INFORMATION
A. Selected Financial Data
[Reserved].
B. Capitalization and
Indebtedness
Not applicable.
C. Reasons
for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
You should carefully consider the risks we
describe below, in addition to the other information set forth elsewhere in this annual report, including our financial statements and
the related notes beginning on page F-1, before deciding to invest in our ordinary shares, or the “ordinary shares”. The risks
and uncertainties described below in this annual report on Form 20-F for the year ended December 31, 2025, are not the only risks facing
us. We may face additional risks and uncertainties not currently known to us or that we currently deem to be immaterial. Any of the risks
described below or incorporated by reference in this Form 20-F, and any such additional risks, could materially adversely affect our business,
financial condition or results of operations. In such case, you may lose all or part of your investment.
Risks Related to Our Business and Industry
We are a dermatology company and have incurred significant losses
since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.
We are a dermatology company with a limited operating history.
We have incurred net losses since our formation in 1997. In particular we incurred a loss of $27.2 million in 2023, a loss of $10.6 million
in 2024, and a loss of $6.1 million in 2025. As of December 31, 2025, we had an accumulated deficit of $237 million. Our losses have resulted
principally from expenses incurred in research and development of SGT-610, Twyneo,
Epsolay and our other past and present product candidates and from general and administrative expenses that we have incurred while building
our business infrastructure. We expect to continue to incur net losses for the foreseeable future as we continue to invest in research
and development and seek to obtain regulatory approval and commercialization of our product candidates. The extent of our future operating
losses and the timing of generating revenues and becoming profitable are highly uncertain, and we may never achieve or sustain profitability.
We anticipate that our expenses will increase substantially as
we:
• complete the Phase III clinical study of SGT-610;
• continue the development of SGT-210 and continue the research and development of other future product candidates
• seek regulatory approvals for any product candidate that successfully completes clinical development;
• establish commercial manufacturing capabilities through one or more contract manufacturing organizations to commercialize our approved products;
• maintain, expand and protect our intellectual property portfolio;
• seek new drug candidates and expand our disease portfolio;
• add clinical, scientific, operational, financial and management information systems and personnel, including personnel to support our product development; and
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• experience any delays or encounter any issues with any of the above, including but not limited to failed studies, complex results, safety issues or other regulatory challenges.
We have financed our operations primarily through public offerings
in the U.S., private placements of equity securities and investments and loans from our controlling shareholder. To date, we have devoted
a significant portion of our financial resources and efforts to developing our products and past and present product candidates. Although
we have received approval from the FDA with respect to our marketing applications for Twyneo in 2021 and Epsolay in 2022, to succeed we
must successfully develop and eventually commercialize products that generate significant revenue. This will require us to be successful
in a range of challenging activities, including successfully commercializing our approved products, completing clinical trials for our
product candidates, discovering and developing additional product candidates, obtaining regulatory approval for any product candidates
that successfully complete clinical trials, establishing manufacturing and marketing capabilities and ultimately selling any product candidates
for which we may obtain regulatory approval. We may never succeed in these activities and, even if we do, may never generate revenue
that is significant enough to achieve profitability.
Because of the numerous risks and uncertainties associated
with pharmaceutical products, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be
able to achieve profitability. If we are required by the FDA or other regulatory authorities to perform studies in addition to those we
currently anticipate, or if there are any delays in completing our clinical trials, our expenses could increase, and revenue could be
further delayed.
We may never achieve or sustain profitability on a quarterly or
annual basis. Our failure to sustain profitability would depress the market price of our ordinary shares and could impair our ability
to raise capital, expand our business, diversify our product offerings or continue our operations. A decline in the market price of our
ordinary shares also could cause you to lose all or a part of your investment.
We will need substantial additional
funding to pursue our business objectives. If we are unable to raise capital when needed, we could be forced to curtail our planned operations
and the pursuit of our growth strategy.
Conducting pre-clinical studies and clinical trials is a time-consuming,
expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain
regulatory approval and achieve product sales of our product candidates. We expect to continue to incur significant expenses and operating
losses over the next several years as we conduct advanced-stage clinical studies for SGT-610 and continue the development of SGT-210 and
pursue any regulatory approvals for our product candidates that successfully complete clinical development. In addition, Twyneo and Epsolay,
and our product candidates, if approved, may not achieve commercial success. Revenue, if any, will be derived from sales of Twyneo and
Epsolay, and our product candidates, if approved. 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 future capital requirements will depend on many factors, including:
• the progress and results of our development activities for SGT-610 and SGT-210;
• the costs, timing and outcome of regulatory reviews of any of our product candidates;
• the cost of manufacturing clinical supplies and exhibition batches of our product candidates;
• the timing of future commercialization activities, including manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval;
• the amount of revenue received from commercial sales of Twyneo, Epsolay and, if any, from our product candidates for which we may receive marketing approval;
• the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims by third parties that we are infringing upon their intellectual property rights; and
• the extent to which we acquire or invest in businesses, product candidates and technologies, including entering into licensing or collaboration arrangements for any of our product candidates.
In order to continue our future operations, we will need to raise
additional capital until we become profitable. If we are unable to raise sufficient additional capital, we could be forced to curtail
our planned operations and the pursuit of our growth strategy.
There is substantial doubt about our ability
to continue as a going concern.
Our audited consolidated financial statements for the year ended
December 31, 2025 were prepared under the assumption that we would continue our operations as a going concern. Our independent registered
public accounting firm has included a “going concern” explanatory paragraph in its report on our financial statements for
the year ended December 31, 2025 based on our net loss, negative cash flow and our working capital level, and such financial statements
also include a “going concern” explanatory paragraph. If we are unable to improve our liquidity position, by, among other
things, raising capital through public or private offerings or reducing our expenses, we may exhaust our cash resources and will be unable
to continue our operations. If we cannot continue as a viable entity, our shareholders would likely lose most or all of their investment
in us.
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All of our current product candidates
are in development stage and we have not yet obtained regulatory approval for such product candidates in the United States or any
other country.
Although we have obtained regulatory approvals in the United States
for Twyneo and Epsolay, none of our current product candidates has obtained regulatory approval for sale in the United States or any other
country, and we cannot guarantee that our product candidates will ever obtain such approvals. Our business is substantially dependent
on our ability to complete the development of, obtain regulatory approval for and successfully commercialize our product candidates in
a timely manner. We or our partners cannot commercialize our product candidates in the United States without first obtaining regulatory
approval to market each product candidate from the FDA. Similarly, we or our partners cannot commercialize product candidates outside
of the United States without obtaining regulatory approval from comparable foreign regulatory authorities.
Before obtaining regulatory approvals for the commercial sale of
any product candidate for a target indication, we or our partners must demonstrate in pre-clinical studies and well-controlled clinical
trials that the product candidate is safe and effective for use for its target indication and that the related manufacturing facilities,
processes and controls are adequate and in substantial compliance with regulatory requirements. In the United States, we or our partners
are required to submit and obtain the FDA’s approval of a new drug application, or NDA, before marketing any product candidate.
An NDA must include extensive preclinical and clinical data and supporting information to establish the product candidate’s safety
and efficacy for each desired indication and, when subject to the requirements of section 505(b)(2) of the Federal Food, Drug and Cosmetic
Act, or FDCA, we or our partners may rely in part on published scientific literature and/or the FDA’s prior findings of safety and
efficacy in its approvals of similar products. The NDA must also include significant information regarding the chemistry, manufacturing
and controls for the product candidate. The FDA will also inspect our or our partners manufacturing facilities to ensure that the facilities
can manufacture each product candidate that is the subject of an NDA, in compliance with current good manufacturing practice, or cGMP
requirements, and may inspect our or our partners clinical trial sites to ensure that the clinical trials conducted at the inspected site
were performed in accordance with good clinical practices, or GCP, and our or our partners clinical protocols.
Obtaining approval of an NDA is a lengthy, expensive and uncertain
process, and approval is never guaranteed. Upon submission of an NDA, the FDA must make an initial determination that the application
is sufficiently complete to accept the submission for filing. We cannot be certain that any submissions will be accepted for filing and
review by the FDA or ultimately be approved. If an application is not accepted for review or approved, the FDA may require that we or
our partners conduct additional clinical trials or pre-clinical studies or take other actions before it will reconsider our or our partner’s
application. If the FDA requires us or our partners to provide additional studies or data to support such applications, we could incur
increased costs and delays in the marketing approval process, which may require us to expend more resources than anticipated or that we
have available. In addition, the FDA may not consider any additional information to be complete or sufficient to support approval.
To date, we have submitted two NDAs that were accepted for filing
by the FDA, one for Twyneo, and one for Epsolay, both of which were subsequently approved by the FDA.
Our current investigational product candidate SGT-610 is a new
chemical entity that has never been approved by the FDA and we believe we will be required to seek approval for such product candidate
through the FDA’s 505(b)(1) NDA pathway, which requires full reports of investigations of safety and effectiveness without reliance
on the FDA’s prior approval of another product candidate. We have never obtained approval of a product through the 505(b)(1) NDA
pathway and may never succeed in doing so. The FDA and comparable authorities in other countries have substantial discretion in the approval
process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional pre-clinical
studies, clinical trials or other data demonstrating the safety and effectiveness of our product candidates. If we are unable to submit
and obtain regulatory approval for our product candidates, we will not be able to commercialize or obtain revenue in connection with such
product candidates.
Regulatory authorities outside of the United States also have requirements
for approval of drugs for commercial sale with which we must comply prior to marketing our product candidates in those countries. Regulatory
requirements can vary widely from country to country and could delay or prevent the introduction of our product candidates. Clinical trials
conducted in one country may not be accepted by regulatory authorities in other countries, and obtaining regulatory approval in one country
does not mean that regulatory approval will be obtained in any other country. However, the failure to obtain regulatory approval in one
jurisdiction could have a negative impact on our ability to obtain approval in other jurisdictions. Approval processes vary among countries
and can involve additional product candidate testing, development, validation and additional administrative review periods. Seeking regulatory
approval outside of the United States could require additional chemical manufacturing control data, pre-clinical studies or clinical trials,
which could be costly and time consuming. Obtaining regulatory approval outside of the United States may include all of the risks associated
with obtaining FDA approval and potentially additional risks.
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We are largely dependent on the success of SGT-610,
Twyneo, Epsolay and our other product candidates, if approved, for the
treatment of topical dermatological conditions.
We have invested a majority of our efforts and financial resources
in the research and development of Twyneo and Epsolay and the development of our product candidates. In April 2025, we sold our rights
related to Twyneo and Epsolay in the U.S. to Mayne, following the mutual termination by Sol-Gel and Galderma Holding SA, or Galderma,
, of the exclusive five-year license agreement in the U.S. for both products, which were entered into in June 2021. In June
2023, we entered into exclusive license agreements with Searchlight, pursuant to which Searchlight has the exclusive right, and is responsible
for all commercial activities for Twyneo and Epsolay in Canada, over a fifteen-year term that is renewable for subsequent five-year periods.
In May 2024, we entered into an asset purchase agreement with Beimei, pursuant to which Beimei purchased and licensed the exclusive rights
to commercialize and manufacture Twyneo in the mainland of China, Hong Kong, Macau, Taiwan and Israel, and
during 2024, we also entered into commercialization agreements for commercialization of Twyneo and in the majority of the European
countries, South Afirica and South Korea. These licensees have the exclusive right to, and are responsible for, all commercial activities
in their respective territories. The success of our business depends largely on the success of Beimei, Searchlight and our other licensees
in commercializing Twyneo and Epsolay and our ability to fund, execute and complete the development of, obtain regulatory approval for
and successfully commercialize our product candidates in a timely manner.
Our business is highly dependent
on market perception of us and the safety and quality of SGT-610, Twyneo, Epsolay and our other product candidates, if approved. Our business
or products could be subject to negative publicity, which could have a material adverse effect on our business.
Market perception of our business is very important, especially
market perception of the safety and quality of our products. If Twyneo, Epsolay and any of our product candidates, or similar products
that other companies distribute, or third-party products from which our product candidates are derived, are subject to market withdrawal
or recall or are proven to be, or are claimed to be, harmful to consumers, it could have a material adverse effect on our business. Negative
publicity associated with product quality, illness or other adverse effects resulting from, or perceived to result from, our products
could have a material adverse impact on our business.
Additionally, continuing and increasingly sophisticated studies
of the proper utilization, safety and efficacy of pharmaceutical products are being conducted by the industry, government agencies and
others which could call into question the utilization, safety and efficacy of previously marketed products. In some cases, studies have
resulted, and may in the future result, in the discontinuance of product marketing or other costly risk management programs such as the
need for a patient registry.
Although we have entered into
exclusive license agreements with commercialization partners for commercial activities for Twyneo and Epsolay in the U.S., China,
Canada and other jurisdictions around the world, we have a limited operating history in the dermatological prescription drug space which
may make it difficult to evaluate the success of our business to date and to assess our future viability.
We have a limited operating history in the dermatological prescription
drug space and have focused much of our efforts, to date, on the research and development of our product candidates, rather than commercialization.
In April 2025, we sold our rights related to Twyneo and Epsolay in the U.S. to Mayne, and in June 2023, we entered into exclusive license
agreements with Searchlight to commercialize in Canada. In addition, in May 2024, we sold licensed to Beimei the rights to commercialize
and manufacture Twyneo in China, Hong Kong, Macau, Taiwan and Israel, and during 2024, we entered into commercialization agreements for
commercialization of Twyneo and Epsolay in most European countries, South Africa and South Korea. We also expect to collaborate with third
parties that have sales and marketing experience in order to commercialize Twyneo and Epsolay in additional territories, and our
product candidates, if approved, in lieu of our own sales force and distribution systems. We cannot provide any assurances as to
when, if ever, we will obtain approvals from governmental authorities outside of the U.S. or generate sufficient revenues to achieve sustained
profitability. Our and our partners’ ability to successfully commercialize our approved products and product candidates, if approved,
and become profitable is subject to a number of challenges, including, among others, that:
• we may not have adequate financial or other resources;
• we or our partners may not be able to manufacture our products in commercial quantities, in an adequate quality or at an acceptable cost;
• we or our partners may not be able to establish adequate sales, marketing and distribution channels for our products;
• we or our partners may not be able to find suitable co-development, contract manufacturing or marketing partners;
• healthcare professionals and patients may not accept our products;
• we may not be aware of possible complications from the continued use of our product candidates since we have limited clinical experience with respect to the actual use of our product candidates;
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• changes in the market, new alliances between existing market participants and the entrance of new market participants may interfere with our or our partners market penetration efforts;
• third-party payors may not agree to reimburse patients for any or all of the purchase price of our products, which may adversely affect patients’ willingness to purchase our approved products or product candidates, once approved;
• uncertainty as to market demand may result in inefficient pricing of our approved products and product candidates, once approved;
• we may face third-party claims of intellectual property infringement;
• we or our partners may fail to obtain and maintain regulatory approvals for our product candidates in our target markets or may face adverse regulatory or legal actions relating to our product candidates even if regulatory approval is obtained;
• we are dependent upon the results of ongoing clinical trials relating to our product candidates and the products of our competitors;
• we may become involved in lawsuits pertaining to our clinical trials; and
• we may experience delays due to shortages in supply and human resources resulting from geopolitical instability (for more information, see “Item 3. Key Information – D. Risk Factors – Risks Related to Our Operations in Israel”).
The occurrence of any one or more of these events may limit
our or our partners' ability to successfully commercialize our approved products and product candidates, once approved, which in turn
could have a material adverse effect on our business, financial condition and results of operations. Consequently, there can be no guaranty
of the accuracy of any predictions about our future success or viability.
Raising additional capital may cause dilution to our shareholders,
restrict our operations or require us to relinquish rights to our technologies or products.
Until such time, if ever, as we can generate substantial revenue,
we may finance our cash needs through a combination of equity offerings, debt financings and license and collaboration agreements. We
do not currently have any committed external source of funds. To the extent that we raise additional capital through the sale of equity
or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or
other preferences that adversely affect your rights as an ordinary shareholder. Debt financing and preferred equity financing, if available,
may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional
debt, making capital expenditures or declaring dividends.
If we raise additional funds through collaborations, strategic
alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable rights to
our technologies, future revenue streams or our products or grant licenses on terms that may not be favorable to us. For example, in April
2025, we sold our rights related to Twyneo and Epsolay in the U.S. to Mayne in consideration for an upfront and milestone payment of $16
million in the aggregate. If we are unable to raise additional funds through equity or debt financings when needed, we may be required
to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market
our products that we would otherwise prefer to develop and market ourselves.
Risks Related to Development and Clinical Testing of Our Products
Clinical drug development involves
a lengthy and expensive process with an uncertain outcome, and results of earlier studies and clinical trials may not be predictive of
future trial results, which could result in development delays or a failure to obtain marketing approval.
Clinical testing of product candidates and the submission of NDAs to the FDA is expensive,
time consuming and has an inherently uncertain outcome. Failure can occur at any time during the clinical trial process, even with active
ingredients that have been previously approved by the FDA or comparable foreign regulatory authorities as safe and effective. Favorable
results in pre-clinical studies and early clinical trials for one or more of our product candidates may not be predictive of similar results
in future clinical trials for such product candidate. Also, interim results during a clinical trial do not necessarily predict final results.
Product candidates in later stages of clinical development may fail to show the desired safety and efficacy traits despite having progressed
through pre-clinical studies and initial clinical trials. In addition, there can be no assurance that our ongoing Phase 3 clinical trial
of SGT-610 will yield positive results, notwithstanding the revisions we have made to the original PellePharm clinical trial design. See
“Item 4. Information on the Company—B. Business Overview—Our Products”. Clinical development is inherently uncertain,
and changes to trial design, including modifications to patient selection criteria may not improve the likelihood of achieving favorable
outcomes. Even with these revisions, our trial may fail to meet its primary or secondary endpoints, may produce inconclusive or negative
data, or may raise safety concerns. A number of companies in the pharmaceutical and biotechnology industries have suffered significant
setbacks in clinical trials even after achieving promising results in early-stage development. Accordingly, the results from the completed
pre-clinical studies and clinical trials for our product candidates may not be predictive of the results we may obtain in later stage
trials for such product candidates. Our and our partners’ clinical trials may produce negative or inconclusive results, and we may
decide, or regulators may require us, to conduct additional clinical trials. Clinical trial results may be inconclusive, or contradicted
by other clinical trials, particularly larger clinical trials. Moreover, clinical data are often susceptible to varying interpretations
and analyses, and many companies that believed their product candidates performed satisfactorily in pre-clinical studies and clinical
trials have nonetheless failed to obtain FDA, or other applicable regulatory agency, approval for their product candidates.
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We or our partners may experience delays in our clinical trials,
and we do not know whether planned clinical trials will begin on time, need to be redesigned, enroll patients on time or be completed
on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including delays related to:
• recruiting, screening and enrolling suitable patients to participate in a trial;
• having subjects complete a trial or return for post-treatment follow-up;
• inability to generate sufficient preclinical, toxicology, or other in vivo or in vitro data to support the initiation or continuation of clinical trials;
• reaching a consensus with regulatory authorities on study design or implementation of clinical trials;
• obtaining regulatory authorization to commence a trial;
• reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
• identifying, recruiting and training suitable clinical investigators;
• obtaining institutional review board, or IRB, or ethics committee approval at each site;
• clinical sites deviating from FDA regulations, or similar foreign requirements (where applicable), including GCPs, or the study protocol, or dropping out of a trial;
• adding new clinical trial sites;
• occurrence of adverse events associated with the product candidate that are viewed to outweigh its potential benefits, or occurrence of adverse events in trial of the same class of agents conducted by other companies;
• the cost of clinical trials of our product candidates being greater than we or our partners anticipate;
• transfer of manufacturing processes to larger-scale facilities operated by a contract manufacturing organization, or CMO, and delays or failure by our or our partners CMOs or us to make any necessary changes to such manufacturing process;
• third parties being unwilling or unable to satisfy their contractual obligations to us;
• manufacturing sufficient quantities of a product candidate for use in clinical trials;
• damage to clinical supplies of a product candidate caused during storage and/or transportation; or
• changes in applicable government regulations or administrative actions.
In addition, we may 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 FDA or other regulatory
authorities or if a data safety monitoring board recommends that any such trial be suspended or terminated, as applicable. Such authorities
may impose or recommend such a suspension or termination due to a number of factors, including failure to conduct the clinical trial in
accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA
or other 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 or our partners experience delays in the completion of any clinical trial for our product candidates
or if any clinical trials are terminated, the commercial prospects of our product candidates will be harmed, and our ability to generate
product revenues from any of these product candidates will be delayed.
Moreover, changes in regulatory requirements and guidance or unanticipated
events during our or our partners’ clinical trials may occur, as a result of which we or our partners may need to amend clinical
trial protocols. Amendments may require us or our partners to resubmit our clinical trial protocols for review and approval, which may
adversely affect the cost, timing and successful completion of a clinical trial. If we or our partners experience delays in the completion
of, or if we or our partners terminate, any of our clinical trials, the commercial prospects for our affected product candidates would
be harmed and our ability to generate product revenue would be delayed, possibly materially.
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Any delays in completing our or our partners’ clinical
trials will increase our costs, slow down our product candidates’ development and regulatory review and approval processes and jeopardize
our or our partners ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial
condition and prospects significantly. 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.
We may find it difficult to enroll patients
in our clinical trials, and any enrolled subjects could discontinue their participation in our or our partners’ clinical trials,
which could delay or prevent clinical trials for our product candidates.
Identifying and qualifying patients to participate in clinical
trials for our product candidates is critical to our success. The timing of our clinical trials depends on the speed at which we or our
partners can recruit patients to participate in testing our product candidates. The indications we are currently pursuing include orphan
diseases (including Gorlin syndrome) for which the patient population is significantly small. If we are unable to locate qualified patients
or if patients are unwilling to participate in our clinical trials because of negative publicity from adverse events in the biotechnology
or pharmaceutical industries or for other reasons, including competitive clinical trials for similar patient populations, the timeline
for recruiting patients, conducting clinical trials and obtaining regulatory approval of product candidates may be delayed. These delays
could result in increased costs, delays in advancing our product candidates' development, or termination of the clinical trials altogether.
Patient enrollment may be affected by numerous factors, including:
• severity of the disease under investigation;
• size and nature of the patient population;
• eligibility criteria for the trial;
• design of the trial protocol;
• perceived risks and benefits of the product candidate under study;
• physicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any drugs that may be approved for the same indications we are investigating;
• proximity to and availability of clinical trial sites for prospective patients;
• our or our partners’ ability to recruit clinical trial investigators with the appropriate competencies and experience;
• the operational efficiency of trial sites, including sufficient staffing;
• availability of competing therapies and clinical trials; and
• ability to monitor patients adequately during and after treatment.
We face intense competition with regard to patient enrollment in
clinical trials from other dermatological companies which also seek to enroll subjects from the same patient populations. In addition,
subjects enrolled in our clinical trials may discontinue their participation at any time during the trial as a result of a number of factors,
including withdrawing their consent or experiencing adverse clinical events, which may or may not be judged related to our product candidates
under evaluation. Therefore, any negative results we may report in clinical trials may make it difficult or impossible to recruit and
retain subjects in other clinical trials of that same product candidate. The discontinuation of patients in any one of our trials may
cause us to delay or abandon our clinical trial or cause the results from that trial not to be positive or sufficient to support a filing
for regulatory approval of the applicable product candidate.
The regulatory approval processes
of the FDA and comparable foreign authorities are lengthy, time consuming and inherently unpredictable, and if we are ultimately unable
to obtain regulatory approval for our product candidates, our business will be substantially harmed.
The time required to obtain approval by the FDA and comparable
foreign authorities is unpredictable but typically takes many years following the commencement of clinical trials and depends upon numerous
factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations, or the type
and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development
and may vary among jurisdictions. Although the FDA has approved Twyneo and Epsolay for marketing, it is possible that Twyneo and Epsolay
will not receive approval from comparable foreign authorities, and that none of our product candidates will ever obtain regulatory approval.
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Our product candidates could fail to receive regulatory approval
for many reasons, including the following:
• the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;
• we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a product candidate is safe and effective for its proposed indication;
• the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval;
• we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;
• the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from pre-clinical studies or clinical trials;
• the data collected from clinical trials of our product candidates may not be sufficient to support the submission of an NDA or other submission or to obtain regulatory approval in the United States or elsewhere;
• the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with which we contract for clinical and commercial supplies; or
• the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval.
This lengthy approval process as well as the unpredictability of
future clinical trial results may result in our failing to obtain regulatory approval to market our product candidates, which would significantly
harm our business, results of operations and prospects.
In addition, even if we were to obtain approval, regulatory authorities
may approve any of our product candidates for fewer or more limited indications than we request, may not approve the price we intend to
charge for our product candidates, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve
a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization
of that product candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates.
We cannot be certain that Twyneo and Epsolay will receive approval
by foreign authorities or that any of our product candidates will receive regulatory approval. If we do not receive regulatory approvals
for our product candidates, we may not be able to continue our development operations for such product candidates. Our revenue will
be dependent, to a significant extent, upon the size of the markets in the territories for which we gain regulatory approval. If the markets
for patients or indications that we are targeting are not as significant as we estimate, we may not generate significant revenue from
sales of such products, even if approved by the FDA or by comparable foreign authorities.
Adverse side effects or other
safety risks associated with our approved products or our product candidates could delay or preclude approval or cause us to suspend or
discontinue clinical trials or abandon products. Adverse side effects or other safety risks associated with our approved products, could
limit their commercial profile.
Undesirable side effects caused by our product candidates could
result in the delay, suspension or termination of clinical trials by us, our partners, the FDA or other regulatory authorities for a number
of reasons. Results of our clinical trials for product candidates could reveal a high and unacceptable severity and prevalence of these
or other side effects. In such an event, our clinical trials could be suspended or terminated, and the FDA or comparable foreign regulatory
authorities could order us to cease further development of or deny approval of our product candidates for any or all targeted indications.
The drug-related side effects could affect patient recruitment or the ability of enrolled subjects to complete the trial or result in
potential product liability claims. If we or our partners elect or are required to delay, suspend or terminate any clinical trial for
any product candidates, the commercial prospects of such product candidates will be harmed and our ability to generate product revenues
from any of these product candidates will be delayed or eliminated. Any of these occurrences may harm our business, prospects, financial
condition and results of operations significantly.
Additionally, with respect to our approved products and any one
or more of our products, for which we obtain regulatory approval, if we or others later identify undesirable side effects caused by such
products, a number of potentially significant negative consequences could result, including:
• regulatory authorities may withdraw or limit their approvals of such products;
• regulatory authorities may require additional warnings on the label, including a “Boxed” Warning or contraindication;
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• we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;
• we may be required to implement a risk evaluation and mitigation strategy, or REMS, which may include a medication guide or patient package insert, a communication plan to educate healthcare providers of the drug’s risks, or other elements to assure safe use;
• we or our partners may be subject to regulatory investigations and government enforcement actions;
• the FDA or a comparable foreign regulatory authority may require us or our partners to conduct additional clinical trials or costly post-marketing testing and surveillance to monitor the safety and efficacy of the product;
• we may decide to recall the affected product;
• we could be sued and held liable for harm caused to patients; and
• our reputation may suffer.
Any of these events could prevent us from achieving or maintaining
market acceptance of our products, and could significantly harm our business, results of operations and prospects.
There is a substantial risk of
product liability claims in our business, and a product liability claim against us could adversely affect our business.
Our business exposes us to significant potential product liability
risks that are inherent in the development, manufacturing and marketing of pharmaceutical products. Product liability claims could delay
or prevent completion of our development and commercialization programs. Such claims could result in a recall of our products or a change
in the approved indications for which they may be used. While we maintain product liability insurance that we believe is adequate for
our operations, such coverage may not be adequate to cover any incident or all incidents. Furthermore, product liability insurance is
becoming increasingly expensive. As a result, we may be unable to maintain sufficient insurance at a reasonable cost to protect us against
losses that could have a material adverse effect on our business. These liabilities could prevent or interfere with our product development
and commercialization efforts.
We expect to utilize the FDA’s Section 505(b)(2) pathway for
some of our product candidates and if that pathway is not available, the development of such product candidates will likely take significantly
longer, cost significantly more and entail significantly greater complexity and risk than currently anticipated, and, in any case, may
not be successful.
We intend to develop and seek approval for some of our product
candidates pursuant to the FDA’s 505(b)(2) NDA pathway. If the FDA determines that we may not use this regulatory pathway, then
we would need to seek regulatory approval via a “full” or “stand-alone” NDA under Section 505(b)(1) of the FDCA.
This would require us to conduct additional clinical trials and nonclinical testing, provide additional safety and efficacy data and other
information, and meet additional standards for regulatory approval. If this were to occur, the time and financial resources required to
obtain FDA approval, as well as the development complexity and risk associated with these programs, would likely substantially increase,
which could have a material adverse effect on our business and financial condition.
The Drug Price Competition and Patent Term Restoration Act of 1984,
informally known as the Hatch-Waxman Act, added Section 505(b)(2) to the FDCA. Section 505(b)(2) permits the filing of an NDA where at
least some of the information required for approval comes from studies and information that were not conducted by or for the applicant
and for which the applicant has not obtained a right of reference. Section 505(b)(2), if applicable to certain of our product candidates
under the FDCA, would allow an NDA we submit to the FDA to rely in part on data in the public domain or the FDA’s prior conclusions
regarding the safety and effectiveness of approved compounds, which could expedite our development programs relative to seeking approval
under the 505(b)(1) regulatory pathway.
If the FDA changes its 505(b)(2) policies and practices or if Congress
were to amend the statute to alter the currently available regulatory pathway, it could delay or even prevent the FDA from approving any
NDA 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 referenced in a Section
505(b)(2) NDA. Even if we are able to utilize the Section 505(b)(2) regulatory pathway for one or more of our candidates, there is no
guarantee this would ultimately lead to faster product development or earlier approval.
Moreover, any delay resulting from our inability to pursue the
FDA's 505(b)(2) pathway could result in new competitive products reaching the market more quickly than our product candidates, which may
have a material adverse impact on our competitive position and prospects. Even if we are allowed to pursue the FDA's 505(b)(2) pathway,
we cannot assure you that our product candidates will receive the requisite approvals for commercialization.
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We may not be able to obtain the
benefits associated with orphan drug designation, such as orphan drug exclusivity and, even if we do, that exclusivity may not prevent
the FDA or other comparable foreign regulatory authorities from approving competing products.
Our product candidate, SGT-610, has obtained orphan drug designation
for the prevention of formation of BCC in patients diagnosed with Gorlin syndrome by both the FDA and the European Commission, or EC.
Regulatory authorities in these jurisdictions may designate drugs for relatively small patient populations as orphan drugs if the applicable
eligibility criteria are met, but there is no guarantee we will maintain the benefits of such designations.
In the United States, the FDA may designate a product as an orphan
drug if it is a drug intended to treat a rare disease or condition, which is defined as a patient population of fewer than 200,000 individuals
annually in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation
that the cost of developing and making available the drug will be recovered from sales in the United States. Orphan designation entitles
a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages and user-fee waivers.
In addition, if a product that has orphan designation subsequently receives the first FDA approval for a particular active ingredient
for the rare disease or condition for which it has such designation, the product is entitled to orphan drug exclusivity. Orphan exclusivity
in the United States provides that the FDA may not approve any other applications, including a full NDA, to market the same drug for the
same rare disease or condition for seven years, except in limited circumstances such as a showing of clinical superiority to the product
with orphan exclusivity or if FDA finds that the holder of the orphan exclusivity has not shown that it can ensure the availability of
sufficient quantities of the orphan drug to meet the needs of patients with the rare disease or condition for which the product was designated.
In the EU, the EC grants orphan designation on the basis of the
European Medicines Agency’s (EMA) Committee for Orphan Medicinal Products scientific opinion. A medicinal product may be designated
as orphan if (1) it is intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition;
(2) either (a) such condition affects no more than five in 10,000 persons in the EU when the application is made, or (b) the product,
without the benefits derived from orphan status, would not generate sufficient return in the EU to justify investment; and (3) there exists
no satisfactory method of diagnosis, prevention or treatment, of such condition authorized for marketing in the EU, or if such a method
exists, the product will be of significant benefit to those affected by the condition. In the EU, orphan designation entitles a party
to financial incentives such as reduction of fees or fee waivers, protocol assistance, and access to the centralized marketing authorization
procedure. Moreover, upon grant of a marketing authorization and assuming the requirement for orphan designation are also met at the time
the marketing authorization is granted, orphan medicinal products are entitled to a ten-year period of market exclusivity for the approved
therapeutic indication. The period of market exclusivity is extended by two years for orphan medicinal products that have also complied
with an agreed Pediatric Investigation Plan, or PIP.
Even though our SGT-610 product candidate has obtained orphan drug
designation, we may not be able to obtain or maintain orphan drug exclusivity for this or any other future orphan designated product candidate.
We may not be the first to obtain marketing approval of any product candidate for which we have obtained designation in the specific rare
disease or condition due to the uncertainties associated with developing pharmaceutical products. In addition, exclusive marketing rights
in the United States may be limited if we seek approval for an indication broader than the orphan-designated indication or may be lost
if the FDA later determines that the request for designation was materially defective or if we are unable to ensure sufficient quantities
of the product to meet the needs of patients with the rare disease or condition. Further, even if we obtain orphan drug exclusivity for
a product, that exclusivity may not effectively protect the product from competition because different drugs with different active moieties
may be approved for the same condition. Even after an orphan drug is approved, the FDA can subsequently approve the same drug with the
same active moiety for the same disease or condition if the FDA concludes that the later drug is clinically superior in that it is shown
to be safer, more effective or makes a major contribution to patient care. In the EU, during the exclusivity period, marketing authorizations
may be granted to a similar medicinal product with the same orphan indication if: (i) the applicant can establish that the second medicinal
product, although similar to the orphan medicinal product already authorized is safer, more effective or otherwise clinically superior
to the orphan medicinal product already authorized; (ii) the marketing authorization holder for the orphan medicinal product grants its
consent; or (iii) if the marketing authorization holder of the orphan medicinal product is unable to supply sufficient quantities of product.
The European exclusivity period can be reduced to six years, if, at the end of the fifth year a medicine no longer meets the criteria
for orphan designation (i.e. the prevalence of the condition has increased above the orphan designation threshold or it is judged that
the product is sufficiently profitable so as not to justify maintenance of market exclusivity). Orphan drug designation neither shortens
the development time or regulatory review time of a drug nor gives the product candidate any advantage in the regulatory review or approval
process.
We may seek and fail to obtain fast track or
breakthrough therapy designations for our product candidates. Even if we are successful, these programs may not lead to a faster development
or regulatory review process, they do not guarantee we will receive approval for any product candidate and the FDA may later rescind fast
track or breakthrough therapy designation if it believes a product candidate no longer meets the conditions for qualification. We may
also seek to obtain accelerated approval for one or more of our product candidates, but the FDA may disagree that we have met the requirements
for such approval.
If a product is intended for the treatment of a serious or life-threatening
condition and preclinical or clinical data demonstrate the potential to address an unmet medical need for this condition, the product
sponsor may apply for fast track designation. The sponsor of a fast track product candidate has opportunities for more frequent interactions
with the applicable FDA review team during product development and, once an NDA is submitted, the product candidate may be eligible for
priority review. A fast track product candidate may also be eligible for rolling review, where the FDA may consider for review sections
of the NDA on a rolling basis before the complete application is submitted. The FDA has broad discretion whether or not to grant
this designation, so even if we believe a particular product candidate is eligible for this designation, we cannot assure you that the
FDA would decide to grant it. Even if we do receive fast track designation for any of our product candidates, we may not experience a
faster development process, review or approval compared to conventional FDA procedures. The FDA may rescind the fast track designation
if it believes that the designation is no longer supported by data from our clinical development program.
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Our product candidate SGT-610 has received Breakthrough Therapy
designation from the FDA, and we may also seek Breakthrough Therapy designation for other product candidates that we develop. A Breakthrough
Therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening
disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over currently
approved therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development.
For product candidates that have been designated as breakthrough therapies, interaction and communication between the FDA and the sponsor
can help to identify the most efficient path for clinical development. Product candidates designated as breakthrough therapies by the
FDA may also be eligible for priority review. Like fast track designation, granting Breakthrough Therapy designation is within the discretion
of the FDA. Accordingly, even if we believe a product candidate we develop meets the criteria for designation as a Breakthrough Therapy,
the FDA may disagree and instead determine not to make such designation. In any event, the receipt of Breakthrough Therapy designation
for a product candidate, such as the designation for SGT-610, may not result in a faster development process, review or approval compared
to drugs considered for approval under conventional FDA procedures and does not assure ultimate approval by the FDA. In addition, even
if a product candidate we develop qualifies as a breakthrough therapy, the FDA may later decide that the drug no longer meets the conditions
for qualification and rescind the designation.
Separate from fast track or breakthrough therapy designation, we
may seek accelerated approval for one or more of our product candidates. A product candidate intended to treat serious or life-threatening
diseases or conditions may be eligible for accelerated approval if it is determined to have an effect on a surrogate endpoint that is
reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality,
or IMM, that is reasonably likely to predict an effect on IMM or other clinical benefit, taking into account the severity, rarity or prevalence
of the condition and the availability or lack of alternative treatments. As a condition of accelerated approval, the FDA will generally
require the sponsor to perform adequate and well-controlled post-approval clinical studies to verify and describe the anticipated effect
on IMM or other clinical benefit. If such post-approval studies fail to confirm the drug’s clinical benefit, or if the sponsor fails
to conduct the required studies in a diligent manner, the FDA may withdraw its approval of the drug on an expedited basis. We cannot guarantee
that the FDA will agree any of our product candidates has met the criteria to receive accelerated approval, which would require us to
conduct additional clinical testing prior to seeking FDA approval. Even if any of our product candidates receives approval through this
pathway, the required post-approval confirmatory clinical trials may fail to verify the predicted clinical benefit of the product, and
we may be required to remove the product from the market or amend the product label in a way that adversely impacts its marketing.
Twyneo, Epsolay and our other
product candidates for which we obtain regulatory approval may continue to face future developmental and regulatory difficulties. In addition,
we and our partners will be subject to ongoing obligations and continued regulatory review.
Even if we complete clinical testing and receive approval of any
for our product candidates, the FDA or comparable foreign regulatory authorities may grant approval contingent on the performance of additional
post-approval clinical trials, risk mitigation requirements such as the implementation of a REMS, and/or surveillance requirements to
monitor the safety or efficacy of the product. Any of these developments 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 product candidates, if any. Similar foreign requirements may also apply in foreign jurisdictions.
The FDA or comparable foreign regulatory authorities also may approve
our product candidates for a more limited indication or a narrower patient population than we initially request or may not approve the
labeling that we believe is necessary or desirable for the successful commercialization of our product candidates. Furthermore, SGT-610,
Twyneo, Epsolay, and any other product candidate for which we obtain approval will remain subject to extensive regulatory requirements,
including requirements relating to manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion, distribution
and recordkeeping. These requirements include registration with the FDA, listing of our product candidates, payment of annual fees, as
well as continued compliance with GCP requirements for any clinical trials that we or our partners conduct post-approval. Similar foreign
requirements may also apply in other jurisdictions. Application holders must notify the FDA, and depending on the nature of the change,
obtain FDA pre-approval for product manufacturing changes. In addition, manufacturers of drug products and their facilities are subject
to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP requirements.
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If we or our partners fail to comply with the regulatory requirements
of the FDA or comparable foreign regulatory authorities or 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, including
the following:
• the FDA or comparable foreign regulatory authorities could suspend or impose restrictions on operations, including costly new manufacturing requirements;
• the FDA or comparable foreign regulatory authorities could mandate modifications to promotional materials or require us to provide corrective information to health care practitioners;
• the FDA or comparable foreign regulatory authorities could refuse to approve pending applications or supplements to applications;
• the FDA or comparable foreign regulatory authorities could suspend any ongoing clinical trials;
• the FDA or comparable foreign regulatory authorities could suspend or withdraw marketing approval;
• the FDA or comparable foreign regulatory authorities could seek an injunction or impose civil or criminal penalties or monetary fines;
• the FDA or comparable foreign regulatory authorities could ban or restrict imports and exports;
• the FDA or comparable foreign regulatory authorities could issue warning letters or untitled letters or similar enforcement actions alleging noncompliance with regulatory requirements;
• governmental authorities could require a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance; or
• the FDA or other governmental authorities including comparable foreign regulatory authorities could take other actions, such as imposition of product seizures or detentions, disgorgement, restitution, or exclusion from federal healthcare programs.
In addition, our or our partners’ product labeling, advertising
and promotional materials for our approved products, if approved by the FDA, would be subject to regulatory requirements and continuing
review by the FDA. The FDA strictly regulates the promotional claims that may be made about prescription drug products. In particular,
a product may not be promoted for uses that are not approved by the FDA as reflected in the product’s approved labeling, a practice
known as off-label promotion. Similar requirements may apply in foreign jurisdictions. Physicians may nevertheless prescribe products
to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may
become subject to significant liability and government fines. The FDA and other foreign agencies actively enforce the laws and regulations
prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to
significant sanctions. The federal government has levied large civil and criminal fines against companies for alleged improper promotion
and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent
decrees or permanent injunctions under which specified promotional conduct is changed or curtailed.
Moreover, the FDA’s policies may change and additional government
regulations may be enacted that could prevent, limit or delay marketing approval of our product candidates, and the sale and promotion
of Twyneo, Epsolay and our product candidates, if approved. We also cannot predict the likelihood, nature or extent of government regulation
that may arise from future legislation or administrative action, either in the United States or abroad. For instance, the EU pharmaceutical
legislation is currently undergoing a complete review process, in the context of the Pharmaceutical Strategy for Europe initiative, launched
by the EC in November 2020. The EC’s proposal for revision of several legislative instruments related to medicinal products (potentially
reducing the duration of regulatory data protection, revising the eligibility for expedited pathways, etc.) was published on April 26,
2023. The proposed revisions remain to be agreed and adopted by the European Parliament and European Council and the proposals may therefore
be substantially revised before adoption, which is not anticipated before early 2026. The revisions may however have a significant impact
on the biopharmaceutical industry in the long term. If we are slow or unable to adapt to changes in existing requirements or the adoption
of new requirements or policies, or if we are not able to maintain regulatory compliance, we may be subject to enforcement action and
we may not achieve or sustain profitability.
Disruptions of funding for the FDA, the SEC
and other government agencies caused by funding shortages, mass layoffs, or global health concerns could hinder their ability to hire
and retain key leadership and other personnel, prevent our product candidates from being developed or commercialized in a timely manner
or otherwise prevent those agencies from performing normal business functions on which the operation of our business relies, 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
the payment of user fees, and statutory, regulatory and policy changes. Average review times at the agency have fluctuated 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 the political process, which is inherently fluid and unpredictable.
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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, the United States government has shut down several times and certain regulatory agencies, such as
the FDA and the SEC, have had to furlough critical FDA, SEC and other government employees and stop critical activities during that period.
In early 2025, following the inauguration of President Trump, the Trump Administration began terminating federal government employees,
including approximately 3,500 employees including at the FDA. The impact of mass layoffs at the agency and other governmental offices
with which we interact is unclear at this time. It is currently unclear how the U.S. biopharmaceutical industry will be affected by the
Trump Administration’s major changes to the FDA and the federal government as a whole.
Separately, during the COVID-19 pandemic, the FDA postponed most
inspections of domestic and foreign manufacturing facilities at various points. Even though the FDA has since resumed standard inspection
operations of domestic facilities where feasible, the agency has continued to monitor and implement changes to its inspectional activities
to ensure the safety of its employees and those of the firms it regulates, and any resurgence of the virus or emergence of new infectious
disease outbreaks may lead to future inspectional delays. Regulatory authorities outside the United States may adopt similar policy measures
in response to emerging infectious disease outbreaks, epidemics, or pandemics. If a prolonged government shutdown or slowdown occurs,
or if global health concerns similar to COVID-19 prevent the FDA or other regulatory agencies from conducting their regular inspections,
review, or other regulatory activities, it could significantly affect the ability of the FDA to timely review and process our regulatory
submissions, which could have a material adverse effect on our business. Further, in our operations as a public company, future government
shutdowns could impact our ability to access the public markets and obtain necessary capital in order to properly capitalize and continue
our operations.
Inadequate funding for the FDA, the SEC and other domestic and foreign
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 business 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, its ability to hire and retain key personnel and accept
the payment of user fees, and statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent
years as a result. In addition, government funding of the FDA, the SEC and other government agencies on which the Company’s operations
may rely, including those that fund research and development activities, is subject to the political process, which is inherently fluid
and unpredictable.
Future legislative and regulatory proposals may materially impact
the ability of the FDA and other regulatory agencies to operate as they have historically operated. We cannot be sure whether additional
legislative changes or executive orders will be enacted, or whether any of the FDA’s regulations, guidances or interpretations will
be changed, or what the impact of such changes on the agency and its scientific review staff, if any, may be. For example, the next FDA
user fee reauthorization package began stakeholder negotiations on July 14, 2025, with any agreement to be sent to Congress in early 2027
for purposes of initiating the legislative process. Reauthorization of the prescription drug user fee program would need to be finalized
by Congress by the end of September 2027 in order to avoid disruptions in FDA’s review goals for NDAs and to other activities supported
by user fees assessed against industry.
In addition, disruptions at the FDA and other agencies may slow
the time necessary for clinical trial applications and/or marketing applications for new drugs to be reviewed or approved, which would
adversely affect the Company’s business. For example, political disputes in Congress may result in a shutdown of the U.S. government
and, in such cases, certain regulatory agencies, such as the FDA and the SEC, may have to furlough critical staff and stop critical activities.
If a prolonged government or slowdown shutdown occurs, it could significantly impact the ability of the FDA to timely review and process
the Company’s regulatory submissions, which could have a material adverse effect on the Company’s business.
Future government shutdowns or slowdowns could also result in delays
in our interactions with the SEC and other government agencies, which could impact our ability to access the public markets and obtain
necessary capital in order to properly capitalize and continue our operations.
SGT-610, Twyneo, Epsolay and our
product candidates, if they receive regulatory approval, may fail to achieve the broad degree of physician adoption and market acceptance
necessary for commercial success.
The commercial success of SGT-610, Twyneo, Epsolay and our product
candidates, if approved, will depend significantly on their broad adoption by dermatologists, pediatricians and other physicians for approved
indications and other therapeutic or aesthetic indications for which we may seek approval from the FDA and other regulatory authorities.
The degree and rate of physician and patient adoption of SGT-610,
Twyneo, Epsolay and our 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;
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• 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 or prevention of the approved indications;
• the cost of treatment in relation to alternative treatments, the extent to which these costs are covered and reimbursed by third-party payors, and patients’ willingness to pay for our products and product candidates, if approved; and
• the effectiveness of our and our partners’ sales and marketing efforts, including 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 expend a significant amount of our resources on
research and development efforts that may not lead to successful product candidate introductions or the recovery of our research and development
expenditures.
We conduct research and development primarily to enable us
to manufacture and market topical dermatological drugs in accordance with FDA regulations as well as similar foreign requirements enforced
by foreign regulatory authorities. We spent approximately $23.5 million, $17.8 million, and $22.8 million on research and development
activities during the years ended December 31, 2023, 2024 and 2025, respectively. We are required to obtain FDA and other regulatory
authority approvals before marketing our product candidates in the United States or in other jurisdictions. The regulatory authority approval
process is costly, time consuming and inherently risky, as is that applicable in other jurisdictions.
We cannot be certain that any investment made in developing product
candidates will be recovered, even if we are successful in commercialization. To the extent that we expend significant resources on research
and development efforts and are not able to introduce successful new product candidates as a result of those efforts, we will be unable
to recover those expenditures.
Our efficacy clinical trials for
SGT-610, Twyneo, Epsolay and our product candidates were not, and will not be, conducted head-to-head with the applicable leading products
of our competitors, and the comparison of our results to those of existing drugs, and the conclusions we have drawn from such comparisons,
may be inaccurate.
Our efficacy clinical trials for SGT-610, Twyneo,
Epsolay and our product candidates were not, and will not be, conducted head-to-head with the drugs considered the applicable standard
of care for the relevant indications. This means that none of the patient groups participating in these trials were, and will not in the
future be, treated with the applicable standard of care drugs alongside the groups treated with our product candidates. Instead, we have
compared and plan to continue comparing the results of our clinical trials with historical data from prior clinical trials conducted by
third parties for the applicable standard of care drugs, and which results are 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 clinical trials with those
published in the product labels for these current standard of care drugs, including conclusions regarding the relative efficacy and expediency
of Twyneo and Epsolay, may be distorted by the inaccurate methodology of the comparison. Moreover, the FDA generally requires head-to-head
studies to make labeling and advertising claims regarding superiority or comparability, and our failure to collect head-to-head data may
limit the types of claims we may make for SGT-610, Twyneo, Epsolay and our
product candidates for which we obtain approval.
We may be subject to risk as a
result of international manufacturing operations.
SGT-610, Twyneo,
Epsolay and certain of our product candidates may be manufactured, warehoused and/or tested at third-party facilities located in territories
outside of Israel, in addition to our facility in Israel, and therefore our operations are subject to risks inherent in doing business
internationally. Such risks include the adverse effects on operations from corruption, war, public health crises, such as pandemics and
epidemics, international terrorism, civil disturbances, political instability, governmental activities, deprivation of contract and property
rights and currency valuation changes. Any of these changes could have a material adverse effect on our reputation, business, financial
condition or results of operations.
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If in the future we acquire or
in-license technologies or additional product candidates, we may incur various costs, may have integration difficulties and may experience
other risks that could harm our business and results of operations.
In January 2023, we purchased assets related to our SGT-610 product candidate, which
included certain intellectual property rights owned by PellePharm Inc., or PellePharm, and licensed to PellePharm by Royalty Security
LLC. In the future, we may acquire or in-license additional potential products and technologies. Any potential product or technology we
in-license or acquire will likely require additional development efforts prior to commercial sale, including extensive pre-clinical studies,
clinical trials, or both, and approval by the FDA or other applicable foreign regulatory authorities, if any. All potential products are
prone to risks of failure inherent in pharmaceutical product development, including the possibility that the potential product, or product
developed based on in-licensed technology, will not be shown to be sufficiently safe and effective for approval by regulatory authorities.
If intellectual property related to potential products or technologies, we in-license or our own know-how is not adequate, we may not
be able to commercialize the affected potential products even after expending resources on their development. In addition, we may not
be able to manufacture economically or successfully commercialize any potential product that we develop based on acquired or in-licensed
technology that is granted regulatory approval, and such potential products may not gain wide acceptance or be competitive in the marketplace.
Moreover, integrating any newly acquired or in-licensed potential products could be expensive and time-consuming. If we cannot effectively
manage these aspects of our business strategy, our business may not succeed. Lastly, our license with Royalty Security LLC requires
us, and future in-license agreements will likely require us, to make payments and satisfy various performance obligations in order to
maintain our rights to our SGT-610 product candidate or other future product candidate, as the case may be. If we do not satisfy
our obligations under our agreement with Royalty Security LLC or under future in-license agreements, or if other events occur that are
not within our control, we could lose the rights to develop and commercialize our SGT-610 product candidate and other future product candidate
covered by such future in-license agreements.
Risks Related to Regulatory Matters
Healthcare reform in the United
States and the EU may harm our future business.
Changes in applicable U.S. federal and state laws and agency
regulation, as well as foreign laws and regulations, could have a materially negative impact on our business. In the United States and
in some other jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare
system that could prevent or delay marketing approval of our product candidates of ours, restrict or regulate post-approval activities,
or affect our ability to profitably sell any product candidates for which we obtain marketing approval. Increased scrutiny by the U.S.
Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent
product labeling and post-marketing testing and other requirements. Congress also must reauthorize the FDA’s user fee programs every
five years and often makes changes to those programs in addition to policy or procedural changes that may be negotiated between the FDA
and industry stakeholders as part of this periodic reauthorization process. The next FDA user fee reauthorization package beganstakeholder
negotiations on July 14, 2025, with any agreement to be sent to Congress in early 2027 for purposes of initiating the legislative process.
Reauthorization of the prescription drug user fee program would need to be finalized by Congress by the end of September 2027 in order
to avoid a disruption in FDA’s review goals for BLAs and other activities supported by user fees assessed against industry.
Among policy makers and payors in the United States and elsewhere,
there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving
quality and/or expanding access. In the United States, the pharmaceutical industry has been a focus of these efforts and has been significantly
affected by major legislative initiatives. In March 2010, Congress passed the Patient Protection and Affordable Care Act, as amended by
the Health Care and Education Reconciliation Act, collectively referred to as the ACA, which substantially changed the way healthcare
is financed by both the government and private insurers, and significantly impacts the U.S. pharmaceutical industry. We expect that changes
or additions to the ACA, the Medicare and Medicaid programs, and changes stemming from other healthcare reform measures, especially with
regard to healthcare access, financing or other legislation in individual states, could have a material adverse effect on the healthcare
industry in the United States.
The Drug Supply Chain Security Act, or DSCSA, which became fully
effective and applicable in November 2024, imposes obligations on manufacturers of pharmaceutical products related to product tracking
and tracing. Furthermore, in February 2022, FDA released proposed regulations to amend the national standards for licensing of wholesale
drug distributors by the states; establish new minimum standards for state licensing third-party logistics providers; and create a federal
system for licensure for use in the absence of a state program, each of which is mandated by the DSCSA. Other legislative and regulatory
proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products.
We are unsure whether additional legislative changes will be enacted, or whether the current regulations, guidance or interpretations
will be changed, or whether such changes will have any impact on our business.
Additionally, there has been heightened governmental scrutiny in
the United States of biopharmaceutical pricing practices considering the rising cost of prescription drugs and biologics. Such scrutiny
has resulted in several recent congressional inquiries and proposed and enacted federal and state legislation designed to, among other
things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform
government program reimbursement methodologies for products. For example, state legislatures are increasingly passing legislation and
implementing regulations designed to control pharmaceutical pricing, including price or patient reimbursement constraints, discounts,
restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage
importation from other countries and bulk purchasing. In December 2020, the U.S. Supreme Court held unanimously that federal law does
not preempt the states’ ability to regulate pharmaceutical benefit managers, or PBMs, and other members of the healthcare and pharmaceutical
supply chain, an important decision that may lead to further and more aggressive efforts by states in this area. Then, in mid-2022, the
Federal Trade Commission, or FTC, launched sweeping investigations into the practices of the PBM industry that could lead to additional
federal and state legislative or regulatory proposals targeting such entities’ operations, pharmacy networks, or financial arrangements.
In addition, in the last few years, several states have formed prescription drug affordability boards, or PDABs, with the authority to
implement upper payment limits, or UPLs, on drugs sold in their respective jurisdictions. There are several pending federal lawsuits challenging
the authority of states to impose UPLs, however.
19
In August 2022, the Inflation Reduction Act, or IRA, was signed
into law. The IRA includes multiple provisions that may impact the prices of drug products that are both sold into the Medicare program
and throughout the United States. For example, a manufacturer of a drug or biological product covered by Medicare Parts B or D must pay
a rebate to the federal government if the product’s price increases faster than the rate of inflation. This calculation is made
on a product-by-product basis and the amount of the rebate owed to the federal government is directly dependent on the volume of a drug
product that is paid for by Medicare Parts B or D. Additionally, starting in payment year 2026, CMS will negotiate drug prices annually
for a select number of single source Part D drugs without generic or biosimilar competition. CMS will also negotiate drug prices for a
select number of Part B drugs starting for payment year 2028. If a drug product is selected by CMS for negotiation, it is expected that
the revenue generated from such drug will decrease. Any additional federal or state healthcare reform measures could limit the amounts
that third-party payers will pay for healthcare products and services, and, in turn, could significantly reduce the projected value of
certain development projects and reduce our profitability.
In 2011, Directive 2011/24/EU was adopted at the EU level. This
Directive establishes a voluntary network of national authorities or bodies responsible for Health Technology Assessment (HTA) in the
individual EU member states. The network facilitates and supports the exchange of scientific information concerning HTAs. Further to this,
on December 13, 2021, Regulation No 2021/2282 on HTA, amending Directive 2011/24/EU, was adopted. While the Regulation entered into force
in January 2022, it will only begin to apply from January 2025 onwards, with preparatory and implementation-related steps to take place
in the interim. Once applicable, it will have a phased implementation depending on the concerned products. The Regulation intends to boost
cooperation among EU member states in assessing health technologies, including new medicinal products, and provide the basis for cooperation
at the EU level for joint clinical assessments in these areas. It will permit EU member states to use common HTA tools, methodologies,
and procedures across the EU, working together in four main areas, including joint clinical assessment of the innovative health technologies
with the highest potential impact for patients, joint scientific consultations whereby developers can seek advice from HTA authorities,
identification of emerging health technologies to identify promising technologies early, and continuing voluntary cooperation in other
areas. Individual EU member states will continue to be responsible for assessing non-clinical (e.g., economic, social, ethical) aspects
of health technology, and making decisions on pricing and reimbursement.
In the EU, similar developments may affect our ability to profitably
commercialize our product candidates, if approved. In addition to continuing pressure on prices and cost containment measures, legislative
developments at the EU or member state level may result in significant additional requirements or obstacles that may increase our operating
costs. The delivery of healthcare in the EU, including the establishment and operation of health services and the pricing and reimbursement
of medicines, is almost exclusively a matter for national, rather than EU, law and policy. National governments and health service providers
have different priorities and approaches to the delivery of health care and the pricing and reimbursement of products in that context.
In general, however, the healthcare budgetary constraints in most EU member states have resulted in restrictions on the pricing and reimbursement
of medicines by relevant health service providers. Coupled with ever-increasing EU and national regulatory burdens on those wishing to
develop and market products, this could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval
activities and affect our ability to commercialize our product candidates, if approved. In markets outside of the U.S. and EU, reimbursement
and healthcare payment systems vary significantly by country, and many countries have instituted price ceilings on specific products and
therapies.
Our employees may engage in misconduct or other improper activities,
including noncompliance with regulatory standards and requirements, which could cause significant liability for us and harm our reputation.
We are exposed to the risk of employee fraud or other misconduct,
including intentional failures to comply with FDA regulations or similar regulations of comparable foreign regulatory authorities, provide
accurate information to the FDA or comparable foreign regulatory authorities, comply with manufacturing standards we have established,
comply with federal and state health care fraud and abuse laws and regulations and similar laws and regulations established and enforced
by comparable foreign regulatory authorities, report financial information or data accurately or disclose unauthorized activities to us.
Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in
regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter employee misconduct, and the
precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in
protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws
or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights,
those actions could have a significant impact on our business and results of operations, including the imposition of significant civil,
criminal and administrative penalties, damages, fines, imprisonment, exclusion from government funded health care programs, such as Medicare
and Medicaid, and integrity oversight and reporting obligations.
20
Risks Related to Commercialization
Our continued growth is dependent on our ability to successfully
develop new product candidates and commercialize our approved products and new product candidates, if approved, in a timely manner.
Our financial results depend upon our ability to introduce and
commercialize additional product candidates in a timely manner. Generally, revenue from new innovative products increases following launch
and then following patent or exclusivity expiry, declines over time, as new competitors enter the market. Our growth is therefore dependent
upon our and our partners' ability to successfully commercialize our approved products and successfully introduce and commercialize our
product candidates, if approved.
The FDA and other foreign regulatory authorities may not approve
marketing applications at all or in a timely fashion for our product candidates under development. Additionally, we or our partners may
not successfully complete our development efforts for other reasons, such as poor results in clinical trials or a lack of funding to complete
the required trials. Even if the FDA or another foreign regulatory authority approves marketing applications for our product candidates,
we or our partners may not be able to market our products successfully or profitably. Our future results of operations will depend significantly
upon our or our partners' ability to timely develop, receive FDA or foreign regulatory authority approval for, and market our products
or otherwise develop new product candidates or acquire the rights to other products.
SGT610, Twyneo, Epsolay
face, and our other product candidates, if approved, face, significant competition and our failure to compete effectively may prevent
us from achieving significant market penetration and expansion.
SGT-610, and our other product candidates, if approved, may face
significant competition and our failure to compete effectively may prevent us from achieving significant market penetration and expansion.
There are no approved pharmacotherapies currently available for
the prevention or treatment of BCC in Gorlin syndrome. If approved, SGT-610 will indirectly compete with a variety of existing and emerging
approaches, including procedural and surgical interventions (such as excision and Mohs surgery), as well as systemic therapies used off
label in certain BCC settings (including hedgehog pathway inhibitors) and other systemic agents that may be used in advanced disease.
In addition, SGT-610 may face competition from other companies developing topically delivered, locally delivered, or next-generation systemic
therapies intended to improve outcomes, reduce recurrence, or improve tolerability and convenience for patients who require chronic management.
Competing in these markets could result in price-cutting, reduced profit margins and loss of market share, any of which has harmed and
would harm our business, financial condition and results of operations.
Success for any of our current or future product candidates, if
approved, will depend on our ability to differentiate them in the marketplace, including by demonstrating a favorable clinical profile
(including effectiveness and tolerability), offering a product presentation and dosing regimen that supports patient and physician adoption,
and achieving pricing and access terms that are acceptable to patients and payors, including obtaining and maintaining favorable formulary
placement and reimbursement. The competitive landscape may also evolve rapidly, and we expect that additional companies will continue
to develop and commercialize therapies targeting the same or related indications, which could intensify competition and reduce the commercial
opportunity for our products.
We believe that our principal competitors include companies with
marketed or development-stage therapies relevant to BCC and hedgehog pathway modulation, and established dermatology and oncology companies
with significant resources. These competitors are large and experienced companies that may 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. In addition, competitors
may be able to develop products that are more effective, have fewer side effects, are more convenient, are better reimbursed, or are priced
more competitively than our products.
Twyneo and Epsolay face significant competition in their respective
international markets from a variety of prescription and non-prescription products. In particular, Twyneo and Epsolay, if approved, could
face significant competition from other approved products, including topical anti-acne drugs such as Epiduo, Epiduo Forte, Differin, Aklief
and Winlevi and topical drugs for the treatment of rosacea such as Metrogel, Finacea, Oracea and Soolantra and other generic topical products
for the treatment of rosacea and acne. Twyneo and Epsolay also compete with non-prescription anti-acne products as well as unapproved
and off-label treatments. Competing in the facial aesthetic market could result in price-cutting, reduced profit margins and loss of market
share, any of which has and would harm our business, financial condition and results of operations.
Other pharmaceutical companies
may develop competing products for Gorlin syndrome, 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.
21
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 other topical treatments for acne, rosacea, prevention of new BCCs in patients with Gorlin syndrome, prevention of
new BCCs in high-frequency BCCs patients or other indications we are pursuing or considering to pursue, and we will likely be unable to
ascertain whether such activities are underway in the future. These potential competitors may therefore introduce competing products without
our prior knowledge and without our ability to take preemptive measures in anticipation of their commercial launch.
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. They may also challenge, narrow
or invalidate our granted patents or our patent applications, and such patents and patent applications may fail to provide adequate protection
for our product candidates.
Third-party payor coverage and
adequate reimbursement may not be available for SGT-610, Twyneo or Epsolay and our other product candidates, once approved, which could
make it difficult for us or our partners to sell them profitably.
Sales of SGT-610, Twyneo, Epsolay, or our other product candidates,
if approved, will depend, in part, on the extent to which the costs of our product candidates will be covered by third-party payors, such
as government healthcare programs, private health insurers and managed care organizations. Third-party payors generally decide which drugs
they will cover for which indications and establish certain reimbursement levels for such drugs. In particular, in the United States,
private health insurers and other third-party payors often provide reimbursement for products and services based on the level at which
the government (typically through the Medicare or Medicaid programs) provides reimbursement for such treatments. Patients who are prescribed
treatments for their conditions and providers performing the prescribed services generally rely on third-party payors to reimburse all
or part of the associated healthcare costs. Patients are unlikely to use our products or product candidates, once approved, unless coverage
is provided and reimbursement is adequate to cover a significant portion of the cost of our products. Sales of SGT-610, Twyneo, Epsolay
depend, and our other product candidates, if approved, will depend, substantially on the extent to which the costs of SGT-610 Twyneo,
Epsolay and our product candidates will be paid by third-party payors. Additionally, the market for SGT-610, Twyneo, Epsolay and our product
candidates, if approved, will depend significantly on access to third-party payors’ formularies without prior authorization, step
therapy, or other limitations such as approved lists of treatments for which third-party payors provide coverage and reimbursement. If
our products and our product candidates, if approved, are not included within an adequate number of formularies or adequate reimbursement
levels are not provided, or if those policies increasingly favor generic products, this could have a material adverse effect on our business,
financial condition, cash flows and results of operations or result in additional pricing pressure on our products and product candidates.
Coverage and reimbursement for therapeutic products can differ significantly from payor to payor. One third-party payor’s decision
to cover a particular medical product or service does not ensure that other payors will also provide coverage for the medical product
or service or will provide coverage at an adequate reimbursement rate. As a result, the coverage determination process will require us
to provide scientific and clinical support for the use of our products and product candidates to each payor separately and will be a time-consuming
process.
Third-party payors are developing increasingly sophisticated methods
of controlling healthcare costs and increasingly challenging the prices charged for medical products and services. Additionally, the containment
of healthcare costs has become a priority of federal and state governments and the prices of drugs have been a focus in this effort. The
United States government, state legislatures and foreign governments have shown significant interest in implementing cost-containment
programs, including price controls and transparency requirements, restrictions on reimbursement and requirements for substitution of generic
products. For example, HHS began implementation in 2025 of “Most Favored Nation” drug pricing by setting the Medicare price
of single-source brand drugs without generic or biosimilar competition to the lowest price available in wealthy countries with a per capita
GDP of at least 60% of that in the United States. Adoption of price controls and cost-containment measures, and adoption of more
restrictive policies in jurisdictions with existing controls and measures, could limit our revenue and operating results. Additionally,
policy efforts designed to reduce patient out-of-pocket costs for medicines could result in new mandatory rebates and discounts or other
pricing restrictions. If third-party payors do not consider SGT-610,or our other product candidates, if approved, to be medically necessary
or cost-effective compared to other therapies, they may not cover SGT-610 or our other product candidates as a benefit under their plans
or, if they do, the level of reimbursement may not be sufficient to allow us or our partners to sell our products or our product candidates
once approved on a profitable basis. Decreases in third-party reimbursement for our products or our product candidates, if approved, or
a decision by a third-party payor to not cover our products or product candidates could reduce or eliminate utilization of our products
or product candidates, and have an adverse effect on our sales, results of operations and financial condition. In addition, state and
federal healthcare reform measures have been and may be adopted in the future, any of which could limit the amounts that federal and state
governments will pay for healthcare products and services, and could result in reduced demand for our products and product candidates,
if approved, or additional pricing pressures.
Outside the United States, sales of any approved products are generally
subject to extensive governmental price controls and other market regulations, and we believe the increasing emphasis on cost-containment
initiatives in Europe and other countries has and will continue to put pressure on the pricing and usage of our products and product candidates,
if approved. In many countries, the prices of medicinal products are subject to varying price control mechanisms as part of national health
systems. Other countries allow companies to fix their own prices for medicinal products but monitor and control company profits. Additional
foreign price controls or other changes in pricing regulation could restrict the amount that we are able to charge for our products and
our product candidates, if approved. Accordingly, in markets outside the United States, the reimbursement for our products and our product
candidates, if approved, may be reduced compared with the United States and may be insufficient to generate commercially reasonable revenue
and profits.
22
Our current and future relationships
with investigators, health care professionals, consultants, third-party payors, and customers are subject to applicable healthcare regulatory
laws, which could expose us to penalties.
Our business operations and current and future arrangements with
investigators, healthcare professionals, consultants, third-party payors and customers, may expose us to broadly applicable fraud and
abuse and other healthcare laws and regulations. Healthcare providers, physicians and third-party payors in the United States and elsewhere
play a primary role in the recommendation and prescription of drug and biological products. Arrangements with third-party payors and customers
can expose pharmaceutical manufacturers to broadly applicable fraud and abuse and other healthcare laws and regulations, including, without
limitation, the federal Anti-Kickback Statute, or AKS, and the False Claims Act, or FCA, which may constrain the business or financial
arrangements and relationships through which such companies sell, market and distribute pharmaceutical products. In particular, the research
and development of any of our product candidates, as well as the promotion, sales and marketing of healthcare items and services, as well
as certain business arrangements in the healthcare industry, are subject to extensive laws designed to prevent fraud, kickbacks, self-dealing
and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion,
structuring and commission(s), certain customer incentive programs and other business arrangements generally. Activities subject to these
laws also involve the improper use of information obtained in the course of patient recruitment for clinical trials.
The healthcare laws that may affect us or our partners include:
the federal fraud and abuse laws, including the AKS; false claims and civil monetary penalties laws, including the FCA and Civil Monetary
Penalties Law; federal data privacy and security laws, including HIPAA, as amended by the Health Information Technology for Economic and
Clinical Health, or HITECH, Act; and the federal Physician Payments Sunshine Act related to ownership and investment interests held by
physicians and their immediate family members, as well as payments and/or other transfers of value made to physicians, certain advanced
non-physician healthcare practitioners and teaching hospitals. In addition, many states have similar laws and regulations that may differ
from each other and federal law in significant ways, thus complicating compliance efforts. Moreover, several states require pharmaceutical
companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated
by the federal government and may require manufacturers to report information related to payments and other transfers of value to physicians
and other healthcare providers or marketing expenditures. Additionally, some state and local laws require the registration of pharmaceutical
sales representatives in the jurisdiction.
The scope and enforcement of each of these laws is uncertain and
subject to rapid change in the current environment of healthcare reform, especially in light of the lack of applicable precedent and regulations.
Ensuring business arrangements comply with applicable healthcare laws, as well as responding to possible investigations by government
authorities, can be time- and resource-consuming and can divert a company’s attention from other aspects of its business.
Efforts to ensure that our current and future business arrangements
with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental
authorities will conclude that our business practices, or those of our partners, do not comply with current or future statutes, regulations,
agency guidance or case law involving applicable healthcare laws. If our or our partners’ operations are found to be in violation
of any of these or any other health regulatory laws that may apply to us, we and our partners may be subject to significant penalties,
including the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, disgorgement, individual
imprisonment, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs or similar programs in
other countries or jurisdictions, integrity oversight and reporting obligations to resolve allegations of non-compliance, contractual
damages, reputational harm, diminished profits and future earnings, and curtailment or restructuring of our operations, any of which could
adversely affect our ability to operate our business and our results of operations. Defending against any such actions can be costly,
time-consuming and may require significant financial and personnel resources. Therefore, even if we are successful in defending against
any such actions that may be brought against us, our business may be impaired.
Actual or perceived failures to comply with
applicable data protection, privacy and security laws, regulations, standards and other requirements could adversely affect our business,
results of operations, and financial condition.
The global data protection landscape is rapidly evolving, and we
are or may become subject to numerous state, federal and foreign laws, requirements and regulations governing the collection, use, disclosure,
retention, and security of personal information, such as information that we may collect in connection with clinical trials. Any failure
or perceived failure by us to comply with federal, state or foreign laws or regulations, our internal policies and procedures or our contracts
governing our processing of personal information could result in negative publicity, government investigations and enforcement actions,
claims by third parties and damage to our reputation, any of which could have a material adverse effect on our business, results of operation,
and financial condition.
23
In the U.S., HIPAA, as amended by the HITECH Act, and regulations
implemented thereunder imposes obligations, including certain mandatory contractual terms, with respect to safeguarding the privacy, security
and transmission of individually identifiable health information. Most healthcare providers, including research institutions from which
we obtain patient health information, are subject to privacy and security regulations promulgated under HIPAA. While we do not believe
that we are currently acting as a covered entity or business associate under HIPAA and thus are not directly regulated under HIPAA, we
must structure our activities in compliance with these laws to ensure that we can access and use health information to support our research,
development and other activities. Our failure to comply with the data privacy and security principles set forth in HIPAA, or a breach
of health information or personal data, could prompt enforcement against our healthcare provider partners, create third-party liability
for our company and/or cause us significant financial or reputational harm. Specifically, depending on the facts and circumstances, we
could face substantial criminal penalties if we knowingly receive individually identifiable health information from a HIPAA-covered healthcare
provider or research institution that has not satisfied HIPAA’s requirements for disclosure of individually identifiable health
information.
Certain states have also adopted comparable privacy and security
laws and regulations, which govern the privacy, processing and protection of health-related and other personal information. Such laws
and regulations will be subject to interpretation by various courts and other governmental authorities, thus creating potentially complex
compliance issues for us and our future customers and strategic partners. For example, the California Consumer Privacy Act, as amended
by the California Privacy Rights Act, or collectively, the CCPA, requires certain businesses that process personal information of California
residents to, among other things: provide certain disclosures to California residents regarding the business’s collection, use,
and disclosure of their personal information; receive and respond to requests from California residents to access, delete, and correct
their personal information, or to opt-out of certain disclosures of their personal information; and enter into specific contractual provisions
with service providers that process California resident personal information on the business’s behalf. Similar laws have passed
in other states and are continuing to be proposed at the state and federal level, reflecting a trend toward more stringent privacy legislation
in the United States.
We are also subject to rapidly evolving data protection laws,
rules and regulations in foreign jurisdictions, including the EU General Data Protection Regulation, or GDPR, which went into effect in
May 2018 and imposes obligations and restrictions on the processing of personal data of individuals located in the European Economic Area,
or EEA, or in the context of our activities within the EEA. Companies that must comply with the GDPR face increased compliance obligations
and risk, including more robust regulatory enforcement of data protection requirements and potential fines for noncompliance of up to
€20 million or 4% of the annual global turnover of the noncompliant undertaking, whichever is greater. Further, the GDPR imposes
strict rules on the transfer of personal data out of the European Union to the United States and other regions that have not been deemed
to offer “adequate” privacy protection and the efficacy and longevity of current transfer mechanisms between the EEA, and
the United States remains uncertain. Case law from the Court of Justice of the European Union states that reliance on the standard contractual
clauses, or SCCs - a standard form of contract approved by the EC as an adequate personal data transfer mechanism - alone may not
necessarily be sufficient in all circumstances and that transfers must be assessed on a case-by-case basis. On July 10, 2023, the EC adopted
its Adequacy Decision in relation to the new EU-U.S. Data Privacy Framework, or DPF, rendering the DPF effective as a GDPR transfer mechanism
to U.S. entities self-certified under the DPF. We expect the existing legal complexity and uncertainty regarding international personal
data transfers to continue. In particular, we expect the DPF Adequacy Decision to be challenged and international transfers to the United
States and to other jurisdictions more generally to continue to be subject to enhanced scrutiny by regulators. As supervisory authorities
issue further guidance on personal data export mechanisms, including circumstances where the SCCs cannot be used, and/or start taking
enforcement action, we could suffer additional costs, complaints and/or regulatory investigations or fines, and/or if we are otherwise
unable to transfer personal data between and among countries and regions in which we operate, it could affect the manner in which we provide
our services, the geographical location or segregation of our relevant systems and operations, and could adversely affect our financial
results.
Additionally, following the United Kingdom’s withdrawal
from the European Union, we have to comply with the United Kingdom General Data Protection Regulation and Data Protection Act 2018, collectively,
the UK GDPR, which imposes separate but similar obligations to those under the GDPR and comparable penalties, including fines of up to
£17.5 million or 4% of a noncompliant undertaking’s global annual turnover, whichever is greater. On October 12, 2023, the
UK Extension to the DPF came into effect (as approved by the UK Government), as a data transfer mechanism from the UK to U.S. entities
self-certified under the DPF. The relationship between the United Kingdom and the European Union in relation to certain aspects of data
protection law remains unclear, for example around how data can lawfully be transferred between each jurisdiction, which exposes us to
further compliance risk.
Although we work to comply with applicable laws, regulations
and standards, our contractual obligations and other legal obligations, these requirements are evolving and may be modified, interpreted
and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another or other legal obligations with
which we must comply. Any failure or perceived failure by us or our employees, representatives, contractors, consultants, collaborators,
or other third parties to comply with such requirements or adequately address privacy and security concerns, even if unfounded, could
result in additional cost and liability to us, damage our reputation, and adversely affect our business and results of operations.
24
The illegal distribution and sale
by third parties of counterfeit versions of SGT-610, Twyneo, Epsolay or our product candidates or of stolen products could have a negative
impact on our reputation and a material adverse effect on our business, results of operations and financial condition.
Third parties could illegally distribute and sell counterfeit versions
of our products, which do not meet the rigorous manufacturing and testing standards that our products undergo. Counterfeit products are
frequently unsafe or ineffective and can be life-threatening. Counterfeit medicines may contain harmful substances, the wrong dose of
the active pharmaceutical ingredient or no active pharmaceutical ingredient at all. However, to distributors and users, counterfeit products
may be visually indistinguishable from the authentic version.
Reports of adverse reactions to counterfeit drugs similar to our
products or increased levels of counterfeiting such products could materially affect physician and patient confidence in our authentic
products. It is possible that adverse events caused by unsafe counterfeit products will mistakenly be attributed to our authentic products.
In addition, thefts of our inventory at warehouses, plant or while in-transit, which are not properly stored and which are sold through
unauthorized channels could adversely impact patient safety, our reputation and our business.
Public loss of confidence in the integrity of our products as a
result of counterfeiting or theft could have a material adverse effect on our business, financial position and results of operations.
Risks Related to Dependence on Third Parties
We rely on commercialization partners
to commercialize Twyneo and Epsolay in the U.S., China, Canada and other jurisdictions around the world and may depend on other parties
for commercialization of Twyneo and Epsolay outside of these jurisdictions, and the development and commercialization of our product candidates,
if approved. We also rely on our commercialization partners to provide
us with accurate reports in order for us to accurately report our royalty revenues and sales based milestone payments. Any collaborative
arrangements that we have or may establish in the future may not be successful or we may otherwise not realize the anticipated benefits
from these collaborations.
In June 2023, we entered into exclusive license agreements with
Searchlight, a private Canadian specialty pharmaceutical company, pursuant to which Searchlight has the exclusive right, and is responsible
for all commercial activities for Twyneo and Epsolay in Canada over a fifteen-year term that is renewable for subsequent five-year periods.
Searchlight will be responsible for obtaining and maintaining any regulatory approvals required to market and sell the drugs in Canada
with support from us. In consideration for the grant of such rights, we will receive up to $11 million in potential upfront payments and
regulatory and sales milestones for both drugs, combined. In addition, we will be entitled to royalty percentages of all Canadian net
sales ranging from low-double-digits to high teens. As of the date of this annual report, the Company has received aggregate proceeds
of $2.8 million under the Searchlight agreement.
In May 2024, we entered into an asset purchase agreement with
Beimei, pursuant to which Beimei purchased and licensed the rights to commercialize and manufacture Twyneo in China, Hong Kong, Macau,
Taiwan and Israel. We expect to receive, subject to applicable government approvals, a total consideration of up to $15 million, out of
which $10 million will be paid as upfront and regulatory milestones, and the remaining $5 million will be paid as royalties on net sales.
As of the date of this annual report, the Company has received aggregate proceeds of $5 million under the Beimei agreement.
During 2024, we also entered into commercialization agreements
for commercialization of Twyneo and Epsolay in most European countries, South Africa and South Korea.
We cannot and will not control these third-party partners, but
we rely on them to achieve results, which may be significant to us. Relying upon collaborative arrangements to commercialize SGT-610, Twyneo,
Epsolay and to develop and, if approved, commercialize our product candidates subjects us to a number of risks, including:
• we may not be able to control the amount and timing of resources that our partners may devote to SGT-610, Twyneo, Epsolay and our product candidates;
• the partners of our current or future partners may fail to secure adequate commercial supplies of SGT-610, Twyneo, Epsolay and our product candidates, if approved;
• should a partner fail to comply with applicable laws, rules, or regulations when performing services for us, we could be held liable for such violations;
• we may not be able to locate additional third-party partners for the commercialization of Twyneo and Epsolay for additional territories;
• our current or future partners may fail to comply with local or any foreign health authorities’ laws and regulations, and as a result, the receipt of a site manufacturing, export or import license may be delayed or withheld for an undefined period;
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• our current or future partners may experience financial difficulties or changes in business focus;
• our current or future partners’ partners may have a shortage of qualified personnel;
• we may be required to relinquish important rights, such as marketing and distribution rights;
• business combinations or significant changes in a partner’s business strategy may adversely affect a partner’s willingness or ability to complete its obligations under any arrangement;
• under certain circumstances, a partner could move forward with a competing product developed either independently or in collaboration with others, including our competitors;
• our current or future partners may utilize our proprietary information in a way that could expose us to competitive harm; and
• collaborative arrangements are often terminated or allowed to expire, which could delay the development and may increase the cost of developing our product candidates.
We also currently rely on our commercialization partners to
provide us with accurate reports in order for us to accurately report our royalty revenues and fixed transfer price and calculate our
rights to receive sales-based milestone payments. Royalty and fixed transfer price payments under our agreements with our partners
are calculated and paid in accordance with reports we receive from our partners, and we have limited audit rights and information with
respect to these reports. For example, in August 2023, we revised previously reported revenue for the first quarter and revenue
due to a disruption in Galderma’s first quarter wholesaler ordering patterns ahead of Galderma’s implementation of a new enterprise
resource planning system, which impacted its standard forecasting procedures and its quarterly assessment of rebate accruals. We cannot
provide any assurance that future reports provided any third parties with whom we have or may have collaborative arrangements will be
accurate or timely provided. If the reports we receive from them are inaccurate or delayed, our ability to accurately and timely
report our royalty revenues, fixed transfer price and sales based milestone payments may be adversely affected.
In addition, if disputes arise between us and our partners, it
could result in the delay or termination of the development, manufacturing or commercialization of Twyneo and Epsolay, lead to protracted
and costly legal proceedings, or cause partners to act in their own interest, which may not be in our interest. As a result, there can
be no assurance that the collaborative arrangements that we have entered into, or may enter into in the future, will achieve their intended
goals.
If any of these scenarios materialize, they could have an adverse
effect on our business, financial condition or results of operations.
It may be desirable or essential to enter into agreements with
a partner who has greater financial resources or different expertise than us, but for which we are unable to find an appropriate partner
or are unable to do so on favorable terms with respect to our product candidates. If we fail to enter into such collaborative agreements
on favorable terms, it could materially delay or impair our ability to develop and commercialize our product candidates and increase the
costs of development and commercialization of such product candidates.
We currently contract with third-party manufacturers
and suppliers for certain compounds and components necessary to produce our product candidates for clinical trials, and for commercial
scale of production of our approved products. Our products are manufactured by third party manufacturers that were identified and qualified
by us. This dependence on third-party manufacturers increases the risk that we or our partners may not have access to sufficient quantities
or such quantities at an acceptable cost, which could delay, prevent or impair our and our partners’ development or commercialization
efforts.
We and our partners currently rely on third parties for the manufacture
and supply of certain compounds and components necessary to produce our product candidates for our clinical trials, and to prepare for
and perform commercial scale production of product candidates and our approved products, including active ingredients and excipients used
in the formulation of our products, as well as primary and secondary packaging and labeling materials. We lack the resources and the capability
to manufacture our approved products or any of our product candidates on a large clinical or commercial scale, and we expect that
we and our partners will continue to rely on third parties to support commercial requirements for our products.
The facilities used by our contract manufacturers to manufacture
our products must be approved by the FDA pursuant to inspections that are conducted after we or our partners submit our marketing applications
to the FDA. As part of the development of Twyneo and Epsolay we qualified CMOs, the facilities of which have been approved by the FDA.
Our current and future potential partners commercializing Twyneo and Epsolay, engaged and will engage these CMOs for the commercial supply
of our approved products. We are completely dependent on our contract manufacturing partners for compliance with applicable current good
manufacturing practice, or cGMP, requirements applicable to the manufacture of both active drug substances and finished drug products.
If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements
of the FDA or others, they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. In addition,
beyond contractual provisions requiring substantial compliance with applicable laws and regulations, we have no control over the ability
of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. We are in the process of
ensuring that our CMOs’ facilities are properly qualified and approved to manufacture, store, and distribute our products, including
any product candidates for which we obtain regulatory approval, under the laws of the EU and other territories where we or our partners
plan to commercialize such products. However, there is no guarantee that our CMOs will succeed in attaining or maintaining such qualification
or approval for any jurisdiction. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture
of our product candidates, discovers evidence of significant non-compliance at any such facility, or imposes enforcement actions or restrictions
on any such facility in the future, we or our partners may need to find alternative manufacturing facilities, which would significantly
impact our or our partners ability to develop, obtain regulatory approval for or market Twyneo, Epsolay or our product candidates.
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Reliance on third-party manufacturers 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. If any of these risks transpire, we may be unable to timely retain
an alternate manufacturer or suppliers on acceptable terms and with sufficient quality standards and production capacity, or at all, which
may disrupt and delay our clinical trials for our product candidates or the manufacture and commercial sale of Twyneo, Epsolay, and our
product candidates, if approved.
Our failure or the failure of our third-party manufacturers and
suppliers 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 supplies of our product candidates that we may develop. Any failure
or refusal to supply or any interruption in supply of the components for Twyneo, Epsolay or any of our product candidates could delay,
prevent or impair our clinical development or commercialization efforts.
We and our partners rely on third parties and consultants to assist
us in conducting clinical trials. If these third parties or consultants do not successfully carry out their contractual duties or meet
expected deadlines, we or our partners may be unable to obtain regulatory approval for or commercialize our product candidates and our
business could be substantially harmed.
We and our partners do not have the ability to independently perform
all aspects of our anticipated pre-clinical studies and clinical trials. We and our partners rely on medical institutions, clinical investigators,
CROs, contract laboratories, collaborative partners and other third parties to assist us in conducting our clinical trials and studies
for our product candidates. The third parties with whom we and our partners 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 employees,
and except for contractual duties and obligations, we and our partners have limited ability to control the amount or timing of resources
that they devote to our programs.
In addition, the execution of pre-clinical studies and clinical
trials, and the subsequent compilation and analysis of the data produced, require coordination among these various third parties. In order
for these functions to be carried out effectively and efficiently, it is 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 and our partner's agreement with these third parties may inevitably enable them to terminate such
agreements upon reasonable prior written notice under certain circumstances.
Although we and our partners rely on these third parties to conduct
certain aspects of our clinical trials and non-clinical studies, we remain responsible for ensuring that each of our and our partners
studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our and our partners
reliance on these third parties does not relieve us or our partners of our and our partners regulatory responsibilities. In particular,
the FDA and foreign regulatory authorities require any clinical trials involving our product candidates to comply with GCPs, which are
the regulations and standards for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data
and results are scientifically credible and accurate, and that the trial subjects are adequately informed of the potential risks of participating
in clinical trials. We and our partners also rely on our consultants to assist us in the execution, including data collection and analysis
of our and our partners' clinical trials. If we, our partners, or any of our and our partners third-party contractors fail to comply with
applicable GCPs, the clinical data generated in the clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory
authorities may require us or our partners to perform additional clinical trials before approving our marketing applications. We cannot
assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our or our partner's
clinical trials complies with GCP regulations. In addition, our and our partners' clinical trials must be conducted with product manufactured
under cGMP regulations or similar foreign requirements. Any failure by us or our partners or any of our respective third-party contractors
to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process.
If the third parties or consultants that assist us and our partners
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 our partners, 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, regulatory requirements or GCPs, or for
any other reason, we or our partners 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 or our partners clinical trials may be extended, delayed or terminated
or may need to be repeated. If any of the foregoing were to occur, we or our partners 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
or our partners efforts to, successfully commercialize these product candidates, if approved.
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The manufacture of pharmaceutical
products is complex, and manufacturers often encounter difficulties in production. If we or any of our third-party manufacturers encounter
any difficulties, our, or our partners’ ability to provide product candidates for clinical trials or our products or product candidates,
once approved, to patients, and the development or commercialization of our product candidates could be delayed or stopped.
The manufacture of pharmaceutical products is complex and requires
significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. We
and our or our partners’ contract manufacturers must comply with cGMP or similar requirements. Manufacturers of pharmaceutical products
often encounter difficulties in production, particularly in scaling up and validating initial production and contamination controls. These
problems include difficulties with production costs and yields, quality control, including stability of the product, quality assurance
testing, operator error, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations.
Furthermore, if microbial, viral or other contaminations are discovered in our products or in the manufacturing facilities in which our
products are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination.
We cannot assure you that any stability or other issues relating
to the manufacture of any of our products will not occur in the future. Additionally, we, our partners and our third-party manufacturers
may experience manufacturing difficulties due to resource constraints or as a result of labor disputes or unstable political environments.
If we, our partners, or our third-party manufacturers were to encounter any of these difficulties, our or our partners ability to provide
any product candidates to patients in clinical trials and approved products to patients would be jeopardized. Any delay or interruption
in the supply of clinical trial supplies could delay the initiation or completion of clinical trials, increase the costs associated with
maintaining clinical trial programs and, depending upon the period of delay, require us or our partners to commence new clinical trials
at additional expense or terminate clinical trials completely. Any adverse developments affecting clinical or commercial manufacturing
of our products may result in shipment delays, inventory shortages, lot failures, product withdrawals or recalls, or other interruptions
in the supply of our products. We may also have to take inventory write-offs and incur other charges and expenses for products that fail
to meet specifications, undertake costly remediation efforts or seek more costly manufacturing alternatives. Accordingly, failures or
difficulties faced at any level of our supply chain could materially adversely affect our business and delay or impede the development
and commercialization of any of our products and could have a material adverse effect on our business, prospects, financial condition
and results of operations.
Risks Related to Our Intellectual Property
We depend on our intellectual property, and our future
success is dependent on our ability to protect our intellectual property and not infringe on the rights of others.
Our success depends, in part, on our ability to obtain patent protection
for our products and product candidates, maintain the confidentiality of our trade secrets and know how, operate without infringing on
the proprietary rights of others and prevent others from infringing our proprietary rights. We try to protect our proprietary position
by, among other things, filing U.S., European, and other patent applications related to our products and product candidates, inventions
and improvements that may be important to the continuing development of our product candidates. While we generally apply for patents in
those countries where we intend to make, have made, use, or sell patented products, we may not accurately predict all of the countries
where patent protection will ultimately be desirable. If we fail to timely file a patent application in any such country, we may be precluded
from doing so at a later date. In addition, we cannot assure you that:
• any of our future processes or product candidates will be patentable;
• our processes or products and product candidates will not infringe upon the patents of third parties; or
• we will have the resources to defend against charges of patent infringement or other violation or misappropriation of intellectual property by third parties or to protect our own intellectual property rights against infringement, misappropriation or violation by third parties.
Because the patent position of pharmaceutical companies involves
complex legal and factual questions, we cannot predict the validity and enforceability of patents with certainty. Changes in either the
patent laws or in interpretations of patent laws may diminish the value of our intellectual property. Accordingly, we cannot predict the
breadth of claims that may be allowable or enforceable in our patents (including patents owned by or licensed to us). Our issued patents
may not provide us with any competitive advantages, may be held invalid or unenforceable as a result of legal challenges by third parties
or could be circumvented. Our competitors may also independently develop formulations, processes and technologies or products similar
to ours or design around or otherwise circumvent patents issued to, or licensed by, us. Thus, any patents that we own or license from
others may not provide any protection against competitors. Our pending patent applications, those we may file in the future or those we
may license from third parties may not result in patents being issued. If these patents are issued, they may not be of sufficient scope
to provide us with meaningful protection. The degree of future protection to be afforded by our proprietary rights is uncertain because
legal means afford relatively limited protection and may not adequately protect our rights or permit us to gain or keep our competitive
advantage.
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Patent rights are territorial; thus, the patent protection we do
have will only extend to those countries in which we have issued patents. Even so, the laws of certain countries do not protect our intellectual
property rights to the same extent as do the laws of the United States and the European Union. Therefore, we cannot assure you that the
patents issued, if any, as a result of our foreign patent applications will have the same scope of coverage as our U.S. patents. Competitors
may successfully challenge our patents, produce similar drugs or products that do not infringe our patents, or produce drugs in countries
where we have not applied for patent protection or that do not respect our patents. Furthermore, it is not possible to know the scope
of claims that will be allowed in published applications and it is also not possible to know which claims of granted patents, if any,
will be deemed enforceable in a court of law.
After the completion of development and registration of our patents,
third parties may still act to manufacture and/or market products in infringement of our patent protected rights, and we may not have
adequate resources to enforce our patents. Any such manufacture and/or market of products in infringement of our patent protected rights
is likely to cause us damage and lead to a reduction in the prices of our products, thereby reducing our anticipated cash flows and profits,
if any.
In addition, due to the extensive time needed to develop, test
and obtain regulatory approval for our products, any patents that protect our products may expire early during commercialization. This
may reduce or eliminate any market advantages that such patents may give us. Following patent expiration, we may face increased competition
through the entry of competing products into the market and a subsequent decline in market share and profits.
We have granted, and may in the future grant, to third parties
licenses to use our intellectual property. Generally, other than the licenses granted to with respect to SGT-610 Twyneo and Epsolay, these
licenses have granted rights to commercialize products outside the pharmaceutical field or to technology we no longer use or to otherwise
use our intellectual property for a limited purpose outside the scope of our business interests. For example, in August 2013 we entered
into an assignment agreement with Medicis Pharmaceutical Corporation, or Medicis, according to which Medicis assigned to us its entire
interest in one of the patents upon which we rely for Twyneo for the treatment of acne. As part of this assignment agreement, we
granted Medicis a non-exclusive, transferable, sub-licensable, royalty-free, perpetual, license to practice the inventions claimed under
the patent.
However, our business interests may change or our licensees may
disagree with the scope of our license grant. In such cases, such licensing arrangements may result in the development, manufacturing,
marketing and sale by our licensees of products substantially similar to our products, causing us to face increased competition, which
could reduce our market share and significantly harm our business, results of operations and prospects. Further, since many of our
license agreements are territory-specific, if a licensee breaches its obligations in one territory under a license agreement, another
licensee in a different territory may have a claim against us (as the licensor) for breach of contract or exclusivity, depending on the
specific terms of the agreement and the nature of the breach.
If we are unable to protect the
confidentiality of our trade secrets or know-how, such proprietary information may be used by others to compete against us.
In addition to filing patent applications, we generally try to
protect our trade secrets, know-how, technology and other proprietary information by entering into confidentiality or non-disclosure agreements
with parties that have access to it, such as our development and/or commercialization partners, employees, contractors and consultants.
We also enter into agreements that purport to require the disclosure and assignment to us of the rights to the ideas, developments, discoveries
and inventions of our employees, advisors, research collaborators, contractors and consultants while we employ or engage them. However,
we cannot assure you that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information
in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information
because these agreements can be difficult and costly to enforce or may not provide adequate remedies. Any of these parties may breach
the confidentiality agreements and willfully or unintentionally disclose our confidential information, or our competitors might learn
of the information in some other way. The disclosure to, or independent development by, a competitor of any trade secret, know-how or
other technology not protected by a patent could materially adversely affect any competitive advantage we may have over any such competitor.
To the extent that any of our employees, advisors, research collaborators,
contractors or consultants independently develop, or use independently developed, intellectual property in connection with any of our
projects, disputes may arise as to the proprietary rights to this type of information. If a dispute arises with respect to any proprietary
right, enforcement of our rights can be costly and unpredictable, and a court may determine that the right belongs to a third party.
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Legal proceedings or third-party claims of intellectual
property infringement and other challenges may require us to spend substantial time and money and could prevent us from developing or
commercializing our products.
The development, manufacture, use, offer for sale, sale or importation
of our products may infringe on the claims of third-party patents or other intellectual property rights. The nature of claims contained
in unpublished patent filings around the world is unknown to us and it is not possible to know which countries patent holders may choose
for the extension of their filings under the Patent Cooperation Treaty, or other mechanisms. Therefore, there is a risk that we could
adopt a technology without knowledge of a pending patent application, which technology would infringe a third-party patent once that patent
is issued. We may also be subject to claims based on the actions of employees and consultants with respect to the usage or disclosure
of intellectual property learned at other employers. The cost to us of any intellectual property litigation or other infringement proceeding,
even if resolved in our favor, could be substantial. Any claims of patent infringement, even those without merit, could: be expensive
and time consuming to defend; cause us or our partners to cease making, licensing or using products that incorporate the challenged intellectual
property; require us or our partners to redesign, reengineer or rebrand our products and product candidates, if feasible; cause us to
stop from engaging in normal operations and activities, including developing and marketing our products and product candidates; and divert
management’s attention and resources. Some of our competitors may be able to sustain the costs of such litigation or proceedings
more effectively because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation
or defense of intellectual property litigation or other proceedings could have a material adverse effect on our ability to compete in
the marketplace. Intellectual property litigation and other proceedings may also absorb significant management time. Consequently, we
are unable to guarantee that we or our partners will be able to manufacture, use, offer for sale, sell or import our products in the event
of an infringement action.
In the event of patent infringement claims, or to avoid potential
claims, we or our partners may choose or be required to seek a license from a third party and would most likely be required to pay license
fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we or our partners were able to
obtain a license, the rights may be non-exclusive, which could potentially limit our competitive advantage. Ultimately, we or our partners
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 or other claims, we or our partners are unable to enter into licenses on acceptable terms. This inability
to enter into licenses could harm our business significantly.
In addition, because of our developmental stage, claims that our
products infringe on the patent rights of others are more likely to be asserted after commencement of commercial sales incorporating our
technology.
We may be subject to claims that
our or our partners' employees, consultants, or independent contractors have wrongfully used or disclosed confidential information of
third parties or that our or our partners' employees have wrongfully used or disclosed alleged trade secrets of their former employers.
We employ individuals who were previously employed at universities
or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that
our employees, consultants, and independent contractors do not use the proprietary information or know-how of others in their work for
us, we may be subject to claims that we or our or our partners employees, consultants, or independent contractors have inadvertently or
otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of any of our or our partners'
employees’ former employers or other third parties. Litigation may be necessary to defend against these claims. If we fail to defend
any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely
impact our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a
distraction to management and other employees.
Although we believe that we and our partners take reasonable steps
to protect our intellectual property, including the use of agreements relating to the non-disclosure of confidential information to third
parties, as well as agreements that purport to require the disclosure and assignment to us or our partners of the rights to the ideas,
developments, discoveries and inventions of our or our partners' employees and consultants while we or our partners employ them, the agreements
can be difficult and costly to enforce. Although we seek to obtain these types of agreements from our contractors, consultants, advisors
and research collaborators, to the extent that employees and consultants utilize or independently develop intellectual property in connection
with any of our projects, disputes may arise as to the intellectual property rights associated with our products. If a dispute arises,
a court may determine that the right belongs to a third party. In addition, enforcement of our rights can be costly and unpredictable.
We also rely on trade secrets and proprietary know-how that we seek to protect in part by confidentiality agreements with our employees,
contractors, consultants, advisors or others. Despite the protective measures we employ, we still face the risk that:
• these agreements may be breached;
• these agreements may not provide adequate remedies for the applicable type of breach;
• our trade secrets or proprietary know-how will otherwise become known; or
• our competitors will independently develop similar technology or proprietary information.
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International patent protection
is particularly uncertain, and if we are involved in opposition proceedings in foreign countries, we may have to expend substantial sums
and management resources.
Patent law outside the United States may be different than in the
United States. Further, the laws of some foreign countries may not protect our intellectual property rights to the same extent as the
laws of the United States, if at all. A failure to obtain sufficient intellectual property protection in any foreign country could materially
and adversely affect our business, results of operations and future prospects. Moreover, we may participate in opposition proceedings
to determine the validity of our foreign patents or our competitors’ foreign patents, which could result in substantial costs and
divert management’s resources and attention. Additionally, due to uncertainty in patent protection law, we have not filed applications
in many countries where significant markets exist.
An NDA submitted under Section
505(b)(2) subjects us to the risk that we may be subject to a patent infringement lawsuit that would delay or prevent the review or approval
of our product candidates.
In the United States, we or our partners have filed and may in
the future file NDAs for our product candidates for approval under Section 505(b)(2) of the FDCA. Section 505(b)(2) permits the submission
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 on which the applicant has not obtained a right of reference. To date we have filed two NDAs under this section. In October 2020,
we submitted an NDA for marketing approval for Twyneo, which was granted by the FDA, and in June 2020, we submitted an NDA for marketing
approval for Epsolay, which was granted by the FDA. Both of these NDA’s were accepted for filing by the FDA. The FDA granted
marketing approval for Twyneo in July 2021, and for Epsolay in April 2022.
A 505(b)(2) application enables us to reference published literature
and/or the FDA’s previous findings of safety and effectiveness for the branded reference drug. For NDAs submitted under Section
505(b)(2) of the FDCA, the patent certification and related provisions of the Hatch-Waxman Act apply. In accordance with the Hatch-Waxman
Act, such NDAs may be required to include certifications, known as paragraph IV certifications, that certify that any patents listed in
the FDA’s publication, “Approved Drug Products with Therapeutic Equivalence Evaluations,” commonly known as the Orange
Book, with respect to any product referenced in the 505(b)(2) application, are invalid, unenforceable or will not be infringed by the
manufacture, use or sale of the product that is the subject of the 505(b)(2) NDA. Applicants must also notify the holder of the approved
NDA for any product referenced in the 505(b)(2) application, along with all patent owners, regarding submission of a paragraph IV certification
with respect to applicable patents listed in the Orange Book.
Under the Hatch-Waxman Act, the NDA holder and patent owner(s)
may file a patent infringement lawsuit after receiving notice of the paragraph IV certification. Filing of a patent infringement lawsuit
against the filer of the 505(b)(2) application within 45 days of the patent owner’s receipt of notice triggers a one-time, automatic,
30-month stay of the FDA’s ability to approve the 505(b)(2) NDA, unless patent litigation is resolved in the favor of the paragraph
IV filer or the patent expires before that time. Accordingly, we or our partners may invest a significant amount of time and expense in
the development of one or more product candidates only to be subject to significant delay and patent litigation before such product candidates
may be commercialized, if at all. Further, although the Section 505(b)(1) regulatory pathway is not subject to the same patent certification
requirements as Section 505(b)(2) applications or ANDAs and is accordingly not associated with litigation under the Hatch-Waxman Act,
we may still face non-Hatch-Waxman patent litigation for products developed through the Section 505(b)(1) pathway.
In addition, a 505(b)(2) application will not be approved until
any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, or NCE, listed in the Orange Book for
the referenced product has expired. The FDA may also require us or our partners to perform one or more additional clinical trials or measurements
to support the change from the branded reference drug, which could be time consuming and could substantially delay our achievement of
regulatory approvals for such product candidates. The FDA may also reject our future 505(b)(2) submissions and require us or our partners
to file such submissions under Section 505(b)(1) of the FDCA, which would require us to provide extensive data to establish safety and
effectiveness of the drug for the proposed use and could cause delay and be considerably more expensive and time consuming. For products
we develop under the Section 505(b)(1) pathway, the FDA may disagree that our clinical data is sufficient for submission through this
pathway, which could result in our inability to seek approval for such products candidates. These factors, among others, may limit our
or our partners' ability to successfully commercialize our product candidates.
Companies that produce branded reference drugs routinely bring
litigation against ANDA or 505(b)(2) applicants that seek regulatory approval to manufacture and market generic and reformulated forms
of their branded products. These companies often allege patent infringement or other violations of intellectual property rights as the
basis for filing suit against an ANDA or 505(b)(2) applicant. Likewise, patent holders may bring patent infringement suits against companies
that are currently marketing and selling their approved generic or reformulated products.
Litigation to enforce or defend intellectual property rights is
often complex and often involves significant expense and can delay or prevent introduction or sale of our product candidates. If patents
are held to be valid and infringed by our product candidates in a particular jurisdiction, we or our partners would, unless we or our
partners could obtain a license from the patent holder, be required to cease selling in that jurisdiction and may need to relinquish or
destroy existing stock in that jurisdiction. There may also be situations where we and our partners use our business judgment and decide
to market and sell our approved product candidates, notwithstanding the fact that allegations of patent infringement(s) have not been
finally resolved by the courts, which is known as an “at-risk launch.” The risk involved in doing so can be substantial because
the remedies available to the owner of a patent for infringement may include, among other things, damages measured by the profits lost
by the patent owner and not necessarily by the profits earned by the infringer. In the case of a willful infringement, the definition
of which is subjective, such damages may be increased up to three times. Moreover, because of the discount pricing typically involved
with ANDA and, to a lesser extent, 505(b)(2), products, patented branded products generally realize a substantially higher profit margin
than ANDA and, to a lesser extent, 505(b)(2), products, resulting in disproportionate damages compared to any profits earned by the infringer.
An adverse decision in patent litigation could have a material adverse effect on our business, financial position and results of operations
and could cause the market value of our ordinary shares to decline.
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Risks Related to Our Operations in Israel
Our headquarters, manufacturing and other significant
operations are located in Israel and, therefore, our business and operations may be adversely affected by political, economic and military
conditions in Israel.
Our business and operations will be directly influenced by the
political, economic and military conditions affecting Israel at any given time. A change in the security and political situation in Israel
and in the economy could impede the raising of the funds required to finance our research and development plans and to create joint ventures
with third parties and could otherwise have a material adverse effect on our business, operating results and financial condition. Since
the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors,
including Hezbollah in Lebanon (and Syria) and Hamas in the Gaza Strip, both of which involved missile strikes in various parts of Israel
causing the disruption of economic activities. Our principal offices are located within the range of rockets that could be fired from
Lebanon, Syria or the Gaza Strip into Israel. In addition, Israel faces many threats from more distant neighbors, in particular, Iran.
Parties with whom we do business have sometimes declined to travel to Israel during periods of heightened unrest or tension, forcing us
to make alternative arrangements when necessary.
In October 2023, Hamas terrorists infiltrated Israel’s southern
border from the Gaza Strip and conducted a series of attacks on civilian and military targets. Following the attack, Israel’s
security cabinet declared war against Hamas, and later against Hezbollah in Lebanon. Hostilities subsequently escalated between Israel
and a number of its other neighbors, including conflicts with Hezbollah along Israel’s northern border with Lebanon, with Iran (including
a war during June 2025) and with the Houthi movement in Yemen, which both launched drone and missile attacks on military and civilian
targets within Israel. In addition, the Houthi movement disrupted international commerce by launching a number of attacks on commercial
vessels traversing the Gulf of Aden and the Red Sea. While a ceasefire between Israel and Lebanon (with respect to Hezbollah) was announced
in November 2024, a ceasefire between Israel and Iran was announced in June 2025 and the latest ceasefire between Israel and Hamas was
announced in October 2025, in February 2026, hostilities between Israel and Iran escalated again. In late February 2026, the United States,
together with Israel, launched a major joint military campaign of air and missile strikes against targets in Iran, which triggered a broad
Iranian response and contributed to significant regional instability, including, in early March 2026, resumed conflicts with Hezbollah.
The security situation in the region remains highly fluid, and we are unable to predict if, when, or on what terms, this escalation will
be resolved . These geopolitical developments may adversely affect our ability to continue carrying out various administrative,
research, operational and commercial functions and activities both in Israel and globally. Further, as an Israeli company, there is heightened
risk of cyberattacks on our and our supply chain’s IT networks by our adversaries in general, and more so as a result of a war.
The political and security situation in Israel may result in parties
with whom we have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those
agreements pursuant to force majeure provisions in such agreements. Any hostilities involving Israel or the interruption or curtailment
of trade between Israel and its present trading partners could result in damage to our facilities and likewise have a material adverse
effect on our business, operating results and financial condition. Furthermore, prior to Hamas attack in October 2023, the Israeli government
proposed extensive changes to Israel’s judicial system which sparked extensive political debate and unrest. In response to
the foregoing, individuals, organizations and institutions, both within and outside of Israel, voiced concerns that the proposed changes
may negatively impact the business environment in Israel. If such changes to Israel’s judicial system are again pursued by the government
and approved by the parliament, this may have an adverse effect on our business, our results of operations and our ability to raise additional
funds, if deemed necessary by our management and board of directors.
Several countries, principally in the Middle East, restrict doing
business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli
companies if hostilities in the region continue or intensify. Moreover, the perception of Israel and Israeli companies by the global
community (as represented, for example, by claims filed with the International Court of Justice (the “ICJ”)) may cause an
increase in sanctions and other adverse measures against Israel, Israeli companies and their products and services. Additionally,
there have been increased efforts by countries, activists and organizations to cause companies and consumers to boycott Israeli goods
and services or otherwise restrict business with Israel and with Israeli companies, which may impact our ability to do business with our
existing and potential customers. Such efforts, particularly if they become widespread, as well as current and future rulings and
orders of international tribunals (including the ICJ) against Israel, could materially and adversely impact our business operations.
Such restrictions may seriously limit our ability to sell Twyneo, Epsolay and our product candidates, if approved, to customers in those
countries.
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Any hostilities involving Israel or the interruption or curtailment
of trade between Israel and its present trading partners, or significant downturns in the economic or financial condition of Israel, could
adversely affect our operations and product development, cause our revenues to decrease and adversely affect the share price of publicly
traded companies having operations in Israel, such as us. Our commercial insurance does not cover losses that may occur as a result of
an event associated with the security situation in the Middle East. Although the Israeli government is currently committed to covering
the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, there can be no assurance that this government
coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Any losses or damages incurred
by us could have a material adverse effect on our business, financial condition and results of operations.
Exchange rate fluctuations between
the U.S. dollar, the New Israeli Shekel and other foreign currencies, may negatively affect our future revenues.
In the future, we expect that a substantial portion of our revenues
will be generated in U.S. dollars, Euros and other foreign currencies, although we currently incur a significant portion of our expenses
in currencies other than U.S. dollars, and mainly in NIS. Our financial records are maintained, and will be maintained, in U.S. dollars,
which is our functional currency. As a result, our financial results may be affected by fluctuations in the exchange rates of currencies
in the countries in which Twyneo, Epsolay or our product candidates, if approved, may be sold.
Our operations may be affected by negative labor
conditions in Israel.
Strikes and work-stoppages occur relatively frequently in Israel.
If Israeli trade unions threaten additional strikes or work-stoppages and such strikes or work-stoppages occur, those may, if prolonged,
have a material adverse effect on the Israeli economy and on our business, including our ability to deliver products to our customers
and to receive raw materials from our suppliers in a timely manner.
Our operations could be disrupted
as a result of the obligation of our personnel to perform military service.
Most of our executive officers and key employees reside in Israel
and, although most of them are no longer required to perform reserve duty, some may be required to perform annual military reserve duty
and may be called for active duty under emergency circumstances at any time. Our operations could be disrupted by the absence for a significant
period of time of one or more of these officers or key employees due to military service. Any such disruption could adversely affect our
business, results of operations and financial condition.
The Israeli government grants that we have received for research
and development expenditures require us to meet several conditions and may restrict our ability to manufacture some of our product candidates
and transfer relevant know-how outside of Israel and require us to satisfy specified conditions.
We have received royalty-bearing grants from the government of
Israel through the National Authority for Technological Innovation, or the Israel Innovation Authority, also known as the IIA (formerly
known as the Office of the Chief Scientist of the Ministry of Economy and Industry, or the OCS), for the financing of a portion of our
research and development expenditures in Israel. These IIA grants relate to a peripheral line of product candidates which forms a negligible
part of our activities. We are required to pay the IIA royalties from the revenues generated from the sale of products (and related services)
developed (in all or in part), directly or indirectly, using the IIA grants we received as part of a research and development program
funded by the IIA, or the Approved Program, (at rates which are determined under the IIA rules), up to the aggregate amount of the total
grants received by the IIA, plus Annual Interest for a File (as defined under the IIA's rules). As we received grants from the IIA, we
are subject to certain restrictions under the Encouragement of Research, Development and Technological Innovation in the Industry Law
5744-1984, or the Innovation Law, the regulations promulgated thereunder and the IIA's rules and guidelines. These restrictions may impair
our ability to perform or outsource manufacturing of IIA funded products outside of Israel, granting licenses for R&D purposes or
otherwise transfer outside of Israel the know-how resulting, directly or indirectly, in whole or in part, in accordance with or as a result
of, research and development activities made according to an Approved Program, as well as any rights associated with such know-how (including
later developments, which derive from, are based on, or constitute improvements or modifications of such know-how), or the IIA Funded
Know-How.
The restrictions under the IIA’s rules and guidelines continue
to apply even after payment to the IIA of the full amount of royalties payable pursuant to the grants. In addition, the IIA may from time
to time audit sales of products which it claims incorporate IIA Funded Know-How and this may lead to additional royalties being payable
on additional product candidates and may subject such products to the restrictions and obligations specified hereunder. Following an audit
conducted by the IIA, the IIA confirmed to us that products based on encapsulation technology of solid material are exempt from royalty
payment obligations to the IIA. Twyneo and Epsolay fall within the category of products based on encapsulation technology of solid material.
However, there can be no guarantee that the IIA will not in the future attempt to claim royalties with respect to these products, or that
future products will not be subject to royalties.
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The IIA restrictions may impair our ability to perform or outsource
manufacturing rights of IIA funded products outside of Israel, or otherwise transfer or license for R&D purpose our IIA Funded Know-How
in and outside of Israel without the approval of the IIA, and we cannot be certain that any approval of the IIA will be obtained on terms
that are acceptable to us, or at all. Furthermore, in the event that we undertake a transaction involving the transfer to a non-Israeli
entity of IIA Funded Know-How pursuant to a merger or similar transaction, or in the event we undertake a transaction involving the licensing
of IIA Funded Know-How for R&D purposes to a non-Israeli entity, the consideration available to our shareholders may be reduced by
the amount we are required to pay to the IIA. Any approval, if given, will generally be subject to additional financial obligations. Failure
to comply with certain requirements under the IIA’s rules and guidelines and the Innovation Law may subject us to financial sanctions,
to mandatory repayment of grants received by us (together with interest and penalties), as well as may expose us to criminal proceedings.
Enforcing a U.S. judgment against us and our current
executive officers and directors, or asserting U.S. securities law claims in Israel, may be difficult.
We are incorporated in Israel. Our current executive officers and
directors reside in Israel and most of our assets reside outside of the United States. Therefore, a judgment obtained against us or any
of these persons in the United States, including one based on the civil liability provisions of the U.S. federal securities laws, may
not be collectible in the United States and may not be enforced by an Israeli court. It may also be difficult to effect service of process
on these persons in the United States or to assert U.S. securities law claims in original actions instituted in Israel.
Even if an Israeli court agrees to hear such a claim, it may determine
that Israeli, and not U.S., law is applicable to the claim. Under Israeli law, if U.S. law is found to be applicable to such a claim,
the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process, and certain matters of
procedure would be governed by Israeli law. There is little binding case law in Israel addressing these matters.
Israeli law and tax considerations may delay, prevent
or make difficult an acquisition of us, which could prevent a change of control and negatively affect the price of our ordinary shares.
Israeli corporate law regulates mergers, requires tender offers
for acquisitions of shares above specified thresholds, requires special approvals for certain transactions involving directors, officers
or significant shareholders and regulates other matters that may be relevant to these types of transactions. These provisions of Israeli
law may delay, prevent or make difficult an acquisition of us, which could prevent a change of control and therefore depress the price
of our ordinary shares.
Furthermore, Israeli tax considerations may make potential transactions
unappealing to us or to our shareholders, especially for those shareholders whose country of residence does not have a tax treaty with
Israel which exempts 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.
We may become subject to claims for remuneration
or royalties for assigned service invention rights by our employees, which could result in litigation and adversely affect our business.
We have entered into assignment of invention agreements with our
employees pursuant to which such individuals agree to assign to us all rights to any inventions created during and as a result of their
employment or engagement with us. A significant portion of our intellectual property has been developed by our employees in the course
of their employment for us. Under the Israeli Patents Law, 5727-1967, or the Patents Law, inventions conceived by an employee during the
scope of his or her employment with a company and as a result thereof are regarded as “service inventions,” which belong to
the employer, absent a specific agreement between the employee and employer giving the employee service invention rights. The Patents
Law also provides that if there is no agreement between an employer and an employee with respect to the employee’s right to receive
compensation for such “service inventions,” the Israeli Compensation and Royalties Committee, or the Committee, a body constituted
under the Patents Law, has the authority to determine whether the employee is entitled to remuneration for service inventions developed
by such employee and the scope and conditions for such remuneration. Case law clarifies that the right to receive consideration for “service
inventions” can be waived by the employee and that in certain circumstances, such waiver does not necessarily have to be explicit.
The Committee will examine, on a case-by-case basis, the general contractual framework between the parties, using interpretation rules
of the general Israeli contract laws. Further, the Committee has not yet determined one specific formula for calculating this remuneration,
but rather uses the criteria specified in the Patents Law. Although our employees have agreed to assign to us service invention rights
and have waived their right to receive remuneration for their service inventions, as a result of uncertainty under Israeli law with respect
to the efficacy of waivers of service invention rights, we may face claims demanding remuneration in consideration for assigned inventions.
As a consequence of such claims, we could be required to pay additional remuneration or royalties to our current and/or former employees,
or be forced to litigate such claims, which could negatively affect our business.
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The government tax benefits that we currently are entitled to receive
require us to meet several conditions and may be terminated or reduced in the future.
Some of our operations in Israel may entitle us to certain tax
benefits under the Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law. If we do not meet the requirements
for maintaining these benefits, they may be reduced or cancelled and the relevant operations would be subject to Israeli corporate tax
at the standard rate, which is set at 23% in 2026. In addition to being subject to the standard corporate tax rate, we could be required
to refund any tax benefits that we have already received, plus interest and penalties thereon. Even if we continue to meet the relevant
requirements, the tax benefits that our current “Benefited Enterprise” is entitled to may not be continued in the future at
their current levels or at all. If these tax benefits were reduced or eliminated, the amount of taxes that we pay would likely increase,
as all of our operations would consequently be subject to corporate tax at the standard rate, which could adversely affect our results
of operations. Additionally, if we increase our activities outside of Israel, for example, by way of acquisitions, our increased activities
may not be eligible for inclusion in Israeli tax benefits programs. See “Item 10. Additional Information — Israeli Tax Considerations
and Government Programs — Tax Benefits Under the 2011 Amendment” for additional information concerning these tax benefits.”
Your rights and responsibilities
as a shareholder will be 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 and restated 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. corporations. For example, 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, 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 shareholder vote or to appoint or prevent the appointment of a director
or executive officer in the company has a duty of fairness toward the company. There is limited case law available to assist us in understanding
the nature of these duties 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. corporations.
Risks Related to Employee Matters
If we are not able to retain our
key management, or attract and retain qualified scientific, technical and business personnel, our ability to implement our business plan
may be adversely affected.
Our success largely depends on the skill, experience and effort
of our senior management. The loss of the service of any of these persons, including our Executive Chairman of the Board and interim Chief
Executive Officer, Mr. Moshe Arkin, would likely result in a significant loss in the knowledge and experience that we possess and could
significantly delay or prevent successful product development and other business objectives. There is intense competition from numerous
pharmaceutical and biotechnology companies, universities, governmental entities and other research institutions, seeking to employ qualified
individuals in the technical fields in which we operate, and we may not be able to attract and retain the qualified personnel necessary
for the successful development and commercialization of our products.
Under applicable employment laws, we may not
be able to enforce covenants not to compete.
Our employment agreements generally include covenants not to compete.
These agreements prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors
for a limited period. We may be unable to enforce these agreements under the laws of the jurisdictions in which our employees work. For
example, Israeli courts have required employers seeking to enforce covenants not to compete to demonstrate that the competitive activities
of a former employee will harm one of a limited number of material interests of the employer, such as the secrecy of a company’s
confidential commercial information or the protection of its intellectual property. If we cannot demonstrate that such an interest will
be harmed, we may be unable to prevent our competitors from benefiting from the expertise of our former employees and our competitiveness
may be diminished.
Risks Related to Our Ordinary Shares
If we fail to maintain compliance with Nasdaq’s
continued listing requirements, our shares may be delisted from the Nasdaq Capital Market.
Our listing on Nasdaq is conditioned on our continued compliance
with Nasdaq’s continued listing requirements, including maintaining a minimum bid price, market capitalization and stockholders’
equity. We have in the past fallen out of compliance with the minimum bid price requirement although we subsequently were able to regain
compliance after effecting a reverse stock split.
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No assurance can be given that we will be able to continue co to
comply with the continued listing requirements that we are required to meet in order to maintain a listing on the Nasdaq. Our failure
to meet these requirements may result in our securities being delisted from Nasdaq.
If our ordinary shares are delisted from Nasdaq, we may seek to
list them on other markets or exchanges or the ordinary shares may trade on the pink sheets. In the event of such delisting, our shareholders’
ability to trade, or obtain quotations of the market value of, our ordinary shares would be severely limited because of lower trading
volumes and transaction delays. These factors could contribute to lower prices and larger spreads in the bid and ask prices for our securities.
In addition, the substantially decreased trading in the ordinary shares and decreased market liquidity of the ordinary shares as a result
of the loss of market efficiencies associated with Nasdaq and the loss of federal preemption of state securities laws, which could materially
adversely affect our ability to obtain financing on acceptable terms, if at all, and may result in the potential loss of confidence by
investors, suppliers, customers and employees and fewer business development opportunities. Additionally, the market price of the ordinary
shares may decline further and shareholders may lose some or all of their investment. There can be no assurance that the ordinary shares,
if delisted from the Nasdaq in the future, would be listed on another national or international securities exchange or on a national quotation
service, the Over-The-Counter Markets or the pink sheets.
The controlling share ownership
position of M. Arkin Dermatology will limit your ability to elect the members of our board of directors, may adversely affect our share
price and will result in our non-affiliated investors having very limited, if any, influence on corporate actions.
M. Arkin Dermatology Ltd. is currently our controlling shareholder. As of March 18,
2026, M. Arkin Dermatology, and its sole beneficial owner, Mr. Moshe Arkin, our Executive Chairman of the Board and interim Chief Executive
Officer, (collectively, “Arkin Dermatology”) beneficially owned approximately 65% of the voting power of our outstanding ordinary
shares. Therefore, Arkin Dermatology has the ability to substantially influence us and exert significant control through this ownership
position. For example, Arkin Dermatology is able to control elections of directors, amendments of our organizational documents, and approval
of any merger, amalgamation, sale of assets or other major corporate transaction. Arkin Dermatology’s interests may not always coincide
with our corporate interests or the interests of other shareholders, and it may exercise its voting and other rights in a manner with
which you may not agree or that may not be in the best interests of our other shareholders. So long as it continues to own a significant
amount of our equity, Arkin Dermatology will continue to be able to strongly influence and significantly control our decisions.
We are a “controlled company” within the
meaning of Nasdaq listing standards and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance
requirements.
As of March 18, 2026, Arkin Dermatology controls over 50% of the combined voting power
of our equity interests through the ownership of ordinary shares. Because of the voting power of Arkin Dermatology, we are considered
a “controlled company” for the purposes of the Nasdaq Capital Market. As such, we are exempt from certain corporate governance
requirements of Nasdaq, including (i) the requirement that a majority of the board of directors consist of independent directors, (ii)
the requirement that we have a Nominating and Corporate Governance Committee that is composed entirely of independent directors and (iii)
the requirement that we have a Compensation Committee that is composed entirely of independent directors. We currently rely on the controlled
company exemption from the requirements that a majority of our board of directors consist of independent directors, and that we have a
nominating committee composed entirely of independent directors with a written charter addressing such committee’s purpose and responsibilities.
Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance
requirements of Nasdaq.
The market price of our ordinary
shares could be negatively affected by future sales of our ordinary shares.
As of March 18, 2026, there were 2,809,879 ordinary shares outstanding. Future sales
by us or our shareholders of a substantial number of our ordinary shares in the public market, or the perception that these sales might
occur, could cause the market price of our ordinary shares to decline or could impair our ability to raise capital through a future sale
of, or pay for acquisitions using, our equity securities. Of our issued and outstanding shares, all of the ordinary shares listed for
trading are freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under
the Securities Act of 1933, as amended, or the Securities Act. In addition, we have filed registration statements on Form S-8 with
the Securities and Exchange Commission, or the SEC, covering all of the ordinary shares issuable under our 2014 Share Incentive Plan,
and under our 2024 Share Incentive Plan, and such shares will be freely transferable, except for any shares held by “affiliates,”
as such term is defined in Rule 144 under the Securities Act. Upon the filing of the registration statements, the number of ordinary shares
that are potentially available for sale in the open market will increase materially, which could make it harder for the value of our ordinary
shares to appreciate unless there is a corresponding increase in demand for our ordinary shares. This increase in available shares could
result in the value of your investment in our ordinary shares decreasing.
In addition, a sale by us 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 you to lose part or all of your investment in our ordinary shares.
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As of March 18, 2026, Arkin Dermatology, beneficially owned 1,806,856 ordinary shares,
and is entitled to require that we register under the Securities Act the resale of these shares into the public markets. All shares sold
pursuant to an offering covered by such registration statement will be freely transferable. See “Item 7.B — Related Party
Transactions — Registration Rights Agreement”
Our outstanding warrants are exercisable for
our ordinary shares, which will increase the number of ordinary shares eligible for future resale in the public market and result in dilution
to our shareholders.
As of March 18, 2026, we had 456,000 outstanding warrants to purchase
an aggregate of 456,000 ordinary shares. All warrants are exercisable at any time before January 27, 2028, subject to certain limitations
and exceptions. The exercise price of the warrants is $58.5 per ordinary share, which is below the current market price of our ordinary
share, which was $75.30 per share based on the closing price of the ordinary shares on Nasdaq on March 18, 2026. The likelihood
that the holders of our warrants will exercise their warrants, and the amount of any cash proceeds that we would receive upon such exercise,
is dependent upon the market price of the ordinary shares. To the extent that our outstanding warrants are exercised, additional shares
of the ordinary shares will be issued, which will result in dilution to our shareholders and increase the number of shares of the ordinary
shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market or the fact that such
outstanding warrants may be exercised could adversely affect the market price of the ordinary shares. However, there is no guarantee that
our outstanding warrants will be in the money prior to their respective expirations, and as such, they may expire worthless.
We do not intend to pay dividends on our ordinary shares
for at least the next several years.
We do not anticipate paying any cash dividends on our ordinary
shares for at least the next several years. 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 the investors’ sole source
of gain for at least the next several years. In addition, Israeli law limits our ability to declare and pay dividends and may subject
us to certain Israeli taxes. For more information, see “Item 8. Financial Information – A. Financial Statements and Other
Financial Information – Dividend Policy.”
As a foreign private issuer whose
shares are listed on The Nasdaq Capital Market, we are permitted to, and follow home country corporate governance practices instead of
certain Nasdaq requirements.
As a foreign private issuer whose shares are listed on The Nasdaq
Capital Market, we are permitted to follow the requirements of the Israeli Companies Law, 5759-1999, or the Companies Law, instead of
certain corporate governance requirements of Nasdaq, including with respect to the required quorum for shareholder meetings, material
changes to equity incentive plans, sending periodic reports to shareholders, and shareholder approval with respect to certain issuances
of securities. We may in the future decide to use the foreign private issuer exemption with respect to some or all of the other Nasdaq
corporate governance requirements.
Following our home country governance practices as opposed to the
requirements that would otherwise apply to a U.S. company listed on the Nasdaq Capital Market may provide less protection than is accorded
to investors of domestic issuers. See “Item 16G. Corporate Governance – Controlled Company.”
In addition, as a foreign private issuer, we are exempted from
the rules and regulations under the United States Securities Exchange Act of 1934, as amended, or the Exchange Act, related to the furnishing
and content of proxy statements (including disclosures with respect to executive compensation). Section 8103 of the National Defense Authorization
Act for Fiscal Year 2026 named, the “Holding Foreign Insiders Accountable Act” was signed into law on December 18, 2025, will
require directors and officers of foreign private issuers to make insider reports under Section 16(a) of the Exchange Act, effective March
18, 2026. Our principal shareholders continue to remain exempt from the reporting under Section 16(a) of the Exchange Act and our directors,
officers and principal shareholders continue to remain exempt from the short-swing profit recovery provisions contained in Section 16(b)
of the Exchange Act. In addition, we are not required under the Exchange Act to file annual, quarterly and current reports and financial
statements with the SEC as frequently or as promptly as domestic companies whose securities are registered under the Exchange Act.
We may lose our foreign private
issuer status, which would then require us to comply with the Exchange Act’s domestic reporting regime and cause us to incur significant
legal, accounting and other expenses.
We are a foreign private issuer and therefore we are not required
to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act applicable to U.S. domestic issuers.
In order to maintain our current status as a foreign private issuer, either (a) a majority of our ordinary shares must be either directly
or indirectly owned of record by non-residents of the United States or (b)(i) a majority of our executive officers or directors may not
be U.S. citizens or residents, (ii) more than 50 percent of our assets cannot be located in the United States and (iii) our business must
be administered principally outside the United States. If we were to lose this status, we would be required to comply with the Exchange
Act reporting and other requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements
for foreign private issuers. We may also be required to make changes in our corporate governance practices in accordance with various
SEC and Nasdaq rules. The regulatory and compliance costs to us under U.S. securities laws if we are required to comply with the reporting
requirements applicable to a U.S. domestic issuer may be significantly higher than the cost we would incur as a foreign private issuer.
As a result, we expect that a loss of foreign private issuer status would increase our legal and financial compliance costs and would
make some activities highly time-consuming and costly. We also expect that if we were required to comply with the rules and regulations
applicable to U.S. domestic issuers, it would make it more difficult and expensive for us to obtain director and officer liability insurance,
and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These rules and regulations
could also make it more difficult for us to attract and retain qualified members of our supervisory board.
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We believe that we were a passive foreign investment
company for U.S. federal income tax purposes for our 2025 taxable year, which could result in materially adverse U.S. federal income tax
consequences to U.S. Holders of our ordinary shares or warrants.
A
non-U.S. entity treated as a corporation for U.S. federal income tax purposes will generally be a passive foreign investment company,
or a PFIC, for U.S. federal income tax purposes for any taxable year if either (i) at least 75% of its gross income for such year is passive
income (such as interest income); or (ii) at least 50% of the value of its assets (based on an average of the quarterly values of the
assets) during such year is attributable to cash or other assets that produce passive income or are held for the production of passive
income. Because the value of our assets for purposes of the PFIC asset test will generally be determined by reference to the market price
of our ordinary shares, based on the value and composition of our assets for our 2025 taxable year (including, in particular, the size
of our cash and other passive assets) and the changes in the market price of our ordinary shares during our 2025 taxable year, we expect
that we will be treated as a PFIC for U.S. federal income tax purposes for our 2025 taxable year.
If we are a PFIC for any taxable year during which a U.S. Holder
(as defined in “Item 10. Additional Information – Certain Material U.S. Federal Income Tax Considerations”) holds our
ordinary shares or under proposed U.S. Treasury Regulations, our warrants, the U.S. Holder may be subject to adverse tax consequences
whether or not we continue to be characterized as a PFIC, including (i) the treatment of all or a portion of any gain on disposition as
ordinary income, (ii) the application of a deferred interest charge on such gain and the receipt of certain dividends, and (iii) compliance
with certain reporting requirements. Certain adverse consequences of PFIC status can be mitigated if a U.S. Holder makes a “mark-to-market”
election or an election to treat us as a qualified electing fund, or QEF. Upon request, we expect to provide the information necessary
for U.S. Holders to make “qualified electing fund election” if we are classified as a PFIC. There is no assurance, however,
that we will have timely knowledge of our status as a PFIC, or that the information that we provide will be adequate to allow U.S. Holders
to make a QEF election.
For further discussion of the adverse U.S. federal income tax consequences
of our classification as a PFIC, see “Item 10. Additional Information — Certain Material U.S. Federal Income Tax Considerations
– Passive Foreign Investment Company.”
General Risk Factors
Our business and operations
may suffer in the event of information technology system failures, cyberattacks or deficiencies in our cyber-security.
We collect and maintain information in digital form that is necessary
to conduct our business, and we are increasingly dependent on information technology systems and infrastructure to operate our business.
In the ordinary course of our business, we collect, store and transmit large amounts of confidential information, including intellectual
property, proprietary business information, preclinical and clinical trial data and personal information of our employees and contractors,
or collectively, Confidential Information. It is critical that we do so in a secure manner to maintain the confidentiality and integrity
of such Confidential Information.
Despite the implementation of security measures, our information
technology systems, and those of third parties on which we rely, are vulnerable to attack, damage and interruption from computer viruses,
malware (e.g. ransomware), misconfigurations, bugs or other vulnerabilities, malicious code, natural disasters, terrorism, war,
telecommunication and electrical failures, cyberattacks, hacking, phishing attacks and other social engineering schemes, employee
theft or misuse, human error, fraud, denial or degradation of service attacks and, sophisticated nation-state and nation-state-supported
actors.
The risk of a security breach or disruption, particularly through
cyberattacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as
the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Furthermore, because
the techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and often are not recognized until launched
against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. We may also experience
security breaches that may remain undetected for an extended period. Even if identified, we may be unable to adequately investigate or
remediate incidents or breaches due to attackers increasingly using tools and techniques that are designed to circumvent controls, to
avoid detection, and to remove or obfuscate forensic evidence. There can also be no assurance that our and our third-party service providers’,
strategic partners’, contractors’, consultants’, CROs’ and collaborators’ cybersecurity risk management
program and processes, including policies, controls or procedures, will be fully implemented, complied with or effective in protecting
our systems, networks and Confidential Information.
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We and certain of our service providers are from time to time subject
to cyberattacks and security incidents. While we do not believe that we have experienced any significant system failure, accident or security
breach as a result to date, if such an event were to occur and cause interruptions in our operations or the operations of our partners
and service providers, it could result in a material disruption of our product development programs. For example, the loss of clinical
trial data from completed or ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly
increase our costs to recover or reproduce the data. To the extent that any disruption or security breach was to result in a loss of or
damage to our data or applications, or inappropriate access to or disclosure of Confidential Information, the costs associated with the
investigation, remediation and potential notification of the breach to counter-parties and data subjects could be material, we could be
subject to regulatory investigations and enforcement actions including fines and penalties, we could incur material legal claims and liability
(including class actions), we could suffer damage to our reputation, and the further development of our product candidates could be delayed.
Further, our insurance coverage may not be sufficient to cover the financial, legal, business or reputational losses that may result from
an interruption or breach of our systems.
We may incur substantial expenses as a result of the
limited nature of our disaster recovery and business continuity plan.
We have implemented a business continuity plan to prevent the collapse
of critical business processes to a large extent or to enable the resumption of critical business processes in case a natural disaster,
public health emergency, or other serious event occurs. However, depending on the severity of the situation, it may be difficult or in
certain cases impossible for us to continue our business for a significant period of time. Our contingency plans for disaster recovery
and business continuity may prove inadequate in the event of a serious disaster or similar event and we may incur substantial costs that
could have a material adverse effect on our business.
If we do not comply with laws regulating the protection
of the environment and health and human safety, our business could be adversely affected.
Our research and development and manufacturing involve the use
of hazardous materials and chemicals and related equipment. If an accident occurs, we could be held liable for resulting damages, which
could be substantial. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those
governing laboratory procedures and the handling of biohazardous materials. We do not maintain insurance for environmental liability claims
that may be asserted against us. Moreover, additional foreign and local laws and regulations affecting our operations may be adopted in
the future. We may incur substantial costs to comply with such regulations and pay substantial fines or penalties if we violate any of
these laws or regulations.
With respect to environmental, safety and health laws and regulations,
we cannot accurately predict the outcome or timing of future expenditures that we may be required to make in order to comply with such
laws as they apply to our operations and facilities. We are also subject to potential liability for the remediation of contamination associated
with both present and past hazardous waste generation, handling, and disposal activities. We will be periodically subject to environmental
compliance reviews by environmental, safety, and health regulatory agencies. Environmental laws are subject to change and we may become
subject to stricter environmental standards in the future and face larger capital expenditures in order to comply with environmental laws
which could have a material adverse effect on our business.
The price of our ordinary shares may be volatile
and may fluctuate due to factors beyond our control.
The share price of publicly traded emerging biopharmaceutical and
drug discovery and development companies has been highly volatile and is likely to remain highly volatile in the future. The market price
of our ordinary shares may fluctuate significantly due to a variety of factors, including:
• positive or negative results of testing and clinical trials by us, strategic partners and competitors;
• announcements of regulatory approvals or the failure to obtain them, or specific label indications or patient populations for their use, or changes or delays in the regulatory review process;
• delays in entering into strategic relationships with respect to the commercialization of Twyneo and Epsolay in additional territories or with respect to the development and/or commercialization of our product candidates or entry into strategic relationships on terms that are not deemed to be favorable to us;
• technological innovations or commercial product introductions by us or competitors;
• changes in government regulations;
• developments concerning proprietary rights, including patents and litigation matters;
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• public concern relating to the commercial value or safety of any of our products;
• financing or other corporate transactions;
• publication of research reports or comments by securities or industry analysts;
• general market conditions in the pharmaceutical industry or in the economy as a whole; or
• other events and factors, many of which are beyond our control.
These and other market and industry factors may cause the market
price and demand for our ordinary shares to fluctuate substantially, regardless of our actual operating performance, which may limit or
prevent investors from readily selling their ordinary shares and may otherwise negatively affect the liquidity of our ordinary shares.
In addition, the stock market in general, and biopharmaceutical companies in particular, have experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance of these companies.
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. The price of our ordinary shares could decline if
one or more securities analysts downgrade our ordinary shares or if those analysts issue other unfavorable commentary or cease publishing
reports about us or our business.
We have been incurring and will
continue to incur increased costs as a result of operating as a public company, and our management will be required to devote substantial
time to new compliance initiatives.
As a public company whose ordinary shares are listed in the United
States, we have been incurring and will continue to incur accounting, legal and other expenses that we did not incur as a private company,
including costs associated with our reporting requirements under the Exchange Act. We also have incurred and anticipate that we will continue
to incur costs associated with corporate governance requirements, including requirements under Section 404 and other provisions of the
Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules implemented by the SEC and The Nasdaq Capital Market, and provisions
of Israeli corporate law applicable to public companies. These rules and regulations increase our legal and financial compliance costs,
introduce new costs such as investor relations and stock exchange listing fees, and make some activities more time-consuming and costly.
Our board and other personnel need to devote a substantial amount of time to these initiatives. Due to developments with respect to these
rules from time to time, we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. Due to
our current ‘public float’ we are eligible to take advantage of an exemption from the requirement to comply with the auditor
attestation requirements of Section 404 of the Sarbanes-Oxley Act (and the rules and regulations of the SEC thereunder). When these exemptions
cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with them.
Pursuant to Section 404 of the Sarbanes-Oxley Act and the related
rules adopted by the SEC and the Public Company Accounting Oversight Board, our management is required to report on the effectiveness
of our internal control over financial reporting. In addition, once our public float exceeds $75 million, we will lose the ability to
rely on the exemptions related thereto discussed above, and our independent registered public accounting firm may also need to attest
to the effectiveness of our internal control over financial reporting under Section 404. The process of determining whether our existing
internal controls over financial reporting systems are compliant with Section 404 and whether there are any material weaknesses or significant
deficiencies in our existing internal controls requires the investment of substantial time and resources, including by our chief financial
officer and other members of our senior management. As a result, this process may divert internal resources and take a significant amount
of time and effort to complete. In addition, while our assessment of our internal control over financial reporting resulted in our conclusion
that as of December 31, 2025, our internal control over financial reporting was effective, we cannot predict the outcome of this
determination in future years and whether we will need to implement remedial actions in order to implement effective controls over financial
reporting. The determination and any remedial actions required could result in us incurring additional costs that we did not anticipate,
including the hiring of outside consultants. As a result, we may experience higher than anticipated operating expenses, as well as higher
independent auditor fees during and after the implementation of these changes. If we are unable to implement any of the required changes
to our internal control over financial reporting effectively or efficiently or are required to do so earlier than anticipated, it could
adversely affect our operations, financial reporting and/or results of operations and could result in an adverse opinion on internal controls
from our independent auditors.
Changes in the laws and regulations affecting public companies
will result in increased costs to us as we respond to their requirements. These laws and regulations could make it more difficult or more
costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept
reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements
could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees
or as executive officers. We cannot predict or estimate the amount or timing of additional costs we may incur in order to comply with
such requirements.
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If we fail to maintain an effective
system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As
a result, shareholders could lose confidence in our financial and other public reporting, which would harm our business and the trading
price of our ordinary shares.
Effective internal control over financial reporting is necessary
for us to provide reliable financial reports. Any failure to implement required new or improved controls, or difficulties encountered
in their implementation could cause us to fail to meet our reporting obligations. While our assessment of our internal control over financial
reporting resulted in our conclusion that as of December 31, 2025, our internal control over financial reporting was effective, we cannot
predict the outcome of our testing or any subsequent testing by our auditor in future periods. Any testing by us conducted in connection
with Section 404, or any subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal
controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to
our financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors
to lose confidence in our reported financial information and affect our reputation, which could have a negative effect on the trading
price of our ordinary shares.
Our management will be required to assess the effectiveness of
our internal controls and procedures and disclose changes in these controls on an annual basis. However, for so long as we have a ‘public
float’ of less than $75 million on the last trading day of our second fiscal quarter, our independent registered public accounting
firm will not be required to attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404. An
independent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might
not. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the
expense of remediation.