficient commercial quantities, in compliance with regulatory requirements or at an acceptable cost. We and our contract manufacturers are, and will be, subject to extensive governmental regulation in connection with the manufacture of any pharmaceutical products or medical devices. We and our contract manufacturers must ensure that all of the processes, methods and equipment are compliant with cGMP and cGLP for drugs on an ongoing basis, as mandated by the FDA and foreign regulatory authorities, and conduct extensive audits of vendors, contract laboratories and suppliers.
We use, and we intend to continue to use, leading providers of manufacturing services to the global pharmaceutical industry, to scale-up and validate a robust manufacturing process to support commercialization and distribution of our products if approved by the FDA.
Marketing, Sales and Distribution
Given our stage of development, we do not have any internal sales, marketing or distribution infrastructure. Extensive planning and market research has been conducted on our current product portfolio. Additionally, continuous efforts are deployed to identify unmet needs in the dermatology market, asses their commercial potential and advise on the prioritization of the development of our future product candidates accordingly. We have formed a U.S. subsidiary, Foamix Pharmaceuticals Inc., with key executives to support our clinical development, regulatory affairs, CMC / drug development, quality and commercialization efforts in the U.S.
We are also evaluating the optimal price range for FMX101 and FMX103, that will reflect their benefits relative to alternative treatments while remaining affordable to potential customers and reimbursable by governments and third-party payers.
In the event that we receive regulatory approvals for FMX101 and FMX103 in markets outside of the U.S., we intend, where appropriate, to pursue commercialization relationships, including strategic alliances and licensing, with pharmaceutical companies and other strategic partners, which are equipped to market or sell our products through their well-developed sales, marketing and distribution organizations in such countries.
In addition, we may out-license some or all of our worldwide patent rights to more than one party to achieve the fullest development, marketing and distribution of any products we develop.
Environmental, Health and Safety Matters
We are subject to extensive environmental, health and safety laws and regulations in a number of jurisdictions, primarily Israel, governing, among other things, (i) the use, storage, registration, handling, emission and disposal of chemicals, waste materials and sewage; and (ii) chemical, air, water and ground contamination, air emissions and the cleanup of contaminated sites, including any contamination that results from spills due to our failure to properly dispose of chemicals, waste materials and sewage. Our operations at our Rehovot research and development facility use chemicals and produce waste materials and sewage. Our activities require permits from various governmental authorities including, local municipal authorities, the Ministry of Environmental Protection and the Ministry of Health. The Ministry of Environmental Protection and the Ministry of Health, local authorities and the municipal water and sewage company conduct periodic inspections in order to review and ensure our compliance with the various regulations.
These laws, regulations and permits could potentially require the expenditure by us of significant amounts for compliance or remediation. If we fail to comply with such laws, regulations or permits, we may be subject to fines and other civil, administrative or criminal sanctions, including the revocation of permits and licenses necessary to continue our business activities. In addition, we may be required to pay damages or civil judgments in respect of third-party claims, including those relating to personal injury (including exposure to hazardous substances we use, store, handle, transport, manufacture or dispose of), property damage or contribution claims. Some environmental, health and safety laws allow for strict, joint and several liability for remediation costs, regardless of comparative fault. We may be identified as a responsible party under such laws. Such developments could have a material adverse effect on our business, financial condition and results of operations.
In addition, laws and regulations relating to environmental, health and safety matters are often subject to change. In the event of any changes or new laws or regulations, we could be subject to new compliance measures or to penalties for activities which were previously permitted. For instance, Israeli regulations were promulgated in 2011 relating to the discharge of industrial sewage into the sewer system. These regulations establish new and potentially significant fines for discharging forbidden or irregular sewage into the sewage system.
The operations of our subcontractors and suppliers are also subject to various Israeli and foreign laws and regulations relating to environmental, health and safety matters, and their failure to comply with such laws and regulations could have a material adverse effect on our business and reputation, result in an interruption or delay in the development or manufacture of our product candidates, or increase the costs for the development or manufacture of our product candidates.
Employees
As of February 5, 2018, we had a total of 75 employees, 71 of whom are full-time employees, 49 of whom were primarily engaged in research and development activities. A total of 11 employees have an M.D. or Ph.D. degree. None of our employees are represented by a labor union, and we consider our employee relations to be good.
Financial and Segment Information
We operate our business as a single segment, as defined by generally accepted accounting principles. Our financial information is included in the consolidated financial statements and the related notes (see “Item 8—Financial Statements and Supplementary Data”).
Legal Proceedings
Currently, we are not involved in any legal proceedings other than the complaints filed by Bayer and Foamix in the U.S. in January 2018 against Teva and in February 2018 against Perrigo, alleging patent infringement arising out of ANDA submissions seeking approval to manufacture and sell a generic version of Bayer’s Finacea Foam prior to the expiry of patents licensed by Foamix to Bayer (see “Item 1A—Risk Factor—Risks Related to Our Intellectual Property—We have received notice letters of ANDAs submitted for drug products that are generic versions of Finacea Foam and we are involved in lawsuits to protect or enforce our patents, which could be expensive, time consuming and unsuccessful”). We consider such actions to be a part of the ordinary course of our business. We may become parties to additional litigation or other legal proceedings that we consider to be a part of the ordinary course of our business, and may also become involved in material legal proceedings.
Organizational Structure and Status
Our legal and commercial name is Foamix Pharmaceuticals Ltd. (formerly Foamix Ltd.). We were incorporated as a limited liability company under the laws of the State of Israel on January 19, 2003. We are registered with the Israeli Registrar of Companies. Our registration number is 51-336881-1. Article 3 of our articles of association provides that our objectives are to conduct all types of business as are permitted by law.
Our corporate structure consists of Foamix Pharmaceuticals Ltd. and Foamix Pharmaceuticals Inc., our wholly-owned U.S. subsidiary, which was incorporated on May 6, 2014, under the laws of the State of Delaware, and which is intended to serve as our marketing and sales arm in the U.S.
Effective January 1, 2018, we ceased to be a “foreign private issuer” as defined in Rule 3b-4 of the Exchange Act, and became subject to the rules and regulations under the Exchange Act applicable to U.S. domestic issuers. As a result, we are filing an Annual Report on Form 10-K beginning with the fiscal year ended December 31, 2017. Our annual reports for prior years were filed on Form 20-F.
We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933 and as modified by the JOBS Act. As such, we are eligible to,Act and intendintends to take advantage of certain exemptions from various reporting requirements applicable to other public companies thatrequirements.
The combined company’s headquarter are not “emerging growth companies” such as not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We will remain an emerging growth company until the earliest of: (i) the last day of our fiscal year during which we have total annual gross revenues of at least $1.0 billion; (ii) the last day of our fiscal year following the fifth anniversary of the closing of our initial public offering; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. Our principal executive offices are located at 2 Holzman St., Weizmann Science Park, Rehovot 7670402, Israel, and our telephone number is +972-8-9316233. Our website is www.foamix.com. The information contained on, or that can be accessed through, our website does not constitute a part of this form and is not incorporated by reference herein. Foamix Pharmaceuticals Inc., our wholly-owned subsidiary, was incorporated on May 6, 2014 under the laws of the State of Delaware, with the intent to serve as our marketing and sales arm in the U.S. Foamix Pharmaceuticals Inc. has been appointed as our agent in the United States and is located at 520 U.S. Highway 22, Suite 305, Bridgewater, New Jersey 08807.
ITEM 1A—RISK1A-RISK FACTORS
In conducting our business, we face many risks that may interfere with our business objectives. Some of these risks could materially and adversely affect our business, financial condition and results of operations. In particular, we are subject to various risks resulting from changing economic, political, industry, business and financial conditions. The risks and uncertainties described below are not the only ones we face.
You should carefully consider the following factors and other information in this annual report. If any of the negative events referred to below occur, our business, financial condition and results of operations could suffer. In any such case, the trading price of our ordinary shares could decline.
Risks Related to Our Business and Industry
We are largely dependent on the success of our lead product candidates, FMX101 and FMX103AMZEEQ for the treatment of acne and our lead product candidate FMX103 for the treatment of rosacea.
We have invested a majority of our efforts and financial resources in the research and development of FMX101AMZEEQ for the treatment of inflammatory lesions of non-nodular moderate-to-severe acne vulgaris in patients 9 years of age and older, which received approval from the FDA on October 18, 2019 and became available for prescribing on January 13, 2020, and FMX103 for the treatment of moderate-to-severe papulopustular rosacea in adults, for which have both completed Phase II clinical trials.we submitted an NDA, that was accepted for review by the FDA in October 2019. We continueplan to dedicate our resources toward (i) announcing top-line results from our third pivotal Phase III clinical trialthe continued commercialization efforts for FMX101 in the third quarter of 2018 and filing a new drug application, or NDA, with the FDA by the end of the first half of 2019;AMZEEQ; (ii) announcing top-line results from our two pivotal Phase III clinical trialspre-commercialization efforts for FMX103 by the endin anticipation of the third quarter or in the beginning of the fourth quarter of 2018 and completing such trials in 2019;FDA approval; and (iii) advancing our other pipeline candidates. The success of our business depends largely on our ability to fund, executesuccessfully commercialize AMZEEQ and complete the development of,to obtain regulatory approval for and successfully commercialize FMX101 and FMX103 in a timely manner. If we fail to do so, we may not be able to obtain adequate funding to continue to operate our business.
Even though AMZEEQ has received FDA approval, and even if FMX103 or our other product candidates receive regulatory approval, they may fail to achieve the broad degree of physician adoption and use and market acceptance necessary for commercial success.
Even though we have obtained FDA approval for AMZEEQ, and even if we obtain FDA approval for FMX103 or any of our other product candidates, the commercial success of such products will depend significantly on their broad adoption and use by dermatologists, pediatricians and other physicians for approved indications, including AMZEEQ for the treatment of moderate-to-severe acne in patients 9 years of age and older and FMX103 for the treatment of moderate-to-severe rosacea in adults, as well as any other therapeutic indications that we may seek to pursue.
Moreover, if the treatment of acne with AMZEEQ or rosacea with FMX103 is deemed to be an elective procedure, the cost of which is borne by the patient, it will not be reimbursable through government or private health insurance.
The degree and rate of physician and patient adoption of AMZEEQ, and, if approved, FMX103 and any of our other product candidates, will depend on a number of factors, including:
the clinical indications for which the product is approved;
the safety and efficacy of our product as compared to existing therapies for those indications;
the prevalence and severity of adverse side effects;
patient satisfaction with the results and administration of our product and overall treatment experience, including relative convenience, ease of use and avoidance of, or reduction in, adverse side effects;
patient demand for the treatment of moderate-to-severe acne and rosacea or other indications;
the effectiveness of our sales and marketing efforts, especially the success of any targeted marketing efforts directed toward dermatologists, pediatricians, other physicians, clinics and any direct-to-consumer marketing efforts we may initiate.
overcoming biases of physicians and patients towards topical treatments for moderate-to-severe acne, rosacea or other indications and their willingness to adopt new therapies for these indications;
the cost of treatment in relation to alternative treatments, the extent to which these costs are covered and adequately reimbursed by third party payors, and patients’ willingness to pay for our products;
proper training and administration of our products by dermatologists, pediatricians and medical staff; and
We have limited commercial sales experience, which makes it difficult to evaluate our current business, predict our future prospects and forecast our financial performance and growth.
Prior to the launch of AMZEEQ on January 13, 2020, we had not generated any revenues from the sale of our drug products. Successful commercialization of AMZEEQ or any future products is subject to many risks. Although many of our employees have commercialized products during their employment at other organizations, Foamix has not, as an organization, commercialized a product, and there is no guarantee that we will be able to do so successfully with AMZEEQ or any of our product candidates.
There are many factors that could cause commercialization of AMZEEQ or any future products to be unsuccessful, including a number of factors that are outside our control. The commercial success of AMZEEQ depends on, among other things, the extent to which patients and physicians accept and adopt AMZEEQ. For example, if the expected patient population is smaller than we estimate or if physicians are unwilling to prescribe or patients are unwilling to take AMZEEQ, the commercial potential of AMZEEQ will be limited. In addition, we also do not know how physicians, patients and payors will respond to the pricing of AMZEEQ. Thus, significant uncertainty remains regarding the commercial potential of AMZEEQ. Moreover, our ability to effectively generate revenues from AMZEEQ will depend on our ability to, among other things:
achieve and maintain compliance with regulatory and other requirements;
create market demand for and achieve market acceptance of AMZEEQ through our marketing and sales activities and other arrangements established for the promotion of AMZEEQ;
compete with other acne treatments (either in the present or in the future);
train, deploy and support a qualified sales force;
maintain and obtain agreements with third-party manufacturers that can produce commercial supplies of AMZEEQ at a scale sufficient to meet our anticipated demand and on terms acceptable to us and that can develop, validate and maintain commercially viable manufacturing processes that are compliant with current cGMP regulations, including our exclusive agreement with ASM for the supply of the finished product of AMZEEQ and our third party agreements with the suppliers of AMZEEQ’s API;
implement and maintain agreements with wholesalers, distributors and group purchasing organizations on commercially reasonable terms;
ensure that our entire supply chain efficiently and consistently delivers AMZEEQ to our customers;
receive coverage and adequate reimbursement for AMZEEQ from commercial health plans and governmental health programs;
successfully educate physicians and patients about the benefits, risks, administration and use of AMZEEQ;
obtain acceptance of AMZEEQ as safe and effective by patients and the medical community;
receive positive publicity related to AMZEEQ relative to the publicity related to our competitors’ products; and
maintain and defend our patent protection, seek additional protection and obtain regulatory exclusivity for AMZEEQ and our other product candidates.
Any disruption in our ability to generate revenues from the sale of AMZEEQ will have a material and adverse impact on our results of operations.
We are currently building our sales, marketing and distribution capabilities, and if we are unable to expand such capabilities, our business, results of operations and financial condition may be materially adversely affected.
In order to successfully market AMZEEQ, we must continue to build and develop our sales, marketing, distribution, managerial, compliance and related capabilities or make arrangements with third parties to perform these services. If we are unable to establish adequate sales, marketing, and distribution capabilities, whether independently or with third parties, we may not be able to appropriately commercialize AMZEEQ and may not become profitable.
AMZEEQ is a newly-marketed drug and, therefore, none of the members of our sales force has ever promoted AMZEEQ prior to its commercial launch. In addition, we must train our sales force to ensure that a consistent and appropriate message about AMZEEQ is being delivered to our potential customers. If we are unable to effectively train our sales force and equip them with effective materials, including medical and sales literature to help them inform and educate potential customers about the benefits of AMZEEQ and its proper administration, our efforts to successfully commercialize AMZEEQ could be harmed, which would negatively impact our ability to generate product revenue.
Additionally, even after initial development of our sales force and the commercial launch of AMZEEQ, we will need to maintain and further develop our sales force, and we will be competing with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel. In the event we are unable to effectively develop and maintain our commercial team, including our U.S. sales force, our ability to effectively commercialize AMZEEQ would be limited, and we would not be able to generate product revenues successfully. There are risks involved both with establishing our own sales and marketing capabilities and with entering into arrangements with third parties to perform these services. For example, any efforts to develop a sales and marketing organization would be subject to numerous risks, including, but not limited to, the following:
recruiting and training a sales force is expensive and time consuming and could delay our product launch;
we may be unable to recruit, retain or motivate adequate numbers of effective and qualified sales and marketing personnel;
we may be unable to provide adequate training to sales and marketing personnel;
our sales personnel may be unable to obtain access to physicians or convince adequate numbers of physicians to prescribe AMZEEQ;
there may be unforeseen costs and expenses associated with creating an independent sales and marketing organization; and
we may incur significant unexpected expenses if the commercial launch of AMZEEQ is delayed or does not occur for any reason.
If we do not establish sales, marketing and distribution capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our proposed products.
We have not finalized our Phase III clinical programs for any of our product candidates, nor have we applied forobtained regulatory approvals to market any ofFMX103 or our other pipeline product candidates, and we may be delayed in obtaining or fail to obtain such regulatory approvals and to commercialize ourthese product candidates.
The process of developing, obtaining regulatory approval for and commercializing FMX103 and our other product candidates is long, complex, costly and uncertain, and delays or failure can occur at any stage, as evident from our recent experience. In March 2017 we suffered a setback in our Phase III clinical program for FMX101 for treatment of moderate-to-severe acne, following the announcement of mixed top-line results from our two pivotal Phase III clinical trials in this product candidate, known as Studies 04 and 05. Although FMX101 demonstrated statistical significance compared to vehicle on the co-primary endpoint of absolute reduction in inflammatory lesions in both Studies 04 and 05, and further demonstrated statistical significance in the co-primary endpoint of investigator global assessment (IGA) treatment success compared to baseline in Study 04 and on a pooled analysis basis, FMX101 failed to demonstrate statistical significance in the co-primary endpoint of IGA treatment success on a standalone basis in Study 05. Consequently, we were compelled to launch a third pivotal Phase III clinical trial for FMX101, in which we are seeking to replicate the results of Study 04 in a larger patient population and confirm the efficacy of FMX101, in order to proceed with the filing of an NDA for this lead product candidate. stage. Furthermore, the research, testing, manufacturing, labeling, marketing, sale and distribution of drugs are subject to extensive and rigorous regulation by the FDA, and foreign regulatory agencies. These regulations are agency-specific and differ by jurisdiction.FDA. We are not permitted to market any of our product candidates in the U.S.United States until we receive approval of athe applicable NDA from the FDA, or in any foreign countries until we receive the requisite approval from the respective regulatory agencies in such countries.FDA. To gain approval of an NDA or other equivalent regulatory approval, we must provide the FDA or relevant foreign regulatory authority with clinical data that demonstrates the continued safety purity and potencyefficacy of the product for the intended indication.
BeforeWhile we can submit an NDAhave received FDA approval to the FDA or similar applications to foreign regulatory authorities, for FMX101 or FMX103, our leading product candidates,market AMZEEQ, we must complete Phase III clinical trials for them. These clinical trials are substantially broader than our Phase II clinical trials and have required (or will require) us to enlist a considerably larger number of patients in multiple clinics and medical centers. We have not received formal regulatory clearance to file an NDA withmarket FMX103 from the FDA or comparable applications to foreign regulatory authorities.FDA. Our other product candidates are at earlier stages of development and therefore subject to similar or even greater uncertainty and risk than FMX101 and FMX103.
Although we received positive Phase III clinical trials often produce unsatisfactorytrial results even though prior clinical trials were successful, as we have witnessed in the case of Study 04 for FMX101 as described above. Moreover,FMX103, the results of those clinical trials may be unsatisfactory to the FDA or foreign regulatory authorities even if we believe those clinical trials to bewere successful. The FDA or applicable foreign regulatory agencies may suspend one or all of our clinical trials or require that we conduct additional clinical, nonclinical, manufacturing, validation or drug product quality studies and submit that data before considering or reconsidering any NDA or similar foreign regulatory application we may submit. Depending on the extent of these additional studies, approval of any applications that we submit may be significantly delayed or may require us to expend more resources than we have available. It is also possible that additional studies we conduct may not be considered sufficient by the FDA or applicable foreign regulatory agencies to provide regulatory approval.
If any of these outcomes occur, we would not receive approval for FMX101, FMX103 or our other product candidates and may be forced to cease operations.
WeChanges in funding for the FDA, the SEC and other government agencies could hinder their ability to hire and retain key leadership and other personnel, prevent new products and services from being developed or commercialized in a timely manner or otherwise prevent those agencies from performing normal functions on which the operation of our business may rely, which could negatively impact our business.
The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept payment of user fees, and statutory, regulatory, and policy changes. Average review times at the agency have conducted only one Phase II clinical trial relatingfluctuated in recent years as a result. In addition, government funding of the SEC and other government agencies on which our operations may rely, including those that fund research and development activities is subject to each of FMX102, FMX103the political process, which is inherently fluid and FDX104, in each case outsideunpredictable.
Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, including beginning on December 22, 2018, the U.S., government has shut down several times and certain regulatory agencies, such as the results of which may not be predictive of future trial results. Positive results in preclinical testingFDA and early clinical trials do not ensure that later clinical trials will be successful. We sufferedthe SEC, have had to furlough critical FDA, SEC and other government employees and stop critical activities. If a significant setback in our Phase III clinical trials for FMX101 with regard to oneprolonged government shutdown occurs, it could significantly impact the ability of the two co-primary endpoints in one of these two trials,FDA to timely review and other pharmaceutical companies have had similar experiences in their Phase III clinical trials after demonstrating promising results in preclinical testing and early clinical trials. These setbacks have included negative safety and efficacy observations in later clinical trials,process our regulatory submissions, including previously unreported adverse events, though we have not encountered such issues to date.
To date, we have conducted only one Phase II clinical trial for each of FMX102, FMX103 and FDX104 which met their respective primary efficacy and secondary endpoints. Our Phase III clinical trialsthe NDA for our lead product candidates may not be successful,candidate FMX103 for the treatment of moderate-to-severe papulopustular rosacea in adults, which was accepted for review in October 2019, and even if they are,such delays could have a material adverse effect on our business. Further, future government shutdowns could impact our ability to access the FDA may not approvepublic markets and obtain necessary capital in order to properly capitalize and continue our NDA for such product candidates, should we be in position to file one, and may not agree that the benefits of such product candidates outweigh its risks, or may raise new concerns regarding our clinical trial designs.operations.
If the FDA does not conclude that FMX101 or FMX103 satisfysatisfies the requirements under Section 505(b)(2) of the Federal Food Drug and Cosmetics Act,FDCA, or Section 505(b)(2), or if the requirements for this product candidateFMX103 under Section 505(b)(2) are not as we expect, the approval pathway for this product candidate will likely take significantly longer, cost significantly more and entail significantly greater complications and risks than anticipated, and in either case may not be successful.
We expect to complete our pivotal Phase III trials for FMX101 and we have commenced pivotal Phase III trialssubmitted an NDA for FMX103 under the FDA’s 505(b)(2) regulatory pathway. The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act added Section 505(b)(2) to the Federal Food, Drug and Cosmetic Act, or FDCA. Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies that were not conducted by or for the applicant, and for which the applicant has not received a right of reference, which could expedite the development program for FMX101 and FMX103 by potentially decreasing the amount of clinical data that we would need to generate in order to obtain FDA approval. If the FDA does not allow us to pursue the Section 505(b)(2) regulatory pathway, we may need to conduct additional clinical trials, provide additional data and information, and meet additional standards for regulatory approval. If this were to occur, the time and financial resources required to obtain FDA approval for these product candidates,FMX103, and complications and risks associated with thesethis product candidates,candidate, would likely increase significantly. Moreover, inability to pursue the Section 505(b)(2) regulatory pathway could result in new competitive products reaching the market more quickly than our product candidates,candidate, which would likely harm our competitive position and prospects. Even if we are allowed to pursue the Section 505(b)(2) regulatory pathway, our product candidatescandidate may not receive the requisite approvals for commercialization.
In addition, notwithstanding the approval of AMZEEQ and certain other products by the FDA under Section 505(b)(2) over the last few years, certain competitors and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA’s interpretation of Section 505(b)(2) is successfully challenged, the FDA may be required to change its 505(b)(2) policies and practices, which could delay or even prevent the FDA from approving any NDA that we submit under Section 505(b)(2).In addition, the pharmaceutical industry is highly competitive and Section 505(b)(2) NDAs are subject to special requirements designed to protect the patent rights of sponsors of previously approved drugs that are referenced in a Section 505(b)(2) NDA.NDA, and we may be required to certify against patents listed in the FDA’s Orange Book. These requirements may give rise to patent litigation and mandatory delays in approval of our NDAs for up to 30 months depending on the outcome of any litigation. It is not uncommon for a manufacturer of an approved product to file a citizen petition with the FDA seeking to delay approval of, or impose additional approval requirements for, pending competing products. If successful, such petitions can significantly delay, or even prevent, the approval of the new product. However, even if the FDA ultimately denies such a petition, the FDA may substantially delay approval while it considers and responds to the petition. In addition, even if we are able to utilize the Section 505(b)(2) regulatory pathway for FMX101 and FMX103, there is no guarantee this would ultimately lead to faster product development or earlier approval.
Moreover, even if these product candidates areFMX103 is approved under Section 505(b)(2), the approval may be subject to limitations on the indicated uses for which the product may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the products.
We may not receive market exclusivity for our product candidates under the Hatch-Waxman Act since our lead product candidates are based on an “old antibiotic” and therefore potential competitors may develop generic versions of our product(s) after launch that, if approved, could compete directly with our product(s) sooner than we expect.
Statutory exclusivity provides the holder of an approved NDA limited protection from new competition in the marketplace for the innovation represented by its approved drug product and precludes approval of certain 505(b)(2) applications and ANDAs, including for a generic version of the drug product, for prescribed periods of time. During the exclusivity period, the FDA may not approve a Section 505(b)(2) application or ANDA to the extent it is subject to exclusivity, or in the case of exclusivity for a new chemical entity may not receive a Section 505(b)(2) application or ANDA. Changes to a drug resulting from new clinical studies (other than bioavailability studies) that were “essential to approval,” and conducted or sponsored by the applicant, such as a new dosage form, strength, route of administration, dosing regimen or indication, are associated with a three-year period of exclusivity during which the FDA cannot approve an ANDA or 505(b)(2) application for the change.
Drugs based on an “old antibiotic,” such as minocycline, are subject to an additional limitation and will not receive three-year exclusivity for a “condition of use” that was approved before October 8, 2008. Prior to 2008, drugs based on an “old antibiotic” were not eligible for Hatch-Waxman Act exclusivity. In 2008, the Q1 Program Supplemental Funding Act of 2008 made drugs containing old antibiotics eligible for three-year exclusivity under certain conditions, but excluded from eligibility for that exclusivity any “condition of use” approved for such drugs before October 8, 2008. The statute does not define “condition of use” but the U.S. District Court has provided guidance in Viropharma, Inc. v. Hamburg, 898 F. Supp.2d (District of Columbia, 2012). In Viropharma, the court held that a supplemental new drug approval for the drug Vancocin was not eligible for three-year exclusivity because the supplemental new drug application at issue did not constitute a “significant new use” for the drug. The court held that the “inclusion of more specific dosing information that was within the range specified in the prior label,” “new instructions on monitoring patients’ renal function,” and “new instructions for the continuation of treatment in older patients” did not effect a “significant new use” but rather served only to “refine labeling regarding already approved conditions of use.” The FDA also emphasized that had the company sought approval for a new indication or a new dosing regimen, it would have had to comply with other statutory requirements (including by providing new pediatric data), and that since the company did not have to provide the clinical data, it did not merit the three-year exclusivity for old antibiotics.
We believe that the clinical data submitted for our product candidates will satisfy the exclusivity requirements for old antibiotics. Our Phase III clinical trials for FMX101AMZEEQ provided new clinical (including new pediatric) data that supported a topical route of administration, a new dosing regimen and a significantly lower concentration of minocycline than the prior oral form. FMX103 is indicated for the treatment of moderate-to-severe papulopustular rosacea, which is a new indication for minocycline. While we believe that any clinical data submitted to support FMX103 and each of our other pipeline products containing an old antibiotic will provide the required new significant benefits and uses to qualify for the three-year non-patent exclusivity, if the FDA and the U.S. courts do not agree with us, the product candidate would not be protected by three-year exclusivity under the Hatch Waxman Act. While we would continue to be able to enforce our patents listed in the FDA’s Orange Book against infringement by third-parties, including a 30-month or any further stay or injunction from a court during the pendency of litigation, the FDA could approve an ANDA for a generic version of our product and a company could launch the product at risk and we may not be able to obtain an injunction to prevent the launch, which would allow a generic into the market sooner than we expect. In addition, even if the FDA awards three-year exclusivity to each of these products, its scope will depend on how the FDA defines the exclusivity-protected change. If the FDA defines this change more narrowly than we anticipate, the three-year exclusivity could provide less protection against generic competition than expected. Moreover, even if we obtain three years marketing exclusivity an ANDA may be submitted at any time before the expiration of market exclusivity.
Because our Phase IIIII clinical trials for the other product candidatesAMZEEQ and FMX103 were not conducted head-to-head with the current standard of care drugs, the comparison ofwe may not compare our results to those of existing drugs for promotional purposes, which may affect our sales and the conclusions we have drawn from such comparisons, may be inaccurate, and the FDA may require our Phase III trials to be controlled against such drugs.marketing efforts.
None of our initial two Phase III clinical trials for FMX101 or Phase II clinical trial forAMZEEQ and FMX103 nor our third Phase III trial for FMX101 or our two Phase III trials for FMX103 which are currently under way, were or are being conducted in head-to-head comparison with the drugs considered the current standard of care for the relevant indications, namely oral Solodyn for moderate-to-severe acne, Bactroban for impetigo,and topical antimicrobials (such as such as Metrogel, generic metronidazole and Finacea) for rosacea and oral doxycycline for chemotherapy induced rash.rosacea. This means that none of the patient groups participating in these trials were or are being treated with the standard of care drugs alongside the groups treated with our product candidates. Instead, we have compared the results of our clinical trials with historical data from prior clinical trials conducted for the standard of care drugs, as presented in their respective product labels. Direct comparison generally provides more reliable information about how two or more drugs compare, and reliance on indirect comparison for evaluating their relative efficacy or other qualities is problematic due to lack of objective or validated methods to assess trial similarity. For example, the various trials were likely conducted in different countries with different demographic features and in patients with different baseline conditions and different hygiene standards, among other relevant asymmetries. Therefore, the conclusions we have drawn from comparing the results of our trials with those published in the product labels for these current standards of care drugs, including conclusions regarding the relative efficacy and expediency of FMX101, FMX102, FMX103 and FDX104, may be distorted by the inaccurate methodology of the comparison.
The FDA may require the Phase III clinical trials of our product candidates to be controlled against the drugs that are currently considered the standards of care for the treatment of the relevant indications, instead of being controlled against a placebo or against a different dosage of our minocycline foam, as was the case in our Phase II clinical trials. Furthermore, even if the FDA does not impose such a requirement in connection with our Phase III clinical trials, the FDA generally requires adequate, well-controlled head-to-head clinical trials to support comparative claims regarding marketed products. As a result, we may decide to conduct comparative studies of FMX101,not make promotional claims that compare AMZEEQ, FMX103 or any of our other product candidates that are commercialized to support comparative claims used in the marketing of those product candidates. Significant additional time and expense will be required to design and conduct any head-to-head trials. For example, in the case of FMX101 for moderate-to-severe acne, the standard of care is an oral drug, Solodyn, whereas FMX101 is a topical drug. To conduct a double blind study comparing the two treatments, all patients would need to receive both modalities, with either the oral or topical treatment consisting of a placebo, increasing the complexity and cost. If we are unable to conduct head-to-head trials for one or more of our product candidates, even if such product candidates are approved for marketing in the U.S., we will not be able to make claims comparing such product candidatesfuture to the current standards of care or other competitor products which may negatively impact sales of theseour products.
Our ability to finance our operations and generate revenues depends on the commercial success of AMZEEQ and on the clinical and commercial success of FMX101, FMX103 and our other product candidates, and failure to achieve such success will negatively impact our business.
Although we received FDA approval of AMZEEQ, we expect to continue to incur losses for the near future, which will delay our profitability. Moreover, it is possible that even if we succeed in developing and commercializing one or more of our other product candidates, we may never become profitable. Our near-term prospects, including our ability to finance our operations and generate revenues, depend on the successful development,commercialization of AMZEEQ and on the successful regulatory approval and commercialization of FMX101 and FMX103, as well as our other product candidates.FMX103. The clinical and commercial success of FMX101,AMZEEQ, FMX103 and our other product candidates depends on a number of factors, many of which are beyond our control, including: | · | the FDA’s and foreign regulatory agencies’ acceptance of our parameters for regulatory approval relating to FMX101, FMX103 and our other product candidates, including our proposed indications, primary endpoint assessments, primary endpoint measurements and regulatory pathways; |
| · | the FDA’s and foreign regulatory agencies’ acceptance of the number, design, size, conduct and implementation of our clinical trials, our trial protocols and the interpretation of data from preclinical studies or clinical trials; |
| · | the FDA’s and foreign regulatory agencies’ acceptance of the sufficiency of the data we collected from our preclinical studies and early clinical trials of FMX101 and FMX103 to support the submission of an NDA or similar foreign regulatory application without requiring additional preclinical or clinical trials; |
| · | the FDA’s and foreign regulatory agencies’ willingness to schedule an advisory committee meeting in a timely manner to evaluate and decide on the approval of our NDA or similar foreign regulatory application; |
| · | the recommendation of the FDA and foreign regulatory agencies’ advisory committee to approve our application without limiting the approved labeling, specifications, distribution or use of the products, or imposing other restrictions; |
| · | the FDA’s and foreign regulatory agencies’ willingness to grant separate approvals for adults and children, where we may have successful clinical trial results for children but not for adults, or vice versa; |
| · | the FDA’s and foreign regulatory agencies’ satisfaction with the safety and efficacy of FMX101 and FMX103 or our other product candidates; |
| · | the prevalence and severity of adverse events associated with FMX101, FMX103 and our other product candidates; |
| · | the timely and satisfactory performance by third party contractors of their obligations in relation to our clinical trials, including any future Phase III clinical trials for FMX101 and FMX103; |
| · | our success in educating dermatologists, pediatricians and patients about the benefits, administration and use of FMX101, FMX103 and our other product candidates, if approved; |
| · | our ability to raise additional capital on acceptable terms in order to achieve our goals; |
23the effectiveness of our marketing, sales and distribution strategy and operations;
| · | the availability, perceived advantages, relative cost, safety and efficacy of alternative and competing treatments; |
our ability to maintain, independently or via third parties, a commercially viable manufacturing process that is compliant with cGMP;
| · | the effectiveness of our marketing, sales and distribution strategy and operations, as well as that of our current and future licensees; |
our success in educating health care providers and patients about the benefits, administration and use of AMZEEQ and, if approved, FMX103 and our other product candidates;
| · | our ability to develop, validate and maintain a commercially viable manufacturing process that is compliant with current good manufacturing practices, or cGMP; |
the FDA’s acceptance of our parameters for regulatory approval relating to FMX103 and our other product candidates, including our proposed indications, primary endpoint assessments, primary endpoint measurements and regulatory pathways;
| · | our ability to obtain, protect and enforce our intellectual property rights with respect to FMX101 or our other product candidates; |
the FDA’s acceptance of the number, design, size, conduct and implementation of our clinical trials for our clinical-stage product candidates, our trial protocols and the interpretation of data from preclinical studies or clinical trials;
| · | our ability to bring an action timely for patent infringement arising out of the filing of ANDAs by generic companies seeking approval to market generic versions of our products before the expiry of our patents; and |
the FDA’s acceptance of the sufficiency of the data we collected from our preclinical studies and clinical trials to support the submission of an NDA without requiring additional preclinical or clinical trials;
| · | our ability to avoid third party claims of patent infringement or intellectual property violations. |
the FDA’s willingness to schedule an advisory committee meeting in a timely manner to evaluate and decide on the approval of an NDA;
the recommendation of the FDA advisory committee to approve our application without limiting the approved labeling, specifications, distribution or use of the products, or imposing other restrictions;
the FDA’s satisfaction with the NDA submission for FMX103 or our other product candidates;
the prevalence and severity of adverse events associated with AMZEEQ, FMX103 and our other product candidates;
the timely and satisfactory performance by third party contractors of their obligations in relation to our clinical trials and our manufacturing and supply of AMZEEQ and our product candidates;
our ability to raise additional capital on acceptable terms in order to achieve our goals;
the availability, perceived advantages, relative cost, safety and efficacy of alternative and competing treatments;
our ability to take advantage of the 505(b)(2) regulatory pathway and obtain regulatory marketing exclusivity for our products under the Hatch-Waxman Act;
our ability to create, pursue, obtain, protect and enforce our intellectual property rights with respect to AMZEEQ, FMX103 or our other product candidates;
the prevalence and severity of signs and symptoms associated with AMZEEQ, FMX103 and our other product candidates;
our ability to bring an action timely for patent infringement arising out of the filing of ANDAs by generic companies seeking approval to market generic versions of our products before the expiry of our patents;
our ability to bring an action timely for patent infringement arising out of the filing of 505(b)(2) applications by companies seeking approval to market products before expiry of our patents; and
our ability to avoid third party claims of patent infringement or intellectual property violations.
If we fail to achieve these objectives or to overcome the challenges presented above, many of which are beyond our control, in a timely manner, we could experience significant delays or an inability to successfully commercialize AMZEEQ or our product candidates. Accordingly, we may not be able to generate sufficient revenues through the sale of FMX101AMZEEQ, FMX103 or our other product candidates to enable us to continue our business.
We may encounter delays in completing clinical trials for FMX101, FMX103 and our other product candidates and may even be prevented from commencing such trials due to factors that are largely beyond our control.
We have in the past and may in the future experience delays in completing our ongoing clinical trials and in commencing future clinical trials. We have already experienced significant delays in our Phase III clinical program for FMX101 for acne,AMZEEQ, first due to quality control issues with certain active ingredients supplied to us by a third party and more recently due to insufficient results in one of the co-primary endpoints, namely IGA treatment success, in one of the two initial Phase III trials. We have also experienced a delay in ourtrials, after which we conducted an additional Phase IIIII clinical trial with FMX102 for impetigo that took place in Israel, due to our difficulty in enrolling a sufficient number of pediatric patients with the necessary severity of the disease to participate in the trial. Such difficulties may arise again in future trials for other indications and for our other product candidates.
We rely on contractclinical research organizations, or CROs, and clinical trial sites to ensure the proper and timely conduct of our clinical trials. While we have agreements governing the committed activities of our CROs, we have limited influence over their actual performance. A failure of one or more of our clinical trials can occur at any time during the clinical trial process. Clinical trials can be delayed or aborted for a variety of other reasons, including delay or failure to:
| · | obtain regulatory approval to commence a trial; |
obtain regulatory approval to commence a trial;
| · | reach agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which may be subject to extensive negotiation and vary significantly among different CROs and trial sites; |
reach agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which may be subject to extensive negotiation and vary significantly among different CROs and trial sites;
| · | obtain institutional review board, or IRB, approval at each site; |
obtain IRB approval at each site;
| · | enlist suitable patients to participate in a trial; |
enlist suitable patients to participate in a trial;
| · | have patients complete a trial or return for post-treatment follow-up; |
have patients complete a trial or return for post-treatment follow-up;
| · | ensure clinical sites observe trial protocol or continue to participate in a trial; |
ensure clinical sites observe trial protocol or continue to participate in a trial;
| · | address any patient safety concerns that arise during the course of a trial; |
address any patient safety concerns that arise during the course of a trial;
| · | address any conflicts with new or existing laws or regulations; |
address any conflicts with new or existing laws or regulations;
| · | add a sufficient number of clinical trial sites; or |
add a sufficient number of clinical trial sites; or
| · | manufacture sufficient quantities of the product candidate for use in clinical trials. |
manufacture sufficient quantities of the product candidate for use in clinical trials.
Patient enrollment is also a significant factor in the timing of clinical trials and is affected by many factors, including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to available alternatives, including any new drugs or treatments that may be approved for the indications we are investigating.
We may also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted, by the trial’s data safety monitoring board, by the FDA or by the applicable foreign regulatory authorities.FDA. Such authorities may suspend or terminate one or more of our clinical trials due to a number of factors, including our failure to conduct the clinical trial in accordance with relevant regulatory requirements or clinical protocols, inspection of the clinical trial operations or trial site by the FDA or foreign regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.
If we experience delays in carrying out or completing any clinical trial of our product candidates, the commercial prospects of our product candidates may be harmed, and our ability to generate product revenues from any of these product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may significantly harm our business and financial condition. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.
FMX101,AMZEEQ and FMX103 and other product candidates may produce undesirable side effects that we may not have detected in our Phase II clinical trials or initial Phase III trials. This could prevent us from gaining marketing approval or market acceptance for thisAMZEEQ or marketing approval for our product candidate,candidates, or from maintaining such approvalacceptance and acceptance,approval, and could substantially increase commercialization costs and even force us to cease operations.
FMX101To date, AMZEEQ and FMX103 have so farnot been shown in Phase I and Phase II to have noassociated with drug-related systemic side effects and only a few cases of mild and temporary skin reactions have been reported, most of which disappeared on their own within 12 weeks from the beginning of the treatment. FMX101 has further demonstrated thisAMZEEQ and FMX103 have both been observed to have a generally favorable safety profile, in its initial Phase III trialswith the most commonly reported adverse events related to upper respiratory tract infections, and extended open-label safety study.there were no treatment-related serious adverse events reported. Nonetheless, in further Phase III clinical trials, which involve large patient populations, and upon commercialization of FMX101,AMZEEQ, and, if approved, FMX103 or other product candidates, if approved, the clinical exposure of the drugs will be significantly expanded to a wider and more diverse group of patients than those participating in the clinical trials, which may reveal undesirable side effects caused by these products that were not previously observed or reported in the current clinical trials.
The FDA and foreign regulatory agency regulations require that we report certain information about adverse medical events if our products may have caused or contributed to those adverse events. The timing of our obligation to report would be triggered by the date on which we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events we become aware of within the prescribed timeframe. We may also fail to appreciate that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of our products. If we fail to comply with our reporting obligations, the FDA or a foreign regulatory agency could take action including criminal prosecution, the imposition of civil monetary penalties or seizure of our products.
Additionally, in the event we discover the existence of adverse medical events or side effects caused by AMZEEQ or one of our product candidates, a number of other potentially significant negative consequences could result, including:
| · | the FDA or foreign regulatory authorities may suspend or withdraw their approval of the product; |
sales of the product may be more modest than originally anticipated;
| · | the FDA or foreign regulatory authorities may require the addition of labeling statements, such as warnings or contraindications or distribution and use restrictions; |
the FDA may suspend or withdraw its approval of the product;
| · | the FDA or foreign regulatory authorities may require us to issue specific communications to healthcare professionals, such as letters alerting them to new safety information about our product, changes in dosage or other important information; |
the FDA may require the addition of labeling statements, such as warnings or contraindications or distribution and use restrictions;
| · | the FDA or foreign regulatory authorities may issue negative publicity regarding the affected product, including safety communications; |
the FDA may require us to issue specific communications to healthcare professionals, such as letters alerting them to new safety information about our product, changes in usage or other important information;
| · | we may be limited with respect to the safety-related claims that we can make in our marketing or promotional materials; |
the FDA may issue negative publicity regarding the affected product, including safety communications;
| · | we may be required to change the way the product is administered, conduct additional preclinical studies or clinical trials or restrict or cease the distribution or use of the product; and |
we may be limited with respect to the safety-related claims that we can make in our marketing or promotional materials;
| · | we could be sued and held liable for harm caused to patients. |
we may be required to change the way the product is administered, conduct additional preclinical studies or clinical trials or restrict or cease the distribution or use of the product;
perception of our products by physicians and patients may be adversely affected; and
we could be sued and held liable for harm caused to patients.
Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or product candidate and could substantially increase commercialization costs or even force us to cease operations.
Even if FMX101, FMX103 or our other product candidates receive marketing approval, we may continue to face future developmental and regulatory difficulties. In addition, we are subject to government regulations and we may experience delays in obtaining required regulatory approvals to market our proposed product candidates.
Even if we complete clinical testing and receive approval of any regulatory filing for FMX101, FMX103 or any of our other product candidates, the FDA or applicable foreign regulatory agency may grant approval contingent on the performance of additional costly post-approval clinical trials risk mitigation requirements and surveillance requirementsor REMS to monitor the safety or efficacy of the product, which could negatively impact us by reducing revenues or increasing expenses, and cause the approved product candidate not to be commercially viable. Absence of long-term safety data may further limit the approved uses of our products, if any.
The FDA or applicable foreign regulatory agency may also approve FMX101, FMX103 or any of our other product candidates for a more limited indication or a narrower patient population than we originally requested, or may not approve the labeling that we believe is necessary or desirable for the successful commercialization of our product candidates. Furthermore, any such approved product, including AMZEEQ, will remain subject to extensive regulatory requirements, including requirements relating to manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion, distribution and recordkeeping.
If we fail to comply with the regulatory requirements of the FDA, or other applicable foreign regulatory authorities, orif we discover previously unknown problems with any approved commercial products, manufacturers or manufacturing processes, are discovered, we could be subject to administrative or judicially imposed sanctions or other setbacks, which could require us to take corrective actions, including the following:to:
| · | suspend or impose restrictions on operations, including costly new manufacturing requirements; |
suspend or impose restrictions on operations, including costly new manufacturing requirements;
| · | refuse to approve pending applications or supplements to applications; |
refuse to approve pending applications or supplements to applications;
| · | suspend any ongoing clinical trials; |
suspend any ongoing clinical trials;
| · | suspend or withdraw marketing approval; |
suspend or withdraw marketing approval;
| · | seek an injunction or impose civil or criminal penalties or monetary fines; |
seek an injunction or impose civil or criminal penalties or monetary fines;
| · | seize or detain products; |
seize or detain products;
| · | ban or restrict imports and exports; |
ban or restrict imports and exports;
| · | issue warning letters or untitled letters; |
issue warning letters or untitled letters;
| · | suspend or impose restrictions on operations, including costly new manufacturing requirements; or |
suspend or impose restrictions on operations, including costly new manufacturing requirements; or
| · | refuse to approve pending applications or supplements to applications. |
refuse to approve pending applications or supplements to applications.
In addition, various aspects of our operations are subject to federal, state or local laws, rules and regulations, any of which may change from time to time. Costs arising out of any regulatory developments could be time-consuming and expensive and could divert management resources and attention and, consequently, could adversely affect our business operations and financial performance. Even if FMX101, FMX103 or our other product candidates receive regulatory approval, they may fail to achieve the broad degree of physician adoption and use and market acceptance necessary for commercial success.
Even if we obtain FDA or foreign regulatory approvals for FMX101, FMX103 or any of our other product candidates, the commercial success of such products will depend significantly on their broad adoption and use by dermatologists, pediatricians and other physicians for approved indications, including, in the case of FMX101 and FMX103, for the treatment of moderate-to-severe acne, moderate-to-sever rosacea and other therapeutic indications that we may seek to pursue.
Moreover, if the treatment of acne with FMX101 or rosacea with FMX103 is deemed to be an elective procedure, the cost of which is borne by the patient, it will not be reimbursable through government or private health insurance.
The degree and rate of physician and patient adoption of FMX101, FMX103 and any of our other product candidates, if approved, will depend on a number of factors, including:
| · | the clinical indications for which the product is approved; |
| · | the safety and efficacy of our product as compared to existing therapies for those indications; |
| · | the prevalence and severity of adverse side effects; |
| · | patient satisfaction with the results and administration of our product and overall treatment experience, including relative convenience, ease of use and avoidance of, or reduction in, adverse side effects; |
| · | patient demand for the treatment of moderate-to-severe acne and rosacea or other indications; |
| · | overcoming biases of physicians and patients towards topical treatments for moderate-to-severe acne, rosacea or other indications and their willingness to adopt new therapies for these indications; |
| · | the cost of treatment in relation to alternative treatments, the extent to which these costs are reimbursed by third party payors, and patients’ willingness to pay for our products; |
| · | proper training and administration of our products by dermatologists, pediatricians and medical staff; |
| · | the revenues and profitability that our products will offer physicians as compared to alternative therapies; and |
| · | the effectiveness of our sales and marketing efforts, especially the success of any targeted marketing efforts directed toward dermatologists, pediatricians, other physicians, clinics and any direct-to-consumer marketing efforts we may initiate. |
We may decide not to continue developing or commercializing any of our product candidates at any time during development or of any of our products after approval, which would reduce or eliminate our potential return on investment for those product candidates.candidates or products.
We have in the past and may again in the future decide to discontinue the development of any of our product candidates in our pipeline or not to continue to commercialize any approved product. We may discontinue development of ourother product candidates for a variety of reasons, such as the appearance of new technologies that make our product less commercially viable, an increase in competition from generic or other competing products, changes in or failure to comply with applicable regulatory requirements, the discovery of unforeseen side effects during clinical development or after the approved product has been marketed or the occurrence of adverse events at a rate or severity level that is greater than experienced in prior clinical trials. If we discontinue a program in which we have invested significant resources, such as our decision to discontinue further in-house development of FMX102 for the treatment of impetigo and FDX104 for the treatment of chemotherapy induced rash, we will not receive anya limited return on our investment and we will have missed the opportunity to have allocated those resources to other product candidates in our pipeline that may have had potentially more productive uses. If FMX101, FMX103 or any of our other product candidates are approved for use but fail to achieve the broad degree of physician adoption and market acceptance necessary for commercial success, our operating results and financial condition will be adversely affected.
Our ability to market FMX101 and FMX103, if approved, may be limited to use for the treatment of moderate-to-severe acne or moderate-to-severe rosacea, respectively, in the U.S., and if we want to expand the indications for which we may market FMX101 or the territories in which we may market these products, we will need to obtain additional regulatory approvals, which may not be granted.
We plan to seek regulatory approval in the U.S. for FMX101 and FMX103 for the treatment of moderate-to-severe acne and moderate-to-severe rosacea, respectively, in the U.S. If FMX101 is approved, the FDA will likely restrict our ability to market or advertise FMX101 and FMX103 for other indications, which could limit physician and patient adoption. We may seek to promote and commercialize our products, FMX101 and FMX103, in Europe as well, by applying for marketing approval from the European Medicines Agency, or EMA, or in other jurisdictions, or we may develop new or additional uses or protocols for FMX101 or FMX103 in the future, but we may not receive the clearances required to do so. If we proceeded to submit for marketing approval in Europe we would likely be required to conduct additional clinical trials or studies to support approvals for such additional jurisdictions or indications, which would be time consuming and expensive, and may produce results that do not support regulatory approvals.
Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The marketing approval process in other countries may include all of the risks detailed above regarding FDA approval in the U.S. as well as other risks. In particular, in many countries outside the U.S., it is required that a product receives pricing and reimbursement approval before the product can be commercialized. This can result in substantial delays in such countries. In other countries, product approval depends on showing superiority to an approved alternative therapy. This may lead to conducting complex clinical trials that require additional significant resources.
None of our products are currently approved for sale in any jurisdiction, including the U.S. or any international markets. If we fail to comply with regulatory requirements in the U.S. or any international market we decide to enter, or to obtain and maintain required approvals, or if regulatory approvals in the U.S. or the relevant international markets are delayed, our target market will be reduced and our ability to realize the full market potential of our products will be harmed.
Marketing approval in one jurisdiction does not ensure marketing approval in another, but a failure or delay in obtaining marketing approval in one jurisdiction may have a negative effect on the regulatory process in others. Failure to obtain a marketing approval in other countries or any delay or setback in obtaining such approval would impair our ability to develop foreign markets for FMX101 and FMX103. This would reduce our target market and limit the full commercial potential of FMX101 and FMX103.
If we are not successful in developing, acquiring regulatory approval for and commercializing additional product candidates beyond FMX101AMZEEQ or FMX103, our ability to expand our business and achieve our strategic objectives will be impaired.
Although we will devote a substantial portion of our resources on the continued clinical testingcommercialization of AMZEEQ and on the potential approval of FMX101 for the treatment of moderate-to-severe acne and FMX103 for the treatment of moderate-to-severe rosacea, another key element of our strategy is to discover, develop and commercialize a portfolio of products based on our proprietary foam or other topical platforms to serve additional dermatology indications and therapeutic markets. We are seeking to do so through our internal research programs, but our resources are limited, and those that we haveour current programs are primarily geared towards clinical testingcommercializing AMZEEQ and seeking regulatory approval for FMX101 and FMX103. We may also explore strategic collaborations for the development or acquisition of new products and product candidates, but we may not be successful in entering into such relationships. While we have completed two initial Phase III clinical trialsreceived FDA approval for AMZEEQ and commenced a third Phase III clinical trial for our lead product candidate, FMX101 for the treatment of moderate-to-severe acne, and have commenced two Phase III clinical trialsNDA for FMX103 for the treatment of rosacea has been accepted by the FDA, all of our other potential product candidates remain in earlier stages of development. Research programs to identify product candidates require substantial technical, financial and human resources, regardless of whether any product candidates are ultimately identified. Our research programs may initially show promise in identifying potential product candidates, yet may fail to yield product candidates for clinical development for many reasons, including:
| · | the research methodology used may not be successful in identifying potential product candidates; |
the research methodology used may not be successful in identifying potential product candidates; | · | competitors may develop alternatives that render our product candidates obsolete or less attractive; |
| · | product candidates we develop may nevertheless be covered by third parties’ patents or other proprietary rights; |
| · | a product candidate may in a subsequent trial be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria; |
| · | a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all; |
| · | a product candidate may not be accepted as safe and effective by patients, the medical community or third party payors, if applicable; |
| · | intellectual property rights, such as patents, which are necessary to protect our interests in a product candidate, may be difficult to obtain or unobtainable; |
| · | intellectual property rights, such as patents, may fail to provide adequate protection, may be challenged and one or more claims may be revoked or the patent may be held to be invalid; and |
| · | intellectual property rights of third parties may potentially block our entry into certain markets, or make such entry economically impracticable. |
Ifcompetitors may develop alternatives that render our product candidates obsolete or less attractive;
product candidates we develop may nevertheless be covered by third parties’ patents or other proprietary rights;
a product candidate may in a subsequent trial be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria;
a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all;
a product candidate may not be accepted as safe and effective by patients, the medical community or third party payors, if applicable;
creation of intellectual property rights, such as patents, which are necessary to protect our interests in a product candidate, can be challenging in relation to pharmaceutical formulations and their uses with known active pharmaceutical ingredients and generally used combinations of inactive ingredients approved by the FDA;
intellectual property rights, such as patents, which are necessary to protect our interests in a product candidate, may be difficult to obtain or unobtainable or if obtained may be difficult to enforce or unenforceable;
intellectual property rights, such as patents, may fail to develop and successfully commercialize other product candidates, our business and future prospectsprovide adequate protection, may be harmedchallenged and one or more claims may be revoked or the patent may be held to be invalid; and
intellectual property rights of third parties may potentially block our business will be more vulnerable to any problems that we encounter in developingentry into certain markets, or make such entry economically impracticable.
AMZEEQ and, commercializing FMX101 and FMX103. Our product candidates, if approved, FMX103 will face significant competition and our failure to compete effectively may prevent us from achieving significant market penetration and expansion.
If we receive marketing approval, the expectedThe approved indication of FMX101 will beAMZEEQ is to treat inflammatory lesions of non-nodular moderate-to-severe acne in patients 9 years of age and older, and the expected indication of FMX103 will beis to treat moderate-to-severe rosacea.papulopustular rosacea in adults. The facial aesthetic market in general, and the market for acne treatments in particular, is highly competitive and dynamic, and is characterized by rapid and substantial technological development and product innovations. FMX101, if approved, may faceAMZEEQ faces significant competition from other acne products, including oral drugs such as Seysara, Solodyn, Doryx, Dynacin, Acticlate and Minocin, and topical anti-acne drugs such as Aklief, Acanya, Ziana, Epiduo, Benzaclin, Aczone and Differin. FMX103, if approved, may face significant competition from other rosacea products, including oral drugs such as Oracea®, and topical anti-rosacea drugs such as Metrogel, Soolantra and Finacea, all of which have been approved for marketing and are currently available to consumers. IfAMZEEQ and, if approved, FMX101 and FMX103 may also compete with non-prescription anti-acne and rosacea products and unapproved and off-label treatments.
There are also several potential competing products currently under development. One of such potential competing products is a new topical gel suspension containing minocycline non-hydrochloride for the treatment of inflammatory skin disease, including acne and rosacea, developed by Hovione, a manufacturer of active pharmaceutical ingredients and drug product intermediates, which product is currently undergoing acandidate has recently completed Phase II clinical trialtrials for the treatment of moderate-to-severe papulopustular rosacea.rosacea and has obtained FDA input for the design of a planned Phase III clinical trial. Another such potential competing product is a topical hydrophilic gel containing minocycline hydrochloride for the treatment of acne, known as BPX-01, developed by BioPharmX Corporation, for which BioPharmX has completed Phase IIa and Phase IIb clinical trials and has obtained FDA approvalinput for the design of a planned Phase III clinical trial. BioPharmX has also announced interimpositive results for its Phase IIb study for a topical minocycline gel named BPX-04 for the treatment of a feasibility study with BPX-01rosacea. In addition, Sol-Gel is developing topical drugs containing microencapsulated benzoyl peroxide for the treatment of rosacea later renamed BPX-04.and acne vulgaris and intends to submit an NDA for each candidate in 2020. If ultimately approved and launched in the U.S., these products would become direct competitors to FMX101AMZEEQ and FMX103.
To compete successfully in the acne and rosacea treatment markets, we will have to continue to demonstrate that FMX101AMZEEQ is safe and effective for the treatment of moderate-to-severe acne and to demonstrate that FMX103 is safe and effective for the treatment of moderate-to-severe rosacea, and that they do not infringe the intellectual property rights of any third parties. Competing in the acne and rosacea markets could result in price-cutting, reduced profit margins and loss of market share, any of which would harm our business, financial condition and results of operations.
Due to less stringent regulatory requirements, there are many more acne products and procedures available for use in international markets than are approved for use in the U.S.United States. There are also fewer limitations on the claims that our competitors in international markets can make about the effectiveness of their products and the manner in which they can market them. As a result, if we partner with other companies in these markets and launch our products, we may face more competition in these markets than in the U.S.United States.
In addition, even if we are able to commercialize our product candidates, we may not be able to price themAMZEEQ or, if approved, FMX103, competitively with current standard of care products or their price may drop considerably due to factors outside our control. If this happens or the price of materials and manufacture increases dramatically, our ability to continue to operate our business would be materially harmed and we may be unable to commercialize FMX101AMZEEQ or FMX103 successfully. Other pharmaceutical companies may develop competing products for acne, rosacea and other indications we are pursuing and enter the market ahead of us.
Other pharmaceutical companies are engaged in developing, patenting, manufacturing and marketing healthcare products that compete with those that we are developing. These potential competitors include large and experienced companies that enjoy significant competitive advantages over us, such as greater financial, research and development, manufacturing, personnel and marketing resources, greater brand recognition and more experience and expertise in obtaining marketing approvals from the FDA and foreign regulatory authorities.
Several of these potential competitors are privately-owned companies that are not bound by public disclosure requirements and closely guard their development plans, marketing strategies and other trade secrets. Publicly-traded pharmaceutical companies are also able to maintain a certain degree of confidentiality over their pipeline developments and other sensitive information. As a result, we do not know whether these potential competitors are already developing, or plan to develop, foam-based or other topical treatments for acne, rosacea, impetigo or other indications we are pursuing, and we will likely be unable to ascertain whether such activities are underway in the future. These potential Potential competitors may therefore introduce competing products withoutchallenge, narrow, invalidate or seek to design around the claims of our prior knowledgegranted patents or our patent applications, and withoutsuch patents and patent applications may fail to provide adequate protection for our ability to take preemptive measures in anticipation of their commercial launch.
In this regard we became aware at the end of 2014 that an active pharmaceutical ingredient and drug product intermediate manufacturer, Hovione, has submitted an IND for Phase I and II clinical trials of a new topical product containing minocycline for the treatment of inflammatory skin disease including acne and rosacea. Hovione is a privately-held company and we do not know if they have commenced a clinical trial for such new topical minocycline product. Hovione also currently manufactures and supplies Foamix with pharmaceutical-grade minocycline for use in FMX101, FMX103 and other products. Although we have not experienced unique difficulties in procuring minocycline from Hovione, we could experience such difficulties in the future. During 2015 we became aware that another company, BioPharmX Corporation (NYSE MKT: BPMX), is developing a topical hydrophilic gel containing minocycline for the treatment of acne, known as BPX-01, for which BioPharmX has announced Phase IIa clinical trial results. If ultimately approved and commercialized in the U.S., such products would become direct competitors of FMX101, FMX103 and other potential pipeline products.
candidates. Furthermore, such potential competitors may enter the market before us, and their products may be designed to circumvent our granted patents and pending patent applications. Potential competitors may also challenge, narrow, invalidate or seek to design around our granted patents or our patent applications, and such patents and patent applications may fail to provide adequate protection for our product candidates. We have agreements with third party licensees to develop new product candidates for them utilizing our foam technology, and our ability to benefit from such product candidates could be impaired or delayed if our licensees’ efforts to develop and commercialize these product candidates are unsuccessful.
In parallel to our core business focused on the development of FMX101, FMX103 and other product candidates, we are pursuing development and license agreements with various pharmaceutical companies for the development and commercialization of product candidates that combine our proprietary technology with the licensees’ drugs for the treatment of various indications. These license agreements generally provide rights to the licensees for a single active pharmaceutical ingredient, and grant the licensee exclusivity in the development and commercialization of the specific licensed product candidates incorporating such active pharmaceutical ingredient. Our entitlement to contingent payments and royalties from such potential product candidates is therefore dependent upon the licensees’ performance of their responsibilities and their continued cooperation in developing and commercializing the potential product candidates.
Our licensees may not cooperate with us or perform their obligations under our agreements with them. Furthermore, the obligations of the licensees under such agreements are, for the most part, limited to ‘commercially reasonable efforts,’ and they do not face penalties or other repercussions for failing to develop or commercialize the relevant product candidates within the designated timetable other than potentially forfeiting their rights to the relevant product candidate and assigning such rights to us. However, there is no guarantee that we will be able to develop, manufacture or commercialize successfully any such product candidate assigned to us. We cannot control the scope or timing of the resources that will be devoted by our licensees to performing their responsibilities under our agreements with them. Our licensees may choose to pursue alternative technologies in preference to those being developed with us. Several of these agreements may also be terminated for convenience by the licensee. The development and commercialization of these licensed product candidates as well as the anticipated contingent payments and royalties we hope to generate from them will be delayed or never obtained if the licensees fail to conduct their responsibilities in a timely manner or in accordance with applicable regulatory requirements, or if they breach their agreements with us. Disputes with our licensees could also impair our reputation or result in development delays, decreased revenues and litigation expenses.
We have granted several of our licensees the right to commercialize the licensed products for any indication, including acne and rosacea, which may allow them to compete against us using our own technology.
The licenses we granted to several of our licensees, with whom we are developing certain topical products based on our technology and the licensees’ proprietary drugs, allow them to commercialize the developed products for any topical application, and not only for the specific indication for which each product was originally intended. If any such licensed products prove to be effective for moderate-to-severe acne, rosacea or any other indication that we are pursuing with FMX101, FMX103 or other product candidates, we may face competition from these licensed products, as the licensees are not bound by any non-compete restrictions.
Healthcare reforms by governmental authorities and related reductions in pharmaceutical pricing, reimbursement and coverage by third-partythird party payors may adversely affect our business. We expect the healthcare industry to face increased limitations on reimbursement, rebates and other payments as a result of healthcare reform, which could adversely affect third-partythird party coverage of our products and how much or under what circumstances healthcare providers will prescribe or administer our products, if approved.
In both the U.S.United States and other countries, sales of our products, if approved for marketing, will depend in part upon the availability ofcoverage and adequate reimbursement from third-partythird party payors, which include governmental authorities, managed care organizations and other private health insurers. Third-partyThird party payors are increasingly challenging the price and examining the cost effectiveness of medical products and services.
Increasing expenditures for healthcare have been the subject of considerable public attention in the U.S.United States. Both private and government entities are seeking ways to reduce or contain healthcare costs. Numerous proposals that would effect changes in the U.S. healthcare system have been introduced or proposed in Congress and in some state legislatures, including reducing reimbursement for prescription products and reducing the levels at which consumers and healthcare providers are reimbursed for purchases of pharmaceutical products.
Cost reduction initiatives and changes in coverage implemented through legislation or regulation could decrease utilization of and reimbursement for any approved products, which in turn would affect the price we can receive for those products. Any reduction in reimbursement that results from federal legislation or regulation may also result in a similar reduction in payments from private payors, as private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Significant developments that may adversely affect pricing in the U.S.United States include the enactment of federal healthcare reform laws and regulations, including the ACA and the Medicare Prescription Drug Improvement and Modernization Act of 2003. Changes toin the healthcare system enacted as part of healthcare reform in the U.S.,United States, as well as the increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, may result in increased pricing pressure by influencing, for instance, the reimbursement policies of third-partythird party payors. While healthcare reform legislation may have increased the number of patients who are expected to have insurance coverage for our product candidates, provisions such as the assessment of a branded pharmaceutical manufacturer fee and an increase in the amount of rebates that manufacturers pay for coverage of their drugs by Medicaid programs may have an adverse effect on us. It is uncertain how current and future reforms in these areas will influence the future of our business operations and financial condition.
In 2017, a new administration, which had promised20
Since its enactment, there have been judicial, Congressional and political challenges to certain aspects of the ACA. For example, President Trump signed two Executive Orders and other directives designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, two bills affecting the implementation of certain taxes under the ACA took officehave been signed into law. In July 2018, CMS published a final rule permitting further collections and payments to and from certain ACA qualified health plans and health insurance issuers under the ACA risk adjustment program in response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment. On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas ruled that the individual mandate is a critical and inseverable feature of the ACA, and because it was repealed as part of the Tax Act, the remaining provisions of the ACA are invalid as well. On December 18, 2019, the Fifth Circuit U.S. Court of Appeals held that the individual mandate is unconstitutional and remanded the case to the lower court to reconsider its earlier invalidation of the full ACA. On January 3, 2020, the U.S. House of Representatives filed a petition for a writ of certiorari with the U.S. Supreme Court. Pending review, the ACA remains in effect, but it is unclear at this time what effect the latest ruling and petition will have on the status of the ACA. Although we cannot predict the form of any such replacement of the ACA may take, if any, or the full effect on our business of the enactment of additional legislation pursuant to healthcare and other legislative reform, we believe that legislation or regulations that would reduce reimbursement for, or restrict coverage of, our products could adversely affect how much or under what circumstances healthcare providers will prescribe or administer our products. This could materially and adversely affect our business by reducing our ability to generate revenues, raise capital, obtain additional licensees and market our products. In addition, we believe the increasing emphasis on managed care in the U.S.United States has and will continue to put pressure on the price and usage of pharmaceutical products, which may adversely impact product sales.
Recently there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several U.S. Congressional inquiries and proposed federal legislation designed to, among other things, bring more transparency to product pricing, reduce the cost of certain products under Medicare, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies. At the state level, individual states in the United States are also increasingly passing legislation and implementing regulations designed to control product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures.
It is likely that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for a pharmaceutical manufacturer’s products or additional pricing pressure.
It will be difficult for us to profitably sell FMX101,AMZEEQ, FMX103 or our other product candidates if reimbursement for these products is limited by government authorities and third-party payor policies.
In addition to any healthcare reform measures which may affect reimbursement, market acceptance and sales of FMX101,AMZEEQ, and, if approved, FMX103 and our other product candidates if approved, will depend on the reimbursement policies of government authorities and third-partythird party payors. Government authorities and third-partythird party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for, and establish reimbursement levels.
A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and these third-partythird party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. We cannot be sure that reimbursement will be available for FMX101AMZEEQ or FMX103, or, if reimbursement is available, the level of reimbursement.
Reimbursement may impact the demand for, or the price of, any product for which we obtain marketing approval. In addition, third-party payors are likely to impose strict requirements for reimbursement in order to limit off-label use of a higher priced drug. Reimbursement by a third-party payor may depend upon a number of factors including the third-party payor’s determination that use of a product is:
| · | a covered benefit under its health plan; |
a covered benefit under its health plan;
| · | safe, effective and medically necessary; |
safe, effective and medically necessary;
| · | appropriate for the specific patient; |
appropriate for the specific patient;
| · | neither experimental nor investigational. |
neither experimental nor investigational.
Obtaining coverage and reimbursement approval for a product from a government or other third-party payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical and cost effectiveness data for the use of our products to the payor. We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. We cannot be sure that coverage or adequate reimbursement will be available for our product candidates, if approved. Also, we cannot be sure that reimbursement amounts will not reduce the demand for, or the price of, our future products. If reimbursement is not available, or is available only to limited levels, we may not be able to commercialize our product candidates, profitably or at all, even if approved.
Legislative or regulatory healthcare reforms in the U.S.United States may make it more difficult and costly for us to obtain regulatory clearance or approval of our product candidates and to produce, market, and distribute our products after clearance or approval is obtained.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory clearance or approval, manufacture, and marketing of regulated products or the reimbursement thereof. In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of FMX101, FMX103 or any of our other product candidates. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things,inter alia, require:
| · | changes to manufacturing methods; |
changes to manufacturing methods;
| · | recall, replacement, or discontinuance of one or more of our products; and |
recall, replacement, or discontinuance of one or more of our products; and
| · | additional recordkeeping. |
additional recordkeeping.
Each of these would likely entail substantial time and cost and could materially harmadversely affect our business and our financial results.
We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development, other operations or commercialization efforts.
We anticipate that we will continue to expend substantial resources for the foreseeable future for the clinical developmentcommercialization of AMZEEQ and regulatory approval for FMX101,pre-commercialization efforts related to FMX103. We also wish to continue the development of other indications and product candidates. However, we may not have sufficient funds to carry out and complete all of these plans and may need to raise additional funds for such purposes.
These expenditures will include costs associated with research and development, conducting preclinical studies and clinical trials, and manufacturing and supply, as well as marketing and selling any products approved for sale. In addition, other unanticipated costs may arise. Because of the outcome of any clinical trial is highly uncertain,numerous risks and uncertainties associated with product development and commercialization, we cannot reasonablyare unable to reliably estimate the actual amounts necessary to successfully complete the development and commercialization of any of our product candidates. WeBased on our current plans, we believe that the net proceeds from our initialexisting cash and follow-on public offeringsinvestments will allow usbe sufficient to fund our operating expenses and capital expenditure requirements throughoutinto the Phase III clinical trials for our lead product candidate, FMX101, for which we expect to announce top-line results in the thirdsecond quarter of 2018 and to complete by the end of 2018. Such proceeds should also fund our Phase III clinical program for FMX103, for which we expect to announce top-line results by the end of the third quarter or in the beginning of the fourth quarter of 2018 and to complete in 2019.2021. However, our operating plan may change as a result of many factors currently unknown to us, as recently exhibited by our need to commence a third pivotal Phase III clinical trial for FMX101 due to inconclusive results in the co-primary endpoint of IGA treatment success in one of the two initial trials.us. We may therefore need to seek additional capital sooner than planned, through public or private equity or debt financings or other sources, such as strategic collaborations or additional license arrangements. Such financings may result in dilution to shareholders, imposition of debt covenants and repayment obligations or other restrictions that may affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans.
Our future capital requirements depend on many factors, including:
| · | the results of the clinical trials of our products candidates; |
the cost of commercialization activities for AMZEEQ, FMX103 or any of our other product candidates approved for sale, including marketing, sales and distribution costs;
| · | the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates; |
the degree and rate of market acceptance of AMZEEQ and any future approved products;
| · | the number and characteristics of any additional product candidates we develop or acquire; |
the emergence, approval, availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing products or treatments;
| · | the scope, progress, results and costs of researching and developing our product candidates, and conducting preclinical and clinical trials; |
the results of the clinical trials of our product candidates;
| · | the cost of commercialization activities if any of our product candidates are approved for sale, including marketing, sales and distribution costs; |
the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates;
| · | the cost of manufacturing our product candidates and any products we successfully commercialize and maintaining our related facilities; |
the number and characteristics of any additional product candidates we develop or acquire;
| · | our ability to establish and maintain strategic collaborations, licensing or other arrangements and the terms of and timing of such arrangements; |
22 | · | the degree and rate of market acceptance of any future approved products; |
| · | the emergence, approval, availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing products or treatments; |
the scope, progress, results and costs of researching and developing our product candidates, and conducting preclinical and clinical trials;
| · | any product liability or other lawsuits related to our products; |
the cost of manufacturing our product candidates and any products we successfully commercialize, and maintaining our related facilities;
| · | the expenses needed to attract and retain skilled personnel; |
our ability to establish and maintain strategic collaborations, licensing or other arrangements and the terms of and timing of such arrangements;
| · | the costs associated with being a public company; |
any product liability or other lawsuits related to our products;
| · | the costs associated with evaluation of our product candidates; |
the expenses needed to attract and retain skilled personnel;
| · | the costs associated with evaluation of third party intellectual property; |
the costs associated with being a public company;
| · | the costs associated with obtaining and maintaining licenses; |
the costs associated with evaluation of AMZEEQ or our product candidates;
| · | the costs associated with obtaining, protecting and enforcing intellectual property, such as costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, litigation costs including the costs of litigation for patent infringement arising out of ANDA submissions by generic companies to manufacture and sell generic products and the outcome of such litigation; and |
the costs associated with evaluation of third party intellectual property;
| · | the timing, receipt and amount of sales of, or royalties on, future approved products, if any. |
the costs associated with obtaining and maintaining licenses;
the costs associated with creating, obtaining, protecting, defending and enforcing intellectual property, such as costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, litigation costs, including for patent infringement arising out of ANDA submissions by generic companies to manufacture and sell generic products or arising out of 505(2)(b) submissions, and the outcome of such litigation; and
the timing, receipt and amount of sales of, or royalties on, approved products.
Additional capital may not be available when we need it, on terms that are acceptable to us or at all. If adequate funds are not available to us on a timely basis, we may be required to:
| · | delay, limit, reduce or terminate preclinical studies, clinical trials or other development activities for FMX101, FMX103 or any of our other product candidates; |
delay, limit, reduce or terminate our establishment of manufacturing, sales and marketing or distribution capabilities or other activities that may be necessary to commercialize AMZEEQ, FMX103 or any of our other product candidates.
| · | delay, limit, reduce or terminate our research and development activities; or |
delay, limit, reduce or terminate our research and development activities; or
| · | delay, limit, reduce or terminate our establishment of manufacturing, sales and marketing or distribution capabilities or other activities that may be necessary to commercialize FMX101, FMX103 or any of our other product candidates. |
delay, limit, reduce or terminate preclinical studies, clinical trials or other development activities for our product candidates.
If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain valuable rights to our product candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. If we raise additional capital through public or private equity offerings, the ownership interest of our existing shareholders will be diluted and the terms of any new equity securities may have a preference over our ordinary shares. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt or making capital expenditures or specified financial ratios, any of which could restrict our ability to commercialize our product candidates or operate as a business.
We have a limited operating history and have incurred significant losses since our inception and we anticipate that we will continue to incur losses for the foreseeable future. We have only four product candidates that have completed any clinical trials and have no sales, which, together with our limited operating history, make it difficult to assess our future commercial viability. We are a small clinical-stage specialty pharmaceutical company with a limited operating history. Pharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We are not profitable and have incurred losses in each year since we commenced operations in 2003. We have only a limited operating history upon which you can evaluate our business and prospects. In addition, we have limited experience and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the pharmaceutical industry.near future.
To date, we have not obtained any regulatory approvals for any of our product candidates or generated any revenues from product sales relating to FMX101, FMX103 or any of our other product candidates. We have generated revenues only from service payments, and contingent payments paid towards or in the course of projects carried out under several of our development and license agreements with various pharmaceutical companies. We have also received (and continue to receive) royalty payments with respect to Finacea®, a prescription foam product that we developed in collaboration with Bayer.
We continue to incur significant research and development and other expenses related to our ongoing clinical trials and operations. We have recorded a net loss of $65.7$95.2 million, $29.3$74.2 million and $16.5$65.7 million for the twelve monthsyears ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. As of December 31, 20172019, we had an accumulated deficit of $141.3$310.6 million and had a working capital surplus of $59.3$47.1 million. We expect to continue to incur losses, for the foreseeable future, and we anticipate these losses will increase substantiallymay continue as we advance our commercialization efforts for AMZEEQ and as we continue our development of, and seek regulatory approvals for, FMX101, FMX103 and our other product candidates, and begincandidates.
We expect to commercialize such product candidates. Our abilityrely on third parties to achieve revenues and profitability is dependent on our ability to complete the developmentconduct some or all aspects of our drug product candidates, obtain necessary regulatory approvalsmanufacturing, production research and successfully manufacture, marketpreclinical and commercialize our products. Even if we achieve profitability in the future, weclinical testing, and these third parties may not be ableperform satisfactorily.
We do not expect to sustain profitability in subsequent periods. Our prior losses, combined with expected future losses, may adversely affect the market priceindependently conduct all aspects of our ordinary sharesdrug product manufacturing, production research and our ability to raise capitalpreclinical and continue operations. We currently contract with third party subcontractors and suppliers for certain compounds and components necessary to produce FMX101 and FMX103 for clinical trials and expect to continue to do so to support commercial scale production if one or more of such product candidates is approved. This increases the risk that we will not have sufficient quantities of FMX101 and FMX103 or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.
testing. We currently rely, on third party subcontractors and suppliers for certain compounds and components necessary to produce FMX101and FMX103 for our clinical trials, including minocycline and other active ingredients, excipients used in the formulation of the foam, delivery apparatus comprising canisters, valves and propellants. We expect to continue to rely, on third parties with respect to these items, including manufacturing in the commercial context.
We have arrangements in place with two suppliers for the supply of the API of AMZEEQ and FMX103, and an exclusive supply agreement with ASM, for the manufacturing and supply of our finished product of AMZEEQ. Pursuant to the agreement, ASM has agreed to manufacture and supply all of our commercial needs for the products on an exclusive basis for a period of four years, subject to certain exceptions.
Our reliance on these third parties for manufacturing, research and development activities will reduce our control over these activities but will not relieve us of our responsibility to ensure compliance with all required regulations and study protocols. For example, for products that we develop and commercialize on our own, we will remain responsible for ensuring that each of our IND-enabling studies and clinical studies are conducted in accordance with the study plan and protocols, and that our products are manufactured in accordance with cGMP as applied in the relevant jurisdictions.
If these third parties do not successfully carry out their contractual duties, meet expected deadlines, conduct our studies in accordance with regulatory requirements or other subcontractorsour stated study plans and suppliersprotocols, or manufacture our drug products in accordance with cGMP, we will not be able to complete, or may be delayed in completing, the preclinical and clinical studies and manufacturing process validation activities required to support future IND submissions and approval of our commercial requirementsproduct candidates, or to support commercialization of AMZEEQ and, if FMX101approved, FMX103 and FMX103 or any of our other product candidates is approved for marketing by the FDA or foreign regulatory authorities.candidates. Many of our agreements with these third parties contain termination provisions that allow these third parties to terminate their relationships with us upon notice. If we need to enter into alternative arrangements, our product development and commercialization activities could be delayed.
Reliance on third party subcontractors and suppliers entails a number of risks, including reliance on the third party for regulatory compliance and quality assurance, the possible breach of the manufacturing or supply agreement by the third party, the possibility that the supply is inadequate or delayed, , the risk that the third party may enter the field and seek to compete and may no longer be willing to continue supplying, and the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us. In addition, third party subcontractors and suppliers may not be able to comply with cGMP or quality system regulation or QSR, or similar regulatory requirements outside the U.S. If any of these risks transpire, we may be unable to timely retain alternate subcontractors or suppliers on acceptable terms and with sufficient quality standards and production capacity, which may disrupt and delay our clinical trials or the manufacture and commercial sale of AMZEEQ or our product candidates, if approved.approved, and may disrupt and delay our clinical trials.
We may be forced to manufacture our product ourselves, for which we may not have the capabilities or resources, or enter into an agreement with a different manufacturer, which we may not be able to do on reasonable terms, if at all. In some cases, the technical skills required to manufacture our product candidates may be unique or proprietary to the original manufacturer, and we may have difficulty or there may be contractual restrictions prohibiting us from, transferring such skills to a back-up or alternate supplier, or we may be unable to transfer such skills at all. Any of these events could lead to clinical study delays or failure to obtain marketing approval, or impact our ability to successfully commercialize our product or any future products. Some of these events could be the basis for FDA action, including injunction, recall, seizure or total or partial suspension of production.
We and our contract manufacturers are subject to significant regulation with respect to manufacturing our product and product candidates. The manufacturing facilities on which we rely may not continue to meet regulatory requirements and have limited capacity.
We and the contract manufacturers for our product and product candidates are subject to extensive regulation. Some components of a finished drug product approved for commercial sale or used in late-stage clinical studies must be manufactured in accordance with cGMP. These regulations govern manufacturing processes and procedures (including record keeping) and the implementation and operation of quality systems to control and assure the quality of investigational products and products approved for sale. Poor control of production processes can lead to the introduction of adventitious agents or other contaminants, or to inadvertent changes in the properties or stability of our product and product candidates that may not be detectable in final product testing. We or our contract manufacturers must supply all necessary documentation in support of regulatory applications on a timely basis and where required, must adhere to the FDA’s or other regulator’s good laboratory practices and cGMP regulations enforced by the FDA or other regulator through facilities inspection programs. Our failurefacilities and quality systems and the facilities and quality systems of some or all of our third-party contractors must pass a pre-approval inspection for compliance with the applicable regulations as a condition of marketing approval of our product and potential products. In addition, the regulatory authorities may, at any time, audit or inspect a manufacturing facility involved with the preparation of our products or the failureassociated quality systems for compliance with the regulations applicable to the activities being conducted. If these facilities do not pass a pre-approval plant inspection, FDA or other marketing approval of the products may not be granted.
The regulatory authorities also may, at any time following approval of a product for sale, audit the manufacturing facilities of our third party subcontractors and suppliersthird-party contractors. If any such inspection or audit identifies a failure to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect suppliesif a violation of our product candidatesspecifications or applicable regulations occurs independent of such an inspection or audit, we or the relevant regulatory authority may require remedial measures that may be costly and/or time-consuming for us or a third party to implement and that may include the temporary or permanent suspension of a clinical study or commercial sales or the temporary or permanent closure of a facility. Any such remedial measures imposed upon us or third parties with whom we may develop.contract could materially harm our business.
AlthoughIf we have not experienced unique difficulties in procuring compounds and components for FMX101, FMX103 or any of our third-party manufacturers fail to maintain regulatory compliance, the FDA or other regulators can impose regulatory sanctions including, among other things, refusal to approve a pending application for a product, candidates,or revocation of a pre-existing approval. As a result, our business, financial condition and whileresults of operations may be materially harmed.
Additionally, if supply from one approved manufacturer is interrupted, there could be a significant disruption in commercial supply. The number of manufacturers with the necessary manufacturing capabilities is limited. The regulatory agencies may also require additional studies if a new manufacturer is relied upon for commercial production. Switching manufacturers may involve substantial costs and is likely to result in a delay in our desired clinical and commercial timelines.
These factors could cause the delay of clinical studies, regulatory submissions, required approvals or commercialization of our product and any future products, cause us to incur higher costs and prevent us from commercializing our products successfully. Furthermore, if our suppliers fail to meet contractual requirements and we are actingunable to secure, additionalvalidate and obtain approval of one or more replacement suppliers for such compounds and components,capable of production at a substantially equivalent cost, our clinical studies may be delayed or we could experience such difficulties in the future.lose potential revenues.
We willexpect to rely on third parties to conduct, supervise and consultants to assist us in conductingmonitor our trialsclinical studies, and studies. Ifif these third parties or consultants will not successfully carry out their contractual duties or meet expected deadlines, weperform in an unsatisfactory manner, it may be unable to obtain regulatory approval for or commercializeharm our product candidates.business.
We do not have the ability to independently perform all aspects of our preclinical studies and clinical trials. We willalso rely on medical institutions, clinical investigators, contract laboratories, collaborative partners and other third parties, such as CROs, to assist us in conducting our Phase III clinical trials for FMX101, FMX103 and studies and clinical trials for our other product candidates. The third parties with whomWhile we contract for execution of our clinical trials play a significant role in the conduct of these trials and the subsequent collection and analysis of data. However, these third parties are not our employees, and except for contractual duties and obligations,will have agreements governing their activities, we will have limited ability toinfluence over their actual performance. We will control the amount or timing of resources that they devote to our programs. Although we rely on these third parties to conductonly certain aspects of our Phase III clinical trials and other studies and clinical trials,CROs’ activities. Nevertheless, we remainwill be responsible for ensuring that each of our clinical trials and preclinical studies is conducted in accordance with its investigational planthe applicable protocol, legal, regulatory and protocol. Moreover,scientific standards, and our reliance on the FDACROs does not relieve us of our regulatory responsibilities.
We and foreign regulatory authorities require usour CROs are required to comply with regulationsthe FDA’s and standards, commonly referred to as currentother regulatory authorities’ good clinical practices, or GCPs, for conducting, monitoring, recording and reporting the results of clinical trialsstudies to ensureassure that the data and reported results are scientifically credible and accurate, and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. We also rely on our consultants to assist us in the execution, including data collectionrights, integrity and analysis of our clinical trials. In addition, the executionconfidentiality of clinical trials and preclinicalstudy participants are protected. If we or our CROs fail to comply with applicable GCPs, the clinical data generated in our future clinical studies may be deemed unreliable and the subsequent compilationFDA and analysis of the data produced, willother regulatory authorities may require coordination among these various third parties. In order for these functionsus to be carried out effectively and efficiently, it will be imperative that these parties communicate and coordinate with one another, which may prove difficult to achieve. Moreover, these third parties may also have relationships with other commercial entities, some of which may compete with us. Our agreement with these third parties may inevitably enable them to terminate such agreements upon reasonable prior written notice under certain circumstances.perform additional clinical studies before approving any marketing applications.
If the third parties or consultants that assist us in conducting our clinical trials do not perform their contractual duties or obligations, experience work stoppages, do not meet expected deadlines, terminate their agreements with us or need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical trial protocols or GCPs, or for any other reason, we may need to conduct additional clinical trials or enter into new arrangements with alternative third parties, which could be difficult, costly or impossible, and our clinical trials may be extended, delayed or terminated or may need to be repeated. If any of the foregoing were to occur, we may not be able to obtain, or may be delayed in obtaining, regulatory approval for the product candidates being tested in such trials, and will not be able to, or may be delayed in our efforts to, successfully commercialize these product candidates.
We have no experience manufacturingSupply interruptions may disrupt our inventory levels and the availability of our products and product candidates and cause delays in obtaining regulatory approval for our product candidates at full commercial scale. Ifor harm our product candidates are approved, we intend to outsourcebusiness by reducing our manufacturing to third parties, and will face certain risks associated with such outsourcing.revenues.
We havedepend on a small-scale integrated research, developmentlimited number of manufacturing facilities to manufacture our finished products and testing facility located at our corporate headquartersproduct candidates. Numerous factors could cause interruptions in Rehovot, Israel. However, we have not equipped our facility with manufacturing capabilities other than small scalethe supply or manufacture and do not currently plan to do so. We do not have experience in manufacturing our product candidates at commercial scale, and if our product candidates are approved, we will outsource all or a significant portion of the manufacturing of our products to third parties, includingand product candidates, including:
timing, scheduling and prioritization of production by our drug substances and finished dose forms. Reliance on third parties to manufacture our products entails various risks, including the possibility of increased costs associated with the large- scale productioncontract manufacturers or a breach of our products. These risks are similar to those involvedagreements by our contract manufacturers;
changes in our current usesources for manufacturing;
the timing and delivery of subcontractorsshipments;
our failure to locate and obtain replacement suppliers for certain compounds and components necessary to produce FMX101, FMX103manufacturers as needed on a timely basis; and any other
conditions affecting the cost and availability of raw materials.
If one of our othersuppliers or manufacturers fails or refuses to supply us with necessary raw materials or finished products or product candidates as explained above. If we are unsuccessful in outsourcing our manufacturing to third parties who are compliant with regulatory requirements, we may encounter delays or additional costs in achieving our commercialization objectives, which could materially damage our business and financial position.
We currently have limited marketing capabilities and no sales organization. If we are unable to establish sales and marketing capabilities on our own or through third parties, we will be unable to successfully commercialize FMX101, FMX103 or any other of our other product candidates, if approved, or generate product revenues.
We currently have limited marketing capabilities and no sales organization. To commercialize FMX101, FMX103 or any other of our other product candidates, if approved, in the U.S. and other jurisdictions we may seek to enter, we must build our marketing, sales, distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services, and we may not be successful in doing so. If FMX101 or FMX103 receive regulatory approval, we expect to market them in the U.S. through a specialized internal sales force or a combination of our internal sales force and distributors, which will be expensive and time-consuming.
There are significant risks involved in building and managing a sales organization, including our ability to hire, retain and incentivize qualified individuals, generate sufficient sales leads, provide adequate training to sales and marketing personnel and effectively manage a geographically dispersed sales and marketing team. Any failure or delay in the development of our internal sales, marketing and distribution capabilities would adversely impact the commercialization of our product candidates.
We may choose to collaborate with third parties that have direct sales forces and established distribution systems, either to augment our own sales force and distribution systems or in lieu of our own sales force and distribution systems. If we are unable to enter into such arrangements on acceptable termstimely basis or at all, weit would take a significant amount of time and expense to qualify a new supplier or manufacturer. We may not be able to successfully commercialize FMX101, FMX103obtain active ingredients or anyfinished products from new suppliers or manufacturers on acceptable terms and at reasonable prices, or at all.
Any interruption in the supply of finished products could hinder our otherability to distribute finished products to meet commercial demand and adversely affect our financial results and financial condition.
With respect to our product candidates, production of product is necessary to perform clinical trials and successful registration batches are necessary to file for approval to commercially market and sell product candidates. Delays in obtaining clinical material or registration batches could adversely impact our clinical trials and delay regulatory approval for our product candidates. If we are not successful in commercializing FMX101, FMX103 or any of our other product candidates, either on our own or through collaborations with one or more third parties, our revenues will suffer and we will incur significant additional losses.
To establish our sales and marketing infrastructure and manufacturing capabilities, we will need to increase the size of our organization, and we may experience difficulties in managing this expansion.
As of February 1, 2018 we had 75 employees. We will need to continue to expand our managerial, operational, finance and other resources to manage our operations and clinical trials, continue our development activities and commercialize FMX101, FMX103 and any other product candidates, if approved. Our management, personnel, systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively execute our expansion strategy requires that we:
| · | manage our clinical trials effectively; |
| · | identify, recruit, retain, incentivize and integrate additional employees; |
| · | manage our internal development efforts effectively while carrying out our contractual obligations to third parties; and |
| · | continue to improve our operational, financial and management controls, reporting systems and procedures. |
Due to our limited financial resources and our limited experience in managing a company with such anticipated expansion, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage expansion could delay the execution of our development and strategic objectives, or disrupt our operations.
We currently develop our clinical drug products exclusivelyproduct candidates in oneour research and development facility located in Rehovot, Israel and may utilize this facility in the future to support commercial production if our product candidates are approved.through partnerships with external contract manufacturing organizations. If thisthese facilities or any future facility or our equipment were to be damaged or destroyed, or if we experience a significant disruption in our operations for any other reason, our ability to continue to operate our business wouldcould be materially harmed.
We currently research and develop our product candidates primarily in our laboratory located in Rehovot, Israel. Israel and through partnership with external contract manufacturing organizations. If thisthese or any future facilityfacilities were to be damaged, destroyed or otherwise unable to operate, whether due to war, acts of hostility, earthquakes, fire, floods, hurricanes, storms, tornadoes, other natural disasters, employee malfeasance, terrorist acts, power outages or otherwise, or if performance of our research and development facility is disrupted for any other reason, such an event could delay our clinical trials or, if our product candidates are approved and we choose to manufacture all or any part of them internally, jeopardize our ability to manufacture our products as promptly as our prospective customers will likely expect, or possibly at all.trials. If we experience delays in achieving our development objectives, or if we are unable to manufacture an approved product within a timeframe that meets our prospective customers’ expectations, our business, prospects, financial results and reputation could be materially harmed.
Currently, we maintain insurance coverage totaling $1.33 million againstcovering damage to our property and equipment and $5.8 million in workers compensation coverage, subject to deductibles and other limitations. If we have underestimated our insurance needs with respect to an interruption, or if an interruption is not subject to coverage under our insurance policies, we may not be able to cover our losses.
We face risks related to health epidemics and other widespread outbreaks of contagious disease, including the novel coronavirus, COVID-19, which could significantly disrupt our operations and impact our financial results.
In December 2019, an outbreak of respiratory illness caused by a strain of novel coronavirus, COVID-19, began in China. As of March 2020, that outbreak has led to numerous confirmed cases worldwide, including in the Unites States and other countries where we or our business partners conduct operations. The outbreak and government measures taken in response have also had a significant impact, both direct and indirect, on businesses and commerce. The future progression of the outbreak and its effects on our business and operations are uncertain. We are currently unaware of any disruptions to our business or any impact on our primary suppliers. In addition, we believe we have a sufficient amount of product in the trade and safety stock of our raw materials to support the current demand for AMZEEQ. However, if the outbreak of COVID-19 persists, we and our third-party contract manufacturers, contract research organizations and clinical sites may experience disruptions in supply of our product and product candidates and/or procuring items that are essential for our commercialization and research and development activities, including, for example, raw materials used in the manufacturing of our products and product candidates, medical and laboratory supplies used in our clinical trials or preclinical studies, in each case, for which there may be shortages because of ongoing efforts to address the outbreak. Any negative impact that the outbreak has on the ability of our suppliers to provide materials for our product and product candidates or on retaining patients in our clinical trials could disrupt our commercialization efforts and clinical trial activities, which could adversely affect our ability to earn revenue, obtain regulatory approval for and to commercialize our product candidates, increase our operating expenses, and have a material adverse effect on our financial results.
If product liability lawsuits are brought against us, we may incur substantial liabilities that may not be fully covered by our insurance policies and we may be required to limit commercialization of any of our other products we develop.
We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk ifas we commercialize AMZEEQ and any products.other product candidates that receive marketing approval. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products. Even a successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in: | · | decreased demand for FMX101, FMX103 or any of our other product candidates or products we develop; |
| · | injury to our reputation and significant negative media attention; |
| · | withdrawal of clinical trial participants or cancellation of clinical trials; |
| · | costs to defend the related litigation, which may be only partially recoverable even in the event of successful defense; |
| · | a diversion of management’s time and our resources; |
| · | substantial monetary awards to trial participants or patients; |
| · | regulatory investigations, product recalls, withdrawals or labeling, marketing or promotional restrictions; |
| · | the inability to commercialize any products we develop. |
Our inability to obtain and maintain sufficient product liability insurance at an acceptable cost and scope of coverage to protect against potential product liability claims could prevent or inhibit the commercialization of FMX101,decreased demand for AMZEEQ, FMX103 or any of our other product candidates or products we develop;
injury to our reputation and significant negative media attention;
withdrawal of clinical trial participants or cancellation of clinical trials;
costs to defend the related litigation, which may develop. We currently carry general third party liability insurance upbe only partially recoverable even in the event of successful defense;
a diversion of management’s time and our resources;
substantial monetary awards to an amounttrial participants or patients;
regulatory investigations, product recalls, withdrawals or labeling, marketing or promotional restrictions;
loss of $10 million per annum. revenues; and
the inability to commercialize any products we develop.
Although we maintain suchproduct liability insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions and deductibles, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts. Moreover, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses. If
Our Credit Agreement subjects us to various financial and whenother restrictive covenants. These restrictions may limit our operational or financial flexibility and could subject us to potential defaults under our Credit Agreement.
On July 29, 2019, we obtain approvalentered into a Credit Agreement and Guaranty, or the Credit Agreement, with Foamix Pharmaceuticals Inc., lenders from time to time party thereto, the subsidiary guarantors from time to time party thereto, or the Subsidiary Guarantors, and Perceptive Credit Holdings II, LP, or Perceptive, as administrative agent, that provides a senior secured (including security on our intellectual property, which for marketingexample is registered against our patents and applications at the USPTO) delayed draw term loan facility in an aggregate principal amount of oneup to $50.0 million. The Credit Agreement contains financial and other restrictive covenants that limit the ability of us, Foamix Pharmaceuticals Inc. and the Subsidiary Guarantors, among other things, to incur new indebtedness; create liens on assets; engage in certain fundamental corporate changes, such as mergers or moreacquisitions or changes to business activities; make certain investments or payments; or pay dividends. The Credit Agreement also contains certain financial covenants, including that we, Foamix Pharmaceuticals Inc. and the Subsidiary Guarantors must (1) maintain a minimum aggregate cash balance of FMX101, FMX103$2.5 million; and (2) as of the last day of each fiscal quarter commencing on the fiscal quarter ending September 30, 2020, receive revenue for the trailing 12-month period in amounts set forth in the Credit Agreement, which range from $10.5 million for the fiscal quarter ending September 30, 2020 to $109.5 million for the fiscal quarter ending June 30, 2024.
The restrictive covenants in the Credit Agreement may limit our ability to plan for or anyreact to market conditions, meet capital needs or otherwise restrict our activities or business plans and adversely affect our ability to finance our operations, enter into acquisitions or to engage in other productbusiness activities that could be in our interest. Our ability to comply with these financial covenants can be affected by events beyond our control and we may develop,not be able to do so. If we intendare unable to expandremain in compliance with the restrictive covenants of the Credit Agreement, then amounts outstanding thereunder may be accelerated and become due immediately. Any such acceleration could have a material adverse effect on our insurance coveragefinancial condition and results of operations.
Our debt obligations and any future debt obligations expose us to include their sale; however,risks that could adversely affect our business, operating results, overall financial condition and may result in further dilution to our stockholders.
The Credit Agreement has a total borrowing capacity of up to $50.0 million, of which we have utilized $35.0 million as of December 31, 2019, and we may draw down the remaining $15.0 million prior to September 30, 2020 if we meet certain revenue targets as set forth in the Credit Agreement. Our current and any future indebtedness, including under the Credit Agreement, could have an adverse impact on our business or operations. For example, it could:
limit our flexibility in commercializing AMZEEQ and the approval and marketing FMX103, as well as the development of our other pipeline product candidates;
increase our vulnerability to both general and industry-specific adverse economic conditions; and
limit our ability to obtain additional funds for working capital, capital expenditures, acquisitions, general corporate and other purposes.
Any current or future indebtedness that we incur, including under the Credit Agreement, will require us to make certain interest and principal payments. Our ability to make payments on this indebtedness depends on our ability to generate cash in the future. We expect to experience negative cash flow for the foreseeable future as we fund our operations and capital expenditures. There can be no assurance we will be in a position to repay this indebtedness when due or obtain extensions to the maturity date. In order to repay these obligations when due, we may be unablerequired to sell assets, to refinance all or a portion of such indebtedness or to obtain this liability insuranceadditional financing, including on commercially reasonable terms.terms that are not acceptable to us. If that additional financing involves the sale of equity securities or convertible securities, it would result in the issuance of additional shares of our capital stock, which would result in dilution to our shareholders.
Changes in interest rates could adversely affect our earnings and/or cash flows. Loans under the Credit Agreement are made at variable rates that use LIBOR as a benchmark for establishing the interest rate. LIBOR is the subject of recent proposals for reform. On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. These reforms may cause LIBOR to cease to exist, new methods of calculating LIBOR to be established or the establishment of an alternative reference rate(s). These consequences cannot be entirely predicted and could have an adverse impact on the market value for or value of LIBOR-linked loans that are due under the Credit Agreement. Changes in market interest rates may influence the financing costs and could reduce our earnings and cash flows.
If we fail to attract and keep senior management and key scientific and commercial personnel, we may be unable to successfully develop FMX101, FMX103 or any of our other product candidates, conduct our clinical trials and commercialize FMX101,AMZEEQ, or FMX103 or any of our other products we develop.
Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific and commercial personnel. We believe that our future success is highly dependent upon the contributions of our senior management, particularly our Chief Executive Officer, as well as key sales personnel and our senior technologists and scientists. The loss of services of any of these individuals could delay or prevent the successful development of our product pipeline completion of our planned clinical trials or thesuccessful commercialization of FMX101,AMZEEQ, FMX103, if approved, or any of the clinical development of our other product candidates.
Although we have not historically experienced unique difficulties in attracting and retaining qualified employees, we could experience such problems in the future. For example, competition for qualified personnel in the pharmaceutical field is intense due to the limited number of individuals who possess the skills and experience required by our industry. We will need to hire additional personnel as we expand our clinical development and commercial activities. We may not be able to attract and retain quality personnel on acceptable terms, or at all. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or that they have divulged proprietary or other confidential information, or that their former employers own their research output. We have incurred, and will continue to incur significant increased costs as a result of operating as a public company in the U.S., and our management will be required to devote substantial time to new compliance initiatives.
As a public company in the U.S., we are subject to an extensive regulatory regime, requiring us to maintain various internal controls and to prepare and file periodic and current reports and statements, including reports on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404. Complying with these requirements is costly and time consuming. In the event that we are unable to demonstrate compliance with our obligations as a public company in the U.S. in a timely manner, or are unable to produce timely or accurate financial statements, we may be subject to sanctions or investigations by regulatory authorities, such as the U.S. Securities and Exchange Commission, or the NASDAQ Global Market, and investors may lose confidence in our operating results and the price of our ordinary shares could decline.
Our independent registered public accounting firm was not engaged to perform an audit of our internal control over financial reporting, and as long as we remain an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we are exempt from the requirement to have an independent registered public accounting firm perform such audit. Accordingly, no such opinion was expressed. Once we cease to qualify as an “emerging growth company,” our independent registered public accounting firm will need to attest to our management’s annual assessment of the effectiveness of our internal controls over financial reporting, which will entail additional costs and expenses.
Our business involves the use of hazardous materials and we and our third party manufacturers and suppliers must comply with environmental laws and regulations, which can be expensive and restrict how we do business.
Our research and development activities and our third party subcontractors’ and suppliers’ activities involve the controlled storage, use and disposal of hazardous materials owned by us, including minocycline and doxycycline, key components of our product candidates, and other hazardous compounds. We and our manufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. We are licensed by the Israeli Ministry of Health to manufacture small batches of product in topical dose form for our Phase I, II and III clinical trials. In some cases, these hazardous materials are stored at our and our subcontractors’ facilities pending their use and disposal.
Despite our efforts, we cannot eliminate the risk of contamination. This could cause an interruption of our commercialization efforts and business operations, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. Although we believe that the safety procedures utilized by us and our subcontractors and suppliers for handling and disposing of these materials generally comply with the standards prescribed by these laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In such an event, we may be held liable for any resulting damages and such liability could exceed our resources and state or federal or other applicable authorities may curtail our use of certain materials and interrupt our business operations.
Furthermore, environmental laws and regulations are complex, change frequently and have tended to become more stringent. We cannot predict the impact of such changes and cannot be certain of our future compliance.
We may in the future beare subject to various U.S. federal, state, local and state laws pertaining toforeign health care fraud and abuse laws, including anti-kickback, self-referral, false claims and fraud laws, health information privacy and security, and transparency laws and any violations by us of such laws could result in finessubstantial penalties. Additionally, any challenge to or other penalties.investigation into our practices under these laws could cause adverse publicity and be costly to respond to, and thus could harm our business.
While we do not expect that FMX101, FMX103 or any other of our other product candidates, if approved, will subject us to the variousThere are numerous U.S. federal, state, local and state laws intended to preventforeign health care fraud and abuse we may in the future becomelaws pertaining to our business, including anti-kickback, false claims and physician transparency laws. Our business practices and relationships with providers, patients and third-party payors are subject to suchscrutiny under these laws. We may also be subject to patient information privacy and security regulation by both the federal government, states and foreign jurisdictions in which we conduct our business. The healthcare laws and regulations that may affect our ability to operate include:
the U.S. federal anti-kickback statuteAnti-Kickback Statute, which prohibits the offer, receipt,knowingly and willfully offering, soliciting, receiving, or payment ofpaying remuneration directly or indirectly, in exchange forcash or in kind to induce or reward either the referral of patientsan individual for, or the usepurchase, order or recommendation of productsgoods or services that wouldfor which payment may be paid formade in whole or part by Medicare, Medicaid or other federal health care programs. Remuneration has been broadly defined to include anything of value, including cash, improper discounts, and free or reduced price items and services. ManyThe intent standard under the federal Anti-Kickback Statute was amended by the ACA to a stricter standard such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it, in order to have committed a violation. In addition, the ACA provides that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA. Additionally, many states have similar laws that apply to their state health care programs as well as private payors. Violations of the federal and state anti-kickback laws can result in exclusion from federal and state health care programs and substantial civil and criminal penalties. The
the federal False Claims Act, orcivil and criminal false claims laws and civil monetary penalties laws, including the FCA, imposes liability on persons who,prohibit, among other things, presentindividuals or causeentities from knowingly presenting, or causing to be presented, false, fictitious or fraudulent claims for payment from Medicare, Medicaid or other federal healthcare programs, and knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to avoid, decrease or conceal an obligation to pay money to the federal government. As a result of a modification made by the Fraud Enforcement and Recovery Act of 2009, a claim includes “any request or demand” for money or property presented to the federal health care program.government. Even where pharmaceutical companies do not submit claims directly to payors, they can be held liable under these laws if they are deemed to “cause” the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers, promoting a product off-label, marketing products of sub-standard quality, or, as noted above, paying a kickback that results in a claim for items or services. In addition, activities relating to the reporting of wholesaler or estimated retail prices for pharmaceutical products, the reporting of prices used to calculate Medicaid rebate information and other information affecting federal, state and third-party reimbursement for such products, and the sale and marketing of such products, are subject to scrutiny under this law. For example, several pharmaceutical and other healthcare companies have faced enforcement actions under these laws for allegedly inflating drug prices they report to pricing services, which in turn were used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Private individuals or “whistleblowers” can bring FCA “qui tam” actions on behalf of the government and may share in recovered amounts. The FCA has been used to prosecute persons submitting claims for payment that are inaccurate or fraudulent, that are for services not provided as claimed, or for services that are not medically necessary. Proof of intent to deceive is not required to establish liability under the civil False Claims Act.
HIPAA, which imposes criminal and civil liability for, among other things, executing or attempting to execute a scheme to defraud any healthcare benefit program, including any third party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statements or representations, or making false statements relating to healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;
HIPAA, as amended by HITECH, and their respective implementing regulations, including the Final Omnibus Rule published on January 25, 2013, which impose, among other things, obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information held by certain healthcare providers, health plans and healthcare clearinghouses, known as “covered entities,” and “business associates.” Among other things, HITECH made certain aspects of HIPAA’s rules (notably the Security Rule) directly applicable to business associates - independent contractors or agents of covered entities that receive or obtain individually identifiable health information in connection with providing a service on behalf of a covered entity. HITECH also created four new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal court to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. The FCA includesDepartment of Health and Human Services Office for Civil Rights, or the OCR, has increased its focus on compliance and continues to train state attorneys general for enforcement purposes. The OCR has recently increased both its efforts to audit HIPAA compliance and its level of enforcement, with one recent penalty exceeding $5 million. In addition, according to the United States Federal Trade Commission, or the FTC, failing to take appropriate steps to keep consumers’ personal information secure constitutes unfair acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act, or the FTCA, 15 USC § 45(a). The FTC expects a whistleblower provisioncompany’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities. Medical data is considered sensitive data that allowsmerits stronger safeguards. The FTC’s guidance for appropriately securing consumers’ personal information is similar to what is required by the HIPAA Security Rule;
the federal Physician Payments Sunshine Act and its implementing regulations, which require certain manufacturers of prescription drugs, devices and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program to annually report to CMS information related to payments and other transfers of value to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, or to entities or individuals to bring actionsat the request of, or designated on behalf of, the physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. On October 25, 2018, President Trump signed into law the “Substance Use-Disorder Prevention that Promoted Opioid Recovery and Treatment for Patients and Communities Act.” This law, in part (under a provision entitled “Fighting the Opioid Epidemic with Sunshine”), will extend the Sunshine Act to payments and transfers of value to physician assistants, nurse practitioners, and other mid-level healthcare providers (with reporting requirements going into effect in 2022 for payments made in 2021). In addition, Section 6004 of the ACA requires annual reporting of information about drug samples that manufacturers and authorized distributors provide to physicians;
analogous state, local and foreign laws and regulations, such as state anti-kickback and false claims laws, and other states’ laws addressing the pharmaceutical and healthcare industries, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third party payors, including private insurers, and in some cases that may apply regardless of payor, i.e., even if reimbursement is not available; state laws that require drug companies to comply with the industry’s voluntary compliance guidelines (the PhRMA Code) and the applicable compliance program guidance promulgated by the federal government (HHS-OIG) or otherwise prohibit or restrict gifts or payments that may be made to healthcare providers and share a portionother potential referral sources; state and local laws that require the licensure of sales representatives; state laws that require drug manufacturers to report information related to drug pricing or payments and other transfers of value to healthcare providers or marketing expenditures and pricing information; and state laws related to insurance fraud in the case of claims involving private insurers;
data privacy and security laws and regulations in foreign jurisdictions that may be more stringent than those in the United States, such as the European Union, which adopted the General Data Protection Regulation (GDPR), which became effective in May 2018. The GDPR, which is wide-ranging in scope, imposes several requirements relating to the consent of the recoveryindividuals to whom the personal data relates, the information provided to the individuals, the security and confidentiality of successful claims. If our marketing or other arrangements were determinedthe personal data, data breach notification and the use of third party processors in connection with the processing of personal data. The GDPR also imposes strict rules on the transfer of personal data out of the European Union to violate anti-kickback or related laws,the United States, provides an enforcement authority and imposes large penalties for noncompliance, including the FCA, thenpotential for fines of up to €20 million or 4% of the annual global revenues of the noncompliant company, whichever is greater. The recent implementation of the GDPR has increased our revenuesresponsibility and liability in relation to personal data that we process, including in clinical trials, and we may in the future be required to put in place additional mechanisms to ensure compliance with the GDPR, which could divert management’s attention and increase our cost of doing business; and
State laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, and may apply more broadly than HIPAA, thus complicating compliance efforts – for example, the California Consumer Privacy Act, or CCPA, which goes into effect January 1, 2020. The CCPA, among other things, creates new data privacy obligations for covered companies and provides new privacy rights to California residents, including the right to opt out of certain disclosures of their information. The CCPA also creates a private right of action with statutory damages for certain data breaches, thereby potentially increasing risks associated with a data breach. Legislators have stated that they intend to propose amendments to the CCPA before it goes into effect, and the California Attorney General will issue clarifying regulations. Although the law includes limited exceptions, including for certain information collected as part of clinical trials as specified in the law, it may regulate or impact our processing of personal information depending on the context. It remains unclear what, if any, modifications will be adversely affected, which would likely harm our business, financial condition, and results of operations.made to this legislation or how it will be interpreted.
State and federal authorities have aggressively targeted medical technologypharmaceutical companies for alleged violations of these anti-fraud statutes,fraud and abuse laws based on improper research or consulting contracts with doctors, certain marketing arrangements that rely on volume-based pricing, off-label marketing schemes, and other improper promotional practices. If our operations are found to be in violation of any of the health regulatory laws described above or any other laws that apply to us, we may be subject to penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, individual imprisonment, possible exclusion from participation in government healthcare programs, injunctions, private qui tam actions brought by individual whistleblowers in the name of the government. Companies targeted in such prosecutions have paid substantial fines in the hundreds of millions of dollars or more, have been forced to implement extensive corrective action plans, and have often become subject to consent decrees or corporate integrity agreements that severely restrictingrestrict the manner in which they conduct their business, including the requirement of additional reporting and oversight obligations. Due to the breadth of these laws, the narrowness of statutory exceptions and regulatory safe harbors available, and the range of interpretations to which they are subject, it is possible that some of our current or future practices might be challenged under one or more of these laws. Responding to investigations can be time-and resource-consuming and can divert management’s attention from the business. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business and reputation. Even an unsuccessful challenge or investigation into our practices could cause adverse publicity and be costly to respond to.
If our operations are found to be in violation of any of the healthcare laws or regulations described above or any other healthcare regulations that apply to us, we becomemay be subject to penalties, including administrative, civil and criminal penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs, such as Medicare and Medicaid, imprisonment, additional reporting obligations and oversight if we becomes subject to a corporate integrity agreement or consent decree, reputational harm, diminished profits and future earnings, and the targetcurtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and pursue our strategy.
We are subject to various U.S. and foreign anti-bribery and anti-corruption laws, and any violations by us of such an investigation or prosecution based on our contractual relationships with providers or institutions, or our marketing and promotional practices, welaws could face similar sanctions, which would materially harm our business.result in substantial penalties.
Also, theThe U.S. Foreign Corrupt Practices Act, or FCPA, and similar worldwide anti-bribery and anti-corruption laws generally prohibit companies and their intermediaries from offering, making or authorizing improper payments to government officials for the purpose of obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations. Our internal control policies and procedures may not protect us from reckless or negligent acts committed by our employees, future distributors, licensees or agents. Violations of these laws, or allegations of such violations, could result in fines, penalties or prosecution and have a negative impact on our business, results of operations and reputation.
Unfavorable global economic conditions could adversely affect our business, financial condition or results of operations.
Although we believe the market for acne and rosacea therapies is less vulnerable to unfavorable economic conditions due to the significant discomfort and distress that these conditions inflict, our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. We currently have very limited visibility regarding the prospects of FMX101,AMZEEQ, FMX103 or our other product candidates becoming eligible for reimbursement by any government or third party payor and the possible scope of such reimbursement, and we must assume that demand for these product candidates may be tied to discretionary spending levels of our targeted patient population.
A severe or prolonged economic downturn could result in a variety of risks to our business, including weakened demand for FMX101,AMZEEQ, or if approved, FMX103 or any of our other product candidates, if approved, and our ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could also strain our suppliers, possibly resulting in supply disruption, or cause our customers to delay making payments for our services.
Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.
Exchange rate fluctuations between the U.S. dollar and the New Israeli shekelShekel may negatively affect our earnings.
The dollar is our functional and reporting currency. However, a significant portion of our operating expenses are incurred in Israeli shekels.NIS. As a result, we are exposed to the risks that the shekelNIS may appreciate relative to the dollar, or, if the shekelNIS instead devalues relative to the dollar, that the inflation rate in Israel may exceed such rate of devaluation of the shekel,NIS, or that the timing of such devaluation may lag behind inflation in Israel. In any such event, the dollar cost of our operations in Israel would increase and our dollar-denominated results of operations would be adversely affected. We cannot predict any future trends in the rate of inflation or deflation in Israel or the rate of devaluation or appreciation of the shekelNIS against the dollar. For example, the rate of appreciation of the shekelNIS appreciated against the dollar by 7.8% in 2019, which appreciation was 11.6% and 1.5%compounded by inflation at the rate of 0.6% that year, while in 2017 and 2016, respectively,2018 the NIS depreciated by 8.1% against the dollar, which depreciation was partly offset by inflation in Israel at a rate of 0.4% in 2017 and compounded by deflation at a rate of -0.2% in 2016.0.8% that year. If the dollar cost of our operations in Israel increases, our dollar-measured results of operations will be adversely affected. Our operations also could be adversely affected if we are unable to effectively hedge against currency fluctuations in the future.
Our research and development and other significant operations are located in Israel and, therefore, our results may be adversely affected by political, economic and military instability in Israel.
Our research and development facilities are located in Rehovot, Israel. In addition, some of our key employees, officers and directors are residents of Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel, its neighboring countries and other organizations. Any hostilities involving Israel or the interruption or curtailment of trade or transport between Israel and its trading partners could adversely affect our operations and results of operations. Further, certain countries, as well as certain companies and organizations, continue to participate in a boycott of Israeli businesses and businesses with large Israeli operations. Such boycott or other restrictive laws, policies or practices may have a material adverse effect on our business and financial condition in the future. In addition, our operations could be disrupted by the obligations of personnel to perform military reserve service.
Sanctions and other trade control laws create the potential for significant liabilities, penalties and reputational harm.
As a company transitioning to commercialization in the United States and overseas, we may be subject to national laws as well as international treaties and conventions controlling imports, exports, re-export and diversion of goods, services and technology. These include import and customs laws, export controls, trade embargoes and economic sanctions, denied party watch lists and anti-boycott measures (collectively “Customs and Trade Controls”). Applicable Customs and Trade Controls are administered by Israel’s Ministry of Finance, the U.S. Treasury’s Office of Foreign Assets Control (OFAC), other U.S. agencies and other agencies of other jurisdictions where we do business. Customs and Trade Controls relate to a number of aspects of our business, including most notably the sales of finished goods and API as well as the licensing of our intellectual property, as provided above. Compliance with Customs and Trade Controls has been the subject of increasing focus and activity by regulatory authorities, both in the United States and elsewhere, in recent years. Although we have policies and procedures designed to address compliance with Customs and Trade Controls, actions by our employees, by third-party intermediaries (such as distributors and wholesalers) or others acting on our behalf in violation of relevant laws and regulations may expose us to liability and penalties for violations of Customs and Trade Controls and accordingly may have a material adverse effect on our reputation and our business, financial condition and results of operations.
Lawsuits that have been filed in connection with the Merger, the outcome of which are uncertain, could require Menlo and Foamix to incur significant costs and suffer management distraction.
Securities litigation or other shareholder litigation frequently follows the announcement of certain significant business transactions, such as the announcement of a business combination transaction. In connection with the Merger, purported shareholders of Foamix filed lawsuits against the company and members of the Foamix board of directors and some lawsuits named Menlo and Merger Sub as additional defendants. See “Item 3—Legal Proceedings” for a description of the lawsuits. Even if the lawsuits are without merit, as the defendants believe these lawsuits to be, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on the combined company’s liquidity and financial condition.
Our disclosure controls and procedures and our systems to implement such disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
As a public company, we are subject to the periodic reporting requirements of the Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.
Risks Related to Our Intellectual Property
If our efforts to obtain, protect or enforce our patents and other intellectual property rights related to FMX101,our launched product AMZEEQ, to our Phase III product candidate FMX103, or any of our other product candidates are not adequate, we may not be able to compete effectively and we otherwise may be harmed.
Our commercial success depends in part on our ability to obtain and maintain patent protection and other intellectual property rights and to utilize trade secret protection for our intellectual property and proprietary technologies, our products and their uses, as well as our ability to operate without infringing upon the proprietary rights of others. We rely upon a combination of patents, trade secret protection, andtrademarks, confidentiality agreements, assignment of invention agreements and other contractual arrangements to protect the intellectual property related to FMX101,our launched product AMZEEQ, to our Phase III product candidate FMX103 and to our other development programs. Limitations on the scope of our intellectual property rights may limit our ability to prevent third parties from designing around such rights and competing against us. For example, our patents do not claim a new compound. Rather, the active pharmaceutical ingredients of our products are existing compounds and our granted patents and pending patent applications are directed to, among other things, novel formulations of these existing compounds that are dispensed as a foam. Accordingly, other parties may compete with us, for example, by independently developing or obtaining competing topical formulations that design around our various patent claims, or by using formulations from expired patents but which may contain the same active ingredients, or by seeking to invalidate our patents. Moreover, any disclosure to or misappropriation by third parties of our confidential proprietary information, unless we have sufficient regulatory and/or patent and/or trade secret protection and we are able to enforce such rights successfully, could enable competitors to quickly duplicate or surpass our technological achievements, eroding our competitive position in our market.
We currently have severalvarious granted patents related to FMX101AMZEEQ and FMX103 in the U.S.,United States, which are expected to remain in effect until 2030. We also have an issued patent in the United States related to AMZEEQ that expires in September 2037. These patents relate to a composition of matter comprising a claim to a formulation of a tetracycline antibiotic, which can include minocycline or doxycycline, and therefore may be less protective than patents that claim a new drug. We also have patents granted claiming compositions of matter relating to FMX101AMZEEQ and FMX103 in each of the following international markets Australia, Canada, Great Britain, Israel, and Israel,Mexico and we have patent applications claiming compositions of matter relating to FMX101AMZEEQ and FMX103 pending in Canada, the European Union, India and Mexico.
As of December 31, 20172019, we had 165over 200 granted patents and over 40 patent applications pending worldwide covering our various topical delivery foam-based platforms and other technology. However, the patent applications that we own or license may fail to result in granted patents in the U.S. or foreign jurisdictions, or if granted the patent claims may fail to prevent a potential infringer from marketing its product or be deemed invalid andor held unenforceable by a court. Competitors and others in the field of topically-administered therapies comprising an active ingredient in foam presentationand other presentations have created a substantial amount of scientific publications, patents and patent applications and other materials relating to their technologies. Our ability to obtain and maintain valid and enforceable patents depends on various factors, including interpretation of our technology and the prior art and whether the differences between them allow our technology to be patentable. Patent applications and patents granted from them are complex, lengthy and highly technical documents that are often prepared under very limited time constraints and may not be free from errors or words that make their interpretation uncertain. The existence of errors in a patent may have a materially adverse effect on the patent, its scope and its enforceability. Our pending patent applications may not issue, andor the scope of the claims of patent applications that do issue may be too narrow or inadequate to protect our competitive advantage. Pending applications may be challenged during prosecution by the submission of third-party observations or pre-grant oppositions. Such observations may result in the scope of claims being narrowed or rejected or the application may be refused. Also, our granted patents may be subject to challenges or construed in a way that may not provide adequate or any protection.
Even if these patents do successfully issue, third parties may challenge the validity, enforceability or scope of such granted patents or any other granted patents we own or license, which may result in such patents being narrowed, invalidated or held unenforceable. For example, patents granted by the European Patent Office may be opposed by any person within 9 months from the publication of their grant. Also, patents granted by the U.S. Patent and Trademark Office, or USPTO, may be subject to review, reexamination and other challenges. Changes to the U.S. patent laws of the U.S. in 2012 provide additional procedures for third parties to challenge the validity of patents issuing from patent applications including post-grant review, which generally applies to patents first filed after March 15, 2013. A post-grant review petition must be filed on or prior to the date which is 9 months after the patent is granted. The procedures also expand and reform the proceedings for challenging issued patents on grounds of prior art and publications, also known as inter partes review, or IPR. For patents filed after March 15, 2013, a petition for IPR may be filed the later of 9 months after grant of the patent or after a post-grant review proceeding on the patent has terminated. For patents filed prior to March 15, 2013, the rules regarding IPR filing remain unchanged and an IPR petition may be filed any time following issuance of the patent.
Furthermore, efforts to enforce our patents could give rise to challenges to their validity or unenforceability in court proceedings. If the patents and patent applications we hold or pursue with respect to FMX101,our launched product AMZEEQ, to FMX103 or any of our other product candidates are challenged, it could put one or more patents at risk of being invalidated, or interpreted narrowly and threaten our competitive advantage for FMX101,AMZEEQ, FMX103 or any of our other product candidates. Furthermore, even if they are not challenged, our patents and patent applications may not adequately protect our intellectual propertyproducts and or product candidates or prevent others from designing around and or challenging our claims. To meet such challenges, which are part of the risks and uncertainties of developing and marketing product candidates, we may need to evaluate third party intellectual property rights and, if appropriate, to seek licenses for such third party intellectual property or to challenge such third party intellectual property, which may be costly and time consuming and may or may not be successful, which could also have a material adverse effect on the commercial potential for FMX101,AMZEEQ, FMX103 and any of our other product candidates.
If we encounter challenges to our patent claims in relation to AMZEEQ and we are not ultimately able to defend them the period of time during which we will be able to market AMZEEQ may be reduced.
Further, if we encounter delays in our clinical trials or in seeking marketing approval of our product candidates, the period of time during which we could market FMX101, FMX103 or any of our other product candidates under patent protection could be reduced.
Since patent applications in the U.S.United States and most other countries are confidential for a period of time after filing, we cannot be certain that we were the first to (i) file any patent application related to FMX101,AMZEEQ, to our Phase III product candidate FMX103, or to any of our other product candidates or (ii) conceive and invent any of the inventions claimed in our patents or patent applications.
Furthermore, for applications filed before March 16, 2013, or patents issuing from such applications, an interference proceeding can be invoked by a third party, or instituted by the USPTO, to determine who was the first to invent any of the subject matter covered by the patent claims of our applications and patents. As of March 16, 2013, the U.S.United States transitioned to a “first-to-file” system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the USPTO under the new first-to-file system before we did, could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by the third party.
The change to “first-to-file” from “first-to-invent” is one of the changes to the patent laws of the U.S. resulting from the Leahy-Smith America Invents Act, or AIA, signed into law on September 16, 2011. Among some of the other changes to the patent laws are changes that limit where a patentee may file a patent infringement suit and providing opportunities for third parties to challenge any issued patent in the USPTO. Because ofUntil recently, a lower evidentiary standard was applied in certain USPTO proceedings compared to the evidentiary standard in U.S. federal court necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficientclaim. Under the new final rule, effective for petitions filed on or after November 13, 2018, the USPTO Patent Trial and Appeal Board (PTAB) is to hold a claim invalid even thoughapply the same evidenceclaim construction standard applied by civil courts under 35 USC §282(b) in IPR, post-grant review, and the transitional program for covered business method patents proceedings. The impact this may be insufficient to invalidatehave in practice on the claim if first presented in a district court action. Accordingly, a third party may attempt to use and outcome of USPTO proceedings is uncertain. Because of lower costs and the USPTO procedures to invalidate our patent claimsfact that would not have been invalidated if first challenged by the third party as a defendant in a district court action. USPTO statistics indicate that a high rate of challenged claims are being invalidated in these USPTO procedures.procedures, they may continue to be a popular and effective means of challenging patents.
Even where patent, trade secret and other intellectual property laws provide protection, costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and the outcome of such litigation would be uncertain. Moreover, any actions we may bring to enforce our intellectual property against our competitors could provoke them to bring actions or counterclaims against us, and our competitors have intellectual property portfolios of their own, some of which are substantial.include substantial patent portfolios. An unfavorable outcome could have a material adverse effect on our business and could result in the challenged patent or one or more of its claims being interpreted narrowly or invalidated, or held not to be infringed, or one or more of our patent applications may be not be granted.
We also rely on trade secret protection and confidentiality agreements to protect our know-how, data and information prior to filing patent applications and during the period before they are published. We additionally rely on trade secret protection and confidentiality agreements to protect proprietary know-how that we consider may be preferably maintained as a trade secret rather than the subject of a patent application. We further rely on trade secret protection and confidentiality agreements to protect proprietary know-how that may not be patentable, processes for which patents may be difficult to obtain or enforce and other elements of our product development processes that involve proprietary know-how, information or technology that is not covered by patents. We also enter into and rely on, where appropriate, common interest agreements to protect privileged confidential information.
In an effort to protect our trade secrets and other confidential information, we incorporate confidentiality provisions in all our employees’ agreements and require our consultants, contractors and licensees to which we disclose such information to execute confidentiality agreements upon the commencement of their relationships with us. These agreements require that confidential information, as defined in the agreement and disclosed to the individual by us during the course of the individual’s relationship with us, be kept confidential and not disclosed to third parties for an agreed term. These agreements, however, may not provide us with adequate protection against accidental or improper use or disclosure of confidential information, and these agreements may be breached. Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information. A breach of confidentiality could significantly affect our competitive position and we could lose our trade secrets or they could become otherwise known or be independently discovered by our competitors. Although we make efforts to protect our trade secrets and other confidential information we cannot be certain that all parties that gain access to our proprietary information or who may be involved in the development of our intellectual property have entered into written confidentiality agreements or that such agreements will be sufficiently protective or that they will not be breached. Also, to the extent that our employees, consultants or contractors use any intellectual property owned by others in their work for us, disputes may arise as to the rights in any related or resulting know-how and inventions. Additionally, others may independently develop the same or substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and other confidential information. Any of the foregoing could deteriorate our competitive advantages, undermine the trade secret and contractual protections afforded to our confidential information and have material adverse effects on our business.
39Cybersecurity disruptions may impact our business operations if it becomes a target for such activities.
We may be subject to attempted cybersecurity disruptions from a variety of threat actors. If our systems for protecting against cybersecurity disruptions prove to be insufficient, our employees or third parties could be adversely affected. Such cybersecurity disruptions could cause damage or destroy assets, compromise business systems, result in proprietary information and trade secrets being altered, lost or stolen; result in employee or third-party information being compromised, or otherwise disrupt business operations. Significant costs to remedy the effects of such a cybersecurity disruption may be incurred by us, as well as in connection with resulting regulatory actions and litigation, and such disruption may harm relationships with third parties and impact our business reputation.
Changes in U.S. or foreign patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.
As is the case with other companies in the markets in which we participate, our success is heavily dependent on intellectual property, particularly patents. The strength of patents in the pharmaceutical field involves complex legal and scientific questions and in the U.S.United States and in many foreign jurisdictions patent policy and case law also continues to evolve and change and the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. This uncertainty includes changes to the patent laws through eitherone or more of legislative action to change statutory patent law, rule changes and practice directions issued by National Patent Offices, or court action that may reinterpret, limit or expand on existing law in ways affecting the scope or validity of granted patents, or both.patents. Particularly in recent years in the U.S.,United States, there have been several major legislative developments and court decisions that have affected patent laws in significant ways and there may be more developments in the future that may weaken or undermine our ability to obtain patents or to enforce our existing and future patents.
We have agreed to share ownership in certain patents that may result from our development and license agreements with certain major pharmaceutical companies, which may detract from our rights to such patents.
We have agreed with several of the pharmaceutical companies with whom we are developing certain topical products, based on our emulsion foam technology and the licensees’ active ingredients, to jointly own and have an undivided interest in patents that arise from the relevant projects, where the licensee made its own material contributions to the invention. In certain agreements, we have further agreed that inventions achieved exclusively or primarily by the licensees in the course of the development without significant contribution by us will be owned solely by them, and they will be allowed to file patent applications covering such inventions without our participation.
We have granted certain licensees the right to provide input during the prosecution of licensed patent applications. We have further granted certain licensees the primary right to enforce several of our existing patents, which we have licensed to these licensees to allow them to commercialize or continue to commercialize our jointly-developed product, in the event that any infringement of the licensed patents adversely affects the licensees’ ability to utilize the licenses for the purpose they were granted. Such rights may detract from our rights and title to such patents.patents and we may as a result have little or no control or say in any proceedings concerning them. In addition, any negative proceedings against our technology could impact any or all of our licensees, and we may be considered or found to be contractually responsible for the payment of certain claims and losses as a result of such impact.
If we infringe or are alleged to infringe or otherwise violate intellectual property rights of third parties, our business could be harmed.
Our research, development and commercialization activities may infringe or otherwise violate or be claimed to infringe or otherwise violate patents owned or controlled by other parties. Competitors in the field of topical and oral drugs for the treatment of acne impetigo,or rosacea chemotherapy-induced rash and other indications have developed large portfolios of patents and patent applications relating to our business. In particular, there are patents and pending patent applications held by third parties that relate to theformulations with minocycline-based and doxycycline-based products and to methods of treatment with minocycline-based and doxycycline-based products for indications we are pursuing with AMZEEQ, our Phase III product candidates, namely FMX101,candidate FMX103 and anyour other of our othersuch-based product candidates. There may be granted patents with claims that could be asserted against us in relation to such products or product candidates. There may also be granted patents held by third parties that may be infringed or otherwise violated by our other product candidates and activities, and we do not know whether or to what extent we aremay be infringing or otherwise violating third party patents. There may also be third party patent applications that if approved and granted as patents may be asserted against us in relation to FMX101,AMZEEQ, FMX103 or any of our other product candidates or activities. We may fail to identify applications and granted patents that may be asserted against us in relation to AMZEEQ, our Phase III product candidate FMX103 or any of our other product candidates or activities. Searches and analyses undertaken may miss or not uncover all potential and future threats. These third parties could bring claims against us that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages and legal fees. These third parties could include non-practicing entities that have no relevant products or revenue. Further, if a patent infringement suit were brought against us, we could be temporarily or permanently enjoined or otherwise forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit.
As a result of patent infringement claims, or to avoid potential claims, we may choose or be required to seek licenses from third parties. These licenses may not be available on acceptable terms, or at all. Even if we are able to obtain a license, the license would likely obligate us to pay license fees or royalties or both, and the rights granted to us might be nonexclusive, which could result in our competitors gaining access to the same intellectual property, or such rights might be restrictive and limit our present and future activities. Ultimately, we or a licensee could be prevented from commercializing a product or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms.
There has been and there currently is substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical industry. In addition to possible infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference, derivation, review, re-examination or other post-grant proceedings declared or granted by the USPTO and similar proceedings in foreign countries, regarding intellectual property rights with respect to our current or any future products. TheIn some jurisdictions, third party observations or pre-grant oppositions may be filed.The cost and burden to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Patent litigation and other proceedings may also absorb significant management time. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings and their outcome could impair our ability to compete in the marketplace and impose a substantial financial burden on us. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.
Furthermore, several of our employees were previously employed at universities or other pharmaceutical companies, including potential competitors. While we take steps to prevent our employees from using the proprietary information or know-how of others that is not in the public domain or that has not already been independently developed by us earlier, we may be subject to claims that we or these employees have inadvertently or otherwise used or disclosed, confidential information, intellectual property, trade secrets or other proprietary information of any such employee’s former employer. Litigation may be necessary to defend against these claims and, even if we are successful in defending ourselves, could result in substantial costs to us or be distracting to our management. If we do not succeed with respect to any such claims, in addition to paying monetary damages and possible ongoing royalties, we may lose valuable intellectual property rights or personnel.
If we are unable to secure registrations and protect our trademarks from infringement, our business prospects may be harmed.
We own trademarks that identify “Foamix”, and have registered these trademarks in the U.S.United States and Israel. We own the trademarks “AMZEEQ” and “MST” that identify our FDA approved topical product for acne vulgaris and its delivery technology and we have filed applications for these trademarks in the United States and in some other jurisdictions including Israel. We also own and have filed applications for trademarks in the United States that represent the logo used in connection with AMZEEQ, and the proposed logo(s) and commercial name(s) of our phase III drug product candidate.
Applications for trademarks may be rejected during prosecution and we may be unable to overcome such proceedings or we may have to narrow or limit the scope of the applications. Opposition or cancellation proceedings may be filed against our trademarks, which may not survive such proceedings or we may have to narrow or limit their scope.
In the US the FDA evaluates and must approve any trademark we propose to use with products for which we seek regulatory approval. Selecting a product trademark can be an expensive process. If the FDA objects to proposed trademarks this could delay regulatory approval and we may be required to expend significant resources in an effort to identify suitable substitutes that would qualify as a registerable trademark, not infringe any existing third party trademark rights and be acceptable to the FDA.
Although we take steps to monitor the possible infringement or misuse of our trademarks, it is possible that third parties may infringe, dilute or otherwise violate our trademark rights. Any unauthorized use of our trademarks could harm our reputation or commercial interests. In addition, our enforcement against third-partythird party infringers or violators may be unduly expensive and time-consuming, and the outcome may be an inadequate remedy.
We may become involved in lawsuits to protect or enforce our patents or other intellectual property or the patents of our licensors, which could be expensive and time-consuming.
Competitors may infringe our intellectual property, including our patents or the patents of our licensors. As a result, we may be required to file infringement claims to stop third party infringement or unauthorized use. This can be expensive and burdensome, particularly for a company of our size, andas well as time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology or method at issue on the grounds that our patent claims do not cover its technology or method or that the factors necessary to grant an injunction against an infringer are not satisfied.
We have received notice letters of ANDAs submitted for drug products that are generic versions of Finacea Foamfoam and we are involved in lawsuits to protect orand enforce our patents, which could beare expensive, time consuming and may be unsuccessful.
Competitors may infringe our patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming.consuming and may be unsuccessful in whole or part. The infringing party may deny any infringement or challenge the patents as invalid or unenforceable. Litigation proceedings may also fail, and even if successful, they may result in substantial costs and distraction of our management and other employees.
For example, we and Bayer have received Paragraph IV Certification Notice Letters from each of Teva and Perrigo,Taro dated NovemberDecember 20, 20172018 and January 4, 2018, respectively,18, 2019, were received in connection with Bayer’s Finacea Foam.foam. A Paragraph IV Certification Notice Letter notifies the FDA that one or more patents listed in the FDA’s Orange Book is allegedly invalid, unenforceable or will not be infringed by an ANDA product. In the case at hand, boththe letters were directed against several of our U.S. patents and stated that each of Teva and PerrigoTaro had submitted to the FDA an ANDA for an azelaic acid foam composition which is a generic version of Finacea Foam. We and Bayer responded by jointly filing complaintsfoam.
Pursuant to our licensing agreement with LEO, this litigation is in the sole control of LEO. Complaints were filed against each of Teva and PerrigoTaro with the U.S. District Court for the District of Delaware, filed January 4, 2018 and February 15, 2018, respectively, asserting, among other things, that each of Teva and PerrigoTaro had infringed our patents, as listed in theirits Paragraph IV Notice Letters, by seeking FDA approval to manufacture and sell a generic version of Bayer’s Finacea Foam prior to expiration of these patents. Since the complaints werecomplaint was filed within the 45-day period required under the Hatch WaxmanHatch-Waxman Act, we were granted a 30-month stay which precludes a genericwill preclude Taro from receiving final FDA approval of a generic version of Finacea Foam prior to May 2020.June 2021, unless a court enters judgment that the patents are invalid or not infringed.
Pursuant to our licensing agreement with Bayer, this litigation is in the sole control of Bayer, andAlthough we are currently unable to predict its outcome. Potentially,the outcome of the litigation, substitution of Finacea Foam in favor of generic versions is likelyhas the potential to have a negative impact on future commercialization of Finacea Foam and to result in a loss of license revenue. Furthermore, in any infringement proceeding, including the foregoing, a court may decide that a patent of ours, or one or more claims of such patent, is not valid or is unenforceable, or may refuse to stop the other party from using the supposedly infringing technology on the grounds that our patents, or one or more claims of such patents, do not cover such technology. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could also put one or more of our pending patent applications at risk of not issuing. There can be no assurance that our product candidates will not be subject to the same risks.
We have also entered into license agreements with other commercial partners for the development and commercialization of products with active ingredients other than azelaic acid that license one or more of the patents listed in the FDA’s Orange Book for Finacea foam, or a family member thereof. Whilst these license agreements are not considered material to our main business, an adverse result may put at risk the development and commercialization of any of these licensed products.
An adverse determination of any litigation or other proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.
Interference, derivation review, or other proceedings brought at the USPTO may be necessary to determine the priority or patentability of inventions with respect to our patent applications or those of our licensors or licensees. Litigation or USPTO proceedings brought by us may fail or may be invoked against us by third parties. Even if we are successful, domestic or foreign, litigation or USPTO or foreign patent office or other proceedings, may result in substantial costs and distraction to our management. Moreover, proceedings may be appealed and obtaining a final resolution can take a long time and substantial resources. We may not be able, alone or with our licensors or licensees, to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the U.S.
Furthermore, because of the substantial amount and extent of discovery required in connection with intellectual property litigation or other proceedings, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation or proceedings. In addition, during the course of this kind of litigation or proceedings, there could be public announcements of the results of hearings, motions or other interim proceedings or developments or public access to related documents. If investors perceive these results to be negative, the market price for our ordinary shares could be significantly harmed.
We may not obtain intellectual property rights or otherwise be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on product candidates in all or most countries throughout the world would be prohibitively expensive. We primarily file patent applications in the U.S.,United States and may file in some other selected jurisdictions on a case-by-case basis. As a result, our intellectual property rights in countries outside the U.S.United States are generally significantly less extensive than those in the U.S.United States. In addition, the laws of some foreign countries and jurisdictions, particularly of certain developing countries and jurisdictions, do not protect intellectual property rights to the same extent as federal and state laws in the U.S.,United States, and these countries and jurisdictions may limit the scope of what can be claimed, and in some cases may even force us to grant a compulsory license to competitors or other third parties. Consequently, we may not be able to prevent third parties from practicing our inventions outside the U.S.,United States, or from selling or importing products made using our inventions in and into the U.S.United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not sought or obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but protection and enforcement is not as strong as that in the U.S.United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. Moreover, competitors or others may raise legal challenges to our intellectual property rights or may infringe upon our intellectual property rights, including through means that may be difficult to prevent or detect.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to pharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims or issue proceedings against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Further, third parties may prevail in their claims against us, which could potentially result in the award of injunctions or substantial damages against us. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
In addition, our ability to protect and enforce our intellectual property rights may be adversely affected by unforeseen changes in domestic and foreign intellectual property laws and practice. We have received notices of opposition to our European patent no. 1556009
Two oppositions were filed against the grant of our European patent EP1556009 entitled “Cosmetic and Pharmaceutical Foam”, which relates to an alcohol-free foamable pharmaceutical or cosmetic carrier and its use. The oppositions were filed by Guderma GmbH and Henkel AG & Co. KGaA. We defended the patent at oral proceedings on January 23, 2017 before the Opposition Division of the European Patent Office, or EPO, and the outcome was a favorable interlocutory decision to maintain the patent in amended form. Both of the unsuccessful opponents filed an appeal against this decision, and in response we have restated our position in support of the patent. We await the next communication from the EPO, which is likely to be a summons to oral proceedings at which the outcome of the appeal will be decided. The opposition and appeal documents are available at the online EPO file for the patent. Although the patent involved is believed by Foamix to be of no material interest to our lead product candidates, it may be of interest in relation to one or more of our licensed products. We are unable to predict the outcome of the appeal, which might result in the patent being revoked, but note that it may potentially have a negative impact on the future commercialization of one or more licensed products.
Under applicable employment laws, we may not be able to enforce covenants not to compete.
We generally enter into non-competition agreements as part of our employment agreements with our employees. These agreements generally prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors or clients for a limited period. We may be unable to enforce these agreements under the laws of the jurisdictions in which our employees work and it may be difficult for us to restrict our competitors from benefitting from the expertise our former employees or consultants developed while working for us.
For example, Israeli labor courts place emphasis on freedom of employment and have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the protection of a company’s trade secrets or other intellectual property. Risks Related to Our Ordinary Shares
We do not know whether a market for our ordinary shares will be sustained and as a result it may be difficult for holders of our ordinary shares to sell their shares.
Although our ordinary shares are quoted on the NASDAQ Global Market, an active trading market for our shares may not be sustained. The lack of an active market may impair holders of our ordinary shares ability to sell their shares at the time they wish to sell them or at a price that they consider reasonable. The lack of an active market may also reduce the fair market value of our shares, and may cause the trading price of our ordinary shares to be more volatile. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other companies by using our shares as consideration.
The market price of our ordinary shares may be subject to fluctuation and holders of our ordinary shares could lose all or part of their investment.
The stock market in general and the market price of our ordinary shares in particular has been, and will likely continue to be, subject to fluctuation, whether due to, or irrespective of, our operating results and financial condition. For example, the price of our shares plummeted by more than 40% in a single trading day on March 27, 2017, following the announcement of somewhat mixed top-line results from our two pivotal Phase III clinical trials for our lead product candidate FMX101 for treatment of moderate-to-severe acne. The market price of our ordinary shares on the NASDAQ Global Market may fluctuate as a result of a number of factors, some of which are beyond our control, including, but not limited to:
| · | actual or anticipated variations in our and our competitors’ results of operations and financial condition; |
| · | market acceptance of our products; |
| · | the mix of products that we sell and related services that we provide; |
| · | the success or failure of our licensees to develop, obtain approval for and commercialize our licensed products, for which we are entitled to contingent payments and royalties; |
| · | changes in earnings estimates or recommendations by securities analysts, if our ordinary shares are covered by analysts; |
| · | development of technological innovations or new competitive products by others; |
| · | announcements of technological innovations or new products by us; |
| · | publication of the results of preclinical or clinical trials for FMX101, FMX103 or our other product candidates; |
| · | failure by us to achieve a publicly announced milestone; |
| · | delays between our expenditures to develop and market new or enhanced products and the generation of sales from those products; |
| · | The filing of ANDAs by generic companies seeking approval to market generic versions of our products and of our licensee’s products; |
| · | developments concerning intellectual property rights, including our involvement in litigation brought by or against us, including patent infringement proceedings before national and state courts, and patent opposition and review proceedings before national patent offices; |
| · | regulatory developments and the decisions of regulatory authorities as to the approval or rejection of new or modified products; |
| · | changes in the amounts that we spend to develop, acquire or license new products, technologies or businesses; |
| · | changes in our expenditures to promote our products; |
| · | our sale or proposed sale, or the sale by our significant shareholders, of our ordinary shares or other securities in the future; |
| · | changes in key personnel; |
| · | success or failure of our research and development projects or those of our competitors; |
| · | the trading volume of our ordinary shares; and |
| · | general economic and market conditions and other factors, including factors unrelated to our operating performance. |
These factors and any corresponding price fluctuations may materially and adversely affect the market price of our ordinary shares and result in substantial losses being incurred by our investors. In the past, following periods of market volatility, public company shareholders have often instituted securities class action litigation. If we were involved in securities litigation, it could impose a substantial cost upon us and divert the resources and attention of our management from our business.
If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our ordinary shares, the price of our ordinary shares could decline.
The trading market for our ordinary shares relies in part on the research and reports that equity research analysts publish about us and our business, if at all. We do not have control over these analysts and we do not have commitments from them to write research reports about us. The price of our ordinary shares could decline if no research reports are published about us or our business, or if one or more equity research analysts downgrades our ordinary shares or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.
Future sales of our ordinary shares could reduce the market price of our ordinary shares.
If our shareholders, particularly our directors and their affiliates or our executive officers, sell a substantial number of our ordinary shares in the public market, the market price of our ordinary shares could decrease significantly. The perception in the public market that our shareholders might sell our ordinary shares could also depress the market price of our ordinary shares and could impair our future ability to obtain capital, especially through an offering of equity securities. In addition, our sale of additional ordinary shares or similar securities in order to raise capital might have a similar negative impact on the share price of our ordinary shares. A decline in the price of our ordinary shares might impede our ability to raise capital through the issuance of additional ordinary shares or other equity securities, and may cause holders of our ordinary shares to lose part or all of their investment.
The significant share ownership position of affiliates of our co-founders, Dr. Dov Tamarkin and Meir Eini, may limit your ability to influence corporate matters.
Tamarkin Medical Innovations Ltd., a company beneficially owned by Dr. Dov Tamarkin, or Tamarkin, our co-founder, beneficially owns or controls, directly or indirectly, 7.0% of our outstanding ordinary shares, and Meir Eini Holdings Ltd., a company beneficially owned by Meir Eini, or Eini, our other co-founder, beneficially owns or controls, directly or indirectly, 7.7% of our outstanding ordinary shares, as of December 31, 2017. Accordingly, Tamarkin and Eini are able to significantly influence, though not independently determine, the outcome of matters required to be submitted to our shareholders for approval, including decisions relating to the election of our board of directors and the outcome of any proposed merger or consolidation of our company. Tamarkin’s and Eini’s interests may not be consistent with those of our other shareholders. In addition, Tamarkin’s and Eini’s significant interest in us may discourage third parties from seeking to acquire control of us, which may adversely affect the market price of our ordinary shares.
We have never paid cash dividends on our share capital, and we do not anticipate paying any cash dividends in the foreseeable future.
We have never declared or paid cash dividends on our share capital, nor do we anticipate paying any cash dividends on our share capital in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our ordinary shares will be investors’ sole source of gain for the foreseeable future. In addition, Israeli law limits our ability to declare and pay dividends, and may subject our dividends to Israeli withholding taxes.
As of January 1, 2018 we are required to report as a U.S. domestic issuer and the benefits of a “foreign private issuer” are no longer available to us, which will likely result in additional costs and expenses for us.
As of January 1, 2018 we have lost our status as a “foreign private issuer” and are required to adjust our disclosure and reporting to comply with the requirements for domestic U.S. companies, given that more than 50% of our outstanding voting securities were owned by residents of the U.S. and more than 50% of our executive officers were U.S. citizens or residents as of June 30, 2017. As a result:
| · | we are required to report on forms that are applicable to U.S. companies, such as Forms 10-K, 10-Q and 8-K, rather than the forms formerly used us, such as Forms 20-F and 6-K; |
| · | we are required to include substantially more information in proxy statements than previously provided; |
| · | we can no longer make use of the shelf registration statement on Form F-3 that was declared effective on March 14, 2017, and will need to file a new registration statement on the relevant form applicable to domestic issuers should we wish to engage in capital raising activities; |
| · | if we engage in capital raising activities, there is a higher likelihood that investors may require us to file resale registration statements with the SEC as a condition to any such financing; and |
| · | we may be required to modify certain of our policies to comply with accepted governance practices associated with U.S. domestic issuers. |
We expect that complying with these additional requirements would increase our legal and audit fees which in turn, could have a material adverse effect on our business, financial condition and results of operations. In addition, as a result of being considered a “domestic issuer” for reporting and disclosure requirements:
| · | we are no longer exempt from certain of the provisions of U.S. securities laws such as (i) Regulation FD, which restricts the selective disclosure of material information, (ii) exemptions for filing beneficial ownership reports under Section 16(a) of the Exchange Act for executive officers, directors and 10% shareholders (Forms 3, 4, and 5), and (iii) the Section 16(b) short swing profit rules; |
| · | we are no longer permitted to disclose compensation information for our executive officers on an aggregate rather than an individual basis, although such exemption may still be available to us as long as we remain an “emerging growth company”; and |
| · | we have lost the ability to rely upon exemptions from NASDAQ corporate governance requirements that are available to foreign private issuers. |
As a foreign private issuer, we are permitted to follow, and had followed through December 31, 2017, certain home country corporate governance practices instead of those otherwise required under the NASDAQ Stock Market for domestic U.S. issuers. For instance, we followed home country practice in Israel with regard to (a) the quorum requirement for shareholder meetings, (b) the lack of need for independent director oversight of director nominations and for a nominating and governance committee; (c) the lack of need for separate executive sessions of independent directors and non-management directors; and (d) the lack of need to obtain shareholder approval for certain dilutive events such as (i) the establishment or amendment of certain equity-based compensation plans and (ii) certain transactions other than a public offering involving issuances of a 20% or more interest in the company.
We are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies may make our ordinary shares less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various requirements that are applicable to other public companies that are not “emerging growth companies.” Most of such requirements relate to disclosures that we would otherwise be required to make, having ceased to be a foreign private issuer. For example, as an emerging growth company, and despite no longer being a foreign private issuer, we will not be required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act for up to five fiscal years after the date of our initial public offering.
We will remain an emerging growth company until the earliest of: (i) the last day of our fiscal year during which we have total annual gross revenues of at least $1.0 billion; (ii) the last day of our fiscal year following the fifth anniversary of the closing of our initial public offering; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act.
When we are no longer deemed to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above. We cannot predict if investors will find our ordinary shares less attractive as a result of our reliance on exemptions under the JOBS Act. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our ordinary shares and our share price may be more volatile.
Our U.S. shareholders may suffer adverse tax consequences if we are characterized as a passive foreign investment company.
Generally, if, for any taxable year, 75% or more of our gross income is passive income, or at least 50% of the average quarterly value of our assets (which may be determined in part by the market value of our ordinary shares, which is subject to change) are held for the production of, or produce, passive income, we would be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes.
Based on certain estimates of our gross income and gross assets, our use of proceeds of our initial public offering, and the nature of our business, we believe that we were not classified as a PFIC for the taxable year ended December 31, 2017, and do not anticipate being classified as a PFIC for the taxable year ending December 31, 2018. Because we currently hold, and expect to continue to hold, a substantial amount of cash and cash equivalents and other passive assets used in our business, and because the value of our gross assets is likely to be determined in large part by reference to our market capitalization, a decline in the value of our ordinary shares may result in our becoming a PFIC. Accordingly, we may be considered a PFIC for any taxable year.
If we are characterized as a PFIC, our U.S. shareholders may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares treated as ordinary income, rather than as capital gain, the loss of the preferential rate applicable to dividends received on our ordinary shares by individuals who are U.S. Holders (as defined in “Item 10.E. Taxation—U.S. Federal Income Tax Consequences” in our annual report on Form 20-F for the year 2016, filed with the SEC on February 21, 2017), and having interest charges apply to distributions by us and the proceeds of share sales. Certain elections exist that may alleviate some of the adverse consequences of PFIC status and would result in an alternative treatment (such as mark-to-market treatment) of our ordinary shares; however, we do not intend to provide the information necessary for U.S. holders to make qualified electing fund elections if we are classified as a PFIC. See also “Item 10.E. Taxation—U.S. Federal Income Tax Consequences—Passive Foreign Investment Company Considerations” in our annual report on Form 20-F for the year 2016, filed with the SEC on February 21, 2017.
Risks Related to Our Operations in Israel
Our headquarters, research and development and other significant operations are located in Israel and, therefore, our results may be adversely affected by political, economic and military instability in Israel.
Our headquarters and research and development facilities are located in Rehovot, Israel. In addition, a significant number of our key employees, officers and directors are residents of Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel, its neighboring countries and other organizations. Any hostilities involving Israel or the interruption or curtailment of trade or transport between Israel and its trading partners could adversely affect our operations and results of operations. Further, our operations could be disrupted by the obligations of personnel to perform military reserve service.
Provisions of Israeli law and our amended and restated articles of association may delay, prevent or otherwise impede a merger with, or an acquisition of, us, even when the terms of such a transaction are favorable to us and our shareholders.
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For example, a tender offer for all of a company’s issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital. Completion of the tender offer also requires approval of a majority of the offerees that do not have a personal interest in the tender offer unless, following consummation of the tender offer, the acquirer would hold at least 98% of the company’s outstanding shares. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer, may, at any time within six months following the completion of the tender offer, petition an Israeli court to alter the consideration for the acquisition, unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek such appraisal rights.
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of a number of conditions, including, in some cases, a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are subject to certain restrictions. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of the shares has occurred.
It may be difficult to enforce a judgment of a U.S. court against us, our officers and directors in Israel or the U.S., to assert U.S. securities laws claims in Israel or to serve process on our officers and directors.
We are incorporated in Israel. A significant number of our executive officers and directors listed in this annual report reside outside of the U.S., and most of our assets and most of the assets of these persons are located outside of the U.S. Therefore, a judgment obtained against us, or any of these persons, including a judgment based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the U.S. and may not be enforced by an Israeli court. It also may be difficult for you to effect service of process on these persons in the U.S. or to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws reasoning that Israel is not the most appropriate forum in which to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proven as a fact by expert witnesses, which can be a time consuming and costly process. Certain matters of procedure will also be governed by Israeli law.
There is little binding case law in Israel that addresses the matters described above. As a result of the difficulty associated with enforcing a judgment against us in Israel, holders of our ordinary shares may not be able to collect any damages awarded by either a U.S. or foreign court.
The rights and responsibilities of our shareholders are governed by Israeli law, which differs in some material respects from the rights and responsibilities of shareholders of U.S. companies.
The rights and responsibilities of the holders of our ordinary shares are governed by our amended articles of association and by Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders in U.S.-based companies. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders, and to refrain from abusing its power in the company, including, among other things, in voting at a general meeting of shareholders on matters such as amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and acquisitions and related party transactions requiring shareholder approval. In addition, a shareholder who is aware that it possesses the power to determine the outcome of a vote at a meeting of the shareholders or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company with regard to such vote or appointment. There is limited case law available to assist us in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. companies.
ITEM 1B —- UNRESOLVED STAFF COMMENTS
None.
ITEM 2 —- PROPERTIES
Our facilities in Israel, which house our headquarters and our research and developments laboratories, are located at two sites in the Weizmann Science Park in Rehovot, Israel. Under a Lease Agreement with Gav Yam Lands Ltd., we are leasingWe currently lease approximately 2,199 square meters untilunder a lease that expires in December 31, 2020.
Our executive offices in the U.S.United States are located in Bridgewater, New Jersey. TheWe currently lease agreement was signed in October 2017,approximately 15,000 square feet of office space under a lease that expires in March 2019 and consists of approximately 929 square meters of space.on August 31, 2022. We have an option to extend our existing lease for an additional three years on similar conditions.
We believe that our current office space and facilities in Israel and the U.S. is sufficientUnited States are adequate to meet our anticipatedcurrent needs, and that suitable additional alternative spaces will be available in the future on commercially reasonable terms for the foreseeableour future and is suitable for the conduct of our business.growth.
ITEM 3 —- LEGAL PROCEEDINGS
From time to time, we may become party toinvolved in litigation or other legal proceedings relating to claimsthat we consider to be a part of arising from the ordinary course of our business. Other thanThere are currently no claims or actions pending against us that, in the complaintsopinion of our management, are likely to have a material adverse effect on our business.
Litigation related to the Merger
On December 11, 2019, a purported Foamix shareholder filed against Teva and against Perrigoa putative class action lawsuit in the United States (see above “Item 1A—Risk Factor—Risks RelatedDistrict Court for the District of Delaware against Foamix, the members of the Foamix Board, Menlo and Merger Sub, claiming generally that the joint proxy statement/prospectus issued in connection with the Merger omitted material information in violation of Sections 14(a) and 20(a) of the Exchange Act. The action, captioned Sabatini v. Foamix Pharmaceuticals Ltd., et al., Case No. 1:19-cv-02257 (D. Del.), or the Sabatini Action, purports to Our Intellectual Property—We have received notice lettersbe brought on behalf of ANDAs submitted for drug productsall public shareholders of Foamix, excluding defendants and certain affiliated persons or entities, and seeks, among other things, to enjoin consummation of the Merger, or alternatively rescission or rescissory damages; to compel the individual defendants to disseminate a joint proxy statement/prospectus that are generic versionsdoes not contain any untrue statements of Finacea Foammaterial fact and we are involvedthat states all material facts required in lawsuitsit or necessary to protect make the statements contained therein not misleading; a declaration that defendants violated Sections 14(a) and/or enforce our patents, which could be expensive, time consuming20(a) of the Exchange Act; and unsuccessful”) we are not currently involved in any legal proceedings. We may become involved in material legal proceedingsan award of costs, including attorneys’ and experts’ fees and expenses.
On December 12 and 17, 2019, respectively, two purported Foamix shareholders filed lawsuits in the future.United States District Court for the District of New Jersey (the “New Jersey District Court”) and the United States District Court for the Southern District of New York (the “Southern District of New York District Court”) against Foamix and the members of the Foamix Board. The actions, captioned Wang v. Foamix Pharmaceuticals Ltd., et al., Case No. 19-21316 (D.N.J.), or the Wang Action, and Simms v. Foamix Pharmaceuticals Ltd., et al., Case No. 1:19-cv-11529 (S.D.N.Y.), or the Simms Action, each purport to be brought on behalf of the named plaintiff only and allege substantially similar claims and seek substantially similar relief as the Sabatini Action, as well as an accounting of damages allegedly suffered by the plaintiff.
On December 18, 2019, a purported Foamix shareholder filed a putative class action lawsuit in the New Jersey District Court against Foamix, the members of the Foamix Board, Menlo and Merger Sub, alleging generally claims for breach of fiduciary duty, aiding and abetting breaches of fiduciary duty, and violations of Sections 14(a) and 20(a) of the Exchange Act. The action, captioned Wilson v. Foamix Pharmaceuticals Ltd., et al., Case No. 3:19-cv-21563 (D.N.J.), or the Wilson Action, purports to be brought on behalf of all public shareholders of Foamix, excluding defendants and certain affiliated persons or entities, and alleges, among other things, that certain members of the Foamix Board and management are conflicted because they will receive unique benefits in connection with the Merger, that the Merger Agreement contains preclusive deal protection provisions, that the disclosures issued in connection with the Merger are false and misleading, and that the Merger consideration is inadequate. The Wilson Action seeks, among other things, to enjoin the Merger, or alternatively rescission or rescissory damages; a declaration that the Merger Agreement was entered into in breach of fiduciary duty and is therefore invalid and unenforceable; an order directing the individual defendants to commence a sale process for Foamix and obtain a transaction; an accounting of damages allegedly suffered by plaintiff and the putative class; and an award of costs, including attorneys’ and experts’ fees and expenses.
On December 20, 2019, a purported Foamix shareholder filed a lawsuit in the Southern District of New York District Court against Foamix and the members of the Foamix Board. The action, captioned Miller v. Foamix Pharmaceuticals Ltd., et al., Case No. 1:19-cv-1169 (S.D.N.Y.), or the Miller Action, purports to be brought on behalf of the named plaintiff only and alleges substantially similar claims and seeks substantially similar relief as the Sabatini, Wang, Simms and Wilson Actions.
On January 7, 2020, a purported shareholder of Foamix filed a lawsuit against Foamix and the members of the Foamix Board in the United States District Court for the District of New Jersey, alleging that the joint proxy statement/prospectus issued in connection with the Merger omitted material information in violation of Section 14(a) and Section 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder. The action, captioned Bushansky v. Foamix Pharmaceuticals Ltd., et al., Case No. 3:20-cv-00256 (D.N.J.), or the Bushansky Action, purports to be brought on behalf of the named plaintiff only and seeks, among other things, injunctive or other equitable relief, including to enjoin consummation of the Merger, or alternatively rescission or rescissory damages, a declaration that the defendants violated Sections 14(a) and/or 20(a) of the Exchange Act, and an award of costs, including attorneys’ and experts’ fees and expenses.
On January 21, 2020, a purported shareholder of Foamix filed an individual action against Foamix and the Foamix Board in the United States District Court for the District of New Jersey under the caption Nam v. Foamix Pharmaceuticals Ltd., et al., Case No. 3:20-cv-00670 (D.N.J.), (the “Nam Action” and together with the Sabatini, Wang, Simms, Wilson, Miller and Bushansky Actions, the “Lawsuits”) . The Nam Action generally claims that the joint proxy statement/prospectus issued in connection with the Merger omitted material information in violation of Sections 14(a) and 20(a) of the Exchange Act. The Nam Action seeks, among other things, injunctive relief to prevent consummation of the Merger, rescission or rescissory damages in the event the Merger is consummated, a declaration that defendants violated Sections 14(a) and/or 20(a) of the Exchange Act, costs, including attorneys’ fees and such other and further relief as the court may deem just and proper. In addition, the Nam Action requests an order directing the individual defendants to disseminate a proxy statement that does not contain any untrue statements of material fact and that states all material facts necessary to make the statements contained therein not misleading.
Foamix and the other defendants believe the Lawsuits are without merit and intend to defend vigorously against all claims asserted.
ITEM 4 —- MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 —- MARKET FOR REGISTRANT’S ORDINARY SHARES, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information
Our ordinary shares have beenwere previously listed on the NASDAQ Global MarketNasdaq under the symbol “FOMX” since September 17, 2014. Prior to that date, there was no public trading market for our ordinary shares. Our initial public offering was priced at $6.00 per share. The following table sets forth forOn the periods indicated the high and low sales prices perEffective Date, each ordinary share as reported on the NASDAQ Global Market:
| 2017 | | High | | | Low | | | First quarter | | | 11.27 | | | | 4.40 | | | Second quarter | | | 5.11 | | | | 4.03 | | | Third quarter | | | 5.99 | | | | 4.34 | | | Fourth quarter | | | 7.00 | | | | 5.17 | | | | | | | | | | | | | 2016 | | High | | | Low | | | First quarter | | | 8.45 | | | | 5.48 | | | Second quarter | | | 7.67 | | | | 5.70 | | | Third quarter | | | 10.40 | | | | 6.16 | | | Fourth quarter | | | 11.26 | | | | 7.12 | |
was converted into 0.5924 of a share of Menlo common stock and one CSR. As of February 26, 2018, the closing price per shareEffective Date, we are a wholly-owned subsidiary of Menlo. Accordingly, our ordinary shares are no longer listed on the NASDAQ Global Market was $6.24. Holders
As of February 26, 2018, we had approximately 6 holders of record of our ordinary shares. This number does not include the number of persons whose shares are in nominee or in “street name” accounts through brokers.
Dividends
We have never declared or paid cash dividends to our shareholders and we do not intend to pay cash dividends in the foreseeable future. We intend to reinvest any earnings in developing and expanding our business. Any future determination relating to our dividend policy will be at the discretion of our board of directors and will depend on a number of factors, including future earnings, our financial condition, operating results, contractual restrictions, capital requirements, business prospects, our strategic goals and plans to expand our business, applicable law and other factors that our board of directors may deem relevant.
Pursuant to the Israeli Companies Law, if we do distribute dividends, the distribution amount will be limited to the greater of retained earnings or earnings generated over the previous two years, according to our then last reviewed or audited financial statements, provided that the end of the period to which the financial statements relate is not more than six months prior to the date of the distribution. If we do not meet such criteria, then we may distribute dividends only with court approval. In each case, we are only permitted to distribute a dividend if our board of directors and the court, if applicable, determines that there is no reasonable concern that payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due.
In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of our ordinary shares in proportion to their shareholdings. This right, as well as the right to receive dividends, 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.
Payment of dividends may be subject to Israeli withholding taxes. For additional information see “Item 10.E.—Taxation—Taxation of our Shareholders—Taxation of non-Israeli shareholders on receipt of dividends” in our annual report on Form 20-F for the year 2016, filed with the SEC on February 21, 2017.
Securities Authorized for Issuance under Equity Compensation Plans
Set forth below is a table that summarizes compensation plans (including individual compensation arrangements) under which the company’s equity securities are authorized for issuance as of February 27, 2018.
| Plan category | | Number of securities to be issued upon exercise of warrants and rights | | | Weighted-average exercise price of outstanding warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans(1) | | | Equity compensation plans approved by security holders | | | - | | | | - | | | | - | | | Equity compensation plans not approved by security holders | | | 4,230,101 | | | $ | 5.65 | (2) | | | 2,076,088 | | | Total | | | 4,230,101 | | | $ | 5.65 | | | | 2,076,088 | |
| (1) | Excluding securities reflected in column titled “Number of securities to be issued upon exercise of warrants and rights”. |
| (2) | including restricted share units with an exercise price of $0. |
Nasdaq.
Our equity compensation plan information required by this item is incorporated by reference to the information in Part III, Item 12 of this report.
Share Performance
The table below compares the three-year cumulative total shareholder return on our ordinary shares with the cumulative total return on the NASDAQ Composite Index and the NASDAQ Biotechnology Index. The period shown commences on December 31, 2014 (the end of the first fiscal year following our initial public offering) and ends on December 31, 2017, the end date of our last fiscal year. The table assumes an investment of $100 on December 31, 2014, and the reinvestment of any dividends. No cash dividends have been declared or paid on our ordinary shares during such period. Shareholder returns over the indicated periods should not be considered indicative of future share prices or shareholder returns.
| | | December 31, 2014* | | | December 31, 2015 | | | December 31, 2016 | | | December 31, 2017 | | | Foamix Pharmaceuticals Ltd. | | | 100.00 | | | | 115.69 | | | | 158.35 | | | | 85.73 | | | NASDAQ Composite Index | | | 100.00 | | | | 105.73 | | | | 113.66 | | | | 145.76 | | | NASDAQ Biotechnology Index | | | 100.00 | | | | 111.42 | | | | 87.26 | | | | 105.64 | |
* $100 invested on December 31, 2014 in shares or index-including reinvestment of dividends.
Below is a graphical depiction of the comparison of the cumulative total return over the years 2015-2017 among Foamix Pharmaceuticals Ltd., NASDAQ Composite Index and NASDAQ Biotechnology Index:
This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities under that Section, and shall not be deemed incorporated by reference into any filing of Foamix Pharmaceuticals Ltd. under the Securities Act of 1933.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
ITEM 6 —- SELECTED FINANCIAL DATA
Our historical consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States and are presented in U.S. dollars. The selected historical consolidated financial information as of December 31, 20172019 and 20162018 and for the years ended December 31, 2017, 20162019, 2018 and 20152017 have been derived from, and should be read in conjunction with, theour consolidated financial statements of Foamix Pharmaceuticals Ltd. and notes thereto appearing elsewhere in this annual report.Annual Report. The selected financial data as of December 31, 2015, 20142017, 2016 and 20132015 and for the years ended December 31, 20142016 and 20132015 have been derived from our audited consolidated financial statements of the company not included in this annual report.Annual Report.
The information presented below is qualified by the more detailed historical consolidated financial statements set forth in this annual report, and should be read in conjunction with those consolidated financial statements, the notes thereto and the discussion under “Item 7 —- Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this annual report.Annual Report.
Consolidated Statement of Operations Data
| | | Year ended December 31, | | | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | | | (in thousands of U.S. dollars, except loss per share) | | Statements of operations data: | | | | | | | | | | | | | | | | | Revenues | | $ | 3,669 | | | $ | 5,527 | | | $ | 849 | | | $ | 5,414 | | | $ | 1,404 | | Cost of revenues(1) | | | 13 | | | | 59 | | | | 70 | | | | 527 | | | | 453 | | | Gross profit | | | 3,656 | | | | 5,468 | | | | 779 | | | | 4,887 | | | | 951 | | | Operating expenses: | | | | | | | | | | | | | | | | | | | | | Research and development(1) | | | 57,779 | | | | 25,897 | | | | 10,680 | | | | 3,557 | | | | 1,086 | | Selling, general and administrative(1) | | | 11,491 | | | | 9,221 | | | | 7,029 | | | | 2,964 | | | | 1,221 | | | Total operating expenses | | | 69,270 | | | | 35,118 | | | | 17,709 | | | | 6,521 | | | | 2,307 | | | Operating loss | | | 65,614 | | | | 29,650 | | | | 16,930 | | | | 1,634 | | | | 1,356 | | | Net Loss | | $ | 65,715 | | | $ | 29,336 | | | $ | 16,517 | | | $ | 11,484 | | | $ | 2,431 | | | Loss per share basic and diluted | | | 1.76 | | | | 0.91 | | | | 0.58 | | | | 0.79 | | | | 0.22 | |
_________________________________________________
| | | | | | | | | | | | | | | | | | | | | | | | | (in thousands of U.S. dollars, except loss per share) | | | Statements of operations data: | | | | | | | | | | | | | | | | | Revenues | | $ | 443 | | | $ | 3,595 | | | $ | 3,669 | | | $ | 5,527 | | | $ | 849 | | Cost of revenues(1) | | | - | | | | - | | | | 13 | | | | 59 | | | | 70 | | | Gross profit | | | 443 | | | | 3,595 | | | | 3,656 | | | | 5,468 | | | | 779 | | | Operating expenses: | | | | | | | | | | | | | | | | | | | | | Research and development(1) | | | 51,202 | | | | 64,474 | | | | 57,779 | | | | 25,897 | | | | 10,680 | | Selling, general and administrative(1) | | | 45,114 | | | | 14,013 | | | | 11,491 | | | | 9,221 | | | | 7,029 | | | Total operating expenses | | | 96,316 | | | | 78,487 | | | | 69,270 | | | | 35,118 | | | | 17,709 | | | Operating loss | | | 95,873 | | | | 74,892 | | | | 65,614 | | | | 29,650 | | | | 16,930 | | | Net loss | | $ | 95,178 | | | $ | 74,163 | | | $ | 65,715 | | | $ | 29,336 | | | $ | 16,517 | | | Loss per share basic and diluted | | | 1.66 | | | | 1.70 | | | | 1.76 | | | | 0.91 | | | | 0.58 | |
(1) Includes share-based compensation expenses as follows:
| | | Year ended December 31, | | | | | | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | | | | | | | | | | | | | | | | | | (in thousands of U.S. dollars) | | | (in thousands of U.S. dollars) | | | Cost of revenues | | $ | 2 | | | $ | 3 | | | $ | 2 | | | $ | 15 | | | $ | 16 | | | $ | - | | | $ | - | | | $ | 2 | | | $ | 3 | | | $ | 2 | | | Research and development | | | 1,711 | | | | 1,135 | | | | 588 | | | | 80 | | | | 59 | | | 1,564 | | | 2,054 | | | 1,711 | | | 1,135 | | | 588 | | | Selling, general and administrative | | | 2,453 | | | | 1,774 | | | | 1,187 | | | | 102 | | | | 430 | | | | 3,331 | | | | 3,266 | | | | 2,453 | | | | 1,774 | | | | 1,187 | | | Total share-based compensation | | $ | 4,166 | | | $ | 2,912 | | | $ | 1,777 | | | $ | 197 | | | $ | 505 | | | $ | 4,895 | | | $ | 5,320 | | | $ | 4,166 | | | $ | 2,912 | | | $ | 1,777 | |
Consolidated Balance Sheet Data
| | | As of December 31, | | | | | | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | | | | | | | | | | | | | | | | | | (in thousands of U.S. dollars, other than number of shares) | | | Balance sheet data: | | | | | | | | | | | | | | | | | | Balance sheet data: | | | (in thousands of U.S. dollars, other than number of shares) | | Cash and investments(1) | | $ | 76,412 | | | $ | 130,988 | | | $ | 103,779 | | | $ | 49,966 | | | $ | 2,308 | | | $ | 73,366 | | | $ | 99,385 | | | $ | 76,412 | | | $ | 130,988 | | | $ | 103,779 | | Working capital(2) | | | 59,276 | | | | 111,730 | | | | 53,091 | | | | 48,757 | | | | 1,144 | | | 47,088 | | | 90,699 | | | 59,276 | | | 111,730 | | | 53,091 | | | Total assets | | | 80,254 | | | | 135,635 | | | | 105,245 | | | | 51,277 | | | | 3,086 | | | | 81,159 | | | | 103,731 | | | | 80,254 | | | | 135,635 | | | | 105,245 | | | Total long-term liabilities | | | 1,425 | | | | 379 | | | | 385 | | | | 381 | | | | 4,917 | | | 34,258 | | | 1,081 | | | 1,425 | | | 379 | | | 385 | | | Total shareholders’ equity (capital deficiency) | | | 68,601 | | | | 129,985 | | | | 100,802 | | | | 48,762 | | | | (3,582 | ) | | | Total shareholders’ equity | | | | 17,575 | | | | 92,182 | | | | 68,601 | | | | 129,985 | | | | 100,802 | | | Capital shares | | $ | 1,576 | | | $ | 1,561 | | | $ | 1,284 | | | $ | 954 | | | $ | 471 | | | $ | 2,659 | | | $ | 2,331 | | | $ | 1,576 | | | $ | 1,561 | | | $ | 1,284 | | | Number of ordinary shares | | | 37,498,128 | | | | 37,167,791 | | | | 30,639,134 | | | | 22,443,934 | | | | 11,408,490 | | | | 61,580,544 | | | | 54,351,140 | | | | 37,498,128 | | | | 37,167,791 | | | | 30,639,134 | |
(1) Cash and investments include cash and cash-equivalents, restricted cash, bank deposits, marketable securities and restricted marketable securities. | (1) | Cash and investments includes cash and cash-equivalents, restricted cash, bank deposits, marketable securities and restricted marketable securities. |
(2) Working capital is defined as total current assets minus total current liabilities.
ITEM 7 —- MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in the section entitled “Item 1A—Risk1A-Risk Factors”.
We have omitted discussion of the earliest of the three years covered by our consolidated financial statements presented in this Annual Report because that disclosure was already included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 28, 2019. You are encouraged to reference Part II, Item 7, within that report, for a discussion of our financial condition and result of operations for the year ended December 31, 2018 to the year ended December 31, 2017.
Company Overview
We are a clinical-stage specialty pharmaceutical company focused on developingthe development and commercializingcommercialization of innovative therapies in dermatology. Utilizing our proprietaryexpertise in the development of topical minocycline, we are working to develop and commercialize topical drugs for dermatological therapy, including the first topical minocycline products in the United States. On October 18, 2019, the FDA approved our first drug product, AMZEEQTM (minocycline) topical foam, 4%, formerly known as FMX101 (“AMZEEQ”), a once-daily topical antibiotic for the treatment of acne, rosacea and other skin conditions. Our lead product candidates, FMX101 forinflammatory lesions of non-nodular moderate-to-severe acne vulgaris in patients 9 years of age and older. AMZEEQ is the first topical minocycline to be approved by the FDA for any condition. AMZEEQ became available for prescribing on January 13, 2020.
On November 10, 2019, we entered into the Merger Agreement with Menlo and Merger Sub whereby Merger Sub agreed to merge with and into Foamix, with Foamix continuing as the surviving corporation and a wholly-owned subsidiary of Menlo. Menlo, which completed its initial public offering in January 2018 and is listed on the Nasdaq Global Select Market under the symbol “MNLO”, is a late-stage biopharmaceutical company focused on the development and commercialization of serlopitant, an NK1 receptor antagonist given as a once-daily oral tablet for the treatment of pruritus, or itch, associated with various conditions such as prurigo nodularis (“PN”) and psoriasis. Menlo’s clinical development program for serlopitant includes two ongoing Phase III clinical trials for the treatment of pruritus associated with PN and a Phase III-ready clinical program for the treatment of pruritus associated with psoriasis. On March 9, 2020 (the “Effective Date”), the Merger was completed and Foamix is now a wholly-owned subsidiary of Menlo. Foamix will cease to be a reporting company as of March 19, 2020 and all future filings of the combined company will be made by Menlo.
On the Effective Date, each ordinary share of Foamix was exchanged for 0.5924 shares of common stock of Menlo (the “Exchange Ratio”). In addition, on the Effective Date, Foamix shareholders received one contingent stock right (a “CSR”) for each Foamix ordinary share held by them. The CSRs are governed by the Contingent Stock Rights Agreement (the “CSR Agreement”), dated as of March 9, 2020, by and between Menlo and American Stock Transfer & Trust Company, LLC, and represent the non-transferable contractual right to receive shares of common stock of Menlo if specified events occur within agreed time periods. Pursuant to the CSR Agreement, each CSR may become convertible upon the occurrence of the events described below, and, if so converted, will entitle its holder to receive from Menlo additional shares of Menlo common stock. The CSR events relate to Menlo’s Phase III PN Trials. The CSRs may become convertible and additional shares of Menlo common stock may become payable to the rights agent, for subsequent distribution to the holders of the CSRs, upon the occurrence of the following events:
if, on or prior to May 31, 2020, the Efficacy Determination reports that proof of statistically significant superiority of serlopitant treatment over placebo treatment on the primary endpoint, as set out in the Merger Agreement (“Serlopitant Significance”), was achieved in one Phase III PN Trial but was not achieved (or has not been determined) in the other Phase III PN Trial, each CSR will be converted into 0.6815 shares of Menlo common stock pursuant to the terms and conditions of the CSR Agreement. Following such Efficacy Determination, the effective Exchange Ratio in the Merger will be 1.2739 shares of Menlo common stock for each Foamix ordinary share, increasing the former Foamix shareholders’ ownership of the outstanding share capital of the combined company to approximately 76% and correspondingly decreasing the pre-Merger Menlo stockholders’ ownership of the outstanding share capital of the combined company to approximately 24%, each calculated on a fully diluted basis (with such percentages calculated as if the CSR conversion to additional shares occurred on the Effective Date); and
if, on or prior to May 31, 2020, the Efficacy Determination reports that Serlopitant Significance was not achieved in either of the Phase III PN Trials, or if the Efficacy Determination has not been delivered on or before May 31, 2020, each CSR will be converted into 1.2082 shares of Menlo common stock pursuant to the terms and conditions of the CSR Agreement. Following such Efficacy Determination, the effective Exchange Ratio in the Merger will be 1.8006 shares of Menlo common stock for each Foamix ordinary share, increasing the former Foamix shareholders’ ownership of the outstanding share capital of the combined company to approximately 82% and correspondingly decreasing the pre-Merger Menlo stockholders’ ownership of the outstanding share capital of the combined company to approximately 18%, each calculated on a fully diluted basis (with such percentages calculated as if the CSR conversion to additional shares occurred on the Effective Date).
If the Efficacy Determination reports that Serlopitant Significance was demonstrated in both Phase III PN Trials, the CSRs will automatically be terminated, and their holders will not be entitled to any additional shares of Menlo common stock pursuant to the CSR or the CSR Agreement. The effective Exchange Ratio in the Merger will remain 0.5924 shares of Menlo common stock for each Foamix ordinary share and former Foamix shareholders will maintain their ownership of approximately 59% of the outstanding share capital of the combined company, with the Menlo stockholders owning the remaining 41% of the outstanding share capital of the combined company, each calculated on a fully diluted basis.
In October 2019, we announced that the FDA accepted our NDA and set a target Prescription Drug User Fee ACT, or PDUFA, action date of June 2, 2020 for our late-stage drug product candidate, FMX103 (1.5% minocycline foam), for the treatment of moderate-to-severe papulopustular rosacea are novel topical foam formulationsin adults. In November 2018, we announced that both of the antibiotic minocycline. Based on the results demonstrated in our Phase II and Phase III clinical trials for FMX101FMX103 (Studies FX2016-11 and our Phase II clinical trial for FMX103, we believe these product candidates have the potentialFX2016-12) met each of providing a fast, effective and well-tolerated treatment for their respective indications, which are currently underserved and commonly treated by prescription products such as oral minocycline, oral doxycycline and various topical therapies. We are currently investing the majority of our efforts and resources to advance our third pivotal Phase III clinical trial (Study 22) for FMX101 in the U.S. We announced the first patient enrolled in this trial on August 3, 2017. We expect to have top-line results from this trial in the third quarter of 2018. In March of 2017, we announced the results of the double-blind stage of our two initial Phase III clinical trials. Statistical significance was demonstrated in both co-primary efficacy endpoints in one study (Study 05), however, statistical significance was demonstrated in only one of the co-primary efficacy endpoints in the second study (Study 04). Statistical significance was also demonstrated for FMX101 compared to vehicle in the pooled analysis of the co-primary endpoints, as well as key secondary endpoints. The third trial was initiated followingdemonstrating a Type B meeting conducted with the FDA in June of 2017. During this meeting, the FDA confirmed that achieving statistically significant results for FMX101 versus vehiclereduction in both co-primary efficacy endpointsinflammatory lesion counts and IGA treatment success, as assessed by Investigator’s Global Assessment, or IGA, scores of approximately 50% from baseline. There were very few reported adverse events and no treatment-related serious adverse events observed in a third independent clinical trial would be sufficient for establishing an efficacy claim. A previous Phase II clinical trial of FMX101 also demonstrated clinically and statistically significant results in all primary and secondary endpoints. In January 2018, we announced the completion of a long-term safety study that was an extension of our two initialthese Phase III clinical trials, for FMX101. The results from the study showed FMX101 to be well-tolerated and to have an acceptable safety profile.
We are also investing significant efforts and resources to advance our two pivotal Phase III clinical trialsas well as in the U.S.40-week open label safety extension (Study FX2016-13) that was completed in February 2019. We cannot provide any assurances or predict with any certainty the schedule for which we will receive approval for FMX103, if at all.
Both AMZEEQ and FMX103 were developed using our Molecule Stabilizing Technology (MST™) vehicle, a proprietary foam platform designed to optimize the topical delivery of minocycline, foam for moderate-to-severe papulopustular rosacea, after our Phase II clinical trial for FMX103 demonstrated clinically and statistically significant resultsan active pharmaceutical ingredient, or API, that was commercially available only in all primary and secondary endpoints. We announcedoral form until the enrollmentFDA’s approval of the first patient in our Phase III trials on June 12, 2017. We expect to have top-line results from the blinded stage of both trials by the end of the third quarter or in the beginning of the fourth quarter of 2018 and to complete the trials, including a long-term safety extension study, in 2019.AMZEEQ. In addition, we successfully completed a Phase II clinical trial with FDX104, ourhave proprietary doxycycline foam for the managementdelivery technologies in development that enable topical delivery of moderate-to-severe rash associated with epidermal growth factor receptor inhibitor (EGFRI) anticancer treatments, and we are currently assessing our various options with regard to this product candidate, including seeking out licensing opportunities for it. We have also successfully completed a Phase II clinical trial of FMX102, our minocycline foam for the treatment of impetigo, including impetigo caused by methicillin-resistant staphylococcus aureus, or MRSA. However, as described in previous reports, we have been contemplating the commercial viability of this product candidate for some time, given its limited market dominated by generic products, and following additional analysis of its potential we have recently decided to discontinue its further development in light of our current priorities and our other ongoing research and development efforts. We developed FMX101, FMX102, FMX103 and FDX104 using our proprietary technology, which includes our foam-based platforms. This technology enables us to formulate and stabilize a wide variety of drugs and deliver them directly to their target site. We have independently developed a series of proprietary foam platforms,APIs, each having unique pharmacological features and characteristics. Our foamcharacteristics designed to keep the API stable when delivered and directed to the target site. We believe our MST vehicle and other topical delivery platforms may offer significant advantages over alternative delivery options and are suitable for multiple application sites. We believe our proprietary foam-based platform may serve as a foundation in developing a potential pipeline of productssites across a range of conditions.
BesideOur corporate strategy is to develop and solidify a commercial presence in acne and rosacea by commercializing our in-house developments, we have also entered into developmentdrug product AMZEEQ and license agreements relating toby obtaining FDA approval for our technology with various pharmaceutical companies, most notably Bayer HealthCare AG (formerly, Intendis), or Bayer, whichlate-stage drug product candidate FMX103, in the third quarterUnited States. We are also seeking to enhance our longer-term commercial potential by identifying and advancing additional product candidates through our internal development efforts, our entry into potential research collaborations or in-licensing arrangements, or our acquisition of 2015 began selling in the U.S.additional products or technologies or product candidates that complement our current product portfolio.
We are currently developing a prescriptionpipeline of other innovative product candidates to enhance our minocycline platform, including FCD105, a topical combination foam product for the treatment of rosacea known as Finacea® Foam (azelaic acid) 15%, or Finacea, after developing suchmoderate-to-severe acne vulgaris, comprising minocycline 3% and adapalene 0.3%. In September 2019, we announced that the first patient was enrolled in our Phase II clinical trial (Study FX2016-40) to evaluate the efficacy and safety of FCD105. In November 2019, we announced that enrollment had been completed for this clinical trial, and we expect topline data from this Phase II clinical trial in the second quarter of 2020. Pending a successful development program, we intend to file an NDA for FCD105 under the FDA 505(b)(2) regulatory pathway, which is the same regulatory pathway we have pursued for AMZEEQ and are pursuing for FMX103.
To date, only one of our products, AMZEEQ, has been approved by the FDA, and we have only submitted one additional product in collaboration with Foamixcandidate, FMX103, for approval by regulatory authorities. We do not currently have rights, other than for AMZEEQ, and utilizing Foamix’s proprietary foam technology platform. According tothose under our license agreement with Bayer, we are entitled to royalties and certain contingent payments upon commercialization of Finacea, based on Bayer’s net sales of Finacea. In 2017 we were entitled to receive royalty payments from Bayer in a total amount of $3.5 million on account of its sales of Finacea. Our total revenues from such agreements from our inception through December 31, 2017 were approximately $28.1 million. To date, we have not yet submitted any product candidates for approval by regulatory authorities and we do not currently have rightsLEO to any products that have been approved for marketing in any territory. We have financed our operations primarily through private and public placements of our ordinary shares, debt, warrants and through fees, cost reimbursements and royalties received from development and licensing collaborations.our licensees. We have incurred significant losses since our inception in 2003. Our accumulated deficit at December 31, 20172019 was $141.3$310.6 million and our net loss for the year ended December 31, 20172019 was $65.7$95.2 million. A substantial amount of our net losses resulted from costs incurred in connection with our research and development programs and clinical trials and from general and administrative costs associated with our operations. The net losses and negative operating cash flows incurred to date, together with expected future losses, have had, and likely will continue to have, an adverse effect on our shareholders’ equity and working capital. The amount of future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate offsetting revenue, if any. We expect to continue to incur significant expenses and operating losses for the foreseeable future.
We do not expect to generate revenue from product sales unless and until we successfully complete clinical trials and obtain marketing approval from the FDA for one or more of our lead product candidates, FMX101 or FMX103. Accordingly, we anticipate that we will need to raise additional capital in order to complete the development and commercialization of FMX101 and FMX103 and to advance the development of our other product candidates. Until we can generate a sufficient amount of product revenue to finance our cash requirements, we expect to finance our future cash needs primarily through a combination of public and private equity offerings, debt or other structured financings, and entry into strategic collaborations. We may be unable to raise capital when needed or on attractive terms, which would force us to delay, limit, reduce or terminate our development programs or commercialization efforts. We will need to generate significant revenue to achieve and sustain profitability, and we may never be able to do so.
Revenues
To date,As of December 31, 2019, we have not generated any revenues from sales of FMX101AMZEEQ, FMX103 or any of our other product candidates. During 2019 we were engaged in pre-launch sales and marketing planning activities and other pre-commercialization efforts in order to support the commercialization of AMZEEQ in the United States. We do notreceived FDA approval for AMZEEQ on October 18, 2019 and launched AMZEEQ in the United States on January 13, 2020. As a result, we expect to commence generating revenues from sales of AMZEEQ in the first half of 2020. We will not commercially launch FMX101FMX103 or other product candidates in the U.S. or generate any revenues from sales of any of our product candidates before 2019, after completing their developmentunless and clinical testing and obtaining approvals for theiruntil we obtain marketing in the U.S.approval. Our ability to generate revenues from sales will depend on the successful commercialization of FMX101AMZEEQ, and, ourif approved, FMX103 and any other product candidates.
As of December 31, 2017,2019, we had generated cumulative revenues of approximately $28.1$32.2 million under development and license agreements, of which approximately $18.3$18.4 million were development service payments, approximately $3.1 million were contingent payments and $6.7$10.7 million were royalty payments. The royalties were paid in relation to Finacea, the prescription foam product that we developed in collaboration with Bayer, which later assigned it to LEO. Our total revenues for the yearsyear ended December 31, 2017, 20162018 was $3.6 million. Our total revenues for the year ended December 31, 2019 fell to $0.4 million due to the ongoing suspension of the manufacturing of Finacea by LEO, following inadequate supply of quality-compliant batches of the API used in such product, as described above in “Item 1 – Business ⸻Development and 2015 were $3.7 million, $5.5 million and $849,000, respectively.License Agreements.” We may become entitled to additional contingent payments, subject to achievement of the applicable clinical results by our other licensees. In light of the current phase of development under these agreements, we do not expect to receive significant payments in the near term, if at all. We are also entitled to additional royalties from net sales or net profits generated by other products to be developed under these agreements, if they are successfully commercialized. In those development and license agreements in which royalties are based on net sales, their rate ranges from 3% to 8.5%, and in the agreement in which royalties are based on net profits, their rate is 6%.
Pursuant to a collaboration agreement with Bayer HealthCare AG, we are entitled to receive royalty payments with respect to Finacea®, a prescription foam product that we developed in collaboration with Bayer. In the year ended December 31, 2017, we were entitled to receive royalty payments in an amount of $3.5 million.
Cost of Revenues
Cost of revenues includes costs and expenses we incur in supplying services to our licensees under our development and license agreements with them. These services include design and development of product prototypes, performance of in-vitro studies and other lab tests, compiling project reports and recommendations and carrying out other tasks related to such efforts. Our services to licensees do not include development work beyond the prototype stage, clinical trials or pursuit of regulatory approval, which are the responsibility and at the expense of each licensee.
Accordingly, our cost of revenues includes payroll and other payments on behalf of the employees and consultants assigned to these projects; laboratory services related to the studies we perform on behalf of the licensees; rent and office maintenance costs related to the use of our facilities and infrastructure, utilities and other overhead services in connection with the projects performed for the licensees.
Our totalThere was no cost of revenues for the twelve monthsyears ended December 31, 2017, 20162019 and 2015 were $13,000, $59,000 and $70,000, respectively. We2018, as revenues in both years consisted almost entirely of royalties, which do not bear related cost of revenue.
We expect substantial changes into incur cost of revenue unless and untilas we obtain regulatory approval for our lead product candidates and begin the serial production of such products, whether internally or through third party manufacturers, at which pointAMZEEQ and we expect our cost of revenues to grow along with the growth of our sales and inventory needs. Cost of revenues as a percentage of revenues for the twelve months ended December 31, 2017, 2016 and 2015 were 0.4%, 1.1%, and 8.2%, respectively. The decrease in cost of revenues is primarily due to the decrease in new development projects and the increase in royalty payments which do not bear related cost of revenue.
Operating Expenses
Research and development expenses
Research and development activities are, and will continue to be, central to our business. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect to incur significant research and development costs to increase significantly forin the foreseeable future, asassuming our pipeline products progress into clinical trials. However, we do not believe that it is possible at this time to accurately project total program-specific expenses to reach commercialization.commercialization for our product pipeline. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will affect our clinical development programs and plans.
Our research and development expenses relate primarily to the development of FMX101.AMZEEQ, FMX103 and FCD105. From January 1, 2007 until December 31, 2017,2019, we cumulatively spent approximately $104.9$220.5 million on research and development of FMX101AMZEEQ, FMX103, FCD105 and our other product candidates. Our total research and development expenses for the years ended December 31, 2017, 20162019 and 20152018 were approximately $57.8, $25.9$51.2 million and $10.7$64.5 million, respectively. We charge all research and development expenses to operations as they are incurred. We expect research
Research and development expenses to increase in the near term due to the ongoing Phase IIIconsist primarily of:
employee-related expenses, including salaries, benefits and related expenses, including share based compensation expenses;
expenses incurred under agreements with third parties, including subcontractors, suppliers and consultants that conduct regulatory activities, clinical trials for FMX101 and FMX103.preclinical studies;
expenses incurred to acquire, develop and manufacture clinical trial materials;
facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance, and other operating costs; and
other costs associated with preclinical and clinical activities and regulatory operations.
The successful development of FMX101, FMX103 and additionalour product candidates, other than FMX103, is highly uncertain. While we have filed an NDA for FMX103, we cannot provide any assurances that we will receive approval from the FDA. As such, at this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of our technology for additional indications. This uncertainty is due to numerous risks and variables associated with developing products, including the uncertainty of:
| · | the scope, rate of progress and expense of our research and development activities; |
the scope, rate of progress and expense of our research and development activities;
| · | the terms and timing of regulatory approvals; |
the terms and timing of regulatory approvals; and
| · | our ability to file, prosecute, obtain, maintain, defend and enforce patents and other intellectual property rights and the expense of filing, prosecuting, obtaining, maintaining, defending and enforcing patents and other intellectual property rights; |
our ability to file, prosecute, obtain, maintain, defend and enforce patents and other intellectual property rights and the expense of filing, prosecuting, obtaining, maintaining, defending and enforcing patents and other intellectual property rights; | · | the ability to market, commercialize and achieve market acceptance for FMX101 or any other product candidate that we may develop in the future; and |
| · | our ability to identify, evaluate, acquire or in-license intellectual property, if needed, to facilitate the commercialization of our products and technologies. |
A change in the outcome of any of these variables with respect to the development of FMX101, FMX103 or our other product candidates could result in a significant change in the costs and timing associated with their development. For example, if the FDA or foreign regulatory authority werewas to require us to conduct preclinical studies and clinical trials beyond those which we currently anticipate for the completion of clinical development of our product candidates, or if we experience significant delays in enrollment in any clinical trials, we could be required to expend significant additional time and financial resources and time on the completion of the clinical development. Research and development expenses consist primarily of:
| · | employee-related expenses, including salaries, benefits and related expenses, including share based compensation expenses; |
| · | expenses incurred under agreements with third parties, including subcontractors, suppliers and consultants that conduct regulatory activities, clinical trials and preclinical studies; |
| · | expenses incurred to acquire, develop and manufacture clinical trial materials; |
| · | facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance, and other operating costs; and |
| · | costs associated with preclinical and clinical activities and regulatory operations. |
We have managed to finance our research and development operations and expenses without the aid of government grants, other than a loan in the amount of approximately $450,000$0.5 million received from the Israel-U.S. Bi-national Industrial Research and Development Foundation, or BIRD, in 2008, which was fully repaid in 2016. Accordingly, we are not subject to the provisions of the Law for Encouragement of Research and Development in the Industry, 5744-1984, nor to any directives issued by the Israel Innovation Authority, previously known as the Office of the Chief Scientist.Scientist of the Ministry of Economy.
Selling, general and administrative expenses
Our selling, general and administrative expenses consist principally of:
| · | employee-related expenses, including salaries, benefits and related expenses, including share based compensation expenses; |
employee-related expenses, including salaries, benefits and related expenses, including share based compensation expenses;
| · | costs associated with market research and business development activities in preparation for future marketing and sales, including activities intended to select the most promising product candidates for further development and commercialization; |
| · | legal and professional fees for auditors and other consulting expenses not related to research and development activities or to market research or business development activities; |
| · | cost of offices, communication and office expenses; |
| · | information technology expenses; |
| · | depreciation of tangible fixed assets related to our general and administrative activities or to our market research and business development activities; and |
| · | costs associated with filing, prosecuting, obtaining and maintaining patents and other intellectual property. |
As part of our growth strategy, we have begun building up our dedicated U.S. marketing and business development teamactivities in preparation for future marketing and infrastructure,sales, including activities intended to select the most promising product candidates for further development and we intendcommercialization;
legal and professional fees for auditors and other consulting expenses not related to furtherresearch and development activities or to market research or business development activities;
cost of office space, communication and office expenses;
information technology expenses;
depreciation of tangible fixed assets related to our general and administrative activities or to our market research and business development activities; and
costs associated with filing, prosecuting, obtaining, maintaining, and defending patents and other intellectual property.
We expect that our selling general and administrative expenses will increase such U.S. infrastructure, as well as expand our marketing effort to new markets. We therefore expect sellingdue the commercialization of AMZEEQ and, marketing expenses to increase in absolute terms as a percentage of our revenues.if approved, FMX103. Our total selling, general and administrative expenses for the years ended December 31, 2017, 20162019 and 20152018 were approximately $11.5, $9.2$45.1 million and $7.0$14.0 million, respectively.
Our ability to successfully commercialize AMZEEQ and, if approved, FMX103, is highly uncertain and depends on a number of factors, including market adoption of our product or product candidates by physicians and patients, market access uncertainty, our ability to scale to the market opportunity and the existence of existing and future products that may compete with ours. As such, at this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary for successful commercialization of AMZEEQ or, if approved, FMX103.
Financial Income, net
Financial income, net, consists primarily of gains from interest earned from our bank deposits and financial income on our marketable securities.securities offset by interest expenses on our long-term debt.
Taxes on Income
During 2016Effective January 1, 2018 the standard corporateU.S. Tax cuts and Jobs Act (Tax Act) reduced the U.S Federal tax by 14% from 35% in 2017 to 21% in 2018, which remained the effective tax rate in Israel was 25%, and during 2017 it was 24%.2019.
We have yet to generate taxable income in Israel, as we have historically incurred operating losses resulting in carry forward tax losses totaling approximately $88.6$224.4 million as of December 31, 2017. We anticipate2019. As of December 31, 2019 we incurred of net carry forward tax losses in the amount of $27.3 million in our U.S subsidiary Foamix Pharmaceuticals Inc.. As of December 31, 2019 we anticipated that we will be able to carry forward these tax losses to future tax years. Accordingly, we do not expect to pay taxes in Israelthe applicable jurisdiction until we have taxable income after the full utilization of our carry forward tax losses.losses in that jurisdiction. We provided a full valuation allowance with respect to the deferred tax assets related to these carry forward losses.
During 2017, 20162019 we incurred tax benefits of $0.2 million and 2015during 2018 we incurred tax expenses of $1.2$ $0.2 million, $387,000 and $39,000, respectively, inrelated to our U.S. subsidiary, Foamix Pharmaceuticals Inc.subsidiary.
Comparison of the Year endedEnded December 31, 20172019 to the Year Ended December 31, 20162018
Revenues
Our total revenues, consisting primarily of royalties, decreased by $1.8$3.2 million, or 32.7%89%, from $5.5$3.6 million in the year ended December 31, 20162018 to $3.7$0.4 million in the year ended December 31, 2017. The decrease is mainly2019, due to a decreasethe ongoing suspension of $2.5 millionthe manufacturing of Finacea by LEO, following inadequate supply of quality-compliant batches of the API used in contingent payments from Buyer, that were payable for 2016 due to Bayer’s achievement of certain sale targets during that year, offset by an increasesuch product, as described above in royalty payments in the amount of $565,000 from Bayer for the sales of Finacea® Foam.“Item 1 – Business ⸻Development and License Agreements.”
Cost of revenues
OurThere was no cost of revenues for the years ended December 31, 20172018 and 2016 were $13,000 and $59,000, respectively. The $46,000 decrease2019, as revenues in costboth years consisted almost entirely of revenues resulted primarily from a decrease in the development projects. Cost of revenues as a percentage of revenues for the years ended December 31, 2017 and 2016 was 0.4% and 1.1%, respectively. The decrease in the cost of revenues as a percentage of revenues was primarily due to the decrease in new development projects and the increase in royalty paymentsroyalties, which do not bear related cost of revenue.
Research and development expenses
Our research and development expenses for the year ended December 31, 20172019 were $57.8$51.2 million, representing an increasea decrease of $31.9$13.3 million, or 123%21%, compared to $25.9$64.5 million for the year ended December 31, 2016.2018. The increasedecrease in research and development expenses resulted primarily from an increasedecrease of $28.0$21.4 million in costs relating predominantlyclinical trial expenses due to FMX101the completion of AMZEEQ and FMX103 clinical trials, andoffset by an increase of $3.0$3.2 million in consulting expenses, an increase of $2.8 million in payroll and payroll relatedpayroll-related expenses primarily due to an increase in headcount.headcount and salaries and an increase of $2.6 million in payments related to the submission of our NDA for FMX103.
Selling, general and administrative expenses
Our general and administrative expenses for the year ended December 31, 20172019 were $11.5$45.1 million, representing an increase of $2.3$31.1 million, or 25%222%, compared to $9.2$14.0 million for the year ended December 31, 2016.2018. The increase in selling, general and administrative expenses resulted primarily from an increase of $1.9$18.0 million in connection with the pre-commercialization activities, an increase of $5.4 million in payroll and other payroll-related expenses mostly due to an increase in headcount as we built-out our sales and salary raises.marketing organization in preparation of the AMZEEQ launch, a $3.1 million increase in costs relating to the Merger and a $2.0 million increase in other advisor and consulting expenses.
Operating loss
As a result of the foregoing, our operating loss for the year ended December 31, 2017,2019, was $65.6$95.9 million, compared to an operating loss of $29.6$74.9 million for the year ended December 31, 2016,2018, an increase of $36.0$21.0 million, or 122%28%.
FinanceFinancial income, net
In the years ended December 31, 20172019 and 2016,2018, our financial income included mostly gains from marketable securities and interest earned on our bank deposits. In the year ended December 31, 2016 those gains were partially2019, such income was offset by interest expenses on the loan from the BIRD foundation fully repaid during the second quarter of 2016.our long-term debt.
The finance expenses (income)financial income, net, by cash and non-cash components are as follows:
| | | Year ended December 31, | | | | | | | | 2017 | | | 2016 | | | | | | | | | | | (in thousands of U.S. dollars) | | | (in thousands of U.S. dollars) | | | Interest on bank deposits | | $ | (532 | ) | | $ | (536 | ) | | $ | 589 | | | $ | 297 | | | Gain from marketable securities, net | | | (602 | ) | | | (401 | ) | | | | | | | | | | Non-cash foreign exchange profit, net | | | - | | | | (24 | ) | | | Total income | | | (1,134 | ) | | | (961 | ) | | | 1,672 | | | | 985 | | | Less: | | | | | | | | | | | | | | | | Interest and finance expenses on long-term debt | | | | (921 | ) | | | - | | | Other expenses | | | 14 | | | | 17 | | | (19 | ) | | (17 | ) | | Finance expenses on BIRD loan | | | - | | | | 243 | | | | Non-cash foreign exchange loss, net | | | 57 | | | | - | | | | Foreign exchange loss, net | | | | | | | | | | | Total expenses | | | 71 | | | | 260 | | | | | | | | | | | Finance income, net | | $ | (1,063 | ) | | $ | (701 | ) | | | Financial income, net | | | | | | | | | |
Taxes on income
During 20172019 and 2016,2018, we havedid not generatedgenerate taxable income in Israel. However, we had incurred tax expensesIsrael and in our U.S. subsidiary, Foamix Pharmaceuticals Inc., For the year ended December 31, 2019 we incurred tax benefits relating to our U.S. subsidiary, in the amount of $1.2$0.2 million and $387,000 forrelating to an uncertain tax position. For the years 2017 and 2016 respectively. The increase inyear ended December 31, 2018, we incurred tax expenses resulted from an increase in our provision for uncertain tax positions.of $0.2 million.
Net Loss
As a result of the foregoing ourOur net loss for the year ended December 31, 20172019 was $65.7$95.2 million, compared to $29.3$74.2 million for the year ended December 31, 2016,2018, an increase of $36.4$21.0 million, or 124%28%.
Comparison of the Year ended December 31, 2016 to the Year Ended December 31, 2015
Revenues
Our total revenues increased by $4.7 million, or 553%, from $849,000 in the year ended December 31, 2015 to $5.5 million in the year ended December 31, 2016. The increase is mainly due to the increase of $2.7 million in royalty payments from Bayer HealthCare AG for the sales of Finacea® Foam, and additional contingent payments totaling $2.5 million, due to Bayer’s achievement of certain sale targets during 2016.
Cost of revenues
Our cost of revenues for the years ended December 31, 2016 and 2015 were $59,000 and $70,000, respectively. The $11,000 decrease in cost of revenues resulted primarily from a decrease in the development projects. Cost of revenues as a percentage of revenues for the years ended December 31, 2016 and 2015 was 1.1% and 8.2%, respectively. The decrease in the cost of revenues as a percentage of revenues was primarily due to the increase in royalty and contingent payments, to which no cost of revenue is related.
Research and development expenses
Our research and development expenses for the year ended December 31, 2016 were $25.9 million, representing an increase of $15.2 million, or 142%, compared to $10.7 million for the year ended December 31, 2015. The increase in research and development expenses resulted primarily from an increase of $12.8 million in costs relating to the FMX101 and FMX103 clinical trials and an increase of $2.2 million in payroll and payroll related expenses due to an increase in the number of R&D employees.
Selling, general and administrative expenses
Our general and administrative expenses for the year ended December 31, 2016 were $9.2 million, representing an increase of $2.2 million, or 31%, compared to $7.0 million for the year ended December 31, 2015. The increase in selling, general and administrative expenses resulted primarily from an increase of $1.3 million in payroll and other payroll-related expenses mainly due to an increase in headcount; an increase of $417,000 in market research expenses; an increase of $225,000 in travel expenses; and an increase of $201,000 in expenses related to the company’s board of directors.
Operating loss
As a result of the foregoing, our operating loss for the year ended December 31, 2016, was $29.6 million, compared to an operating loss of $16.9 million for the year ended December 31, 2015, an increase of $12.7 million, or 75%.
Finance income
In the year ended December 31, 2016, our financial income included mostly gains from marketable securities and interest earned on our bank deposits, partially offset by expenses on the loan from the BIRD foundation fully repaid during the second quarter of 2016. In the year ended December 31, 2015 our financial income included mostly gains from marketable securities and interest earned on our bank deposits.
The finance expenses (income) by cash and non-cash components are as follows:
| | | Year ended December 31, | | | | | 2016 | | | 2015 | | | | | (in thousands of U.S. dollars) | | | Other expenses | | $ | 17 | | | $ | 23 | | | Finance expenses on BIRD loan | | | 243 | | | | * | | | Total expenses | | | 260 | | | | 23 | | | Less: | | | | | | | | | | Interest on bank deposits | | | (536 | ) | | | (289 | ) | | Gain from marketable securities, net | | | (401 | ) | | | (180 | ) | | Non-cash foreign exchange profit, net | | | (24 | ) | | | (6 | ) | | Total income | | | (961 | ) | | | (475 | ) | | Finance income, net | | $ | (701 | ) | | $ | (452 | ) |
________________________
* Less than $1,000
Taxes on income
During 2015 and 2016, we have not generated taxable income in Israel. However, we had incurred tax expenses in our U.S. subsidiary, Foamix Pharmaceuticals, Inc., in the amount of $39,000 and $387,000 for the years 2015 and 2016 respectively.
Net Loss
As a result of the foregoing our loss for the year ended December 31, 2016 was $29.3 million, compared to $16.5 million for the year ended December 31, 2015, an increase of $12.8 million, or 78%.
Liquidity
Since our inception, we have incurred losses from operations and negative cash flows from our operations. For the twelve monthsyear ended December 31, 2017,2019, we incurred a net loss of $65.7$95.2 million, which included $53.2$73.4 million used for operating activity.activities. For the twelve monthsyear ended December 31, 2016,2018, we incurred a net loss of $29.3$74.2 million, which included $27.4$68.7 million used for operating activity.activities.
As of December 31, 20172019 and December 31, 2016,2018, we had a working capital surplus of $59.3$47.1 million and $111.7$90.7 million, respectively, and an accumulated deficit of $141.3$310.6 million and $75.6$215.4 million, respectively.
Our principal source of liquidity as of December 31, 20172019 consisted of cash cash equivalents,and investments (including restricted cash bank deposits and marketable securitiessecurities) of $76.4$73.4 million and borrowings under our Credit Agreement of $35.0 million.
On July 29, 2019, we entered into a Credit Agreement with Foamix Pharmaceuticals Inc., or the Borrower, lenders from time to time party thereto, the subsidiary guarantors from time to time party thereto, or the Subsidiary Guarantors, Perceptive Credit Holdings II, LP, or Perceptive, as administrative agent, and OrbiMed Royalty & Credit Opportunities III, LP, or OrbiMed, that provides us with a senior secured delayed draw term loan facility in an aggregate principal amount of up to $50.0 million, or the Term Loan, for general corporate purposes.
In connection with the Merger, the Credit Agreement will be amended on or around the effective Date in order to add Menlo as a guarantor.
The Term Loan is comprised of three tranches: (a) $15.0 million, which was available and drawn by the Borrower on July 29, 2019, the date of closing of the Credit Agreement, (b) $20.0 million, which was available until February 29, 2020 and drawn by the Borrower on December 17, 2019, following the FDA’s approval of AMZEEQ, the listing of AMZEEQ in the FDA’s “Orange Book,” and our entrance into the Contract Manufacturing and Supply Agreement with ASM for the manufacture and supply of AMZEEQ, and (c) up to $15.0 million, which will become available to the Borrower subject to our achievement, prior to September 30, 2020, of certain revenue targets set forth in the Credit Agreement.
The lenders are entitled to a fee in an amount equal to 1.0% of any principal amount actually drawn by the Borrower, upon such drawdown. Additionally, the outstanding principal amount accrues interest on a monthly basis (and is payable monthly in arrears) at an annual rate equal to the sum of 8.25% plus the greater of (i) the one-month $US LIBOR as of the second quarterbusiness day of 2014,each calendar month, and (ii) 2.75%. Upon the occurrence and during the continuance of any event of default, as defined in the Credit Agreement, the base interest of 8.25% shall automatically increase to 12.25% per annum.
There will be no scheduled repayments of principal prior to July 29, 2023, the fourth anniversary of the closing date. Thereafter, the Borrower shall make monthly payments in an amount equal to 1.5% of the aggregate principal amount of the loans outstanding on such fourth anniversary date, and repay the entire remaining outstanding balance of the Term Loan on July 29, 2024, the final maturity date, subject to any acceleration as provided in the Credit Agreement, including upon an event of default. Also, a mandatory prepayment may be triggered by certain casualty losses or sales of the assets serving as collateral, as defined in the Credit Agreement.
The Borrower has the right to optionally prepay all or any part of the outstanding principal amount of the Term Loan at any time, subject to payment of any accrued but unpaid interest on the principal being prepaid plus an additional prepayment premium equal to (i) 10.0% of any principal amount prepaid prior to the first anniversary of the closing date, (ii) 8.0% of any principal amount prepaid after the first anniversary and prior to the second anniversary of the closing date, (iii) 4.0% of any principal amount prepaid after the second anniversary and prior to the third anniversary of the closing date, and (iv) 2.0% of any principal amount prepaid after the third anniversary and prior to the fourth anniversary of the closing date.
As additional consideration for the Term Loan, we completedissued to Perceptive and OrbiMed, upon closing of the Credit Agreement, a private placement of preferred A shares and warrants with a group of new investors and several of our existing shareholders in two phases, on May 13, 2014 and June 3, 2014, raisingwarrant to purchase a total of $8.2 million, net1,100,000 of issuance costs, in considerationour ordinary shares at an exercise price of 1,036,431 preferred$2.09 per share – equal to the trailing five-day volume weighted average price of our ordinary shares on the trading day immediately prior to the closing date – and 1,061,469 warrants to purchase preferred shares.expiring on July 29, 2026.
In September 2014,connection with our entry into the Credit Agreement described above, on July 29, 2019, we completed our initial public offering infurther entered into a Securities Purchase Agreement, or the Purchase Agreement, with Perceptive Life Sciences Master Fund Ltd., or Perceptive Life Sciences, an affiliate of Perceptive, pursuant to which we issued and sold 6,700,000 ordinary shares for $6.00 per share raising total net proceeds, after expenses,to Perceptive Life Sciences, in a registered offering, an aggregate of approximately $35.7 million. In October 2014 the underwriters exercised their option to purchase an additional 968,2006,542,057 of our ordinary shares at a purchase price of $6.00 per share. The proceeds from the exercise of the option, net of underwriters’ commission, were approximately $5.4 million, bringing the total net proceeds from the initial public offering, after expenses, to approximately $41.1 million. In April 2015, we completed a follow-on offering in which we sold 7,419,353 ordinary shares, including the exercise of underwrites option, for $9.30$2.14 per share, raising total net proceeds, after expenses, of approximately $64.2 million.
On October 21, 2015, we filed withrepresenting the Securities and Exchange Commission (the SEC) a “shelf” registration statement on a Form F-3 for the registrationclosing price of our ordinary shares thaton the last trading day prior to signing of the Purchase Agreement, for aggregate gross proceeds of approximately $14.0 million, before deducting offering expenses.
On August 19, 2019, we entered into a Controlled Equity Offering Sales Agreement, or the Sales Agreement, with Cantor Fitzgerald & Co., or Cantor, as sales agent. Under the terms of the Sales Agreement, we may offer, issue and sell through Cantor, from time to time, offer and sell in one or more offerings withordinary shares having an aggregate offering price of up to $150$30.0 million. On September 12, 2016 we filed withUnder the SEC an amendment to the shelf registration statement on a Form F-3/A, which became effective on September 23, 2016. On September 30, 2016, we completed another follow-on offering under our amended shelf registration statement, in which we sold 5,700,000 ordinary shares for $9.50 per share, raising net proceeds, after expenses and underwriter commissions, of approximately $50.4 million. An additional 300,000 ordinary shares were sold by certain selling shareholders. In October 2016 the underwriters partially exercised the option granted to them in the underwriting agreement and purchased an additional 411,959 ordinary shares at a price of $9.50 per share. The proceeds from the exercise of the option, net of expenses and underwriter commissions, were approximately $3.7 million, bringing the total net proceeds from the offering to approximately $54.1 million.
On February 24, 2017, we filed with the SEC a “shelf” registration statement on a Form F-3 for the registration ofSales Agreement, Cantor may sell our ordinary shares that we may, from timeby any method permitted by law and deemed to time, offer and sellbe an “at-the-market offering,” as defined in one or more offerings with an aggregate offering price of upRule 415(a)(4) promulgated under the Securities Act, including sales made directly on the Nasdaq, in each case pursuant to $291,936,389, which becameour effective on March 14, 2017. However, following our transition from foreign private issuer to domestic issuer status beginning January 1, 2018 and the filing of this Annual Report on Form 10-K, we will no longer be able to make use of such shelf registration statement on Form F-3S-3 (File No. 333-224084) and will need to file a newthe related base prospectus included in such registration statement, as supplemented by the prospectus supplement dated August 19, 2019. We have not made any sales under the Sales Agreement and on a form applicable to domestic issuers, such as Form S-3, should we wish to engage in further public offeringsMarch 9, 2020, with the completion of our shares or other instruments.the Merger, the Sales Agreement has been terminated.
We anticipate that with our existing cash and investments, along with Menlo’s Cash and investment, funds that we may be entitled to receive upon reaching certain milestones under the Credit Agreement and our 2020 estimated income from AMZEEQ and FMX103, we will be able to fund our planned operating expenses and capital expenditure requirements forinto the third Phase III clinical trial for FMX101, whichsecond quarter of 2021. Prior to issuing this report, we expectrevised our operating plan in order to complete by the endreduce expenses and, until we are able to obtain further funding, we will only focus on (a) commercialization of 2018,AMZEEQ, (b) pre-commercialization and for the two Phase III clinical trialslaunch preparations for FMX103, whichassuming we receive regulatory approval, and (c) other general corporate expenses. We expect we will need additional funding to complete bysupport our operating expenses and capital requirements during the end of the thirdsecond quarter of 2019,2021 and throughoutbeyond, including with regard to certain pipeline development activities, the NDA filing for FMX101, whichcommercialization of any of our product candidates if they are granted regulatory approval, and to fund our internal and external research and development efforts. We have based this estimate on assumptions that may prove to be wrong, and we expect to complete by the end of 2019.could use our capital resources sooner than we currently expect. Foamix Pharmaceuticals Inc., our wholly-owned subsidiary, was incorporated on May 6, 2014 under the laws of the State of Delaware, with the intent to serve as our marketing and sales arm in the U.S. As a result, we do not expect our subsidiary to distribute any dividends, or extend any loans or advances to us in the foreseeable future.
Capital Resources
Overview
To date, we have financed our operations primarily through private and public placements of our ordinary shares, convertible loansdebt, warrants and through fees, cost reimbursements and royalties received from our licensees.
From inception through December 31, 2017,2019, we have received net cash proceeds of approximately $187.7$328.1 million from the issuance of ordinary shares, preferred shares, debt, exercise of options and warrants and from convertible loans.
Cash flows
The following table summarizes our statement of cash flows for the years ended December 31, 2017, December 31, 20162019, 2018 and December 31, 2015:2017:
| | | Year ended December 31, | | | | | | 2017 | | | 2016 | | | 2015 | | | | | | | | (in thousands of U.S. dollars) | | | | | | | | | | | | Net cash (used in) / provided by: | | | | | | | | | | | (in thousands) | | | Operating activities | | $ | (53,177 | ) | | $ | (27,370 | ) | | $ | (12,498 | ) | | $ | (73,394 | ) | | $ | (68,664 | ) | | $ | (53,177 | ) | | Investing activities | | | 37,755 | | | | (15,018 | ) | | | (78,516 | ) | | 41,869 | | | (11,755 | ) | | 37,755 | | | Financing activities | | $ | 140 | | | $ | 55,031 | | | $ | 66,801 | | | $ | 47,950 | | | $ | 92,374 | | | $ | 140 | |
Net cash used in operating activities
The use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and measurements and changes in components of working capital. Adjustments to net income for non-cash items consists mainly include depreciation and amortization andof share-based compensation.
Net cash used in operating activities was $53.2$73.4 million in the twelve monthsyear ended December 31, 2017,2019, compared to $27.4$68.7 million in the twelve monthsyear ended December 31, 2016 and compared to $12.52018. The increase of $4.7 million in the net cash used in operating activities in the twelve months ended December 31, 2015. The increase2019 compared to 2018 was attributable primarily to the increase in company activity, mostly related pre-commercialization efforts in order to support the commercialization of AMZEEQ and applying for FDA approval for FMX103, offset by a reduction in activities relating to clinical trials following the completion of the Phase III clinical trials of AMZEEQ and payroll expenses.FMX103 in the course of 2018.
Net cash used in investing activities
The use of cash in investing activities has been primarily related to purchase of marketable securities and investment in bank deposits. Net cash provided by investing activities was $37.8primarily related to proceeds from the sale and maturity of marketable securities, offset by investment in bank deposits and marketable securities. Net cash provided by investing activities was $41.9 million in the twelve monthsyear ended December 31, 2017,2019, compared to net cash$11.8 million used in investing activitiesin the year ended December 31, 2018. The change of $15.0$53.7 million in the twelve monthsyear ended December 31, 2016 and2019 compared to $78.5 million in the twelve monthsyear ended December 31, 2015. The change in investing activities between 2017, 2016 and 20152018 was attributable primarily to increase in proceeds from sale and maturity of marketable securities and bank deposits, and the decrease in cash invested.deposits.
Net cash provided by financing activities
Net cash provided by financing activities was $140,000$47.9 million in the twelve monthsyear ended December 31, 2017, a decrease of $54.9 million from $55.02019, compared to $92.4 million in the twelve monthsyear ended December 31, 2016.2018. The decrease of $44.5 in net cash provided by financing activities in the year ended December 31, 2019 compared to the year ended December 31, 2018 was attributable primarily to the capital raised in our 2016 follow-on public offering. Net cash provided by financing activities was $55.0 millionreduction in the twelve months ended December 31, 2016, a decreasescope of $11.8our share offerings in 2019, after conducting two offerings in 2018 in which we received aggregate net proceeds of approximately $16.1 million from $66.8issuance of shares to OrbiMed and of approximately $75.4 million from issuance of shares in the twelve months ended December 31, 2015. The decrease was attributable primarilyfollow-on offering which closed on September 18, 2018, our financing in 2019, included the first two tranches of the Term Loan withdrawn under the Credit Agreement and the proceeds from the share offering to a larger amount of capital raised inPerceptive Life Sciences under the 2015 financing round compared to the 2016 financing round.Purchase Agreement.
Cash and funding sources
The table below summarizes our main sources of financing for the years ended December 31, 2017, 20162019, 2018 and 2015:2017:
| | | Proceeds from our public offerings(1) | | | Proceeds from issuance of ordinary shares | | | Payments from licensees | | | Total | | | | | (in thousands of U.S. dollars) | | | Year ended December 31, 2017 | | $ | - | | | $ | 161 | | | $ | 5,978 | | | $ | 6,139 | | | Year ended December 31, 2016 | | $ | 54,132 | | | $ | 1,407 | | | $ | 2,575 | | | $ | 58,114 | | | Year ended December 31, 2015 | | $ | 64,202 | | | $ | 2,629 | | | $ | 1,063 | | | $ | 67,894 | |
| | | Proceeds from our underwritten public offerings(1) | | | Proceeds from our direct public offerings | | | Proceeds from loans and issuance of warrant (1) | | | Proceeds from issuance of ordinary shares | | | | | | | | | | | (in thousands of U.S. dollars) | | | 2019 | | $ | - | | | $ | 13,714 | | | $ | 33,903 | | | $ | 333 | | | $ | 1,374 | | | $ | 49,324 | | | 2018 | | $ | 75,356 | | | $ | 16,131 | | | $ | - | | | $ | 887 | | | $ | 3,457 | | | $ | 95,831 | | | 2017 | | $ | - | | | $ | - | | | $ | - | | | $ | 161 | | | $ | 5,978 | | | $ | 6,139 | |
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(1) Net of issuance costs.
Our sources of financing in the year ended December 31, 20172019 totaled $6.1$49.6 million and consisted primarily of $33.9 million of net proceeds from the first two tranches of the Term Loan, $13.7 million of net proceeds from the registered offering under the Purchase Agreement and $1.4 million of payments from licensees.
Our sources of financing in the year ended December 31, 20162018 totaled $58.1$95.8 million and consisted primarily of $54.1$75.4 million of net proceeds from our 2016underwritten follow-on public offering.offering which closed in September 2018 and $16.1 million of net proceeds from our registered direct offering to OrbiMed.
WeOther than our commitments under the Credit Agreement, we currently have no ongoing material financial commitments, (suchsuch as lines of credit)credit, that may affect our liquidity over the next five years.
Contractual Obligations Our significant non-cancelable contractual obligations as of December 31, 2019 are summarized in the following table: | | | | | | | | | | | | | | | | | | | | | | | | | | | | (in thousands of U.S. dollars) | | Operating lease obligations(1) | | $ | 1,849 | | | $ | 1,164 | | | $ | 685 | | | $ | - | | | $ | - | | | $ | - | | Credit Agreement(2) | | | 52,503 | | | | 3,914 | | | | 14,787 | | | | 33,802 | | | | - | | | | - | | Liability for employee severance benefits(3) | | | 433 | | | | - | | | | - | | | | - | | | | - | | | | 433 | | Purchase Obligation (4) | | | 4,799 | | | | 4,799 | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | |
_________________________________________ (1) Operating lease obligations consist of lease of our facilities and lease of vehicles. (2) On July 29, 2019 we secured up to $50 million in debt which matures on July 29, 2024 and bears interest of 8.25% plus the greater of the one-month LIBOR and 2.75%. Refer to Note 10 to our consolidated financial statements included elsewhere in this report for further information. (3) The liability is considered long term, however we cannot estimate the exact period in which they will be paid. (4) Purchase obligations primarily include non-cancelable commitments under our contract manufacturing agreements.
Funding requirements
We believe, based on our current business plan,anticipate that with our existing cash and investments, along with Menlo’s Cash and investment, funds that we may be entitled to receive upon reaching certain milestones under the Credit Agreement and our 2020 estimated income from AMZEEQ and FMX103, we will enable usbe able to fund our planned operating expenses and capital expenditure requirements throughoutinto the completionsecond quarter of 2021. Prior to issuing this report, we revised our operating plan in order to reduce expenses and, until we are able to obtain further funding, we will only focus on (a) commercialization of AMZEEQ, (b) pre-commercialization and launch preparations for FMX103, assuming we receive regulatory approval, and (c) other general corporate expenses. We expect we will need additional funding to support our operating expenses and capital requirements during the second quarter of 2021 and beyond, including with regard to certain pipeline development activities, the commercialization of any of our third pivotal Phase III clinical trial forproduct candidates if they are granted regulatory approval, and to fund our lead product candidate FMX101internal and our two pivotal Phase III clinical trials for FMX103, the first of which we expect to complete by the end of 2018external research and the other two by the end of the third quarter of 2019, and the full development and NDA submission for FMX101. The full development and NDA submission for FMX103, as well as any future pipeline products, will require us to raise additional funds. efforts.
We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. Our present and future funding requirements will depend on many factors, including, amonginter alia:
selling, marketing and patent-related activities undertaken in connection with the commercialization of AMZEEQ, and, if approved, FMX103 and any other things:product candidates, as well as costs involved in the development of an effective sales and marketing organization;
| · | the progress, timing and completion of preclinical testing and clinical trials for FMX101, FMX103 or any future pipeline product; |
the progress, timing and completion of preclinical testing and clinical trials for future pipeline product candidates;
| · | selling, marketing and patent-related activities undertaken in connection with the anticipated commercialization of FMX101 and any other product candidates and costs involved in the development of an effective sales and marketing organization; |
the time and costs involved in obtaining regulatory approval for FMX103 and our other pipeline products and any delays we may encounter as a result of evolving regulatory requirements or adverse results with respect to any of these products;
| · | the time and costs involved in obtaining regulatory approval for FMX101 and our other pipeline products and any delays we may encounter as a result of evolving regulatory requirements or adverse results with respect to any of these products; |
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| · | the number of potential new products we identify and decide to develop; |
the efforts necessary to institute post-approval regulatory compliance requirements for AMZEEQ; | · | the costs involved in filing and prosecuting patent applications and obtaining, maintaining and enforcing patents or defending against claims or infringements raised by third parties, and license royalties or other amounts we may be required to pay to obtain rights to third party intellectual property rights; and |
the number of potential new products we identify and decide to develop; | · | the amount of revenues, if any, we may derive either directly or in the form of royalty payments from future sales of FMX101 and any other pipeline product that is commercialized. |
the costs involved in filing and prosecuting patent applications, defending third party observations and pre-grant oppositions and obtaining, maintaining and enforcing patents or defending against review, claims or infringements raised by third parties, and license royalties or other amounts we may be required to pay to obtain rights to third party intellectual property rights; and
the amount of revenues, if any, we may derive either directly or in the form of royalty payments from future sales of our drug product AMZEEQ, our product candidate FMX103 and any other pipeline product that is commercialized.
Our operating plan may change as a result of many factors currently unknown to us, and any such change may affect our funding requirements. We have never before launched a product commercially, and the costs involved in such commercial launch may exceed our expectations. We may therefore need to seek additional capital sooner than planned, through public or private equity or debt financings or other sources, such as strategic collaborations or additional license arrangements. Such financings may result in dilution to shareholders, imposition of debt covenants and repayment obligations or other restrictions that may affect our business.
Our capital expenditures for 2019 and 2018 amounted to $1.1 million and $0.6 million, respectively. During 2019, these expenditures were primarily related to laboratory equipment, computers and leasehold improvements.
For more information as to the risks associated with our future funding needs, see “Item 1A—1A - Risk Factors—Risks Related to Our Business and Industry—We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development, other operations or commercialization efforts.”efforts” included herein.
Our capital expenditures for 2017, 2016 and 2015 amounted to $1.5 million, $424,000 and $500,000, respectively. During 2017, these expenditures were primarily related to leasehold improvements and purchase of laboratory equipment.
Off-Balance Sheet Arrangements
As of December 31, 2017,2019, we did not have any off-balance sheet arrangements. Contractual Obligations
Our significant non-cancelable contractual obligations as of December 31, 2017 are summarized in the following table:
| | | Payments due by period | | | | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | | | Other | | | | | (in thousands of U.S. dollars) | | | | | Operating lease obligations(1) | | $ | 2,322 | | | $ | 865 | | | $ | 1,457 | | | | - | | | | - | | | | | Liability for employee severance benefits(2) | | $ | 437 | | | | - | | | | - | | | | - | | | | - | | | $ | 437 | | | Total | | $ | 2,759 | | | $ | 865 | | | $ | 1,457 | | | | - | | | | - | | | $ | 437 | |
_________________________________________
(1) | Operating lease obligations consist of lease of our facilities and lease of vehicles. |
(2) | The liability is considered long term, however we cannot estimate the exact period in which they will be paid. |
Critical Accounting Policies and Significant Judgments and Estimates
We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the U.S.United States. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
While our significant accounting policies are more fully described in Note 2, Summary of Significant“Significant Accounting Policies,” to the consolidated financial statements included in “Item 8—Financial“Financial Statements and Supplementary Data” of this Annual Report, on Form 10-K, we believe that the following accounting policies are the most critical to assist shareholders and investors reading the consolidated financial statements in fully understanding and evaluating our financial condition and results of operations. These policies relaterelates to the more significant areas involving management’s judgments and estimates and they requirerequires our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of the matters that are inherently uncertain.
Clinical trial accruals
Clinical trial costs are charged to research and development expense as incurred. We accrue for expenses resulting from obligations under contracts with clinical research organizations, or CROs. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided. Our objective is to reflect the appropriate trial expense in the consolidated financial statements by matching the appropriate expenses with the period in which services and efforts are expended. In the event advance payments are made to a CRO, the payments will be recorded as other assets, which will be recognized as expenses as services are rendered. The CRO contracts generally include pass-through fees including, but not limited to, regulatory expenses, investigator fees, travel costs and other miscellaneous costs. We estimate our clinical accruals based on reports from and discussion with clinical personnel and the CRO as to the progress or state of completion of the trials. We estimate accrued expenses as of each balance sheet date in the consolidated financial statements based on the facts and circumstances known at that time. Our clinical trial accrual is dependent, in part, upon the receipt of timely and accurate reporting from the CROs.
Equity-based compensation51
The fair value of equity-based payment transactions is recognized as an expense over the requisite service period and computed using the Black-Scholes model. We recognize compensation costs for awards that are conditioned only on continued service and which have a graded vesting schedule using the straight-line method based on the multiple-option award approach. When options and restricted share units, or RSUs, are granted as consideration for services provided by consultants and other non-employees, the grant is accounted for based on the fair value of the consideration received or the fair value of the awards issued, whichever is more reliably measurable. The fair value of the awards granted is measured on a final basis at the end of the related service period and is recognized over the related service period using the straight-line method.
Recently Issued Accounting Pronouncements
Certain recently issued accounting pronouncements are discussed in Note 2, Summary of Significant“Significant Accounting Policies,” to the consolidated financial statements included in “Item 8—Financial“Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.Report.
ITEM 7A —- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the riskAs a “smaller reporting company,” as defined by Item 10 of loss relatedRegulation S-K, we are not required to changes in market prices, including interest rates, foreign exchange rates and prices of financial instruments, that may adversely impact our financial position, results of operationsprovide quantitative or cash flows. As of December 31, 2017 we did not have any financial instruments sensitive toqualitative disclosures about market risk. We therefore have little exposure to market risks in the ordinary course of our operations, and such risks are primarily related to changes in foreign currency exchange rates and in interest rates.
Foreign Currency Exchange Risk
The U.S. dollar is our functional and reporting currency. Although a substantial portion of our expenses (mainly salaries and related costs) are denominated in Israeli shekels, accounting for 11%, 21%, and 32% of our expenses in the years ended December 31, 2017, 2016 and 2015, respectively, almost all our revenues were generated under agreements denominated in U.S. dollars and our proceeds from our public offerings, share issuance and convertible loan agreements, which are the main source of our financing, are denominated in U.S. dollars. Furthermore, while we anticipate that a portion of our expenses, principally salaries and related personnel expenses in Israel, will continue to be denominated in shekels, we expect to incur an increasing amount of expenses in U.S. dollars as we expand our operations in the U.S. We also have expenses, although to a much lesser extent, in other non-dollar currencies, in particular the Euro. Moreover, for the next few years we expect that the substantial majority of our revenues, if any, will be denominated in U.S. dollars from the sale of FMX101 and potentially other product candidates in the U.S. Having the substantial majority of our revenues denominated in U.S. dollars while having a substantial portion of our expenses denominated in Israeli shekels and other non-U.S. currencies exposes us to risk, associated with exchange rate fluctuations vis-à-vis the U.S. dollar. See “Item 1A—Risk Factors—Risks Related to Our Business and Industry—Exchange rate fluctuations between the U.S. dollar and the Israeli shekel may negatively affect our earnings.”
A devaluation of the shekel in relation to the U.S. dollar has the effect of reducing the U.S. dollar amount of our expenses or payables that are payable in shekels, unless those expenses or payables are linked to the U.S. dollar. Conversely, any appreciation of the shekel in relation to the U.S. dollar has the effect of increasing the U.S. dollar value of our unlinked shekel expenses, which would have a negative impact on our profit margins. In 2017, the value of the shekel appreciated in relation to the U.S. dollar by 11.6%, the effect of which was partially offset by inflation in Israel at a rate of approximately 0.4%. In 2016, the value of the shekel appreciated in relation to the U.S. dollar by approximately 1.5%, the effect of which was compounded by deflation in Israel at the rate of approximately -0.2%.
Because exchange rates between the U.S. dollar and the shekel (as well as between the U.S. dollar and other currencies) fluctuate continuously, such fluctuations have an impact on our results and period-to-period comparisons of our results. The effects of foreign currency re-measurements are reported in our statements of operations.
The following table presents information about the changes in the exchange rates of the shekel against the U.S. dollar:
| | Shekel against the U.S. dollar | | 2016 | 1.5% | | 2017 | 11.6% |
We will continue to monitor exposure to currency fluctuations. Since February 2015 we engage in currency hedging activities in order to reduce our exposure to currency fluctuations. Instruments that are used to hedge future risks may include foreign currency forward, swap contracts and options. These instruments may be used to selectively manage risks, but we may not be fully protected against material foreign currency fluctuations.
Inflation-Related Risks
We do not believe that the rate of inflation in Israel has had a material impact on our business to date, however, our costs in Israel will increase if inflation in Israel exceeds the devaluation of the shekel against the U.S. dollar or if the timing of such devaluation lags behind inflation in Israel.
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ITEM 8 —- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements
FOAMIX PHARMACEUTICALS LTD.
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2019
FOAMIX PHARMACEUTICALS LTD.
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2019 INDEX OF FINANCIAL STATEMENTS
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the board of directors of FOAMIX PHARMACEUTICALS LTD.
OpinionOpinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Foamix Pharmaceuticals Ltd. and its subsidiary (the “Company”) as of December 31, 20172019 and 2016,2018, and the related consolidated statements of operations, comprehensive loss, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017,2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and its subsidiary as of December 31, 20172019 and 2016,2018, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 20172019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Change in Accounting Principle As discussed in Note 2(y) to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for OpinionOpinions
TheseThe Company's management is responsible for these consolidated financial statements, are the responsibilityfor maintaining effective internal control over financial reporting, and for its assessment of the Company’s management and Boardeffectiveness of Directors.internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinionopinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding offraud, and whether effective internal control over financial reporting but not for the purpose of expressing an opinion on the effectivenesswas maintained in all material respects.
Our audits of the Company's internal control overconsolidated financial reporting. Accordingly, we express no such opinion. Our auditsstatements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions.
Kesselman & Kesselman, Trade Tower, 25 Hamered Street, Tel-Aviv 6812508, Israel, | | P.O Box 50005 Tel-Aviv 6150001 Telephone: +972 -3- 7954555, Fax:+972 -3- 7954556, www.pwc.com/il |
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| Tel-Aviv, Israel | /s/ Kesselman & Kesselman | February 27, 2018March 12, 2020 | Certified Public Accountants (Isr.) | | | A member firm of PricewaterhouseCoopers International Limited |
We have served as the Company's auditor since 2006.2006.
Kesselman & Kesselman, Trade Tower, 25 Hamered Street, Tel-Aviv 6812508, Israel, | | P.O Box 50005 Tel-Aviv 6150001 Telephone: +972 -3- 7954555, Fax:+972 -3- 7954556, www.pwc.com/il |
P.O Box 50005 Tel-Aviv 6150001 Telephone: +972 -3- 7954555, Fax:+972 -3- 7954556, www.pwc.com/il
| | | December 31 | | | | | 2017 | | | 2016 | | | A s s e t s | | | | | | | | CURRENT ASSETS: | | | | | | | | Cash and cash equivalents | | $ | 15,956 | | | $ | 31,190 | | | Restricted cash | | | 250 | | | | 250 | | | Short term bank deposits | | | 19,443 | | | | 38,351 | | | Investment in marketable securities (Note 4) | | | 31,797 | | | | 43,275 | | | Restricted investment in marketable securities (Note 4) | | | 290 | | | | 261 | | | Accounts receivable: | | | | | | | | | | Trade | | | 996 | | | | 3,236 | | | Other (Note 11a) | | | 772 | | | | 438 | | | TOTAL CURRENT ASSETS | | | 69,504 | | | | 117,001 | | | | | | | | | | | | | NON-CURRENT ASSETS: | | | | | | | | | | Investment in marketable securities (Note 4) | | | 8,533 | | | | 17,532 | | | Restricted investment in marketable securities (Note 4) | | | 143 | | | | 129 | | | Property and equipment, net (Note 5) | | | 2,042 | | | | 938 | | | Other | | | 32 | | | | 35 | | | TOTAL NON-CURRENT ASSETS | | | 10,750 | | | | 18,634 | | | | | | | | | | | | | TOTAL ASSETS | | $ | 80,254 | | | $ | 135,635 | |
| | | | | | | | 2019 | | | 2018 | | | A s s e t s | | | | | | | | CURRENT ASSETS: | | | | | | | | Cash and cash equivalents | | $ | 43,759 | | | $ | 27,868 | | | Restricted cash | | | 825 | | | | 250 | | | Short term bank deposits | | | 12,102 | | | | 24,047 | | | Investment in marketable securities (Note 4) | | | 16,246 | | | | 46,669 | | | Restricted investment in marketable securities (Note 4) | | | 434 | | | | 268 | | | Trade receivable | | | 135 | | | | 1,066 | | | Other (Note 13a) | | | 1,557 | | | | 999 | | | Inventory (Note 5) | | | | | | | | | | TOTAL CURRENT ASSETS | | | | | | | | | | | | | | | | | | | | NON-CURRENT ASSETS: | | | | | | | | | | Investment in marketable securities (Note 4) | | | - | | | | 150 | | | Restricted investment in marketable securities (Note 4) | | | - | | | | 133 | | | Property and equipment, net (Note 6) | | | 2,885 | | | | 2,235 | | | Operating lease right of use assets (Note 7) | | | 1,694 | | | | - | | | Other | | | | | | | | | | TOTAL NON-CURRENT ASSETS | | | | | | | | | | | | | | | | | | | | TOTAL ASSETS | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | December 31 | | | | | 2017 | | | 2016 | | | Liabilities and shareholders’ equity | | | | | | | | | | | | | | | | CURRENT LIABILITIES: | | | | | | | | Current maturities of bank borrowing (Note 8b) | | $ | - | | | $ | 20 | | | Accounts payable and accruals: | | | | | | | | | | Trade | | | 6,436 | | | | 2,267 | | | Deferred revenues | | | 62 | | | | - | | | Other (Note 11b) | | | 3,730 | | | | 2,984 | | | TOTAL CURRENT LIABILITIES | | | 10,228 | | | | | | | | | | | | | | | | LONG-TERM LIABILITIES: | | | | | | | | | | Liability for employee severance benefits (Note 6) | | | 437 | | | | 379 | | Other liabilities | | | | | | | | | | TOTAL LONG-TERM LIABILITIES | | | | | | | | | | TOTAL LIABILITIES | | | | | | | | | COMMITMENTS (Note 7) | | | | | | | | | | SHAREHOLDERS' EQUITY: | | | | | | | | | Ordinary Shares, NIS 0.16 par value - authorized: 90,000,000 and 50,000,000 Ordinary Shares as of December 31, 2017 and December 31, 2016, respectively; issued and outstanding: 37,498,128 and 37,167,791 Ordinary Shares as of December 31, 2017 and December 31, 2016, respectively | | | 1,576 | | | | 1,561 | | | Additional paid-in capital | | | 208,364 | | | | 204,052 | | | Accumulated deficit | | | (141,281 | ) | | | (75,566 | ) | | Accumulated other comprehensive loss | | | (58 | ) | | | (62 | ) | | TOTAL SHAREHOLDERS' EQUITY | | | | | | | | | | TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 80,254 | | | $ | 135,635 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | Year ended December 31 | | | | | 2017 | | | 2016 | | | 2015 | | REVENUES (Note 11c) | | $ | 3,669 | | | $ | 5,527 | | | $ | 849 | | | COST OF REVENUES | | | 13 | | | | 59 | | | | 70 | | | GROSS PROFIT | | | 3,656 | | | | 5,468 | | | | 779 | | | OPERATING EXPENSES: | | | | | | | | | | | | | | Research and development | | | 57,779 | | | | 25,897 | | | | 10,680 | | | Selling, general and administrative | | | 11,491 | | | | 9,221 | | | | 7,029 | | | TOTAL OPERATING EXPENSES | | | | | | | | | | | | | | OPERATING LOSS | | | 65,614 | | | | 29,650 | | | | 16,930 | | FINANCE INCOME, net (Note 11d) | | | (1,063 | ) | | | (701 | ) | | | (452 | ) | | LOSS BEFORE INCOME TAX | | | 64,551 | | | | 28,949 | | | | 16,478 | | INCOME TAX (Note 10) | | | | | | | | | | | | | | NET LOSS FOR THE YEAR | | $ | 65,715 | | | $ | 29,336 | | | $ | 16,517 | | | | | | | | | | | | | | | | | LOSS PER SHARE BASIC AND DILUTED | | $ | 1.76 | | | $ | 0.91 | | | $ | 0.58 | | | | | | | | | | | | | | | | | WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING USED IN COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE IN THOUSANDS | | | 37,376 | | | | 32,263 | | | | 28,229 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | | | | | | 2019
| | | 2018
| | | 2017
| | REVENUES (Note 13b) | | $ | 443 | | | $ | 3,595 | | | $ | 3,669 | | | COST OF REVENUES | | | | | | | | | | | | | | GROSS PROFIT | | | 443 | | | | 3,595 | | | | 3,656 | | | OPERATING EXPENSES: | | | | | | | | | | | | | | Research and development | | | 51,202 | | | | 64,474 | | | | 57,779 | | | Selling, general and administrative | | | | | | | | | | | | | | TOTAL OPERATING EXPENSES | | | | | | | | | | | | | | OPERATING LOSS | | | 95,873 | | | | 74,892 | | | | 65,614 | | FINANCE INCOME (Note 13c) | | | (1,672 | ) | | | (985 | ) | | | (1,134 | ) | FINANCE EXPENSES (Note 13c) | | | | | | | | | | | | | | LOSS BEFORE INCOME TAX | | | 95,354 | | | | 73,951 | | | | 64,551 | | INCOME TAX (Note 12) | | | | | | | | | | | | | | NET LOSS FOR THE YEAR | | | | | | | | | | | | | | | | | | | | | | | | | | | | LOSS PER SHARE BASIC AND DILUTED | | | | | | | | | | | | | | | | | | | | | | | | | | | | WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING USED IN COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE IN THOUSANDS | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | Year ended December 31 | | | | | | | | 2017 | | | 2016 | | | 2015 | | | | | | | | | | | | NET LOSS | | | | | | | | | | | $ | 95,178 | | | $ | 74,163 | | | $ | 65,715 | | | OTHER COMPREHENSIVE LOSS (INCOME): | | $ | 65,715 | | | $ | 29,336 | | | $ | 16,517 | | | | OTHER COMPREHENSIVE INCOME: | | | | | | | | | | | | Net unrealized losses (gains) from marketable securities | | | 5 | | | | (65 | ) | | | 103 | | | (47 | ) | | (59 | ) | | 5 | | | Gains (losses) on marketable securities reclassified into net loss | | | - | | | | 4 | | | | (57 | ) | | 2 | | | (5 | ) | | - | | | Net unrealized losses (gains) on derivative financial instruments | | | (146 | ) | | | (20 | ) | | | 5 | | | (3 | ) | | 74 | | | (146 | ) | | Gains on derivative financial instruments reclassified into net loss | | | 137 | | | | 13 | | | | - | | | | TOTAL OTHER COMPREHENSIVE LOSS (INCOME) | | | (4 | ) | | | (68 | ) | | | 51 | | | | Gains (losses) on derivative financial instruments reclassified into net loss | | | | | | | | | | | | | | | TOTAL OTHER COMPREHENSIVE INCOME | | | | | | | | | | | | | | | TOTAL COMPREHENSIVE LOSS | | $ | 65,711 | | | $ | 29,268 | | | $ | 16,568 | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements
| | | Ordinary shares | | | Additional paid-in capital | | | Accumulated deficit | | | Accumulated other comprehensive loss | | | Total | | | | | Number of shares | | | Amounts | | | Amounts | | | BALANCE AT JANUARY 1, 2015 | | | 22,443,934 | | | | 954 | | | | 77,600 | | | | (29,713 | ) | | | (79 | ) | | | 48,762 | | | CHANGES DURING 2015: | | | | | | | | | | | | | | | | | | | | | | | | | | Comprehensive loss | | | - | | | | - | | | | - | | | | (16,517 | ) | | | (51 | ) | | | (16,568 | ) | | Issuance of Ordinary Shares through a public offering, net of $4.8 million issuance costs (Note 9b) | | | 7,419,353 | | | | 298 | | | | 63,904 | | | | - | | | | - | | | | 64,202 | | | Exercise of warrants (Note 9c) | | | 546,322 | | | | 23 | | | | 2,262 | | | | - | | | | - | | | | 2,285 | | | Exercise of options and restricted share units (Note 9d) | | | 229,525 | | | | 9 | | | | 335 | | | | - | | | | - | | | | 344 | | | Share-based compensation (Note 9d) | | | - | | | | - | | | | 1,777 | | | | - | | | | - | | | | 1,777 | | | BALANCE AT DECEMBER 31, 2015 | | | 30,639,134 | | | | 1,284 | | | | 145,878 | | | | (46,230 | ) | | | (130 | ) | | | 100,802 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | CHANGES DURING 2016: | | | | | | | | | | | | | | | | | | | | | | | | | | Comprehensive income (loss) | | | - | | | | - | | | | - | | | | (29,336 | ) | | | 68 | | | | (29,268 | ) | Issuance of Ordinary Shares through a public offering, net of $3.9 million issuance costs (Note 9b) | | | 6,111,959 | | | | 260 | | | | 53,872 | | | | - | | | | - | | | | 54,132 | | | Exercise of warrants (Note 9c) | | | 257,137 | | | | 10 | | | | 1,285 | | | | - | | | | - | | | | 1,295 | | | Exercise of options and restricted share units (Note 9d) | | | 159,561 | | | | 7 | | | | 105 | | | | - | | | | - | | | | 112 | | | Share-based compensation (Note 9d) | | | - | | | | - | | | | 2,912 | | | | | | | | | | | | 2,912 | | | BALANCE AT DECEMBER 31, 2016 | | | 37,167,791 | | | | 1,561 | | | | 204,052 | | | | (75,566 | ) | | | (62 | ) | | | 129,985 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | CHANGES DURING 2017: | | | | | | | | | | | | | | | | | | | | | | | | | | Comprehensive income (loss) | | | - | | | | - | | | | - | | | | (65,715 | ) | | | 4 | | | | (65,711 | ) | | Exercise of warrants (Note 9c) | | | 191,793 | | | | 8 | | | | (8 | ) | | | - | | | | - | | | | - | | | Exercise of options and restricted share units (Note 9d) | | | 138,544 | | | | 7 | | | | 154 | | | | - | | | | - | | | | 161 | | | Share-based compensation (Note 9d) | | | - | | | | - | | | | 4,166 | | | | - | | | | - | | | | 4,166 | | | BALANCE AT DECEMBER 31, 2017 | | | 37,498,128 | | | $ | 1,576 | | | $ | 208,364 | | | $ | (141,281 | ) | | $ | (58 | ) | | $ | 68,601 | |
| | | Ordinary | | | Additional paid-in capital | | | | | | Accumulated other comprehensive income (loss) | | | | | | | | | | | | | | | | | BALANCE AT JANUARY 1, 2017 | | | 37,167,791 | | | $ | 1,561 | | | $ | 204,052 | | | $ | (75,566 | ) | | $ | (62 | ) | | $ | 129,985 | | | CHANGES DURING 2017: | | | | | | | | | | | | | | | | | | | | | | | | | | Comprehensive income (loss) | | | - | | | | - | | | | - | | | | (65,715 | ) | | | 4 | | | | (65,711 | ) | | Exercise of warrants (Note 11b) | | | 191,793 | | | | 8 | | | | (8 | ) | | | - | | | | - | | | | - | | | Exercise of options and restricted share units (Note 11e) | | | 138,544 | | | | 7 | | | | 154 | | | | - | | | | - | | | | 161 | | | Share-based compensation (Note 11e) | | | | | | | | | | | | | | | | | | | | | | | | | BALANCE AT DECEMBER 31, 2017, as previously reported | | | 37,498,128 | | | $ | 1,576 | | | $ | 208,364 | | | $ | (141,281 | ) | | $ | (58 | ) | | $ | 68,601 | | | Impact of initial adoption of new accounting standards (Note 4) | | | - | | | | - | | | | - | | | | 35 | | | | (35 | ) | | | - | | | CHANGES DURING 2018: | | | | | | | | | | | | | | | | | | | | | | | | | | Comprehensive income (loss) | | | - | | | | - | | | | - | | | | (74,163 | ) | | | 50 | | | | (74,113 | ) | | Issuance of Ordinary Shares through a public offering, net of $5.2 issuance costs (note 11c) | | | 13,420,500 | | | | 599 | | | | 74,757 | | | | - | | | | - | | | | 75,356 | | | Issuance of Ordinary Shares through a securities purchase agreement, net of $39 issuance costs (note 11d) | | | 2,940,000 | | | | 134 | | | | 15,997 | | | | - | | | | - | | | | 16,131 | | | Exercise of warrants (Note 11b) | | | 178,468 | | | | 8 | | | | 832 | | | | - | | | | - | | | | 840 | | | Exercise of options and restricted share units (Note 11e) | | | 314,044 | | | | 14 | | | | 33 | | | | - | | | | - | | | | 47 | | | Share-based compensation (Note 11e) | | | | | | | | | | | | | | | | | | | | | | | | | | BALANCE AT DECEMBER 31, 2018 | | | 54,351,140 | | | $ | 2,331 | | | $ | 305,303 | | | $ | (215,409 | ) | | $ | (43 | ) | | $ | 92,182 | | | CHANGES DURING 2019: | | | | | | | | | | | | | | | | | | | | | | | | | | Comprehensive income (loss) | | | - | | | | - | | | | - | | | | (95,178 | ) | | | 48 | | | | (95,130 | ) | | Issuance of Ordinary Shares and warrants, net of $359 issuance costs (Notes 10 and 11) | | | 6,542,057 | | | | 297 | | | | 14,714 | | | | - | | | | - | | | | 15,011 | | | Exercise of options, restricted share units and shares issued under employee share purchase plan (Note 11e) | | | 687,347 | | | | 31 | | | | 586 | | | | - | | | | - | | | | 617 | | | Share-based compensation (Note 11e) | | | | | | | | | | | | | | | | | | | | | | | | | | BALANCE AT DECEMBER 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements FOAMIX PHARMACEUTICALS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)| | | Year ended December 31 | | | | | 2017 | | | 2016 | | | 2015 | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | Net Loss | | $ | (65,715 | ) | | $ | (29,336 | ) | | $ | (16,517 | ) | Adjustments required to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | | | Depreciation and amortization | | | 221 | | | | 143 | | | | 87 | | | Loss from sale and disposal of fixed assets | | | 134 | | | | 16 | | | | 15 | | | Changes in marketable securities and bank deposits, net | | | 97 | | | | 91 | | | | 57 | | Changes in accrued liability for employee severance benefits, net of retirement fund profit | | | 57 | | | | 14 | | | | 35 | | | Share-based compensation | | | 4,166 | | | | 2,912 | | | | 1,777 | | | Non-cash finance income, net | | | (47 | ) | | | (1 | ) | | | (8 | ) | | Changes in operating asset and liabilities: | | | | | | | | | | | | | | Decrease (increase) in trade and other receivable | | | 1,915 | | | | (2,889 | ) | | | 140 | | | Decrease (increase) in other non-current assets | | | 4 | | | | - | | | | (1 | ) | | Increase in accounts payable and accruals | | | 5,003 | | | | 1,680 | | | | 1,917 | | | Increase in other liabilities | | | 988 | | | | | | | | | | | Net cash used in operating activities | | | (53,177 | ) | | | (27,370 | ) | | | (12,498 | ) | | | | | | | | | | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | Purchase of fixed assets | | | (1,518 | ) | | | (424 | ) | | | (500 | ) | | Proceeds from sale of fixed assets | | | 33 | | | | - | | | | - | | | Investment in bank deposits | | | (17,000 | ) | | | (23,000 | ) | | | (28,000 | ) | | Investment in marketable securities | | | (22,839 | ) | | | (31,700 | ) | | | (72,518 | ) | Proceeds from sale and maturity of marketable securities and
bank deposits | | | 79,079 | | | | 40,106 | | | | 22,502 | | | Net cash provided by (used in) investing activities | | | 37,755 | | | | (15,018 | ) | | | (78,516 | ) | | | | | | | | | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | Proceeds from issuance of ordinary shares through public offerings, net of issuance costs | | | - | | | | 54,132 | | | | 64,202 | | | Proceeds from exercise of warrants | | | - | | | | 1,295 | | | | 2,285 | | | Proceeds from exercise of options | | | 161 | | | | 112 | | | | 344 | | Payments in respect of BIRD loan | | | - | | | | (476 | ) | | | - | | | Payments in respect of bank borrowings | | | (21 | ) | | | (32 | ) | | | (30 | ) | | Net cash provided by financing activities | | | 140 | | | | 55,031 | | | | 66,801 | | | | | | | | | | | | | | | | | INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | | (15,282 | ) | | | 12,643 | | | | (24,213 | ) | | EFFECT OF EXCHANGE RATE ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | | 48 | | | | 2 | | | | *- | | | | | | | | | | | | | | | | | CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF THE YEAR | | | | | | | | | | | | | | | | | | | | | | | | | | | | CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF THE YEAR | | $ | 16,206 | | | $ | 31,440 | | | $ | 18,795 | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 15,956 | | | $ | 31,190 | | | $ | 18,795 | | | Restricted cash | | | 250 | | | | 250 | | | | - | | TOTAL CASH, CASH EQUIVALENTS AND RESTRICTED CASH SHOWN IN STATEMENT OF CASH FLOWS | | $ | 16,206 | | | $ | 31,440 | | | $ | 18,795 | |
| | | | | | | | | | | | | | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | Net Loss | | $ | (95,178 | ) | | $ | (74,163 | ) | | $ | (65,715 | ) | Adjustments required to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | | | Depreciation and amortization | | | 350 | | | | 319 | | | | 221 | | | Loss from sale and disposal of fixed assets | | | 18 | | | | 44 | | | | 134 | | | Changes in marketable securities and bank deposits, net | | | (357 | ) | | | 201 | | | | 97 | | | Changes in accrued liability for employee severance benefits, net of retirement fund profit | | | 57 | | | | (70 | ) | | | 57 | | | Share-based compensation | | | 4,895 | | | | 5,320 | | | | 4,166 | | | Non-cash finance expenses (income), net | | | 140 | | | | 43 | | | | (47 | ) | | Changes in operating asset and liabilities: | | | | | | | | | | | | | | Decrease (increase) in trade and other receivables | | | 373 | | | | (308 | ) | | | 1,915 | | | Decrease (increase) in other non-current assets | | | (131 | ) | | | (14 | ) | | | 4 | | | Increase in accounts payable and accruals | | | 18,053 | | | | 238 | | | | 5,003 | | | Increase in inventory | | | (1,356 | ) | | | - | | | | - | | | Increase (decrease) in other liabilities | | | | | | | | | | | | | | Net cash used in operating activities | | | | | | | | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | Purchase of fixed assets | | | (1,058 | ) | | | (567 | ) | | | (1,518 | ) | | Proceeds from sale of fixed assets | | | 40 | | | | 10 | | | | 33 | | | Investment in bank deposits | | | (26,013 | ) | | | (39,000 | ) | | | (17,000 | ) | | Investment in marketable securities | | | (18,951 | ) | | | (38,652 | ) | | | (22,839 | ) | | Proceeds from sale and maturity of marketable securities and bank deposits | | | | | | | | | | | | | | Net cash provided by (used in) investing activities | | | | | | | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | Proceeds from exercise of warrants | | | - | | | | 840 | | | | - | | | Proceeds from exercise of options and issuance of shares under the employee shares purchase plan | | | 365 | | | | 47 | | | | 161 | | | Withholding tax from net exercise of restricted share units | | | (32 | ) | | | - | | | | - | | | Proceeds from issuance of Ordinary Shares, net of issuance costs | | | 13,714 | | | | 16,131 | | | | | | | Proceeds from issuance of Ordinary Shares through a public offering, net of $5.2 issuance costs | | | - | | | | 75,356 | | | | - | | | Proceeds from debt financing and issuance of warrants, net of $1,097 issuance costs | | | 33,903 | | | | - | | | | - | | | Payments in respect of bank borrowings | | | | | | | | | | | | | | Net cash provided by financing activities | | | | | | | | | | | | | | INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | | 16,425 | | | | 11,955 | | | | (15,282 | ) | | EFFECT OF EXCHANGE RATE ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | | 41 | | | | (43 | ) | | | 48 | | | CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF THE YEAR | | | | | | | | | | | | | | CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF THE YEAR | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | | 43,759 | | | | 27,868 | | | | 15,956 | | | Restricted cash | | | | | | | | | | | | | | TOTAL CASH, CASH EQUIVALENTS AND RESTRICTED CASH SHOWN IN STATEMENT OF CASH FLOWS | | | | | | | | | | | | |
FOAMIX PHARMACEUTICALS LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
| | | Year ended December 31 | | | | | | | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | | SUPPLEMENTARY INFORMATION ON INVESTING AND FINANCING ACTIVITIES NOT INVOLVING CASH FLOWS: | | | | | | | | | | | | | | | | | | | | Cashless exercise of warrants | | | 8 | | | | - | | | | 4 | | | | Exercise of restricted share units | | | 3 | | | | 4 | | | | - | | | Cashless exercise of warrants and restricted share units
| | | | | | | | | | | | | | | Issuance of shares under employee share purchase plan | | | | | | | | | | | | | | | Property and equipment purchases included in accounts payable and accruals | | | 1 | | | | 27 | | | | - | | | | | | | | | | | | | | | Additions to operating lease right of use assets and liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | | | | | | | | | | | | | | | | | | | Cash paid for taxes | | | 478 | | | | 163 | | | | 16 | | | | | | | | | | | | | | | Interest received | | | 1,209 | | | | 1,015 | | | | 921 | | | | | | | | | | | | | | | Interest paid | | | | | | | 239 | | | | *- | | | | | | | | | | | | | |
* Represents an amount less than $1. The accompanying notes are an integral part of these consolidated financial statements. |
