Oramed Pharmaceuticals Inc.: Form 10-Q for the period ended Jun 30, 2024

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the related notes included elsewhere herein and in our consolidated financial statements, accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report.

Overview of Operations

We are a pharmaceutical company engaged in the research and development of innovative pharmaceutical solutions with a technology platform that allows for the oral delivery of therapeutic proteins.

We have developed an oral dosage form intended to withstand the harsh environment of the gastrointestinal tract and effectively deliver active insulin or other proteins. The formulation is not intended to modify the proteins chemically or biologically, and the dosage form is designed to be safe to ingest.

On January 11, 2023, we announced that the Phase 3 oral insulin trial (ORA-D-013-1) did not meet its primary or secondary endpoints. As a result, we terminated this trial and a parallel Phase 3, ORA-D-013-2 clinical trial. In 2023, we completed an analysis of the ORA-D-013-1 Phase 3 trial data and found that subpopulations of patients with pooled specific parameters, such as body mass index (BMI), baseline HbA1c and age, responded well to oral insulin. Based on this analysis, we have submitted a protocol for a new Phase 3 clinical trial to the FDA. We are additionally examining our existing pipeline and have commenced an evaluation process of potential strategic opportunities, with the goal of enhancing value for our stockholders.

Scilex Transaction

On September 21, 2023, we completed a transaction, or the Transaction, with Scilex Holding Company, or Scilex, in exchange for certain equity securities of Scilex as follows:

a. Senior Secured Promissory Note due 18 months from the date of issuance in the principal amount of $101,875,000, or the Note, maturing on March 21, 2025 and bearing and interest of SOFR plus 8.5%, payable in-kind. Scheduled principal payments are due on December 21, 2023, March 21, 2024, June 21, 2024, September 21, 2024, and December 21, 2024, with the balance due on March 21, 2025. As per the Note terms, if the Note is not repaid in full on or prior to March 21, 2024, an exit fee of $3,056 is due. Since the Note was not repaid by that date, the Company is entitled to the above-mentioned exit fee at the maturity date of the Note. As of June 30, 2024, Scilex has repaid $40,000,000 of the amount due under the Note, according to the terms of the Note.

b. Warrants to purchase up to 4,500,000 shares of Scilex common stock with an exercise price of $0.01 per share and additional warrants for up to 8,500,000 shares, or the Subsequent Penny Warrants, which will be vested in accordance with the terms of the Note. As of June 30, 2024, 4,250,000 Subsequent Penny Warrants were vested.

c. Transferred warrants to purchase 4,000,000 shares of Scilex common stock at $11.50 per share, fully exercisable and expiring on November 10, 2027.

Oral Insulin

Type 2 Diabetes: We conducted the ORA-D-013-1 Phase 3 trial on patients with type 2 diabetes, or T2D, with inadequate glycaemic control who were on two or three oral glucose-lowering agents. The primary endpoint of the trial was to evaluate the efficacy of our oral insulin capsule, ORMD-0801, compared to placebo in improving glycaemic control as assessed by HbA1c, with a secondary efficacy endpoint of assessing the change from baseline in fasting plasma glucose at 26 weeks. On January 11, 2023, we announced that the ORA-D-013-1 Phase 3 trial did not meet its primary or secondary endpoints. Following the results of the ORA-D-013-1 Phase 3 trial, we also terminated the ORA-D-013-2 Phase 3 trial, a second Phase 3 trial that included T2D patients with inadequate glycaemic control who were attempting to manage their condition with either diet alone or with diet and metformin. In 2023, we completed an analysis of the data from the ORA-D-013-1 Phase 3 trial and found that subpopulations of patients with pooled specific parameters, such as BMI, baseline HbA1c and age, responded well to oral insulin. These subsets exhibited an over 1% placebo adjusted, statistically significant, reduction in HbA1c. Based on this analysis, we have submitted a protocol for a new Phase 3 clinical trial to the FDA.

Joint Venture Agreement: On January 22, 2024, Oramed and its wholly-owned subsidiary, Oramed Ltd., entered into a joint venture agreement, or the JV Agreement, with HTIT Biotech and Technowl Limited, a wholly-owned indirect subsidiary of HTIT Biotech, or HTIT Sub, and together with HTIT Biotech, HTIT, pursuant to which, subject to the terms and conditions set forth in the JV Agreement, the parties will establish a joint venture, or the JV, based on Oramed’s oral drug delivery technology.

The JV will focus on the development and worldwide commercialization of innovative products based on Oramed’s oral insulin and POD™ (Protein Oral Delivery) pipeline and HTIT’s manufacturing capabilities and technologies. The parties intend for the JV to use the protocol we recently submitted to the FDA to initiate a Phase 3 oral insulin trial in the United States.

Oramed and HTIT will initially hold equal shares in the JV, with each owning 50% of the equity. The board of directors will initially consist of equal representation from HTIT and Oramed. HTIT will contribute to the JV $70 million in cash, while Oramed will contribute $20 million (comprised of $10 million in cash and $10 million in shares of Oramed common stock that will be subject to certain registration rights) and will transfer intellectual property related to its oral insulin and POD™ technology, as well as other assets in the Oramed pipeline. HTIT will have an option to invest additional funds into the JV up to an aggregate amount of $20 million, thereby increasing its equity holdings and board representation.

The consummation of the JV Agreement is subject to and contingent upon the parties entering into additional agreements pursuant to the JV Agreement. There is no assurance that the parties will complete and sign these additional agreements.

Oral Vaccine

On March 18, 2021, we entered into a license agreement with Oravax, a 63% owned joint venture to commercialize oral vaccines for COVID-19 and other novel coronaviruses based on Premas Biotech Pvt. Ltd.’s proprietary vaccine technology involving a triple antigen virus like particle.

Impact of Current Events

On October 7, 2023, the State of Israel was attacked by and subsequently declared war on Hamas. Israel has been in an ongoing state of war with Hamas since that time. Following the attack by Hamas, Hezbollah has also launched attacks against Israel and Israel has been responding to these attacks with targeted air strikes. It is possible that other terrorist organizations, including Palestinian military organizations in the West Bank, as well as other hostile countries, such as Iran, will join the hostilities. As of August 14, 2024, we believe that there is no immediate risk to our business operations related to these events. For further information, see “Item 1A. Risk Factors,” under “We are affected by the political, economic and military risks of having operations in Israel” in our Annual Report.

Results of Operations

Comparison of six and three month periods ended June 30, 2024 and June 30, 2023

The following table summarizes certain statements of operations data of the Company for the six and three month periods ended June 30, 2024 and June 30, 2023 (in thousands of dollars except share and per share data):

Revenues

Revenues consist of proceeds related to the Amended and Restated Technology License Agreement, dated December 21, 2015, between the Company and HTIT, or as further amended by the parties on June 3, 2016 and July 24, 2016, the HTIT License Agreement, that are recognized on a cumulative basis when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur, through the expected product submission date by HTIT of June 2023, using the input method.

There were no revenues for the six month period ended June 30, 2024 while revenues were $1,340,000 for the six month period ended June 30, 2023. The decrease was due to recognition of revenues until the product submission date by HTIT of June 2023.

There were no revenues for the three month period ended June 30, 2024 while revenues were $674,000 for the three month period ended June 30, 2023. The decrease was due to recognition of revenues until the product submission date by HTIT of June 2023.

Research and Development Expenses

Research and development expenses include costs directly attributable to the conduct of research and development programs, including the cost of salaries, employee benefits, costs of materials, supplies, the cost of services provided by outside contractors, including services related to our clinical trials, clinical trial expenses, the full cost of manufacturing drugs for use in research and preclinical development. All costs associated with research and development are expensed as incurred.

Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. We outsource a substantial portion of our clinical trial activities, utilizing external entities such as contract research organizations, or CROs, independent clinical investigators and other third-party service providers to assist us with the execution of our clinical trials.

Clinical activities, which relate principally to clinical sites and other administrative functions to manage our clinical trials, are performed primarily by CROs. CROs typically perform most of the start-up activities for our trials, including document preparation, site identification, screening and preparation, pre-trial visits, training and program management.

Clinical trial and preclinical trial expenses include regulatory and scientific consultants’ compensation and fees, research expenses, purchase of materials, cost of manufacturing of the oral insulin and exenatide capsules, payments for patient recruitment and treatment, as well as salaries and related expenses of research and development staff.

Research and development expenses for the six month period ended June 30, 2024 decreased by 58% to $2,621,000, compared to $6,248,000 for the six month period ended June 30, 2023. The decrease was mainly due to lower expenses related to the Phase 3 trials that were terminated and was partially offset by higher stock-based compensation expenses.

Research and development expenses for the three month period ended June 30, 2024 decreased by 21% to $1,442,000, compared to $1,821,000 for the three month period ended June 30, 2023. The decrease was mainly due to lower expenses related to the Phase 3 trials that were terminated.

Government grants

In the six month periods ended June 30, 2024 and June 30, 2023, we did not recognize any research and development grants. As of June 30, 2024, we had incurred liabilities to pay royalties to the Israel Innovation Authority of the Israeli Ministry of Economy and Industry of $59,000.

Sales and Marketing Expenses

Sales and marketing expenses include the salaries and related expenses of our commercial functions, consulting expenses and other general expenses.

We did not recognize any sales and marketing expenses for the six month period ended June 30, 2024 compared to expenses of $376,000 for the six period ended June 30, 2023. This was primarily due to the termination of the employment of an executive officer in fiscal year 2023. We did not recognize any stock-based compensation expenses for the six month period ended June 30, 2024, compared to expenses of $223,000 for the six month period ended June 30, 2023. This was primarily due to the termination of the employment of an executive officer.

We did not recognize any sales and marketing expenses for the three month period ended June 30, 2024 compared to $192,000 for the three month period ended June 30, 2023. This was primarily due to the termination of the employment of an executive officer in fiscal year 2023. We did not recognize any stock-based compensation expenses for the three month period ended June 30, 2024, compared to expenses of $136,000 for the three month period ended June 30, 2023. This was primarily due to the termination of the employment of an executive officer.

General and Administrative Expenses

General and administrative expenses include the salaries and related expenses of our management, consulting expenses, legal and professional fees, travel expenses, business development expenses, insurance expenses and other general expenses.

General and administrative expenses for the six month period ended June 30, 2024 decreased by 6% to $3,476,000 compared to $3,715,000 for the six month period ended June 30, 2023.

General and administrative expenses for the three month period ended June 30, 2024 decreased by 31% to $1,693,000 compared to $2,452,000 for the three month period ended June 30, 2023. This decrease was mainly due to decreases in stock-based compensation.

Interest Expenses

Interest expenses were $853,000 for the six month period ended June 30, 2024, while there were no interest expenses for the six month period ended June 30, 2023. The increase was mainly due to interest on the Short-Term Borrowings (as defined below).

Interest expenses were $261,000 for the three month period ended June 30, 2024, while there were no interest expenses for the three month period ended June 30, 2023. The increase was mainly due to interest on the Short-Term Borrowings (as defined below).

Financial Income, Net

Net financial income increased by 474% to $19,322,000 for the six month period ended June 30, 2024, compared to $4,075,000 for the six month period ended June 30, 2023. The increase was mainly due to the revaluation of the investments in Scilex.

Net financial income increased by 574% to $14,234 for the three month period ended June 30, 2024, compared to $2,478,000 for the three month period ended June 30, 2023. The increase was mainly due to the revaluation of the investments in Scilex.

Tax expenses

During the six and three month period ended June 30, 2024, we recognized tax expenses totaling $1,634,000. The tax expenses are primarily attributable to the Transaction. The provision for income taxes in the interim period is determined using an estimated annual effective tax rate (taking into account utilization of carryforward tax losses of Oramed Pharmaceuticals Inc).

During the six month period ended June 30, 2023, we did not recognize any tax expenses.

Liquidity and Capital Resources

From inception through June 30, 2024, we have incurred losses in an aggregate amount of $146,808,000. During that period and through June 30, 2024, we have financed our operations through several private placements of our common stock, as well as public offerings of our common stock, raising a total of $255,384,000, net of transaction costs. During that period, we also received cash consideration of $28,001,000 from the exercise of warrants and options. We expect to seek additional financing through similar sources in the future, as needed. As of June 30, 2024, we had $84,753,000 of available cash and $1,778,000 of short-term bank deposits.

From inception through June 30, 2024, we have not generated significant revenues from our operations. Following the termination of the ORA-D-013-1 and ORA-D-013-2 Phase 3 trials, the Company’s research and development activities have been significantly reduced while it conducts a strategic review process. As a result, the Company is currently incurring lower research and development and sales and marketing expenses.

Based on our current cash resources and commitments, we believe we will be able to maintain our current planned activities and the corresponding level of expenditures for at least the next 12 months.

On August 8, 2023, we borrowed an aggregate of $99,550,000 pursuant to loan agreements from Israel Discount Bank Ltd., or the Short-Term Borrowings. The Short-Term Borrowings mature on dates ranging from August 11, 2023 to May 24, 2024, bear interest ranging from 6.66% to 7.38%, are secured by certificates of deposits issued by Israel Discount Bank Ltd. having an aggregate face amount of $99,550,000. The net proceeds of the Short-Term Borrowings were used to fund the Note. The Short-Term Borrowings are paid in one payment of principal and interest at each respective maturity. As of June 30, 2024, we repaid the entire Short-Term Borrowings amount.

As of June 30, 2024, our total current assets were $153,270,000 and our total current liabilities were $3,733,000. On June 30, 2024, we had a working capital surplus of $149,537,000 and an accumulated loss of $146,808,000. As of December 31, 2023, our total current assets were $162,584,000 and our total current liabilities were $53,214,000. On December 31, 2023, we had a working capital surplus of $109,370,000 and an accumulated loss of $157,556,000. The increase in working capital from December 31, 2023 to June 30, 2024 was mainly due to an increase in cash and cash equivalents and in investments at fair value, together with a decrease in Short-term borrowings partially offset by a decrease in short-term deposits.

During the six month period ended June 30, 2024, cash and cash equivalents increased to $84,753,000, from $9,055,000 as of December 31, 2023. The increase was mainly due to the reasons described below.

Operating activities provided cash of $600,000 in the six month period ended June 30, 2024, compared to $8,183,000 used in the six month period ended June 30, 2023. Cash provided in operating activities primarily consisted of interest received from short-term deposits and an increase in accounts payable, accrued expenses and related parties, offset by research and development, general and administrative expenses.

Investing activities provided cash of $124,653,000 in the six month period ended June 30, 2024, compared to used cash of $27,913,000 in the six month period ended June 30, 2023. Cash provided by investing activities in the six month period ended June 30, 2024 consisted primarily of proceeds from short-term deposits and proceeds from long-term investments. Cash used by investing activities in the six month period ended June 30, 2023 consisted primarily of the purchase of short-term deposits, partially offset by proceeds from short term investing activities.

Financing activities used cash of $49,550,000 in the six month period ended June 30, 2024, compared to cash of $2,430,000 provided in the six month period ended June 30, 2023. Cash used by financing activities in the six month period ended June 30, 2024, consisted primarily of repayments of the Short-Term Borrowings. Cash provided by financing activities in the six month period ended June 30, 2023, consisted primarily of proceeds from the issuance of our common stock.

On March 18, 2024, the Company entered into an at the market offering agreement, or the ATM Agreement, with Rodman & Renshaw LLC and StockBlock Securities LLC, as agents, pursuant to which the Company may issue and sell shares of its common stock having an aggregate offering price of up to $75,000,000 through a sales agent, subject to certain terms and conditions. The ATM is not currently active since we do not have an effective shelf registration statement covering the shares of common stock issuable thereunder. As of June 30, 2024 and through August 14, 2024, no shares were issued under the ATM Agreement.

Critical accounting policies and estimates

Our critical accounting policies are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report.

Planned Expenditures

We have invested heavily in research and development, and we expect that in the upcoming years our research and development expenses will continue to be our major operating expense.

Following the results of the Phase 3 trials for our oral insulin capsule candidate, ORMD-0801 and the current strategic review initiated by the Company, our obligations may change significantly.

There has been no significant change in our exposure to market risk during the quarter ended June 30, 2024. For a discussion of our exposure to market risk, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” contained in our Annual Report.

Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2024. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.