<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1997
REGISTRATION STATEMENT NO. 333-37821
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
APOLLON, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
PENNSYLVANIA 23-2681961
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
</TABLE>
------------------------
ONE GREAT VALLEY PARKWAY
MALVERN, PENNSYLVANIA 19355
(610) 647-9452
(Address, including zip code and telephone number, including
area code, of registrant's principal executive offices)
VINCENT R. ZURAWSKI, JR., PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
APOLLON, INC.
ONE GREAT VALLEY PARKWAY
MALVERN, PENNSYLVANIA 19355
(610) 647-9452
(Name, address, including zip code and telephone number, including
area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
MORRIS CHESTON, JR., ESQUIRE DONALD J. MURRAY, ESQUIRE
Ballard Spahr Andrews & Ingersoll Dewey Ballantine LLP
1735 Market Street, 51st Floor 1301 Avenue of the Americas
Philadelphia, Pennsylvania 19103 New York, NY 10019
(215) 665-8500 (212) 259-8000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 20, 1997
P R O S P E C T U S
2,500,000 SHARES
[LOGO]
COMMON STOCK
---------
All of the shares of Common Stock (the "Common Stock") offered hereby (the
"Offering") are being sold by Apollon, Inc. ("Apollon" or the "Company"). Prior
to this Offering, there has been no public market for the Common Stock of the
Company. It is currently estimated that the initial public offering price will
be between $11.00 and $13.00 per share. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
Application will be made to have the Common Stock approved for quotation on the
Nasdaq National Market under the symbol "APLN".
In October 1997, A.H. Investments Ltd., an affiliate of American Home
Products Corporation, invested $3.0 million in the Company in exchange for a
convertible promissory note in the principal amount of $3.0 million and a
warrant to purchase 68,910 shares of the Company's Common Stock at a price equal
to 115% of the initial public offering price. The promissory note will be
converted into shares of Common Stock upon the closing of the Offering at a
conversion price equal to the initial public offering price.
The Underwriters have reserved 83,333 shares (assuming a public offering
price of $12.00 per share) of the Common Stock offered hereby for possible sale
at the initial public offering price to Biogen, Inc., a licensor of certain
intellectual property to the Company, which has expressed an interest in
purchasing such shares.
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share $ $ $
Total(3) $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
375,000 additional shares of Common Stock on the same terms as set forth
above solely to cover over-allotments, if any. If such option is exercised
in full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
--------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1997 at the offices of Smith Barney Inc., 333 West 34th Street, New
York, New York 10001.
--------------
SMITH BARNEY INC.
GENESIS MERCHANT GROUP
SECURITIES
CRUTTENDEN ROTH
INCORPORATED
, 1997
<PAGE>
[Four groups of photos including: five photos of scientists working in
laboratories; three photos of vialed/ encapsulated products; five photos of
close ups of laboratory work; two photos of microscope images; and one photo of
vaccine administration. One graph of product development time lines.]
- ------------------------
APOLLON-REGISTERED TRADEMARK-, THE APOLLON LOGO,
GENEVAX-REGISTERED TRADEMARK- AND GENEVAX-HIV-REGISTERED TRADEMARK- ARE
REGISTERED TRADEMARKS OF APOLLON, INC. GENEVAX-HSV-TM-, GENEVAX-HBV-TM-,
GENEVAX-TCR-TM-, GENEVAX-HPV-TM-, GENEVAX-HCV-TM- AND GENEVAX-MTB-TM- ARE
TRADEMARKS OF APOLLON, INC. ALL OTHER BRAND NAMES OR TRADEMARKS APPEARING IN
THIS PROSPECTUS ARE THE PROPERTY OF THEIR RESPECTIVE OWNERS. ALL REFERENCES IN
THIS PROSPECTUS TO HIV REFER TO HIV-1 AND THE TERM AIDS INCLUDES ALL HIV-INDUCED
DISEASE.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
INCLUDING BY OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER "RISK FACTORS."
THE COMPANY
Apollon, Inc. ("Apollon" or the "Company") is a leader in the development of
non-viral DNA-based vaccines and other DNA-based gene therapy products for the
prevention and treatment of infectious and autoimmune diseases. Apollon's
vaccine product candidates, which utilize its proprietary facilitated DNA
delivery technology, are designed to stimulate an immune response by causing
cells to express specific encoded antigenic proteins. The Company believes that
its GENEVAX vaccine product candidates may have several positive attributes,
including the ability to: (i) stimulate both humoral (antibody) and cellular
(cytotoxic T-cell) immune responses; (ii) target different strains of the same
pathogen, as well as multiple pathogens, with a single vaccine; (iii) be
conveniently administered using conventional methods; (iv) demonstrate increased
safety relative to live virus vaccines; and (v) be manufactured with relative
ease. The Company believes that its technology represents a new paradigm for the
development of preventive and therapeutic vaccines directed against a range of
infectious diseases, including genital and oral/labial herpes, viral hepatitis,
AIDS, genital warts and tuberculosis, as well as autoimmune diseases and cancer.
In order to develop DNA-based vaccine products successfully, the Company is
focusing a significant proportion of its resources on the advancement of its
vaccine product candidates into human clinical trials, including both clinical
trials of preventive product candidates in healthy adults and clinical trials of
therapeutic product candidates in patients afflicted with a target disease.
Using its facilitated DNA-based vaccine technology, the Company has demonstrated
that its vaccines can stimulate humoral and cellular immune responses that have
provided preventive and therapeutic outcomes in preclinical studies. Based on
the results of these preclinical studies, Apollon has advanced multiple product
candidates into human clinical trials.
The Company believes that it initiated the first ever clinical trial of a
therapeutic DNA-based vaccine in adults infected with human immunodeficiency
virus ("HIV") in June 1995 and the first ever clinical trial of a preventive
DNA-based vaccine for HIV in healthy adults in March 1996. Apollon believes that
it also commenced the first ever clinical trial in healthy adults of a DNA-based
preventive vaccine for herpes simplex virus ("HSV") in September 1996 and the
first ever clinical trial of a DNA-based therapeutic vaccine in HSV-infected,
genital herpes patients in March 1997. The Company also initiated a clinical
trial in healthy adults of its DNA-based vaccine for treatment of individuals
persistently infected with hepatitis B virus ("HBV") in July 1997. In addition,
the Company initiated a clinical trial in December 1995 with a T cell
receptor-directed, therapeutic DNA vaccine for cutaneous T-cell lymphoma
("CTCL"), which is a part of the first phase of the Company's program to develop
therapeutic vaccines for autoimmune diseases such as psoriasis.
Apollon is currently conducting nine Phase I and Phase I/II clinical trials
of its GENEVAX vaccine product candidates for the prevention or treatment of
infection by HSV, HBV and HIV, as well as the treatment of CTCL. As of September
30, 1997, 163 people have been enrolled in these clinical trials. To date,
Apollon's vaccine product candidates have been safe and well tolerated in its
clinical trials. In addition to evaluating safety, an objective of the ongoing
clinical trials is to evaluate the ability of Apollon's DNA-based vaccine
product candidates to stimulate immune responses. The Company is currently
reviewing the results of its June 1995 HIV clinical trial, and has observed
increases in immune responses in HIV-infected patients. Subject to favorable
clinical results, the Company expects to initiate Phase II clinical trials of
its therapeutic HSV-, HBV- and HIV-directed vaccine product candidates within
the next 15 months.
3
<PAGE>
The Company's goal is to develop and commercialize a portfolio of DNA-based
vaccine and gene therapy products aimed at the prevention and treatment of
infectious and autoimmune diseases and intends to achieve this goal by pursuing
the following strategy: (i) developing a diversified product pipeline; (ii)
expanding its DNA delivery technology platform; (iii) leveraging its corporate,
governmental and academic collaborations; and (iv) enhancing its manufacturing
capabilities.
Apollon has entered into collaborative agreements with three corporate
partners, Wyeth-Lederle Vaccines and Pediatrics ("Wyeth-Lederle"), a business
unit of the Wyeth-Ayerst Division of American Home Products Corporation ("AHP"),
as well as Centocor, Inc. ("Centocor"), and Biogen, Inc. ("Biogen"), both
publicly traded biopharmaceutical companies. The collaborative agreements with
Wyeth-Lederle were entered into in July 1995 between the Company and American
Cyanamid Company, a business unit of AHP, and provide for the joint development,
manufacture and marketing of preventive and therapeutic GENEVAX products
directed against HSV, HIV and human papillomavirus ("HPV"). The activities of
American Cyanamid Company under these agreements are performed by Wyeth-Lederle.
Pursuant to the agreements, Wyeth-Lederle has made a number of payments to
Apollon to fund development of the GENEVAX product candidates directed against
the three viruses and is required to make additional payments subject to the
achievement of certain milestones in connection with clinical trials. Apollon is
primarily responsible for product development and clinical testing expenses
through the completion of Phase II clinical trials and Wyeth-Lederle will assume
all Phase III clinical trial expenses. As of September 30, 1997, the Company has
received $15.1 million from Wyeth-Lederle pursuant to the agreements. Apollon
has granted Wyeth-Lederle worldwide rights to market and sell these vaccine
product candidates and has retained exclusive worldwide manufacturing rights.
In October 1997, A.H. Investments Ltd., an affiliate of AHP, invested $3.0
million in the Company in exchange for a convertible promissory note in the
principal amount of $3.0 million and a warrant to purchase 68,910 shares of the
Company's Common Stock at a price equal to 115% of the initial public offering
price. The promissory note will be converted into shares of Common Stock upon
the closing of the Offering at a conversion price equal to the initial public
offering price.
Apollon's agreement with Centocor, executed in March 1995, grants Centocor
exclusive worldwide rights to use the Company's facilitated DNA-based technology
to develop products directed at most cancers. Under the terms of this agreement,
Centocor is required to provide research funding, to make additional payments
upon the achievement of specified milestones by Centocor and to pay royalties to
Apollon on any sales of these products. In June 1997, Centocor initiated a Phase
I/II clinical trial in colorectal cancer patients using the Company's GENEVAX
technology.
In November 1997, Biogen and the Company entered into a license and option
agreement pursuant to which the Company received a license to Biogen's
intellectual property related to DNA sequences encoding hepatitis B viral
antigens. In addition, Biogen received an option to market and sell on an
exclusive basis in Japan GENEVAX product candidates directed against HBV that
are developed by Apollon and which incorporate Biogen's intellectual property.
The Company is currently prosecuting 37 U.S. patent applications. A majority
of these patent applications have foreign counterparts. These patent
applications include specifications and claims regarding methods of facilitated
DNA delivery and expression by target cells IN VIVO, methods of patient
treatment and routes of administration, methods of discovery of novel vaccines
and pharmaceutical agents, molecular targets and methods of utilizing these
targets and compositions of matter for vaccines and pharmaceutical products.
Apollon holds exclusive rights to a method patent which was issued to inventors
at the University of Pennsylvania and The Wistar Institute of Anatomy and
Biology (the "Wistar Institute") in January 1997. This patent describes an
important portion of the Company's core technology using bupivacaine-facilitated
DNA-based immunization.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock being offered.................. 2,500,000 shares (1)
Common Stock to be outstanding after the
Offering.................................. 8,145,568 shares(1) (2)
Use of proceeds............................. To fund research and development, including
preclinical and clinical studies, and for
working capital. See "Use of Proceeds."
Proposed Nasdaq National Market symbol...... APLN
</TABLE>
- ------------------------
(1) Excludes 375,000 shares of Common Stock that may be sold by the Company
pursuant to the Underwriters' over-allotment option. See "Underwriting."
(2) Based on the number of shares of Common Stock outstanding as of September
30, 1997. Includes 4,748,021 shares of Common Stock issuable upon the
automatic conversion of all outstanding shares of the Company's Class A
Convertible Preferred Stock, Class B Convertible Preferred Stock and Class C
Convertible Preferred Stock (collectively, the "Convertible Preferred
Stock"), upon completion of the Offering (the "Conversion") and 250,000
shares of Common Stock issuable upon the automatic conversion of the $3.0
million convertible promissory note issued to A.H. Investments Ltd. (the
"AHP Financing"). Excludes 457,171 and 416,428 shares of Common Stock
issuable upon the exercise of options and warrants, respectively,
outstanding as of September 30, 1997, with a weighted average exercise price
of $1.87 and $6.40, respectively.
5
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS
JANUARY 31, 1992 ENDED
(DATE OF INCEPTION) YEAR ENDED DECEMBER 31, SEPTEMBER 30,
TO ------------------------------------------ --------------------
DECEMBER 31, 1992 1993 1994 1995 1996 1996 1997
------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Research, development and contract
revenues............................... $ -- $ -- $ -- $ 7,825 $ 8,249 $ 4,039 $ 711
Operating costs and expenses:
Research and development........... 1,213 3,440 6,179 5,253 7,310 4,942 7,088
General and administrative......... 529 947 1,538 2,193 3,050 2,120 2,852
------- --------- --------- --------- --------- --------- ---------
Total operating costs and expenses..... 1,742 4,387 7,717 7,446 10,360 7,062 9,940
------- --------- --------- --------- --------- --------- ---------
(Loss) income from operations............ (1,742) (4,387) (7,717) 379 (2,111) (3,023) (9,229)
Interest income........................ 100 94 54 110 373 220 210
Interest expense....................... (6) (35) (89) (415) (123) (116) (22)
------- --------- --------- --------- --------- --------- ---------
Net (loss) income........................ $ (1,648) $ (4,328) $ (7,752) $ 74 $ (1,861) $ (2,919) $ (9,041)
------- --------- --------- --------- --------- --------- ---------
------- --------- --------- --------- --------- --------- ---------
Pro forma net loss per share
(unaudited)(1)......................... $(.33) $(1.59)
Shares used in computing pro forma net
loss per share (unaudited)(1).......... 5,608,888 5,687,791
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------
ACTUAL AS ADJUSTED(2)
----------- --------------
<S> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA:
Cash, cash equivalents and investments available for sale............................ $ 1,746 $ 32,046
Redeemable cumulative convertible preferred stock.................................... 30,703 --
Accumulated deficit.................................................................. (28,153) (28,153)
Total shareholders' (deficit) equity................................................. (28,147) 32,856
</TABLE>
- ------------------------
(1) Reflects the Conversion and the AHP Financing. See Note 2 of Notes to
Financial Statements for discussion of the calculation of pro forma net loss
per share.
(2) Gives effect to (i) the sale of 2,500,000 shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $12.00 per
share after deduction of estimated underwriting discounts, commissions and
offering expenses; (ii) the AHP Financing; and (iii) the Conversion.
------------------------
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES
THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED; (II) HAS BEEN
RETROACTIVELY ADJUSTED TO GIVE EFFECT TO A 0.4594-FOR-ONE REVERSE STOCK SPLIT
(THE "REVERSE STOCK SPLIT") OF THE COMMON STOCK THAT WILL BE EFFECTED PRIOR TO
COMPLETION OF THE OFFERING; AND (III) REFLECTS THE CONVERSION AND THE AHP
FINANCING WHICH WILL AUTOMATICALLY OCCUR UPON COMPLETION OF THE OFFERING. ALL
SHARE AMOUNTS CONTAINED HEREIN WITH RESPECT TO SHARES OF COMMON STOCK ISSUED IN
THE AHP FINANCING AND THE EXERCISE PRICE OF THE WARRANT ISSUED TO A.H.
INVESTMENTS LTD. IN SUCH FINANCING ASSUME AN INITIAL PUBLIC OFFERING PRICE OF
$12.00 PER SHARE. UPON COMPLETION OF THE OFFERING, THE CONVERTIBLE PREFERRED
STOCK OUTSTANDING WILL CONVERT TO COMMON STOCK SUCH THAT EACH SHARE OF
CONVERTIBLE PREFERRED STOCK WILL BE CONVERTED INTO 0.4594 SHARES OF COMMON
STOCK.
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN APOLLON INVOLVES A HIGH DEGREE OF RISK AND SHOULD NOT BE
UNDERTAKEN UNLESS THE INVESTOR CAN SUFFER A COMPLETE LOSS OF THE INVESTMENT. THE
FOLLOWING RISK FACTORS, IN ADDITION TO OTHER INFORMATION IN THIS PROSPECTUS,
SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE
PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY.
EARLY STAGE OF PRODUCT DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY
DNA-based vaccination and gene therapy are new and rapidly evolving
technologies. While many approaches to gene therapy are being pursued by
pharmaceutical and biotechnology companies and academic institutions, there are
currently no marketed DNA-based vaccine or gene therapy products and existing
clinical data on the safety and efficacy of potential products is limited.
Preclinical and clinical data relating to the Company's specific DNA-based
vaccine and other gene therapy approaches is also limited. There can be no
assurance that the Company will ultimately develop and commercialize safe and
effective products.
Each of the Company's potential products under development are either in
research, preclinical development or early stage clinical trials. Potential
products currently under development by the Company will require significant
additional research and development efforts, including extensive preclinical and
clinical testing and the receipt of regulatory approval, prior to commercial
use. There can be no assurance that the Company's research and development
efforts will be successful, that any of the potential products developed by the
Company will prove to be safe and effective in clinical trials or that any
commercially successful products utilizing the Company's technology will be
developed by the Company or its collaborators. Even if successfully developed,
these potential products may not receive regulatory approval, be successfully
marketed at prices that would permit the Company to operate profitably or be
accepted by the market. For these reasons, revenues from the sale of any
products being developed by the Company may not be realized for the foreseeable
future, if at all.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
Before obtaining regulatory approvals for the commercial sale of any of its
product candidates, the Company must undertake extensive, lengthy and costly
preclinical studies and clinical trials to demonstrate that such product
candidates, as biological drugs, are safe, potent, pure and efficacious.
Existing preclinical and clinical data relating to the Company's specific
DNA-based vaccine and other gene therapy approaches is limited. Further, results
of preclinical studies do not predict safety or efficacy in humans and results
from such tests or studies are not necessarily indicative of results that will
be obtained in human clinical trials. Nor are results from early stage clinical
trials necessarily indicative of results that will be obtained in subsequent
clinical trials. Currently, Apollon is conducting Phase I and Phase I/II
clinical trials of GENEVAX-HIV, GENEVAX-HBV, GENEVAX-HSV and GENEVAX-TCR. These
clinical trials are being conducted in healthy volunteers or patients with
disease, or both. A number of companies in the biotechnology and pharmaceutical
industries have suffered significant setbacks in advanced clinical trials, even
after obtaining promising results in earlier clinical trials, including clinical
trials involving diseases targeted by the Company's products which are currently
in clinical trials. Further, there can be no assurance that the Company will be
permitted by regulatory authorities to undertake additional clinical trials for
its vaccines under development or currently in Phase I and Phase I/II clinical
trials or to commence clinical trials for any of the Company's potential
products currently in research or preclinical studies, either in the United
States or elsewhere. If the Company is permitted to undertake further clinical
trials or commence new clinical trials, there can be no assurance that its
product candidates will not be toxic or not have undesirable side effects or
other characteristics that prevent or limit further clinical studies or their
commercial use or that results from such clinical trials will demonstrate the
safety and efficacy of any product candidates necessary to permit further
clinical studies or obtain regulatory approval. The failure to adequately
demonstrate the safety, purity, potency and efficacy of a biological
7
<PAGE>
product candidate would delay or prevent regulatory approval of such product
candidate and could have a material adverse effect on the Company. Even if the
results of subsequent clinical trials are positive, products, if any, resulting
from the Company's research and development programs are not likely to be
commercially available for several years. Even if approved by the United States
Food and Drug Administration (the "FDA") or foreign regulatory authorities,
products may later exhibit adverse effects that prevent their widespread use or
necessitate their withdrawal from the market.
The rates of completion of the Company's human clinical trials, if permitted
to continue, will be dependent upon, among other factors, the rate of accrual of
patients entering into the clinical trials, which can in turn be dependent upon
the nature of the protocol, the availability of alternative treatments, the
proximity to clinical sites, the eligibility criteria for the study and the
existence of competitive clinical trials. Delays in planned patient enrollment
might result in increased costs and delays, which could have a material adverse
effect on the Company.
VARIABLE REVENUES; NO REVENUES FROM PRODUCT SALES; ACCUMULATED DEFICIT
To date, the Company's revenues have been derived almost entirely from
payments under its collaborative agreements with corporate partners. Such
payments are made upon the Company's achievement of certain product development
milestones and thus are recognized at irregular intervals. Prior to 1995, the
Company had no revenues. In 1996, the Company's revenues were $8.2 million,
approximately $6.9 million of which were earned in the second half of the year.
In the nine months ended September 30, 1997, the Company's revenues were
$711,000 and the Company expects to generate revenues of less than $500,000
during the remainder of 1997.
Apollon has generated no revenues from product sales and will not generate
sales revenues for the foreseeable future, if at all. At September 30, 1997, the
Company had an accumulated deficit of approximately $28.2 million. These losses
have resulted from expenses incurred in the Company's research and development
programs and, to a lesser extent, from general and administrative expenses. The
Company expects to incur substantial additional losses for the foreseeable
future and expects that these losses will increase as the Company's research and
development programs progress. The Company's ability to achieve profitability
depends, in part, on its ability to successfully complete development of its
proposed products, obtain regulatory approvals and manufacture and market its
product candidates directly or through collaborative partners. There can be no
assurance that the Company will ever generate revenues from product sales or
achieve profitability.
FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING
The amount and timing of the Company's expenditures and funding requirements
will depend upon the progress of its research and development, results of
preclinical studies and clinical trials, the cost and timing of regulatory
approvals, general market conditions, relationships with current and potential
collaborators, changes in the focus and direction of the Company's research and
development programs, competitive and technological advances, cost of
manufacturing scale-up and other factors. The Company anticipates that its
existing capital resources in combination with the net proceeds of the Offering
and interest thereon, plus payments anticipated under existing collaborative
agreements will enable the Company to fund its operations until mid-1999. In
order to receive most of the anticipated funds from corporate collaborators, the
Company must meet certain milestones in the development of its product
candidates, and there can be no assurance that the Company will meet such
milestones in a timely manner, if at all. The Company will require substantial
additional capital to fund continued product development, conduct clinical
trials and seek regulatory approvals, as well as establish manufacturing and
marketing capabilities, prior to the commercialization of its first product.
The Company currently has no committed sources of capital. The Company
intends to seek additional funding through public or private equity or debt
financing, when market conditions allow, and through
8
<PAGE>
arrangements with corporate collaborators and other sources. If additional funds
are raised by issuing equity securities, dilution to existing shareholders may
result. There can be no assurance that additional financing will be available on
terms acceptable to the Company, if at all. Any shortfall in funding could
require the Company to delay, scale back or eliminate some or all of its
development programs and could have a material adverse effect on the Company.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources."
DEPENDENCE ON THIRD PARTIES
The Company's strategy for the research, development and commercialization
of its products requires entering into various arrangements with academic
collaborators and corporate partners, licensors, licensees and others and is
dependent upon the subsequent success of these parties in performing their
responsibilities. The Company's most significant collaborative arrangement is
with Wyeth-Lederle, for the development of DNA-based vaccines for the prevention
and treatment of diseases caused by HSV, HIV and HPV. Wyeth-Lederle has the
right to terminate the agreements with the Company at any time unilaterally and
without cause in their entirety or as to any specific product. In the event that
Wyeth-Lederle were to terminate the agreements as a result of a change in
control of the Company, the options and licenses granted to Wyeth-Lederle would
vest or be retained, as appropriate, and Apollon would be required to assign all
governmental approvals. There can be no assurance that Wyeth-Lederle will not
terminate the collaborative arrangement and any such termination would have a
material adverse effect on the Company. See "Business -- Strategic Alliances and
Collaborations -- Corporate Collaborations."
In addition, Apollon has several collaborative arrangements with other
corporate partners, academic institutions and government entities. Internal time
tables and policies of the Company's collaborators and the amount and timing of
resources to be devoted to collaborative activities may not be within the
control of the Company. There can be no assurance that the Company's
collaborative partners will perform their obligations as expected or that the
Company will derive any revenue from such arrangements. In addition, certain of
the Company's collaborators may be pursuing alternative competing technologies
as a means for developing treatments for the diseases targeted by these
collaborative programs. Moreover, disputes could develop between Apollon and its
collaborative partners, or its corporate collaborative partners could terminate
the agreements with the Company. Such disputes or termination of the
collaborative arrangements could have a material adverse effect on the Company.
Certain of the clinical trials of the Company's HIV-related product
candidates are sponsored by government funding. There can be no assurance, in
the event such funding is withdrawn, that the Company could fund or otherwise
maintain such research programs.
Apollon intends to seek additional collaborative arrangements to develop and
commercialize other product candidates in the future. There can be no assurance
that the Company will be able to negotiate acceptable collaborative arrangements
in the future or that its current or future collaborative arrangements will be
successful.
PATENTS AND PROPRIETARY RIGHTS; ACCESS TO PROPRIETARY GENES AND PROTEINS
The Company's success will depend, in part, on its ability to obtain patent
protection for its future products, technology and processes both in the United
States and other countries. The patent positions of biotechnology and
pharmaceutical companies can be highly uncertain and involve complex legal and
factual questions, and therefore, the breadth of claims allowed in biotechnology
and pharmaceutical patents cannot be predicted. The Company has filed or
participated as licensee in the filing of a number of patent applications in the
United States relating to the Company's technology, as well as foreign
counterparts of certain of these applications in many countries. Apollon and its
collaborators are actively prosecuting 37 U.S. patent applications. A majority
of these patent applications have foreign counterparts. In the United States,
two such patents have issued and notices of allowance have been received on sets
of
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claims enumerated in four other patent applications. There can be no assurance
that patents will issue from any of the other applications or, if patents do
issue, that the claims allowed will be sufficient to protect the Company's
technology. In addition, there can be no assurance that any patents issued to
the Company or to licensors of the Company's technology will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
proprietary protection or commercial advantage to the Company. Moreover, the
Company believes that obtaining foreign patents in certain countries may be more
difficult than obtaining domestic patents because of differences in patent laws
and, accordingly, its patent position may be stronger in the United States than
abroad. The Company intends to continue to file applications as appropriate for
patents covering both its technology and processes.
The commercial success of the Company will also depend in part on the
Company not infringing patents issued to competitors and not breaching the
technology licenses that might cover technology used in the Company's products.
It is uncertain whether any third-party patents will require the Company to
alter products it develops or processes, obtain licenses or cease certain
activities. The Company is aware that other companies have filed patent
applications covering technology used by or relating to the Company's technology
and in the area of gene therapy, and if any such patents issue, the Company may
be required to obtain licenses under such patents in order to test, use or
market its potential products. There can be no assurance that the Company will
be able to obtain any of such licenses or any further required licenses on
commercially favorable terms, if at all. If such licenses are not obtained by
the Company, it will not be able to commercialize the products requiring such
licenses. Failure by the Company to obtain a license to any technology that it
may require to test, use, manufacture or market its product candidates may have
a material adverse effect on the Company. Further, if any such patents are
issued to other companies with broad applications in the area, there could be a
material adverse effect on the Company.
Vical, Incorporated ("Vical"), controls Patent no. 5,580,589 - Delivery of
Exogenous DNA Sequences in a Mammal ("Patent A") and Patent no. 5,589,466 -
Induction of a Protective Immune Response in a Mammal By Injecting a DNA
Sequence ("Patent B" and, with Patent A, the "Vical patents"). Patent A claims a
method of delivering a physiologically active protein or peptide by injecting a
DNA sequence into the muscle of a mammal, where the DNA sequence is free from
association with transfection-facilitating proteins, viral particles, liposomal
formulations, charged lipids and calcium phosphate precipitating agents. Patent
B claims a method of inducing a protective immune response in a mammal by
injecting into muscle or skin a DNA sequence encoding an immunogen linked to a
promoter sequence in an amount sufficient to induce the protective immune
response where the DNA sequence is free from transfection-facilitating proteins,
viral particles, liposomal formulations or charged lipids. Vical has filed
similar patent applications in Europe and Japan, although to the Company's
knowledge no patents have yet been issued. Vical has licensed certain rights to
these patents to Merck & Co., Inc. ("Merck") and to Pasteur-Merieux Serums &
Vaccins ("PMC"). While the Company believes, after consultation with its
scientists, consultants, advisors and patent counsel, that its potential
products do not infringe any claim of the Vical patents, there can be no
assurance that Vical, Merck or PMC, separately or in combination, will not
assert a claim against the Company. There can be no assurance that if Vical sues
on these patents, a court will not reach an unfavorable decision,
notwithstanding the Company's belief. Furthermore, there can be no assurance
that the Company will not become subject to any other patent infringement claims
or litigation arising out of the above noted patents or pending applications,
should they issue, including the Vical applications described above, or
interference proceedings declared by the United States Patent and Trademark
Office to determine the priority of inventions.
In addition, a number of the DNA sequences or proteins encoded by certain of
the sequences that the Company is currently investigating in its preclinical
studies and clinical trials or may use in the future are or may become patented
by others. As a result, the Company will or may require licenses under such
patents in order to test, use, manufacture or market products that contain
proprietary DNA sequences or encode proprietary proteins. The Company has
obtained, or has the right to obtain, certain licenses, including rights
received from Wyeth-Lederle to the gene for HSV-2 glycoprotein D and a license
received
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<PAGE>
from Biogen to DNA sequences encoding hepatitis B viral antigens, and is
currently negotiating certain other licenses. There can be no assurance that the
Company will be able to obtain any further required licenses on commercially
favorable terms, if at all. If such licenses are not obtained by the Company, it
will not be able to commercialize the products requiring such licenses. Failure
by the Company to obtain a license to any DNA sequences that it may require to
test, use, manufacture or market its product candidates could have a material
adverse effect on the Company.
Litigation, which could result in substantial cost to the Company, may also
be necessary to enforce any patents issued to the Company or to determine the
scope and validity of third-party patents. Should any of its competitors have
prepared and filed patent applications in the United States which claim
technology also invented by the Company, the Company may have to participate in
interference proceedings declared by the United States Patent and Trademark
Office in order to determine priority of invention and, thus, the right to a
patent for the technology in the United States, all of which could result in
substantial cost to the Company to determine its rights. The Company also relies
on protecting its proprietary technology in part through confidentiality
agreements with its collaborators, employees, consultants and certain
contractors. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or be independently
discovered by its competitors. Failure of the Company to protect its technology
from use by other parties would have a material adverse effect on the Company.
See "Business -- Patents and Proprietary Rights."
GOVERNMENT REGULATION; NO ASSURANCE OF FDA APPROVAL
The FDA and comparable foreign regulatory authorities impose substantial
requirements on the introduction of pharmaceutical products through detailed
laboratory, preclinical and clinical testing and other costly and time-consuming
procedures. Satisfaction of these requirements typically takes many years,
varies substantially based upon the type, complexity and novelty of the
pharmaceutical products and is subject to significant uncertainty. Government
regulation also affects the manufacture and marketing of pharmaceutical
products. In addition, as DNA-based vaccine and other gene therapy products are
being developed using new technologies and have not been extensively tested in
patients, the regulatory requirements governing such potential products and
related clinical procedures are uncertain. Preclinical studies of the Company's
product development candidates are subject to Good Laboratory Practices ("GLP")
requirements and the manufacture of any products developed by the Company will
be subject to Good Manufacturing Practices ("GMP") requirements prescribed by
the FDA.
The Company believes that its potential vaccine products will be regulated
by the FDA and comparable foreign regulatory bodies as biological drug products
and that any newly developed facilitating agents will be regulated as
non-biological new drugs. Biological drugs generally are regulated more
stringently than non-biological drugs. For example, traditionally, biologics are
subject to separate product and manufacturing facility licensing requirements
and to lot-by-lot release requirements. Although new requirements have been
adopted for biologics that are well characterized, no assurances exist that any
of the Company's biologics will be subject to these new procedures. Each product
containing a particular gene will likely be regulated either as a biologic drug
or non-biological drug depending on a variety of factors, including its precise
nature and source and evolving FDA policy. The Company believes that its
facilitating agents, which can be used to enhance DNA delivery and protein
expression or can be used directly to augment the immune process, will be
regulated as non-biological new drugs. The use of such facilitating agents in
conjunction with the Company's vaccine products may result in their regulation
as combination products that are subject both to the new drug or biologics
approval processes. The Company may need to, under FDA regulations, file a
designation request in such cases to seek clarification of whether the FDA's
Center for Drug Evaluation and Research ("CDER") or its Center for Biologics
Evaluation and Research ("CBER") will have primary jurisdiction for the
regulation of such combination drug products. Moreover, the use of facilitating
agents to help augment the immune process in conjunction
11
<PAGE>
with the Company's DNA-based vaccine products may require the design of clinical
trials to demonstrate that the facilitating agent and DNA-based vaccine each
contribute to the efficacy of the product, and that neither adversely affects
the safety of the product. The treatment of the Company's vaccine products
containing facilitating agents as combination products can substantially
increase the time and costs associated with obtaining regulatory approvals.
In order to commercialize any drug products, the Company must file an
Investigational New Drug ("IND") application for each proposed product, which
must become effective before clinical studies can begin to demonstrate the
safety, purity, efficacy and potency that are necessary to obtain FDA approval
of any biological drug product. The FDA regulatory process, which includes
preclinical studies, clinical trials and post-marketing testing of each product
candidate takes many years and requires the expenditure of substantial
resources. Delays may also be encountered and substantial costs incurred in
obtaining approval to market the Company's products in foreign countries. Data
obtained from preclinical and clinical activities are subject to varying
interpretations which could delay, limit or prevent regulatory approval by the
FDA or other regulatory agencies. The Company, an independent Institutional
Review Board organized by an institution conducting a clinical trial, the FDA or
other regulatory agency may suspend clinical trials at any time if participants
in such clinical trials are being exposed to unacceptable health risks. Product
approvals, if granted, may contain significant limitations on the indicated uses
for which products may be marketed. There can be no assurance that, even after
passage of many years and expenditure of significant resources, FDA or other
comparable regulatory approval will be obtained for any drug products developed
by the Company, in a timely manner, if at all. The Prescription Drug User Fee
Act ("PDUFA"), which imposes certain fees on the drug industry, has helped
reduce the time necessary to obtain FDA approval, including FDA marketing
application review times. PDUFA has expired and legislation to reauthorize PDUFA
has been passed separately by the House and Senate. It must now be reconciled in
a House-Senate conference and signed by the President to become law. The failure
to extend PDUFA, or the failure to obtain regulatory approval, or the occurrence
of any significant delays in obtaining such approval for one or more of the
Company's products currently under development, would have a material adverse
effect on the Company.
Failure to comply with applicable regulatory requirements can, among other
things, result in fines, suspension of regulatory approvals, product recalls,
seizure of products, operating restrictions and criminal prosecutions. FDA
policy may change and additional government regulations may be established that
could prevent or delay regulatory approval of the Company's potential products.
In addition, a marketed drug and its manufacturer are subject to continual
review and subsequent discovery of previously unknown problems with a product or
manufacturer may result in restrictions on such product or manufacturer,
including withdrawal of the product from the market and withdrawal of the right
to manufacture the product. In addition, many academic institutions and
companies doing research in the gene therapy field are using a variety of
approaches and technologies similar to the Company's technology. Any adverse
results obtained by such researchers in preclinical studies or clinical trials
could adversely affect the regulatory environment for gene therapy products in
general, possibly leading to delays in the approval process for the Company's
potential products. All of the foregoing regulatory matters also will be
applicable to development, manufacturing and marketing undertaken by any
collaborative partners or licensees of the Company. See "Business -- Government
Regulation."
COMPETITION; RAPID TECHNOLOGICAL CHANGE
Competitors of the Company in the United States and other countries are
numerous and include, among others, pharmaceutical and chemical companies,
biotechnology firms, universities and other research institutions. These
competitors are engaged in developing products for human prophylactic and
therapeutic applications of DNA-based vaccines, other gene therapies,
traditional drugs and viral vaccines, which are competitive with the Company's
technologies and product candidates. Some of these competitors have potential
products in clinical trials. Many of the Company's competitors have
substantially
12
<PAGE>
greater financial, technical and human resources than the Company and
significantly greater experience in pharmaceutical products and obtaining FDA
and other regulatory approvals for such products. Accordingly, the Company's
competitors may succeed in obtaining FDA or other regulatory approvals for
products or in commercializing such products more rapidly than the Company. In
addition, there are currently commercially available products for the treatment
of certain of the diseases targeted by the Company. Furthermore, if the Company
is permitted to commence commercial sales of its products, it may compete with
respect to manufacturing efficiency and marketing capabilities, areas in which
the Company has limited or no experience. See "Business -- Competition."
The Company believes that industry-wide interest in investigating the
potential of DNA-based vaccine and other gene therapy technologies will continue
and will accelerate as techniques which permit design and development of drugs
based on such technologies become more widely understood. There can be no
assurance that the Company's competitors will not succeed in developing products
based on technologies similar to its own technologies, which are more effective
than any that are being developed by the Company, or which would render
Apollon's product candidates obsolete and noncompetitive. The development of
such products would have a material adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL AND CONSULTANTS
Apollon is highly dependent on the principal members of its scientific staff
and management. In addition, the Company relies on consultants and advisors to
assist in formulating its research and development strategy. Attracting and
retaining qualified scientists, personnel, consultants and advisors will be
critical to the Company's success. Further, in order to pursue its product
development and marketing plans, the Company will be required to hire additional
qualified scientific personnel to perform research and development as well as
personnel with expertise in clinical testing, government regulation,
manufacturing, sales and marketing. Expansion in product development will also
require the addition of management personnel and the development of additional
expertise by current management. The Company faces intense competition for
qualified individuals in these areas from numerous pharmaceutical and
biotechnology companies, universities and other research institutions. There can
be no assurance that the Company will be able to attract and retain such
individuals on acceptable terms, if at all. The Company's inability to attract
and retain such individuals on acceptable terms would have a material adverse
effect on the Company.
The lack of continued involvement by the principal members of the Company's
management and scientific staff, including, but not limited to Vincent R.
Zurawski, Jr., Ph.D., the Company's President and Chief Executive Officer, in
the development of the Company's proposed products, would have a material
adverse effect on the Company.
LIMITED MANUFACTURING EXPERIENCE; NO SALES OR MARKETING CAPABILITIES
The Company's product candidates are currently manufactured by Apollon
employees in facilities owned by third parties. While the Company believes these
facilities meet its standards of quality and availability, there can be no
assurance that such facilities will continue to meet the Company's requirements
of quality, availability and timeliness or that, if necessary, Apollon would be
able to find alternative facilities on a timely basis or on acceptable terms.
The Company plans to construct its own central manufacturing facilities to
manufacture products on a scale sufficient for advanced clinical trials and
commercialization. The establishment of manufacturing facilities requires
substantial additional funds and personnel and compliance with extensive
regulations applicable to such facilities. If the Company is unable to develop
its own facilities on a timely basis, or at all, the Company will be required to
contract for manufacturing facilities. There can be no assurance that the
Company will be able to construct its own facilities or, alternatively, contract
for such facilities on commercially acceptable terms, if at all. The inability
of the Company to manufacture or provide for the manufacture of its products on
a cost-effective basis would have a material adverse effect on the Company. See
"Business -- Manufacturing."
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<PAGE>
The Company has no experience in selling, marketing or distributing
pharmaceutical products. In order to market its DNA-based vaccine and other gene
therapy products, the Company must develop a sales and marketing capability or
maintain or enter into collaborations with other parties. There can be no
assurance that the Company will be able to maintain or enter into any
arrangements for the marketing of its product candidates, that such arrangements
will be successful or that the Company will be able to obtain additional capital
and expertise to conduct such activities independently.
UNCERTAINTY OF HEALTHCARE REIMBURSEMENT AND RELATED MATTERS
Apollon's success may depend in part on the extent to which reimbursement
for the costs of its potential products will be available from third party
payors, such as government entities, managed care organizations and private
insurers. There can be no assurance that third party payor coverage will be
adequate for the Company to establish and maintain price levels sufficient for
realization of an appropriate return on its investment. In addition, the
Company's revenue and profitability may be affected by the continuing efforts of
governmental and other third party payors to contain or reduce the cost of
health care through various means. If purchasers or users of the Company's
products are not entitled to adequate reimbursement, they may forego or reduce
use of such products. Significant uncertainty exists as to the reimbursement
status of newly approved healthcare products and there can be no assurance that
adequate third party coverage will be available. There can be no assurance that
healthcare reforms or limited third party payor coverage will not have a
material adverse effect on the Company.
PRODUCT LIABILITY
The use of the Company's product candidates in clinical trials and the
commercial sale of any products may expose the Company to liability claims.
These claims might be made directly by consumers, healthcare providers or by
pharmaceutical and biotechnology companies or others selling such products. In
addition, the Company is obligated to indemnify certain of its licensors against
product liability claims brought against them arising out of products developed
by the Company under these licenses. Apollon has limited product liability
insurance coverage and such coverage is subject to various deductibles. Such
coverage is becoming increasingly expensive and no assurance can be given that
the Company will be able to maintain or obtain such insurance at reasonable cost
or in sufficient amounts to protect the Company against losses due to liability
claims that could have a material adverse effect on the Company. An inability to
obtain product liability insurance at acceptable cost or to otherwise protect
against potential product liability claims could prevent or inhibit the
commercialization of products developed by the Company. Product liability claims
could have a material adverse effect on the Company.
HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS
Apollon's research and development activities involve the use of hazardous
materials, such as chemicals, human bodily fluids, viruses, various radioactive
compounds and microorganisms that can cause human disease (e.g. pathogenic
viruses). The Company is subject to federal, state and local laws governing the
use, manufacture, storage, handling and disposal of such materials and certain
waste products. Although the Company believes that its safety procedures for
handling and disposing of such materials comply with the standards prescribed by
such laws and regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result and any
such liability could exceed the resources of the Company. The Company may be
required to incur significant costs to comply with environmental laws and
regulations in the future. The Company's operations, business or assets may be
materially adversely affected by current or future environmental laws or
regulations.
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ABSENCE OF PUBLIC MARKET; DIVIDEND POLICY
Prior to the Offering, there has been no public market for the shares of
Common Stock offered hereby and there can be no assurance that an active trading
market will develop or be sustained subsequent to the Offering. The initial
public offering price of the Common Stock will be determined in negotiations
among the Company and the representatives of the Underwriters and may not be
indicative of the prices that may prevail in the public market. There can be no
assurance that the market price of the Common Stock will not decline below the
initial public offering price. Additionally, the Company does not anticipate
paying dividends on its Common Stock for the foreseeable future. See
"Underwriting" and "Dividend Policy."
ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation, as amended, employment agreements
with certain executive officers and the Pennsylvania Business Corporation Law of
1988, as amended (the "1988 BCL"), contain certain provisions which could delay
or impede the removal of incumbent directors and could make more difficult a
merger, tender offer or proxy contest involving the Company, even if such
transaction would be beneficial to the interests of the shareholders, or could
discourage a third party from attempting to acquire control of the Company. In
particular, the Company has authorized 10,000,000 shares of undesignated capital
stock, all of which will be unissued after consummation of the Offering, which
the Company could issue without further shareholder approval and upon such terms
and conditions and having such rights privileges and preferences, as the Board
of Directors may determine. The Company has no current plans to issue any such
capital stock. In addition, the collaborative agreements between Apollon and
Wyeth-Lederle contain termination provisions in the event of a change in control
of the Company, which could discourage a change in control and the license
agreement with Biogen contains payment provisions which could discourage a
change in control of the Company. See "Business -- Strategic Alliances and
Collaborations -- Corporate Collaborations"; "Description of Capital Stock --
Anti-Takeover Provisions."
PRICE VOLATILITY
The market price of the Common Stock is likely to be highly volatile and
could be subject to significant fluctuations in response to results of
preclinical studies and clinical trials of the Company or its competitors,
technological set-backs of the Company or technological advancements of
competitors, governmental regulatory actions, developments concerning patent or
other proprietary rights of the Company or its competitors, including
litigation, market conditions for life science stocks in general, other factors
or for no identifiable reason. From time to time in recent years, the securities
markets have experienced significant price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of
particular companies. These broad fluctuations may adversely affect the market
price of the Common Stock.
CONCENTRATION OF OWNERSHIP
Upon completion of the Offering, the Company's directors and their
affiliates will beneficially own approximately 48.8% of the Company's
outstanding Common Stock. The Chairman of the Board of Centocor, which will hold
23.8% of the Company's outstanding Common Stock upon completion of the Offering,
is Co-Chairman of the Executive Committee of the general partner of Technology
Leaders, L.P. and Technology Leaders Offshore C.V., which will hold an aggregate
of 9.1% of the Company's outstanding Common Stock upon completion of the
Offering, assuming an initial public offering price of $12.00 per share. As a
result, these shareholders, if acting together, will have the ability to
influence significantly the outcome of corporate actions requiring shareholder
approval. This concentration of ownership may have the effect of causing,
delaying or preventing a change in control of the Company. See "Management" and
"Principal Shareholders."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding 8,145,568
shares of Common Stock. Of these shares, the Common Stock sold in the Offering
will be freely tradable without restriction or limitation under the Securities
Act, unless purchased by "affiliates" of the Company, as that term is defined in
Rule 144 under the Securities Act ("Rule 144"). In addition, of the 5,645,568
shares of Common Stock previously issued by the Company, including shares of
Common Stock issued in the Conversion and the AHP Financing, 5,271,064 shares
(4,975,249 shares of which are subject to the lock-up agreements described
below) will be eligible for sale in the public market, pursuant to Rule 144,
beginning 90 days after the Offering, subject to the manner of sale, volume and
other restrictions of Rule 144 and 50,254 shares (45,385 shares of which are
subject to the lock-up agreements described below) will be eligible for sale in
the public market immediately after the Offering pursuant to Rule 144(k) and
without the restrictions of Rule 144. The remaining shares of Common Stock will
become eligible for sale under Rule 144 at various times, and subject to certain
limitations, and could be sold earlier by certain shareholders if they exercise
their registration rights. The Company, its officers, directors and certain
shareholders, have agreed that, for a period of 180 days from the date of this
Prospectus, they will not, without the prior written consent of Smith Barney
Inc., offer, sell, contract to sell or otherwise dispose of, any shares of
Common Stock or any securities convertible into, or exercisable or exchangeable
for, shares of Common Stock, subject to certain exceptions. The sale of a
substantial number of shares of Common Stock in the public market following the
Offering, or the perception that such sales could occur, could adversely affect
the market price of the Common Stock and/or impair the Company's ability in the
future to raise additional capital through the sale of its equity securities.
See "Description of Capital Stock -- Registration Rights."
DILUTION
Investors in the Offering will experience immediate and substantial dilution
in the net tangible book value of the shares of Common Stock purchased in the
Offering of $8.05 per share (based on an assumed initial public offering price
of $12.00 per share). See "Dilution."
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USE OF PROCEEDS
The net proceeds to Apollon from the sale of the shares of Common Stock
offered hereby (at an assumed initial public offering price of $12.00 per share)
are estimated to be approximately $27,300,000 ($31,485,000 if the Underwriters'
over-allotment option is exercised in full), after deducting underwriting
discounts and commissions and offering expenses payable by the Company.
The Company currently anticipates using substantially all of the net
proceeds of the Offering to fund research and development, including preclinical
and clinical studies of its product candidates. The cost, timing and amount of
funds required for such uses by the Company cannot be precisely determined at
this time and will be based on competitive developments, the rate of the
Company's progress in research and development, results of preclinical studies
and clinical trials, timing of regulatory approvals, payments under
collaborative agreements and availability of alternate methods of financing. The
Board of Directors has broad discretion in determining how the net proceeds of
the Offering will be applied. Pending such uses, the Company intends to invest
the net proceeds of the Offering in short-term, interest-bearing obligations of
investment grade. The Company anticipates that its existing resources, including
net proceeds of the Offering, will enable the Company to fund its operations
until mid-1999. The Company's capital requirements may vary, however, depending
upon numerous factors, including those described above. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any future earnings to fund its
operations and, therefore, does not anticipate paying any cash dividends in the
foreseeable future.
THE COMPANY
Apollon was founded in January 1992. The Company's executive offices are
located at One Great Valley Parkway, Malvern, Pennsylvania 19355 and its
telephone number is (610) 647-9452.
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CAPITALIZATION
The following table sets forth (i) the capitalization of the Company at
September 30, 1997, and (ii) the capitalization of the Company on a pro forma as
adjusted basis after giving effect to the Conversion, the AHP Financing and the
sale by the Company of the shares of Common Stock offered hereby (at an assumed
initial public offering price of $12.00 per share) and the receipt of the net
proceeds therefrom, as if such transactions had occurred as of September 30,
1997. This table should be read in conjunction with the Company's financial
statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
(IN THOUSANDS)
Cash, cash equivalents and investments available for sale................................ $ 1,746 $ 32,046
---------- -----------
---------- -----------
Redeemable convertible preferred stock:
Series A Convertible Preferred Stock, $.01 par value;
3,900,000 shares authorized;
3,900,000 shares issued and outstanding, actual; and
no shares issued or outstanding, pro forma as adjusted............................... $ 9,102 --
Series B Convertible Preferred Stock, $.01 par value;
6,000,000 shares authorized;
4,000,000 shares issued and outstanding, actual; and
no shares issued or outstanding, pro forma as adjusted............................... 11,533 --
Series C Convertible Preferred Stock, $.01 par value;
3,000,000 shares authorized;
2,435,286 shares issued and outstanding, actual; and
no shares issued or outstanding, pro forma as adjusted............................... 10,068 --
Common shareholders' (deficit) equity:
Common Stock, $.01 par value,
50,000,000 shares authorized,
647,547 shares issued and outstanding, actual;
8,145,568 shares issued and outstanding,
pro forma as adjusted(1)............................................................. 6 81
Additional paid-in capital............................................................... -- 60,928
Accumulated deficit...................................................................... (28,153) (28,153)
---------- -----------
Total shareholders' (deficit) equity................................................. (28,147) 32,856
---------- -----------
Total capitalization............................................................... $ 2,556 $ 32,856
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) Excludes 457,171 and 416,428 shares of Common Stock issuable upon the
exercise of options and warrants, respectively, outstanding as of September
30, 1997, with a weighted average exercise price of $1.86 and $6.40,
respectively.
18
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of September 30,
1997 was $4,844,000, or $.86 per share. Pro forma net tangible book value per
share is determined by dividing the net tangible book value of the Company
(total assets less intangible assets and total liabilities) by the number of
shares outstanding, after giving effect to the conversion of all outstanding
shares of Convertible Preferred Stock into 4,748,021 shares of Common Stock and
the sale and subsequent conversion of the $3.0 million convertible note held by
A.H. Investments Ltd. into 250,000 shares of Common Stock. Without taking into
account any changes in pro forma net tangible book value after September 30,
1997, other than to give effect to the sale of the shares of Common Stock
offered by the Company hereby (at an assumed initial public offering price of
$12.00 per share and after deducting estimated underwriting discounts,
commissions and offering expenses), the adjusted pro forma net tangible book
value of the Company as of September 30, 1997 would have been approximately
$32,144,000, or $3.95 per share. This represents an immediate increase in pro
forma net tangible book value of $3.09 per share to existing shareholders and an
immediate dilution of $8.05 per share to new shareholders. The following table
illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $ 12.00
Pro forma net tangible book value per share as of September 30,
1997................................................................ $ .86
Increase per share attributable to new investors...................... 3.09
---------
Adjusted pro forma net tangible book value per share after the Offering..... 3.95
---------
Dilution per share to new investors......................................... $ 8.05
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1997 (after giving effect to the conversion of all outstanding shares of
Convertible Preferred Stock into 4,748,021 shares of Common Stock and the
conversion of the $3.0 million convertible note held by A.H. Investments Ltd.
into 250,000 shares of Common Stock, the number of shares purchased from the
Company, the total consideration paid and the average price per share paid by
existing shareholders and new investors (based upon, in the case of new
investors, an assumed initial public offering price of $12.00 per share and
before deduction of estimated underwriting discounts, commissions and offering
expenses).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
AMOUNT PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Current shareholders................................ 5,645,568 69.3% $ 29,930,000 49.9% $ 5.30
New investors....................................... 2,500,000 30.7 30,000,000 50.1 12.00
---------- ----- ------------- -----
Total........................................... 8,145,568 100.0% $ 59,930,000 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
The foregoing tables assume no exercise of options or warrants outstanding
as of September 30, 1997. At such date, there were outstanding options to
purchase 457,171 shares at a weighted average exercise price of $1.86 per share
and warrants to purchase 416,428 shares at a weighted average exercise price of
$6.40 per share. To the extent that any of these options or warrants are
exercised, there will be further dilution to new investors. See "Management --
Executive Compensation and Note 11 of Notes to Financial Statements of the
Company."
19
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The selected financial data set forth below with respect to the Company's
statements of operations for each of the three years in the period ended
December 31, 1996 and, with respect to the balance sheets at December 31, 1995
and 1996, are derived from the financial statements that have been audited by
Coopers & Lybrand L.L.P., independent accountants, which are included elsewhere
in this Prospectus and are qualified by reference to such financial statements.
The report on this audit includes an explanatory paragraph on the Company's
ability to continue as a going concern. The statement of operations for the
period from January 31, 1992 (date of inception) to December 31, 1992 and for
the year ended December 31, 1993 and the balance sheet data at December 31,
1992, 1993 and 1994 are derived from financial statements that have been audited
by Coopers & Lybrand L.L.P. but are not included in this Prospectus. Financial
data for the nine months ended September 30, 1996 and September 30, 1997 are
unaudited and, in the opinion of the Company's management, contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation thereof. Results for the nine months ended September 30, 1997
are not necessarily indicative of the results that may be expected for the full
1997 fiscal year. The Company anticipates that its existing resources, including
net proceeds of the Offering, will enable the Company to fund its operations
until mid-1999. The Company's capital requirements may vary, however, depending
upon numerous factors, including those described elsewhere in this Prospectus.
The data set forth below should be read in conjunction with the financial
statements and related notes included elsewhere in this Prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 31, 1992 NINE MONTHS
(DATE OF INCEPTION) YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
TO ------------------------------------------ ------------------------
DECEMBER 31, 1992 1993 1994 1995 1996 1996 1997
------------------- --------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Research, development and contract
revenues............................. $ -- $ -- $ -- $ 7,825 $ 8,249 $ 4,039 $ 711
Operating costs and expenses:
Research and development............. 1,213 3,440 6,179 5,253 7,310 4,942 7,088
General and administrative........... 529 947 1,538 2,193 3,050 2,120 2,852
------- --------- --------- --------- --------- --------- -------------
Total operating costs and expenses... 1,742 4,387 7,717 7,446 10,360 7,062 9,940
------- --------- --------- --------- --------- --------- -------------
(Loss) income from operations.......... (1,742) (4,387) (7,717) 379 (2,111) (3,023) (9,229)
Interest income...................... 100 94 54 110 373 220 210
Interest expense..................... (6) (35) (89) (415) (123) (116) (22)
------- --------- --------- --------- --------- --------- -------------
Net (loss) income...................... $ (1,648) $ (4,328) $ (7,752) $ 74 $ (1,861) $ (2,919) $ (9,041)
------- --------- --------- --------- --------- --------- -------------
------- --------- --------- --------- --------- --------- -------------
Accretion of redemption value
attributable to redeemable cumulative
convertible preferred stock.......... 260 609 999 1,517 876 1,413
--------- --------- --------- --------- --------- -------------
Net loss allocable to common
shareholders......................... $ (4,588) $ (8,361) $ (925) $ (3,378) $ (3,795) $ (10,454)
--------- --------- --------- --------- --------- -------------
--------- --------- --------- --------- --------- -------------
Pro forma net loss per share
(unaudited) (1)...................... $(.33) $(1.59)
Shares used in computing pro forma net
loss per share (unaudited) (1)....... 5,608,888 5,687,791
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA:
Cash, cash equivalents and investments available for
sale................................................. $ 5,044 $ 4,961 $ 1,120 $ 2,456 $ 9,720 $ 1,746
Total assets........................................... 6,334 7,449 3,828 5,983 13,601 4,496
Total liabilities...................................... 1,033 1,476 5,608 6,686 2,090 1,940
Redeemable cumulative convertible preferred stock...... 6,500 11,760 12,369 14,368 29,290 30,703
Accumulated deficit.................................... (1,648) (5,976) (14,154) (15,077) (17,785) (28,153)
Total shareholders' (deficit).......................... (1,199) (5,787) (14,148) (15,071) (17,779) (28,147)
</TABLE>
- ------------------------
(1) Reflects the Conversion, the AHP Financing and the Reverse Stock Split. See
Note 2 of Notes to Financial Statements for discussion of the calculation of
pro forma net loss per share.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Apollon was incorporated in 1992 and has devoted substantially all of its
resources to the development of DNA-based vaccine and other DNA-based gene
therapy product candidates for the prevention and treatment of infectious and
autoimmune diseases. The Company has financed its operations primarily through
the sale of Common Stock and Convertible Preferred Stock, the issuance of demand
notes and through funds received under research and development agreements. To
date, all of the Company's revenues have resulted from research funding provided
by its collaborative partners. As of September 30, 1997, the Company had an
accumulated deficit of $28.2 million.
The Company incurred operating losses in each year from inception through
1994. In 1995, the Company generated operating income of $379,000. In 1996 and
for the nine months ended September 30, 1997, the Company had losses from
operations of $2.1 million and $9.2 million, respectively. The Company's losses
have resulted principally from research and development and, to a lesser extent,
general and administrative costs. These costs have exceeded the Company's
revenues and interest income. The Company expects to incur substantial operating
losses for the foreseeable future as a result of increases in its expenses for
research and product development and expects that these losses will increase as
the Company's research and development programs progress.
COLLABORATIVE AGREEMENTS
In July 1995, the Company entered into research and development and supply
agreements with Wyeth-Lederle for development of certain GENEVAX product
candidates (the "Wyeth-Lederle Agreements"). Under the terms of these
agreements, the Company has granted to Wyeth-Lederle worldwide rights to market
and sell HSV, HIV and HPV products. In exchange for these rights, Wyeth Lederle
has made a number of payments to Apollon to fund development of the GENEVAX
product candidates directed against the three viruses and is required to make
additional payments subject to the achievement of certain milestones in
connection with clinical trials. The Company has retained exclusive worldwide
manufacturing rights with respect to these products.
In March 1995, the Company entered into a license and option agreement with
Centocor (the "Centocor License and Option Agreement"). This agreement grants to
Centocor exclusive worldwide rights to develop, use, market and sell GENEVAX
products directed against most cancers. This agreement also grants Centocor the
right to sublicense any of these rights with the prior written consent of
Apollon. Under the terms of this agreement, Centocor is required to provide
research funding, to make additional payments upon the achievement of specified
milestones and to pay royalties on any sales of products.
In August 1995, the Company entered into a manufacturing agreement with
Centocor (the "Centocor Manufacturing Agreement"). Pursuant to this agreement,
the Company assisted Centocor in the manufacture of a human carcinoembryonic
antigen and hepatitis B surface antigen plasmid (the "Centocor Plasmid") for use
in DNA-based vaccines and transferred to Centocor the know-how required to
manufacture the Centocor Plasmid and similar plasmids.
In November 1997, the Company entered into a license and option agreement
pursuant to which the Company received a license to Biogen's intellectual
property related to DNA sequences encoding hepatitis B viral antigens. In
addition, Biogen received an option to market and sell on an exclusive basis in
Japan the GENEVAX-HBV product candidates developed by Apollon incorporating
Biogen's intellectual property.
21
<PAGE>
The Company receives research and development support payments under certain
grants from various government agencies, including the Division of AIDS,
National Institute of Allergy and Infectious Disease, and university-supported
programs.
The majority of these research and development payments are based upon the
achievement of certain milestones. There can be no assurance that the Company
will achieve these milestones in a timely manner, if at all. In any event,
payments received under these agreements will not be adequate to support the
research and development and operating expenses of the Company for the
foreseeable future. See "Business -- Strategic Alliances and Collaborations" and
"Risk Factors -- Variable Revenues; No Revenues from Product Sales; Accumulated
Deficit," "-- Future Capital Requirements; Uncertainty of Additional Funding,"
"-- Government Regulation; No Assurance of FDA Approval."
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Revenues for the nine months ended September 30, 1997 decreased to $711,000
from $4.0 million for the nine months ended September 30, 1996. During the
period ended September 30, 1997, the Company received $550,000 under the terms
of the Wyeth-Lederle Agreements, $75,000 under the terms of the Centocor License
and Option Agreement and $86,000 under a government sponsored research program.
During the period ended September 30, 1996, the Company received $3.8 million
under the terms of the Wyeth-Lederle Agreements, $50,000 under the terms of the
Centocor License and Option Agreement and $239,000 under a government sponsored
research program.
Research and development expenses for the nine months ended September 30,
1997 increased to $7.1 million from $4.9 million during the same period in 1996.
This increase was due to increases in license payments to third parties and
increases in expenses for clinical trials and for contracted research services.
General and administrative expenses for the nine months ended September 30,
1997 increased to $2.9 million from $2.1 million for the same period in 1996.
This increase was due primarily to increases in legal and consulting expenses.
Interest income for the nine months ended September 30, 1997 decreased to
$210,000 from $220,000 for the same period in 1996. The decrease was due
primarily to decreased average cash and cash equivalents in 1997.
Interest expense for the nine months ended September 30, 1997 decreased to
$22,000 from $116,000 for the same period in 1996. This decrease was due to the
conversion of certain demand notes to Convertible Preferred Stock in March 1996.
The net loss for the nine months ended September 30, 1997 was $9.0 million
compared to the net loss of $2.9 million for the same period in 1996.
FISCAL YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues for the year ended December 31, 1996 increased to $8.2 million from
$7.8 million for the year ended December 31, 1995. In 1996, the Company received
$7.8 million under the terms of the Wyeth-Lederle Agreements. In 1996, the
Company also received $50,000 under the terms of the Centocor License and Option
Agreement and $399,000 under a government sponsored research program.
In 1995, the Company received $6.7 million under the terms of the
Wyeth-Lederle Agreements. These payments were for milestones achieved in advance
of the execution of the Wyeth-Lederle Agreements and also included $2.5 million
in research funding and $500,000 in option payments. In 1995, the Company also
received an aggregate of $750,000 under the terms of the Centocor License and
Option Agreement and $275,000 under a government sponsored research program.
22
<PAGE>
Research and development expenses for the year ended December 31, 1996
increased to $7.3 million from $5.3 million during the same period in 1995. The
increase was due to an increase in staffing related to implementation of the
research and development agreement with Wyeth-Lederle, as well as increases in
expenses related to licenses with third parties.
General and administrative expenses for the year ended December 31, 1996
increased to $3.1 million from $2.2 million for the same period in 1995. The
increase was due primarily to increases in staffing as well as costs related to
the sale of the Series C Convertible Preferred Stock in 1996.
Interest income for the year ended December 31, 1996 increased to $373,000
from $110,000 for the same period in 1995. The increase was due primarily to
increased average cash and cash equivalents in 1996.
Interest expense for the year ended December 31, 1996 decreased to $123,000
from $415,000 for the same period in 1995. The reduction was due to the
conversion of certain demand notes to Convertible Preferred Stock as of March
1995 which reduced the number of days outstanding for the demand notes.
The net loss for the year ended December 31, 1996 was $1.9 million compared
to net income of $74,000 for the same period in 1995.
FISCAL YEARS ENDED DECEMBER 31, 1995 AND 1994
Revenues for the year ended December 31, 1995 increased to $7.8 million from
zero for the year ended December 31, 1994. This increase was due to the
commencement in 1995 of research funding and other payments from Wyeth-Lederle
and Centocor.
Research and development expenses for the year ended December 31, 1995
decreased to $5.3 million from $6.2 million during the same period in 1994. This
decrease was attributable primarily to a reduction in contracted laboratory
expenses.
General and administrative expenses for the year ended December 31, 1995
increased to $2.2 million from $1.5 million during the same period in 1994. The
increase was attributable to increased facility costs, professional services and
corporate development and staffing activities.
Interest income for the year ended December 31, 1995 increased to $110,000
from $54,000 during the same period in 1994. The increase was attributable to
increased cash balances from the increase in the principal amount of demand
notes outstanding and the receipt of payments under the terms of the Wyeth-
Lederle Agreements, the Centocor License and Option Agreement and the Centocor
Manufacturing Agreement in 1995.
Interest expense for the year ended December 31, 1995 increased to $415,000
from $89,000 during the same period in 1994 due to the increase in the principal
amount of demand notes outstanding during 1994 from zero at January 1, 1994 to
$2.8 million at December 31, 1994 and up to $4.0 million by December 31, 1995.
The net income for the year ended December 31, 1995 was $74,000 compared to
the net loss of $7.8 million for the same period in 1994.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had cash, cash equivalents and
investments available for sale of $1.7 million.
Since inception, the Company has financed its operations through the sale of
Common Stock and Convertible Preferred Stock, the issuance of demand notes and
through funds received under research and development agreements. Through
September 30, 1997, the Company had raised $25,000 through the sale of Common
Stock, $21.2 million from the sale of Convertible Preferred Stock and $4.0
million from the
23
<PAGE>
issuance of demand notes. In addition, the Company has received $16.1 million
from research and development agreements from inception to September 30, 1997,
including $15.1 million under the terms of the Wyeth-Lederle Agreements.
In October 1997, A.H. Investments Ltd., an affiliate of AHP, invested $3.0
million in the Company in exchange for a convertible promissory note in the
principal amount of $3.0 million and a warrant to purchase 68,910 shares of
Common Stock at a price equal to 115% of the initial public offering price. The
promissory note will be converted into shares of Common Stock upon the closing
of the Offering at a conversion price equal to the initial public offering
price.
In April 1996, $4.0 million of convertible demand notes was converted into
1,600,000 shares of Series B Convertible Preferred Stock and $511,000 in accrued
interest on the notes was waived. In May 1996, the Company completed the sale of
2,435,286 shares of its Series C Convertible Preferred Stock for net proceeds to
the Company of $9.4 million after deducting placement fees and expenses of the
placement agent.
Certain of the clinical trials of the Company's HIV-related product
candidates are sponsored by government funding. Although the Company has no
reason to believe such funding will be withdrawn, in the event it is withdrawn
the Company would need to fund such clinical trials using internal or external
sources.
Since inception, the Company has invested $4.8 million in property and
equipment, including purchases totalling $118,000 in the first nine months of
1997, $1.1 million in 1996, $557,000 in 1995, $554,000 in 1994 and $1.3 million
in 1993. The Company intends to increase its expenditures substantially over the
next several years to enhance its technologies and to develop its DNA-based
vaccine and other gene therapy product candidates. The Company expects to incur
additional expenses, resulting in significant losses, as it continues and
expands its research and development activities and undertakes additional
preclinical studies and clinical trials. The Company also expects to incur
substantial administrative and manufacturing expenditures in the future as it
seeks FDA approval for its products and establishes its manufacturing capability
under GMP and substantial expenses related to the filing, prosecution,
maintenance, defense and enforcement of patent and other intellectual property
claims. The Company believes that its existing capital resources, together with
the net proceeds from the Offering, will be sufficient to support its current
and projected funding requirements until mid-1999. The Company's capital
requirements may vary as a result of a number of factors, including the progress
of its product development programs, competitive and technological developments,
the continuation of its existing collaborative agreements, establishment of
additional development agreements and progress of development efforts of the
Company's corporate partners.
The Company expects that it will require significant additional financing in
the future, which it may seek to raise through public or private equity or debt
financings, when market conditions allow and through arrangements with corporate
collaborators and other sources. No assurance can be given that such additional
financing will be available when needed or that, if available, such financing
will be obtained on terms favorable to the Company. If adequate funds are not
available, the Company will be required to delay, scale back or eliminate one or
more of its research and development programs or attempt to obtain funds through
arrangements with collaborative partners or others that may require the Company
to relinquish some or all of its rights to certain of its intellectual property
product candidates or products. To the extent that additional capital is raised
through the sale of equity or convertible debt securities, the issuance of such
securities could result in dilution to the Company's shareholders. See "Risk
Factors-- Future Capital Requirements; Uncertainty of Additional Funding."
At December 31, 1996, the Company had tax net operating loss carryforwards
of approximately $12.0 million which expire through 2011 as well as research and
development tax credit carryforwards of approximately $710,000 which expire
between 2007 and 2011. The Company's ability to utilize such net
24
<PAGE>
operating loss and research and development credit carryforwards may be subject
to certain limitations due to ownership changes as defined by rules enacted with
the Tax Reform Act of 1986.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS 128"). This
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock. This statement
is effective for financial statements issued for periods ending after December
15, 1997 and earlier application is not permitted. This statement requires
restatement of all prior period EPS data presented. The Company will adopt SFAS
128 in the fourth quarter of the fiscal year ending December 31, 1997. The
adoption of this accounting standard is not expected to have a material impact
on the financial statements.
During February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129, DISCLOSURE OF INFORMATION
ABOUT CAPITAL STRUCTURE ("SFAS 129"). SFAS 129 requires entities to explain, in
summary form within their financial statements, the pertinent rights and
privileges of the various securities outstanding. Information that shall be
disclosed should include dividend and liquidation preferences, participation
rights, call prices and dates, conversion or exercise prices or rates and
pertinent dates, sinking fund requirements, unusual voting rights, and
significant terms of contracts to issue additional shares. SFAS 129 is effective
for periods ending after December 15, 1997. The adoption of this accounting
standard is not expected to have a material impact on the financial statements.
During June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME ("SFAS
130"). SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS 130 is effective for fiscal years beginning after
December 15, 1997 and reclassification of financial statements for earlier
periods provided for comparative purposes is required. The adoption of this
accounting standard is not expected to have a material impact on the financial
statements.
25
<PAGE>
BUSINESS
OVERVIEW
Apollon is a leader in the development of non-viral DNA-based vaccines and
other DNA-based gene therapy products for the prevention and treatment of
infectious and autoimmune diseases. Apollon's vaccine product candidates, which
utilize its proprietary facilitated DNA delivery technology, are designed to
stimulate an immune response by causing cells to express specific encoded
antigenic proteins. The Company believes that its GENEVAX vaccine product
candidates may have several positive attributes, including the ability to: (i)
stimulate both humoral (antibody) and cellular (cytotoxic T-cell) immune
responses; (ii) target different strains of the same pathogen, as well as
multiple pathogens, with a single vaccine; (iii) be conveniently administered
using conventional methods; (iv) demonstrate increased safety relative to live
virus vaccines; and (v) be manufactured with relative ease. The Company believes
that its technology represents a new paradigm for the development of preventive
and therapeutic vaccines directed against a range of infectious diseases,
including genital and oral/labial herpes, viral hepatitis, AIDS, genital warts
and tuberculosis, as well as autoimmune diseases and cancer.
In order to develop DNA-based vaccine products successfully, the Company is
focusing a significant proportion of its resources on the advancement of its
vaccine product candidates into human clinical trials, including both clinical
trials of preventive product candidates in healthy adults and clinical trials of
therapeutic product candidates in patients affected with a target disease. Using
its facilitated, DNA-based vaccine technology, the Company has demonstrated that
its vaccines can stimulate humoral and cellular immune responses that have
provided preventive and therapeutic outcomes in preclinical studies. Based on
the results of these preclinical studies, Apollon has advanced multiple product
candidates into human clinical trials.
The Company believes that it initiated the first ever clinical trial of a
therapeutic DNA-based vaccine in adults infected with human immunodeficiency
virus ("HIV") in June 1995 and the first ever clinical trial of a preventive
DNA-based vaccine for HIV in healthy adults in March 1996. Apollon believes that
it also commenced the first ever clinical trial in healthy adults of a DNA-based
preventive vaccine for herpes simplex virus ("HSV") in September 1996 and the
first ever clinical trial of a DNA-based therapeutic vaccine in HSV-infected,
genital herpes patients in March 1997. The Company also initiated a clinical
trial in healthy adults of its DNA-based vaccine for treatment of individuals
persistently infected with hepatitis B virus ("HBV") in July 1997. In addition,
the Company initiated a clinical trial in December 1995 with a T cell
receptor-directed, therapeutic DNA vaccine for cutaneous T-cell lymphoma
("CTCL"), which is a part of the first phase of the Company's program to develop
therapeutic vaccines for autoimmune diseases such as psoriasis.
Apollon is currently conducting nine Phase I and Phase I/II clinical trials
of its GENEVAX vaccine product candidates for the prevention or treatment of
infection by HSV, HBV and HIV, as well as the treatment of CTCL. As of September
30, 1997, 163 people have been enrolled in these clinical trials. To date,
Apollon's vaccine product candidates have been safe and well tolerated in its
clinical trials. In addition to evaluating safety, an objective of the ongoing
clinical trials is to evaluate the ability of Apollon's DNA-based vaccine
product candidates to stimulate immune responses. The Company is currently
reviewing the results of its June 1995 HIV clinical trial, and has observed
increases in immune responses in HIV-infected patients. Subject to favorable
clinical results, the Company expects to initiate Phase II clinical trials of
its therapeutic HSV-, HBV- and HIV-directed vaccine product candidates within
the next 15 months.
Apollon has entered into collaborative agreements with three corporate
partners, Wyeth-Lederle, Centocor and Biogen. The collaborative agreements with
Wyeth-Lederle, executed in July 1995, provide for the joint development,
manufacture and marketing of preventive and therapeutic GENEVAX products
directed against HSV, HIV and human papillomavirus ("HPV"). Pursuant to the
agreements, Wyeth-Lederle has made a number of payments to Apollon to fund
development of the GENEVAX product
26
<PAGE>
candidates directed against the three viruses and is required to make additional
payments subject to the achievement of certain milestones in connection with
clinical trials. Apollon is primarily responsible for product development and
clinical testing expenses through the completion of Phase II clinical trials and
Wyeth-Lederle will assume all Phase III clinical trial expenses. As of September
30, 1997, the Company has received $15.1 million from Wyeth-Lederle pursuant to
the agreements. Apollon has granted Wyeth-Lederle worldwide rights to market and
sell these vaccine product candidates and has retained exclusive worldwide
manufacturing rights.
Apollon's agreement with Centocor, executed in March 1995, grants Centocor
exclusive worldwide rights to develop GENEVAX vaccine product candidates
directed at most cancers. Under the terms of this agreement, Centocor is
required to provide research funding, to make additional payments upon the
achievement of specified milestones and to pay royalties on any sales of
products. In June 1997, Centocor initiated a Phase I/II clinical trial in
colorectal cancer patients using the Company's GENEVAX technology.
In November 1997, Biogen and the Company entered into a license and option
agreement pursuant to which the Company received a license to Biogen's
intellectual property related to DNA sequences encoding hepatitis B viral
antigens. The license granted to Apollon is subject to Biogen's right to grant a
limited number of other licenses to this intellectual property. In addition,
Biogen received an option to market and sell on an exclusive basis in Japan the
GENEVAX-HBV product candidates developed by Apollon incorporating Biogen's
intellectual property.
The Company is currently prosecuting 37 U.S. patent applications. A majority
of these patent applications have foreign counterparts. These patent
applications include specifications and claims regarding methods of facilitated
DNA delivery and expression by target cells IN VIVO, methods of patient
treatment and routes of administration, methods of discovery of novel vaccines
and pharmaceutical agents, molecular targets and methods of utilizing these
targets and compositions of matter for vaccines and pharmaceutical products.
Apollon holds exclusive rights to a method patent which was issued to inventors
at the University of Pennsylvania and The Wistar Institute in January 1997. This
patent describes an important portion of the Company's core technology using
bupivacaine-facilitated DNA-based immunization.
THE IMMUNE SYSTEM AND VACCINES
THE IMMUNE SYSTEM
The human body's immune system fights both invading microorganisms, such as
viruses, and cells that have been altered by malignant disease processes. The
system has two dominant disease-fighting arms, the humoral arm and the cellular
arm. The humoral arm fights disease by producing circulating antibodies that are
directed against antigens, which are molecular structures the body perceives to
be foreign. These antibodies are effective at specifically binding to
free-floating antigenic proteins, particles or microbes, thereby targeting them
for destruction by cells of the immune system. These antibodies, however, are
less effective at targeting infected or abnormal cells. The cellular arm fights
disease through the activation of specialized white blood cells known as
cytotoxic T cells. These cytotoxic T cells destroy cells that display fragments
of target antigenic proteins on their cell surface. A cytotoxic T-cell response
is important in overcoming viral infection because viruses replicate inside host
cells, where they are protected from a humoral immune response. Cytotoxic T
cells are also thought to be important in the destruction of tumor cells.
TRADITIONAL ANTIVIRAL VACCINES
Historically, vaccines have been used to prevent infectious disease by
stimulating an immune response to disease-causing microorganisms prior to
infection. Such an immune response provides the vaccinee with
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the means to kill off and eliminate invading microorganisms thereby preventing
disease. Currently, there are three basic types of antiviral vaccines: live
attenuated virus vaccines, such as the oral polio or measles vaccine; killed
virus vaccines, such as the injected polio or rabies vaccine; and protein-based
vaccines, such as the HBV vaccine. Although these vaccine types have proven
effective for PREVENTION of certain diseases such as smallpox, polio and
measles, they have been generally ineffective for TREATMENT of other diseases
including genital herpes, hepatitis and AIDS. Total annual revenues from the
sale of vaccines worldwide have been projected to be approximately $2.7 billion
for 1997.
Several of the most effective antiviral vaccines have been live attenuated
virus vaccines. These vaccines contain a weakened form of virus which replicates
slowly and is designed to be nonpathogenic. Live attenuated virus vaccines
stimulate both humoral and cellular immune responses directed at all antigenic
proteins of the virus. However, because these vaccines contain live virus, they
have the potential to infect a vaccinee persistently or to revert to a
pathogenic form. Moreover, because the vaccines must be prepared in living
tissue or cell culture, certain residual tissue components in the vaccine can
cause allergic reactions.
Killed virus vaccines are comprised of whole, chemically treated virus
particles that are not infectious. These vaccines can stimulate a strong humoral
immune response directed against several structural proteins of the virus;
however, these vaccines are relatively poor stimulators of a cellular immune
response. Moreover, the inactivation process used to make a killed virus vaccine
may alter the structure of viral proteins. These altered proteins may stimulate
an immune response directed against clinically irrelevant antigenic structures,
thereby diminishing desired immune responses. As with live attenuated virus
vaccines, allergic reactions to killed virus vaccines can also be a problem.
Consequently, vaccination using killed virus vaccines may have limited
application and have the potential to leave a vaccinee vulnerable to certain
virus infections.
Protein-based vaccines are comprised of one or two individual viral
proteins, often mixed with an adjuvant that helps stimulate a strong immune
response. These vaccines can stimulate a strong humoral immune response directed
against the immunizing proteins. Like killed virus vaccines, protein-based
vaccines are relatively poor stimulators of a cellular immune response. They
also have the same potential to stimulate, in part, an immune response directed
against clinically irrelevant antigenic structures and, because of surface
protein mutation, may fail to stimulate some or all of a desired immune
response.
DNA-BASED VACCINES
DNA-based vaccines have been developed to address some of the limitations
associated with current vaccines and other therapies. DNA-based vaccines are
formulated with DNA which contains genes that encode antigens. Following
administration, DNA is taken up by cells of the vaccinee, which then synthesize
antigenic proteins encoded by DNA. Fragments of these antigenic proteins are
presented on the surface of the DNA-containing cells thereby stimulating an
immune response characterized by both humoral and cytotoxic T cell components.
See Figure 1 on the inside back cover of this Prospectus.
DNA-based vaccines have the potential to stimulate a broader immune response
than several other vaccine types because a single vaccine can be designed to
stimulate an immune response directed against different strains of the same
pathogen or against multiple antigenic protein targets. DNA-based vaccines may
stimulate both antibody and cytotoxic T-cell immune responses thereby
potentially producing a more effective immune response than either the killed
virus vaccines or the protein-based vaccines. The Company believes that a
clinically effective immune response requires only transient residence of the
injected DNA in cells of the vaccinee. The injected DNA is designed in a way
that prevents its replication and integration into existing human DNA contained
within the cells, which may give DNA-based vaccines a better safety profile than
live attenuated or killed virus vaccines. These attributes make it less likely
that the target pathogen could escape an immune response by mutating and
changing antigenic structures. Additionally, proteins produced IN VIVO inside
cells of the vaccinee mimic exactly the structure of native
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<PAGE>
proteins, thereby avoiding stimulation of irrelevant immune responses. DNA-based
vaccines can also be designed to stimulate immune responses directed against the
same proteins that are non-identical in structure in multiple strains of a
virus.
APOLLON'S TECHNOLOGY
Apollon's vaccine product candidates have been developed utilizing its
proprietary facilitated DNA delivery technology. Apollon's facilitated DNA-based
vaccines are formulated with DNA which contains genes that encode antigens and
facilitating agents that enhance uptake of the DNA into cells. The Company's
technology enables these vaccines to be administered to various sites by any of
several delivery methods. DNA vaccines are produced in a process involving
bacterial fermentation and chromatographic purification. The Company believes
that this production method is both efficient and scalable, and will be cost
competitive with other vaccine technologies.
Apollon's product candidates are formulated with DNA in the form of
plasmids, which are small, double-stranded, closed loops of DNA that contain the
genes encoding antigens. The Company has designed and constructed proprietary
plasmids that provide the machinery necessary for genes of interest to be
transcribed efficiently and expressed as proteins. These DNA plasmids are also
designed in a way that prevents their replication in cells of the body and their
integration into existing DNA in these cells and do not introduce clinically
irrelevant proteins as do other vaccines. Furthermore, this technology obviates
the need for virus-based gene transfer methods, such as retroviral, adenoviral
or other viral vector gene delivery systems, thereby eliminating safety concerns
associated with such viral-based transfer methods. A plasmid can also carry
several different genes simultaneously. Consequently, each plasmid can carry
genes that encode several antigenic proteins of single or multiple pathogens.
Moreover, multiple plasmids may be incorporated into a product formulation
thereby expanding the potential targets of a single product. Apollon is
currently prosecuting a number of patent applications which incorporate its
plasmid technology. See "-- Patents and Proprietary Rights."
Apollon's technology also employs biomolecular and chemical agents which
facilitate uptake of DNA into cells of the body. Adequate uptake of DNA into
cells is required for expression of sufficient protein to stimulate a clinical
effect. Biomolecular facilitating agents are often protein or lipid based.
Chemical facilitating agents may be synthetic lipids or other organic
substances. Apollon and its collaborators have identified several facilitating
agents, including local anesthetics such as bupivacaine. Apollon believes its
use of bupivacaine may enhance its ability to advance the Company's first
facilitated product candidates through the regulatory approval process rapidly
because it is an approved, readily available local anesthetic. Altogether,
Apollon is evaluating the use of at least six classes of facilitating agents,
including some proprietary synthetic lipids designed and synthesized by
Apollon's chemists. Delivery of a vaccine to a specified site in the body may be
enhanced by one or more classes of facilitating agents. For example, a
facilitator that is useful for intramuscular or intradermal delivery may or may
not be useful for oral delivery and vice versa. Some facilitating agents, in
addition to enhancing DNA delivery and protein expression, may directly augment
the immune response. Therefore, one or more facilitating agents may be selected
for use in each vaccine. Apollon is currently prosecuting a number of patent
applications related directly to its facilitation technology. See "-- Patents
and Proprietary Rights."
Apollon has also demonstrated in preclinical studies that its DNA-based
vaccines stimulate an immune response when administered orally, intranasally,
intrarectally or intravaginally and when injected into different tissues of the
body, including muscle, skin and subcutaneous tissue, using both needle and
needleless injection methods. See Figure 2 on the inside back cover of this
Prospectus.
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<PAGE>
BUSINESS STRATEGY
Apollon's goal is to develop and commercialize a substantial portfolio of
DNA-based vaccine and gene therapy products aimed at the prevention and
treatment of infectious and autoimmune diseases. In order to develop DNA-based
vaccine products successfully, the Company is focusing a significant proportion
of its resources on the advancement of its vaccine product candidates into human
clinical trials including both clinical trials of preventive product candidates
in healthy adults and clinical trials of therapeutic product candidates in
infected patients. The Company's GENEVAX products incorporate its proprietary
facilitated DNA delivery technology which the Company believes represents a new
paradigm for the development of preventive and therapeutic vaccines directed
against a wide range of diseases. The key elements of the Company's strategy are
as follows:
DEVELOP A DIVERSIFIED PRODUCT PIPELINE. Apollon is utilizing its technology
to develop a portfolio of vaccine and gene therapy products that target a range
of infectious diseases including genital and oral/ labial herpes, viral
hepatitis, AIDS, genital warts and tuberculosis, as well as autoimmune diseases
and cancer. By targeting multiple disease categories, the Company seeks to
reduce its reliance on any single product development program. Apollon is
focusing its vaccine development program on infectious disease targets and, in
particular, on the prevention and treatment of viral infection by HSV, HBV, HIV
and HPV, with research programs targeting bacterial infections, autoimmune
diseases and gene therapy products.
CONTINUE TO EXPAND ITS FACILITATED DNA DELIVERY TECHNOLOGY
PLATFORM. Apollon's proprietary facilitated DNA technology provides the Company
with the ability to deliver DNA into cells efficiently. The Company's current
product candidates use bupivacaine as a facilitating agent. The Company will
continue to focus its resources on developing additional facilitating agents and
determining the most efficacious routes of administration for each product
candidate. The Company intends to continue to seek patent protection for each of
its proprietary discoveries.
LEVERAGE CORPORATE, GOVERNMENTAL AND ACADEMIC COLLABORATIONS. Apollon has
established corporate partnerships with pharmaceutical and vaccine companies to
help fund its research and development activities, reduce development risks
associated with commercialization and provide for future marketing, sales and
distribution capabilities. Existing partnerships include a commercial
partnership with Wyeth-Lederle for DNA-based vaccines directed against HSV, HIV
and HPV, a license arrangement with Centocor for DNA-based vaccines directed
against most cancers and a license and option agreement with Biogen for
DNA-based vaccines directed against HBV. The Company intends to continue working
with government agencies in order to reduce its financial risk and gain access
to additional research and clinical trial program opportunities. Apollon also
intends to build upon its existing partnerships and seek to enter into new
partnerships in order to leverage the infrastructure of its collaborative
partners, while it continues to enhance its internal manufacturing and
commercial capabilities. In addition, Apollon intends to continue to form
collaborations with academic researchers in order to obtain know-how regarding
specific genes, disease targets and DNA delivery and gene expression
technologies that supplement the Company's internal expertise.
CONTINUE TO ENHANCE MANUFACTURING CAPABILITIES. The Company is producing a
variety of DNA-based vaccines using a single manufacturing process. The Company
is refining its proprietary scalable manufacturing methods for the production of
DNA-based vaccines of high purity and stability. By retaining control of its
manufacturing processes, Apollon believes it will be able to maintain and
enhance its leadership position in the development of DNA-based products and
prepare for production at a scale required for commercialization. The Company's
DNA-based vaccine products are currently manufactured by Apollon employees in
two facilities owned by third parties.
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PRODUCTS UNDER DEVELOPMENT
Apollon believes that its DNA-based vaccine product candidates may be used
to prevent or treat a variety of infectious diseases, autoimmune diseases and
certain cancers. The Company is currently conducting nine Phase I and Phase I/II
clinical trials of its GENEVAX vaccine product candidates for the prevention and
treatment of infection by HSV, HBV and HIV, as well as treatment of CTCL. The
Company's current strategy is to focus a significant proportion of its internal
resources on its HSV, HBV and HPV product development programs while continuing
to leverage its corporate and governmental collaborations to advance its HIV
product development program. The Company has established a proprietary portfolio
of patent applications and licenses to DNA sequences or proteins encoded by DNA
sequences with respect to its product candidates. In connection with its product
development programs, the Company will be required to seek licenses to
additional DNA sequences or proteins encoded by DNA sequences. If such licenses
are not obtained by the Company, it will not be able to commercialize the
products requiring such licenses. See "-- Patents and Proprietary Rights."
SELECTED PRODUCT DEVELOPMENT PROGRAMS
<TABLE>
<CAPTION>
CURRENT
DEVELOPMENT FIRST CLINICAL
PRODUCT COMMERCIAL STATUS TRIAL
CANDIDATES DISEASE TARGETS PARTNER (1) (2)(3) INITIATED
- ----------------- ---------------------- --------------- ------------ --------------
<S> <C> <C> <C> <C>
GENEVAX-HSV Genital herpes Wyeth-Lederle Phase September 1996
I/II(4)
Oral/labial herpes Wyeth-Lederle Research --
GENEVAX-HBV Viral hepatitis B -- Phase I/II July 1997
GENEVAX-HIV HIV infection and AIDS Wyeth-Lederle Phase June 1995
I/II(4)
GENEVAX-TCR CTCL -- Phase December 1995
I/II(5)
Psoriasis and other -- Research --
autoimmune diseases
GENEVAX-HPV HPV infection, genital Wyeth-Lederle Research --
warts and cervical
cancer
GENEVAX-HCV Viral hepatitis C -- Research --
GENEVAX-MTB Tuberculosis -- Research --
</TABLE>
--------------------------
(1) For a description of the Company's collaboration with Wyeth-Lederle, see
"-- Strategic Alliances and Collaborations -- Corporate Collaborations."
(2) The Company currently is conducting nine Phase I and Phase I/II clinical
trials of its GENEVAX vaccine product candidates including two HSV trials,
one HBV trial, five HIV trials and one CTCL trial.
(3) For each product candidate, the Company is testing one or more plasmids
containing one or more genes. Final products may include one or more of
the genes being tested. For the GENEVAX-HIV vaccine product candidate, the
Company is testing both an envelope-directed plasmid and a core-directed
plasmid. See "-- HIV Infection and AIDS."
(4) Both preventive and therapeutic clinical trials are being conducted
related to this disease target.
(5) A therapeutic clinical trial is being conducted related to CTCL as a part
of the first phase of the Company's program to develop therapeutic
vaccines for autoimmune diseases such as psoriasis.
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GENITAL AND ORAL/LABIAL HERPES
It has been estimated that there are 30 million people in the United States
infected for life with HSV as a result of sexually transmitted genital or
anogenital herpes. Type 2 HSV is the dominant cause of genital herpes. In
contrast, type 1 HSV is responsible for more than 90% of oral/labial HSV
infections. There may be as many as 150 million people in the United States
infected for life with the type 1 virus. It has been estimated that in the
United States there are 500,000 new genital herpes infections each year and
between five million and 20 million recurrent episodes of genital herpes.
Antiviral drug treatment has been helpful in controlling recurrent disease, but
it is expensive, not completely effective and drug resistant forms of HSV have
begun to emerge.
Apollon is developing both preventive and therapeutic DNA-based,
HSV-directed vaccines. These vaccines carry the gene encoding a type 2 HSV
envelope protein (glycoprotein D), but the Company believes the vaccines may
have the potential to be effective against both type 1 and type 2 HSV. The
Company has also identified and isolated additional HSV genes that may be used
in later generation or multiple component vaccines.
In September 1996, Apollon initiated a blinded, controlled Phase I/II
clinical trial of the Company's HSV-directed vaccine in healthy, uninfected
individuals using the intramuscular delivery method. As of September 30, 1997,
the Company has enrolled 37 people in this 40-person clinical trial, which is
being conducted at the Virology Research Clinic of the University of Washington
in Seattle and is designed to test for both safety and immune responses. In
February 1997, the Company initiated a second clinical trial at the University
of Washington in patients with recurrent genital herpes. As of September 30,
1997, the Company has enrolled 31 people in this 36-person blinded, controlled
Phase I/II clinical trial that will evaluate primarily safety and immune
responses. To date, the Company's HSV-directed vaccine has been safe and well
tolerated in both of these clinical trials.
The GENEVAX-HSV program is being conducted in partnership with
Wyeth-Lederle. Under the terms of this partnership, Wyeth-Lederle has been
granted worldwide marketing and sales rights for GENEVAX-HSV product candidates
and Apollon retains all manufacturing and supply rights.
VIRAL HEPATITIS B
Despite the availability of effective preventive vaccine products, it has
been estimated that up to 300 million individuals worldwide are persistently
infected with HBV and as many as 20 million new HBV infections are diagnosed
each year. In the United States, it is estimated that there are approximately
one million individuals persistently infected with HBV. Adults exposed to the
virus usually develop acute hepatitis and in 90-95% of cases recover completely
from the infection because their immune systems are generally able to limit the
course of disease and prevent the virus from infecting them persistently.
Persistently infected individuals can develop chronic hepatitis and have a
substantially higher than normal risk of developing primary hepatocellular
carcinoma, a fatal form of liver cancer. HBV infection in numerous countries in
Asia is endemic. In these populations, IN UTERO or perinatal vertical infection
is common. The risk for persistent HBV infection is 70% to 90% for infants who
acquire the disease during the perinatal period.
Because persistent HBV infection can lead to chronic active hepatitis and
liver cirrhosis, therapy for persistent infection is needed. Immunotherapy for
persistent HBV infection using alpha interferon is only effective in a minority
of patients. Moreover, this therapy can lead to side effects including those
which may require discontinuation of therapy. The Company believes facilitated
DNA-based vaccination could represent an effective immunotherapy for individuals
persistently infected with HBV, because such individuals typically have poor or
absent cytotoxic T-cell responses to the virus and this method of vaccination
can stimulate a strong cytotoxic T-cell response which has the potential to
eradicate HBV-infected cells from the vaccinee.
Apollon is developing HBV-directed vaccines that contain genes encoding
HBsAg and HBcAg. The Company has demonstrated in research and preclinical
studies that these vaccines stimulate both humoral and cytotoxic T-cell
responses directed against both of these HBV proteins. A discussion of this work
was recently published in the April 1997 issue of GASTROENTEROLOGY.
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<PAGE>
In November 1997, Apollon entered into a license and option agreement with
Biogen pursuant to which the Company received a license to Biogen's intellectual
property related to DNA sequences encoding hepatitis B viral antigens and Biogen
received an option to market and sell on an exclusive basis in Japan the
GENEVAX-HBV product candidates developed by Apollon incorporating Biogen's
intellectual property. The license granted to Apollon is subject to Biogen's
right to grant a limited number of other licenses to this intellectual property.
In July 1997, a blinded, controlled Phase I/II clinical trial of the
Company's HBV-directed DNA-based vaccine containing the gene that encodes HBsAg
was initiated in uninfected adult volunteers at the University of Cincinnati,
Children's Hospital Medical Center. This clinical trial will evaluate both
safety and immune responses stimulated by the vaccine. As of September 30, 1997,
the Company has enrolled 16 people in this 24-person clinical trial. To date,
the Company's HBV-directed vaccine has been safe and well tolerated.
Apollon is in various stages of discussion with several potential commercial
partners for its HBV-directed product candidates.
HIV INFECTION AND AIDS
In the United States, there are estimated to be as many as one million
individuals infected with HIV, with an estimated 40,000 new infections each
year. Worldwide, it is estimated that more than 22 million people are infected
with HIV. Although new combination drug therapy has been effective in
temporarily improving the outlook for many individuals, most experts agree that
this burdensome and expensive approach to treatment is not a final answer, nor
is it a cure. Therefore, an effective preventive vaccine directed against HIV is
needed. Moreover, an efficacious immunotherapeutic vaccine directed against HIV
could augment or possibly replace drug treatment regimens to prolong
disease-free survival in infected individuals.
Apollon believes its HIV-directed vaccines will have advantages when
compared with other HIV vaccines being tested. Most importantly, Apollon's
vaccines are designed to target several HIV proteins simultaneously and produce
cytotoxic T-cell and antibody responses that will be directed against cells
infected with HIV. Apollon believes that because HIV is spread by both free
virus and virus-infected cells, the Company's DNA-based vaccine methodology may
provide a means to develop both safe and efficacious preventive and therapeutic
vaccines for HIV.
The Company is developing both preventive and therapeutic GENEVAX-HIV
vaccine product candidates. The preventive vaccine product candidate is
currently designed to have two components. The first component carries the genes
for the envelope protein of HIV (the "envelope-directed" component). The second
component carries the genes encoding the core protein (p24), several other HIV
structural proteins and inactivated viral enzymes (the "core-directed"
component). The therapeutic vaccine could include either the envelope-directed
or core-directed components, or both. The Company is also evaluating the use of
additional accessory genes which may be included in a final preventive or
therapeutic vaccine. Apollon is testing these individual components separately
before combining them into a final vaccine formulation.
In June 1995, Apollon commenced a Phase I/II clinical trial of the
envelope-directed component of GENEVAX-HIV in HIV-infected individuals at the
University of Pennsylvania Medical Center. The Company believes that this
clinical trial was the first human clinical trial of a DNA-based vaccine. The
clinical trial was designed to evaluate both safety and immune responses.
Enrollment is complete in this clinical trial with 20 people enrolled. The
Company is currently reviewing the results of this clinical trial, and has
observed increases in immune responses in patients in this clinical trial.
Circulating virus levels did not change after 36 weeks of follow-up. The Company
also conducted a related four-person clinical trial in Zurich, Switzerland.
Immune response analysis from this clinical trial is currently being conducted
at the University of Pennsylvania Medical Center. To date, the Company's
HIV-directed vaccine has been safe and well tolerated in both clinical trials.
In March 1996, the Company commenced enrollment into a blinded, controlled
Phase I/II clinical trial of its envelope-directed vaccine component in
uninfected individuals. This clinical trial is the first human
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<PAGE>
clinical trial of a DNA-based vaccine in healthy volunteers and is being
conducted at the National Institutes of Health ("NIH") Clinical Center in
Bethesda, Maryland. As of September 30, 1997, the Company has enrolled 16 people
in this 24-person clinical trial. It is designed to establish the safety and
evaluate the immune responses stimulated by the vaccine. In February 1997, the
Company also initiated a related unblinded Phase I/II clinical trial of its
envelope-directed vaccine component in uninfected individuals using a needleless
injection system. The clinical trial is being conducted at the University of
Pennsylvania Medical Center. As of September 30, 1997, seven people have been
enrolled in this 12-person clinical trial. To date, the Company's HIV-directed
vaccine has been safe and well tolerated in both clinical trials.
In July 1997, the Company began a Phase I clinical trial in collaboration
with the NIH-supported AIDS Vaccine Evaluation Group ("AVEG") of the
core-directed component of GENEVAX-HIV. This clinical trial of uninfected
volunteers is being conducted by AVEG at four sites in the United States and is
designed to test for both safety and immune responses. As of September 30, 1997,
the Company has enrolled 27 people in this 40-person clinical trial. To date,
the Company's HIV-directed vaccine has been safe and well tolerated in this
clinical trial.
In October 1997, the Company began a Phase I clinical trial of the
envelope-directed component of GENEVAX-HIV in collaboration with the U.S. Army.
In this clinical trial, uninfected volunteers are being injected intradermally
with the formulated vaccine. The Company believes this human clinical trial is
the first trial of a DNA-based vaccine in which this intradermal route of
administration is being tested. The trial is designed to evaluate both the
safety of the intradermal route of administration and immune responses
stimulated by the vaccine.
The Company expects to initiate additional Phase I/II clinical trials of
both the envelope-directed and core-directed components of GENEVAX-HIV by the
end of 1997.
In separate preclinical studies, Apollon's investigators have vaccinated two
HIV-infected and three uninfected chimpanzees. Both infected animals receiving
the envelope-directed vaccine experienced an increase in immune response and a
reduction in circulating virus levels. In one animal the levels became
undetectable and have remained undetectable for more than two years. Apollon's
investigators also vaccinated three uninfected chimpanzees. Two of these three
were subsequently challenged intravenously with a high dose of HIV. Both
resisted the challenge and appear to have been protected. At six months these
protected animals had negative lymph nodes and nearly 24 months after the
challenge, these protected animals do not have detectable circulating HIV in
their blood plasma. In contrast, an unvaccinated control animal in the study was
clearly infected with HIV. The results of the uninfected chimpanzee study were
published in the May 1997 issue of NATURE MEDICINE.
The HIV program is being conducted in partnership with Wyeth-Lederle. Under
the terms of this partnership, Wyeth-Lederle has been granted worldwide
marketing and sales rights for GENEVAX-HIV product candidates and Apollon
retains all manufacturing and supply rights.
PSORIASIS AND OTHER AUTOIMMUNE DISEASES AND CTCL
It is estimated that between five percent and ten percent of the U.S.
population is afflicted with an autoimmune disease such as psoriasis, rheumatoid
arthritis or multiple sclerosis, and inadequate therapies make this a major area
of unmet medical need. The objective of Apollon's GENEVAX-TCR program is to
develop DNA-based vaccines for treatment of autoimmune diseases. The Company
believes that certain autoimmune diseases are caused by abnormal activation of
specific families or types of T cells. These T-cell families are defined in part
by a protein on their surface called the T-cell receptor ("TCR"), and also by a
protein chain of the TCR known as the variable region beta chain ("V-beta"). The
Company's GENEVAX-TCR vaccines are being developed to target specific T cells
through the V-beta chain. Apollon's strategy is first to evaluate its
GENEVAX-TCR vaccine approach in patients with a rare T cell cancer known as CTCL
in which the cancerous T cells develop with a specific V-beta subset. If the
Company is successful in its clinical trials for CTCL, it intends to pursue a
clinical program using this approach in people suffering from the autoimmune
disease psoriasis vulgaris ("psoriasis"). As the Company proceeds with its
psoriasis clinical program, it may be required to seek licenses under patents to
DNA sequences or proteins encoded by
34
<PAGE>
certain of the DNA sequences related to psoriasis. If such licenses cannot be
obtained by the Company, it will not be able to commercialize the products
requiring such licenses.
Approximately 6.4 million people in the United States suffer from the
chronic dermatologic disease psoriasis. Individuals with moderate to severe
psoriasis require lifelong therapy. Standard treatments such as phototherapy or
drug therapies (such as retinoids or methotrexate) can be effective but are
associated with a high risk for unacceptable complications. An improved
psoriasis treatment would moderate or eliminate the underlying pathogenic
process which is believed to include the activation of certain T-cell subsets or
families. Recent published reports indicate that the V-beta-3 or V-beta-13.1
subsets are involved in the pathogenesis of psoriasis, although additional
V-beta subsets of T cells might be involved. The Company believes that its
TCR-directed DNA-based vaccines, which are designed to target T cells with a
specific V-beta protein chain, may be effective in eliminating these activated T
cells or altering their influence in the skin.
In December 1995, Apollon commenced the first Phase I/II clinical trial of
its T cell receptor-directed DNA-based vaccine program at the University of
Pennsylvania Medical Center in a study of patients with CTCL. The objectives of
the clinical trial are to evaluate the safety and tolerability of the
GENEVAX-TCR vaccine and the clinical and immunological responses to the vaccine
in CTCL patients. As of September 30, 1997, five patients have been enrolled in
this clinical trial, and the vaccine has been safe and well tolerated. Two
patients had clinical responses involving clearing of cutaneous lesions. One of
these patients had a clinical response resulting in nearly complete clearance of
the skin. This patient also responded to additional injections and his disease
was controlled for over six months with vaccine therapy alone until relapse
occurred. The other patient's clinical response was transient and involved 10%
clearance of the skin. Apollon has obtained Orphan Drug status for this vaccine
product candidate indication. For a description of Orphan Drug status, see "--
Government Regulation."
Apollon has retained the commercial rights to its GENEVAX TCR-directed
vaccines.
HPV INFECTION, GENITAL WARTS AND CERVICAL CANCER
The annual incidence of anogenital warts caused by certain strains of HPV in
the U.S. has been estimated at 1.5 million and prevalent cases at four million.
Other strains of HPV are the likely cause of laryngeal and cervical cancers.
Cervical cancer is the second most common cancer among women worldwide. HPV is
believed to be the cause of essentially all cervical cancer. Recent studies have
demonstrated that at least 93% of cervical cancers and high-grade cervical
lesions contain one or more cancer-causing types of HPV.
No specific antiviral treatments are available for HPV infection, although
topical creams have been used to treat warts at various sites. Typically,
anogenital warts are treated with some combination of topical drug and surgery
or with laser ablation therapy. Intralesional treatment with alpha interferon
has also been somewhat effective in treating venereal warts. Recurrence of warts
following local treatment is common. If detected in the precancerous stage,
virtually all cases of cervical cancer are preventable. The treatment of
cervical cancer after it reaches the invasive stage may require chemotherapy,
radiation treatment or surgery, including hysterectomy. These treatments are
expensive and often unsuccessful. To date, no preventive or therapeutic vaccines
for HPV have been approved for clinical use.
Apollon is developing both preventive and therapeutic DNA-based vaccines
directed against HPV, which have been shown to stimulate immune responses in
animals. Because cervical cancer is associated with HPV, an effective vaccine
directed against the virus may help to reduce the risk of cervical cancer.
Preclinical testing of the Company's HPV-directed vaccine product candidates is
expected to begin by the end of 1997.
The GENEVAX-HPV program is being conducted in partnership with
Wyeth-Lederle. Under the terms of this partnership, Wyeth-Lederle has been
granted worldwide marketing and sales rights for GENEVAX-HPV product candidates
and Apollon retains all manufacturing and supply rights.
VIRAL HEPATITIS C
Worldwide, more than 100 million people are persistently infected with HCV.
It has been estimated that up to 2.5 million in the United States and up to 3.4
million people in Europe are persistently infected
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with HCV. The virus is endemic in many parts of Asia. In Japan, for example, it
has been estimated that two to three percent of the population is infected.
Similar levels of infection have been reported in Taiwan, Korea and China. Alpha
interferon, the only currently approved treatment for HCV in the United States,
has been effective in only a minority of patients with chronic HCV infections.
The Company believes that augmentation of the virus-specific immune response
to HCV, especially the cytotoxic T-cell response, in HCV-infected individuals is
a therapeutic strategy that provides a reasonable likelihood of success for the
following reasons: (i) immunotherapy with alpha interferon has been successful
in some infected patients; (ii) circulating virus levels in infected individuals
are generally low and the proportion of liver cells infected is generally low,
possibly leading to suboptimal cytotoxic T-cell responses in infected
individuals which, if augmented, might lead to more effective killing of
infected cells; and (iii) in the 50% of patients who appear to clear acute HCV
infections completely, cytotoxic T cells directed against various viral proteins
have been identified.
Apollon believes that treatment with a therapeutic DNA-based vaccine
directed against HCV provides the best opportunity for augmenting HCV-directed
cytotoxic T-cell responses in infected patients. Apollon and its collaborators
have demonstrated that DNA-based vaccine constructs containing the gene encoding
the HCV core antigen can stimulate cytotoxic T-cell responses in animals.
Moreover, Apollon's collaborators have cloned additional HCV viral genes that
are now being tested, including genes encoding some of the non-structural
proteins of the virus. All these genes have now been incorporated into Apollon's
clinical plasmids and are being readied for clinical testing. As the Company
proceeds with its HCV clinical program, it will be required to seek licenses
under patents to DNA sequences or proteins encoded by certain of the DNA
sequences related to the HCV core antigen. If such licenses cannot be obtained
by the Company, it will not be able to commercialize the products requiring such
licenses.
Apollon has retained the commercial rights to its HCV-directed vaccines.
Apollon is currently in discussions with potential commercial partners for these
product candidates.
TUBERCULOSIS
It is estimated that one third of the world's population or approximately
two billion people are infected with MYCOBACTERIUM TUBERCULOSIS ("MTB"), the
bacteria that causes tuberculosis. Annually, MTB causes two to three million
deaths, making it the pathogen responsible for the highest incidence of death
and disease worldwide. In the United States, the annual incidence of
tuberculosis cases increased about 20% from the period 1985 to 1992, and the
population currently at risk for MTB infection includes the poor, the elderly,
immuno-compromised patients and health care workers exposed to these
individuals. Although MTB infection is effectively controlled with drugs such as
isoniazid and rifampin, there has been an increased incidence of tuberculosis in
AIDS patients and outbreaks of multidrug-resistant MTB strains.
Due to the large number of individuals infected and the steady annual
incidence of infections worldwide, control of MTB is unlikely to occur until an
effective vaccine becomes available. The tuberculosis vaccine used for the past
75 years, known as bacillus Calmette Guerin ("BCG"), is a live-attenuated
bacteria (M. BOVIS) related to MTB. The reported efficacy of this vaccine is
less than 50% in controlled human studies.
Apollon believes that a DNA-based vaccine for prevention of MTB infection
might offer greater efficacy and increased safety in comparison to the
live-attenuated BCG vaccine. The Company's current research program has produced
prototype vaccine vectors containing genes isolated from the MTB bacteria. These
vaccine vectors are designed to produce MTB-specific immune responses.
Furthermore, the Company's MTB DNA-based vaccines are being designed to
stimulate a strong, cell mediated immune response against MTB. This is important
because the pathogenesis of MTB involves the establishment of infection within
the lung and replication within alveolar macrophages. Since MTB replicates
within human cells, it is a particularly attractive target for DNA vaccine
technology, which is capable of inducing a strong, cell-mediated immune response
to eradicate infected cells. In studies published by other researchers,
DNA-based vaccines expressing MTB genes have induced cytotoxic T-cell responses
and have protected mice from challenge with live MTB.
Apollon has retained the commercial rights to its MTB-directed vaccines.
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GENE THERAPY APPLICATIONS
Gene therapy is the use of gene-containing products for prevention or
treatment of inherited or acquired diseases. Gene therapy products encode
biologically active molecules or proteins that interfere with replication of
viruses or alter or augment a particular biological function and may be useful
for replacing an inherited defective protein in order to prevent or treat
inherited or acquired diseases such as cystic fibrosis or hemophilia. Using its
facilitated DNA delivery technology platform as a foundation, Apollon is
pursuing a research program in gene therapy. While Apollon's focus has been, and
continues to be, on its DNA-based vaccine programs, the Company has also begun
development of other gene therapy products that utilize the Company's
proprietary facilitated DNA delivery technology. The Company is developing
proprietary tissue-targeted facilitators, which are being designed to target
injected DNA to specific cell types within the body. The direct facilitated
delivery of DNA-based products could provide the physician with a
straightforward approach to gene therapy that does not require the use of live
viral vectors or treatment of cells outside the body.
Apollon initially expects to develop gene therapy product candidates that
will modify immune responses generated by existing GENEVAX vaccine product
candidates. For example, some of these potential products may stimulate enhanced
cytotoxic T-cell responses directed against antigenic proteins targeted by the
Company's GENEVAX vaccine product candidates. The Company has active research
programs evaluating DNA-based prototype products that encode various cytokines
such as IL2, IL4 and IL12 and co-stimulatory molecules such as B7-1 and B7-2.
STRATEGIC ALLIANCES AND COLLABORATIONS
CORPORATE COLLABORATIONS
WYETH-LEDERLE. Apollon's corporate collaboration with Wyeth-Lederle is
based on a Research and Development and License Agreement (the "R&D Agreement")
and a Supply Agreement entered into in July 1995. The agreements provide that
Apollon and Wyeth-Lederle will jointly develop, manufacture and market
preventive and therapeutic GENEVAX products directed against HSV, HIV and HPV.
Pursuant to the R&D Agreement, Wyeth-Lederle has made a number of payments
to Apollon to fund the development of the preventive and therapeutic GENEVAX
vaccine product candidates directed at the three viruses. The R&D Agreement
provides for significant additional payments subject to the achievement of
certain milestones in connection with clinical trials. Apollon is primarily
responsible for product development and clinical testing expenses through the
completion of Phase II clinical trials and Wyeth-Lederle will assume all Phase
III clinical trial expenses. As of September 30, 1997, the Company has received
$15.1 million from Wyeth-Lederle pursuant to the R&D Agreement. In return,
Apollon has granted to Wyeth-Lederle worldwide rights to market and sell
products directed at the three viruses. The R&D Agreement also provides
Wyeth-Lederle an option to obtain sublicenses to technology that is covered by
license agreements Apollon has with third parties. The R&D Agreement also
provides Wyeth-Lederle a three-year option, in exchange for certain option
payments, to obtain exclusive commercialization rights to develop DNA-based
vaccines for other microorganisms. If the option is exercised, Wyeth-Lederle
will make research and development and milestone payments to the Company under
substantially similar terms as for other products developed under this
collaboration. The R&D program is managed by a Steering Committee and an R&D
Management Committee, each with equal representation from both companies.
Apollon has retained the exclusive right to manufacture and supply GENEVAX
products to Wyeth-Lederle under the terms of the Supply Agreement, which
requires Apollon to sell such products exclusively to Wyeth-Lederle or its
designated affiliates at a price based upon a percentage of Wyeth-Lederle's
selling price.
Both agreements will terminate as to any product upon the later of (a) the
expiration date of the last patent covering that product and (b) the date that
is ten years following the first commercial sale of that product. Wyeth-Lederle
has the right to terminate both agreements in their entireties or as to any
specific product unilaterally and without cause. In the event of termination
unilaterally without cause by Wyeth-
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Lederle, exclusive rights to the products and co-exclusive rights to the
supporting technology will revert or vest to Apollon as appropriate and
Wyeth-Lederle will be entitled to receive payments on sales of products
commercialized by Apollon under the Supply Agreement based upon Wyeth-Lederle's
contribution to the development costs of the respective product. In the event
Wyeth-Lederle terminates because of a breach by, or change in control of,
Apollon, the options and licenses granted to Wyeth-Lederle vest or are retained,
as appropriate, any licenses granted to Apollon by Wyeth-Lederle terminate and
Apollon is required to assign all governmental approvals. Apollon has similar
rights if Apollon terminates because of a breach by, or change in control of,
Wyeth-Lederle.
CENTOCOR. Apollon and Centocor entered into the License and Option
Agreement in March 1995, whereby Centocor obtained the rights to use the
Company's facilitated DNA-based technology to develop, market and sell GENEVAX
products directed at most cancers. The agreement gives Centocor the right to
sublicense technology from Apollon which is licensed by the Company from certain
third parties. This agreement excludes TCR-directed GENEVAX vaccine product
candidates and any potential GENEVAX products which utilize antigen genes
derived from viruses and other microorganisms. Subject to Centocor achieving
various milestones, this agreement requires certain payments to be made to
Apollon and establishes a royalty to be paid to Apollon based upon Centocor's
product sales under certain circumstances, subject to an offset of the
development payments previously made to Apollon by Centocor. Centocor has agreed
to share any improvements it makes to facilitated DNA-based vaccine delivery
technology with Apollon during the first three years of this collaboration,
solely for application by Apollon outside of the fields in which Centocor
acquired rights under the agreement. In June 1997, Centocor initiated a Phase
I/II clinical trial in colorectal cancer patients using the Company's GENEVAX
technology.
The Company and Centocor entered into the Centocor Manufacturing Agreement
in August 1995, whereby the Company assisted Centocor in the manufacture of the
Centocor Plasmid for use in DNA-based vaccines and transferred to Centocor the
know-how required to manufacture the Centocor Plasmid and similar plasmids.
BIOGEN. Apollon and Biogen entered into a license and option agreement in
November 1997 pursuant to which the Company received a license to Biogen's
intellectual property related to DNA sequences encoding hepatitis B viral
antigens. In addition, Biogen received an option to market and sell on an
exclusive basis in Japan the GENEVAX-HBV product candidates developed by Apollon
incorporating Biogen's intellectual property. The license granted to Apollon is
subject to Biogen's right to grant a limited number of other licenses to this
intellectual property. Apollon has retained the exclusive right to manufacture
and supply GENEVAX products to Biogen for sale in Japan.
In the event of a change of control of Apollon during the term of the
license and option agreement, which results in control of Apollon by a "Fortune
500 Company" (as defined in the agreement), Apollon shall be required to make
payments to Biogen upon obtaining both FDA and European regulatory approval for
a product which uses Biogen's intellectual property.
GOVERNMENTAL COLLABORATIONS
Apollon has entered into collaborative arrangements with government agencies
to supplement its internal product development and business capabilities. These
include an agreement with the Division of AIDS, National Institute of Allergy
and Infectious Disease ("NIAID") to collaborate in the preclinical evaluation of
the pharmacological and toxicological properties of GENEVAX-HIV as well as the
evaluation of the vaccine product candidate in certain animal models. The
Company believes that this cooperative endeavor will provide an opportunity to
accelerate the development of GENEVAX-HIV vaccine product candidates.
Upon joint application, beginning in August 1994, the University of
Pennsylvania and the Company have received a $4.2 million four-year grant from
NIAID to support the Company's HIV-directed therapeutic vaccine research and
development efforts. This grant was among the first awarded by NIAID in
connection with its Strategic Program for Innovative Research in AIDS Treatment
("SPIRAT"). The University of Pennsylvania receives direct funding, portions of
which are distributed to Apollon.
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The Company's HIV-directed vaccines are being tested in a Phase I clinical
trial being conducted by AVEG at four sites in the United States and in a Phase
I clinical trial being conducted by the U.S. Army.
ACADEMIC COLLABORATIONS
Apollon works closely with its academic collaborators in the research,
development and clinical testing of its vaccine product candidates and,
connected with such collaboration, funds continuing research efforts in
laboratories at the University of Pennsylvania, the Massachusetts General
Hospital, Loyola University (Chicago) and the University of Washington in
Seattle.
Apollon's academic collaborators include: Dr. David Weiner of the University
of Pennsylvania on research and development projects developing basic gene
delivery technology and HIV-directed vaccines; Dr. Lawrence Corey at the
University of Washington on immunological and clinical research regarding
development of the Company's HSV-directed vaccines; Dr. Jack Wands at the
Massachusetts General Hospital on the development of DNA-based vaccines and gene
therapy products directed against viral hepatitis and methods of DNA delivery;
Dr. Martin Kast at Loyola University on the development of vaccines directed
against HPV; and Dr. Harvey Rubin at the University of Pennsylvania, on the
development of Apollon's vaccines directed against MTB.
MANUFACTURING
The Company is producing a variety of DNA-based vaccines using the same
manufacturing process and is refining proprietary scalable manufacturing methods
for the production of DNA-based vaccines of high purity and stability. The
Company manufactures plasmids using common bacterial fermentation methods and
proprietary purification techniques. The Company believes that it has already
developed production methods that are adequate to accommodate the
commercialization of certain of its GENEVAX product candidates in therapeutic
markets and intends to construct a manufacturing facility meeting Good
Manufacturing Practices (GMP) requirements to implement these methods. The
Company believes its manufacturing processes may also be used to manufacture
DNA-based gene therapy products other than vaccines.
The Company's DNA-based vaccine product candidates are currently
manufactured by Apollon employees in two facilities owned by third parties, at a
scale sufficient to support its current and future Phase I and Phase I/II
clinical trials and projected Phase II and Phase III clinical trials. One
facility, owned by Centocor, is dedicated to Apollon through August 1998 with
automatic year-to-year renewals unless terminated by either party. In addition,
Apollon is party to a Cooperative Research Agreement with Walter Reed Medical
Center that provides the Company with availability, at designated intervals, to
a GMP environment to perform microbial fermentation. The Company's current
manufacturing capability includes an experienced internal staff of
bioengineering, microbial fermentation and quality control scientists and
manufacturing development scientists and operators. In addition, the Company has
contracted with third parties for facilities in which the Company may
manufacture bulk products in a GMP environment. Apollon conducts quality testing
of its manufactured product candidates according to Good Laboratory Practices
(GLP) requirements using proprietary assays developed by the Company. Currently,
the Company is manufacturing product candidates using a second generation
process that allows for production of up to fifty thousand doses in each lot.
The Company contracts with a third party manufacturer to perform the final
sterilization, packaging and fill of its product candidates. The Company
believes that, in the event of termination of its current arrangement, it will
be able to negotiate an arrangement with another third party manufacturer
without significant delay.
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SALES AND MARKETING
The Company's strategy is to market products directly, through its corporate
collaborators or through licensing arrangements with large pharmaceutical or
biotechnology companies. Implementation will depend, in large part, on the
market potential of any products the Company develops, as well as on the
Company's financial resources. The Company does not expect to establish a direct
sales capability for at least the next several years. Centocor and Wyeth-Lederle
each have the right to market worldwide future products, if any, resulting from
their respective collaborations.
PATENTS AND PROPRIETARY RIGHTS
Patents and other proprietary rights are important to the Company's
business. The Company's policy is to file patent applications to protect
technology, inventions and improvements to its inventions that are considered
important to the development of its business. The Company also relies upon trade
secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain its competitive position. To date, Apollon
has established a proprietary portfolio of patent applications and has an
exclusive royalty bearing license from the Trustees of the University of
Pennsylvania, the Institute of Biotechnology and Advanced Molecular Medicine,
Inc. and The Wistar Institute to make, sell and use products developed using the
technology that is the subject matter of certain patent applications covered by
the license. These patent applications include, among other things,
specifications and claims regarding methods of facilitated DNA delivery and
expression by target cells IN VIVO, methods of patient treatment and routes of
administration, methods of discovery of novel vaccines and pharmaceutical
agents, molecular targets and methods of utilizing these targets and
compositions of matter for vaccines and pharmaceutical products. Apollon and its
collaborators are actively prosecuting 37 U.S. patent applications, about half
of which specifically support the Company's DNA injection and delivery
technology and DNA-based vaccine program. Several such applications are pending
in the United States and corresponding foreign applications have been filed. In
the United States, two such patents have issued and notices of allowance have
been received on sets of claims enumerated in several other patent applications.
No assurance can be given that claims of the remaining applications will issue
in their present form, if at all. See "Risk Factors -- Patents and Proprietary
Rights; Access to Proprietary Genes and Proteins."
The patent positions of pharmaceutical and biotechnology firms, including
those of the Company, are uncertain and involve complex legal and factual
questions for which important legal principles are largely unresolved. In
addition, the coverage claimed in a patent application can be significantly
reduced before a patent is issued. Consequently, the Company does not know
whether any of its unissued patent applications will result in the issuance of
patents or, if any patents are issued, whether they will provide significant
proprietary protection or will be circumvented or invalidated. Because patent
applications in the United States are maintained in secrecy until patents issue
or foreign counterparts, if any, publish and since publication of discoveries in
the scientific or patent literature often lag behind actual discoveries, the
Company cannot be certain that it or any licensor was the first creator of
inventions covered by pending patent applications or that it or such licensor
was the first to file patent applications for such inventions. Moreover, the
Company might have to participate in interference proceedings commenced by the
United States Patent and Trademark Office to determine priority of invention,
which could result in substantial cost to the Company, even if the eventual
outcome were favorable to the Company. There can be no assurance that the
Company's patents, if issued, would be held valid or enforceable by a court or
that a competitor's technology or product would be found to infringe such
patents. See "Risk Factors -- Patents and Proprietary Rights; Access to
Proprietary Genes and Proteins."
A number of pharmaceutical and biotechnology companies and research and
academic institutions have developed technologies, filed patent applications or
received patents on various technologies that may be related to the Company's
business. Some of these technologies, applications or patents may conflict with
the Company's technologies or patent applications. Such conflict could limit the
scope of the patents, if any, that the Company may be able to obtain or result
in the denial of the Company's patent
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applications. In addition, if patents that cover the Company's activities are
issued to other companies, there can be no assurance that the Company would be
able to obtain licenses to these patents at a reasonable cost or be able to
develop or obtain alternative technology. The Company is aware of two patents
controlled by Vical with claims relating to aspects of DNA-based vaccine
technology. While the Company believes that its technology does not infringe the
Vical patents, there can be no assurance that a claim will not be asserted
against the Company. See "Risk Factors -- Patents and Proprietary Rights; Access
to Proprietary Genes and Proteins." A number of the DNA sequences or proteins
encoded by certain of these sequences that the Company is currently
investigating in its preclinical studies and clinical trials or may use in other
of its DNA-based product candidates are or may become patented by others. As a
result, the Company will and may be required to obtain licenses under such
patents in order to test, use or market products that contain proprietary DNA
sequences or encode proprietary proteins. If such licenses are not obtained by
the Company, it will not be able to commercialize the products requiring such
licenses. The Company has obtained, or has the right to obtain, certain licenses
to DNA sequences or encoded proteins and is currently negotiating certain other
licenses. There can be no assurance that the Company will be able to obtain any
of such licenses or any further required licenses on commercially favorable
terms, if at all.
In addition to patent protection, the Company also relies upon trade secret
protection for its confidential and proprietary information. There can be no
assurance that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets or disclose such technology or that the Company can meaningfully
protect its trade secrets.
It is the Company's policy to require its employees, officers, consultants
and collaborative partners to execute confidentiality agreements upon the
commencement of employment or consulting relationships or a collaboration with
the Company. These agreements provide that all confidential information
developed or made known during the course of the relationship with the Company
is to be kept confidential and not disclosed to third parties except in specific
circumstances. In the case of employees, the agreements provide that all
invention resulting from work performed for the Company, utilizing property of
the Company or relating to the Company's business and conceived or completed by
the individual during employment, shall be the exclusive property of the Company
to the extent permitted by applicable law. There can be no assurance, however,
that these agreements will provide meaningful protection of the Company's trade
secrets or adequate remedies in the event of unauthorized use or disclosure of
such information.
GOVERNMENT REGULATION
Any drug products developed by the Company will require regulatory
authorization prior to clinical trials and additional regulatory clearances
prior to commercialization. New human DNA-based vaccine and other gene therapy
product candidates are expected to be subject to extensive regulation by the FDA
as biological drugs and comparable agencies in other countries. The precise
regulatory requirements with which the Company must comply are uncertain at this
time due to the novelty of the human gene products, vaccines and therapies
currently under development. The Company believes that its potential vaccine
products will be regulated as biological drugs and that any newly developed
facilitating agents will be regulated as non-biological new drugs. New drugs are
subject to regulation under the Federal Food, Drug and Cosmetic Act, and
biological drug products, in addition to being subject to certain provisions of
that act, are regulated under the Public Health Service Act. Both statutes and
the regulations promulgated thereunder govern, among other things, the testing,
manufacturing, safety, efficacy, labeling, storage, record keeping, advertising
and other promotional practices involving biologics or non-biological new drugs,
as the case may be. FDA authorization must be obtained before clinical testing
and approval must be obtained before manufacturing and marketing of biologics or
new drugs. At the FDA, CBER is responsible for the regulation of biological
drugs and CDER is responsible for the regulation of non-
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biological new drugs. Biological drugs generally are regulated more stringently
than non-biological drugs. Drugs that contain biological and non-biological
components that both contribute to the efficacy of a product may be regulated
more onerously as combination products. The use of facilitating agents in the
Company's vaccine or other DNA-based products could result in combination drug
status. See "Risk Factors -- Government Regulation: No Assurance of FDA
Approval."
Obtaining FDA approval of a drug has historically been a costly and time
consuming process. Generally, in order to gain FDA premarket approval, a
developer first must conduct preclinical studies in the laboratory and in animal
models in accordance with GLP requirements to gain preliminary information about
the potential efficacy of a product candidate and to identify any major safety
concerns. The results of these studies are submitted as a part of an
Investigational New Drug ("IND") application, which must become effective before
human clinical trials of an investigational drug can start. The IND also
includes a detailed description of the clinical investigations to be undertaken.
See "Risk Factors -- Government Regulation; No Assurance of FDA Approval."
The Company must file an IND for each product candidate and for each
preventive or therapeutic vaccine indication it intends to study in the clinic.
Clinical studies must usually be conducted in accordance with FDA informed
conduct and institutional review board requirements. The Company is responsible
for initiating and overseeing the clinical studies to demonstrate the safety,
purity, efficacy and potency that are necessary to obtain FDA approval of any
such product candidates as biological drugs. Clinical trials are normally done
in three phases. In Phase I, clinical trials are conducted with a small number
of either healthy volunteers or patients afflicted with the target disease to
determine the safety profile and immunogenicity of the product candidate. In
Phase II, clinical trials are conducted with a larger group of either healthy
volunteers or patients afflicted with the target disease in order to determine
preliminary efficacy, optimal dosages and vaccination schedule and expanded
evidence of safety. In Phase III, large-scale, multi-center, comparative
clinical trials are conducted with either healthy volunteers or patients
afflicted with the target disease in order to provide enough data for the
statistical proof of safety and efficacy required by the FDA and other
regulatory authorities. In the case of DNA-based products, the initial human
testing is generally done to assess both safety and immune responses, as well as
preliminary efficacy issues either in healthy volunteers or patients afflicted
with the target disease. Such clinical trials are referred to herein as Phase
I/II clinical trials.
The FDA receives reports on the progress of each phase of clinical testing,
and it may require the modification, suspension or termination of clinical
trials if an unwarranted risk is presented to patients or healthy volunteers.
DNA-based vaccine and other gene therapy products are a new category of
potential preventive and therapeutic products. There can be no assurance as to
the length of the clinical trial period or the number of patients or healthy
volunteers the FDA will require to be enrolled in the clinical trials in order
to establish to its satisfaction the safety, purity, efficacy and potency of
DNA-based vaccine and other gene therapy products as biological drugs. See "Risk
Factors -- Government Regulation; No Assurance of FDA Approval."
After successful completion of clinical trials of a new product candidate,
FDA marketing approval must be obtained. The Company expects that its vaccine
and gene therapy products will be regulated as biological drugs. All drugs
regulated as biologics must be proven to be safe, pure, potent and efficacious.
Currently, there are three alternative possible application processes that may
apply to the Company's product candidates. First, traditionally, approval by
CBER of both a Product License Application ("PLA") and an Establishment License
Application ("ELA") is required before commercial marketing of a biologic can
occur. Further requirements traditionally applicable to biologics include
release of each lot of a biologic and specific biological GMP standards in
addition to those applicable to other drugs. Second, only a single Biologics
License Application ("BLA") may be required for certain biologics the FDA
considers to be well characterized. The ELA requirement has been eliminated for
certain specified biotechnology and synthetic biological products, including
therapeutic DNA plasmids. Lot release requirements have also been eliminated for
certain of these well characterized biologics. Thus, if the Company were to
reach the
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license stage for a therapeutic DNA plasmid product candidate, under current
regulations only a single license application, a BLA may be required. However,
if the Company were to reach the license stage for a preventive DNA-based
vaccine, under current regulations both a PLA and ELA would be required. Third,
if the product candidate is classified as a non-biological new drug, the Company
must file a New Drug Application ("NDA") with CDER and receive approval before
commercially marketing the drug. New drugs must be shown by substantial evidence
to be safe and effective. Generally, in order to obtain approval of
non-biological drugs, the FDA requires at least two properly conducted, adequate
and well controlled clinical studies demonstrating safety and efficacy with
sufficient levels of statistical assurance. In case of approval of a biological
drug, one properly conducted, adequate and well controlled study may suffice.
The NDA, BLA or PLA/ELA must include results of product development
activities, preclinical studies and clinical trials in addition to detailed
manufacturing information. The review and approval processes require substantial
time and effort and there can be no assurance that any approval will be granted
on a timely basis, if at all. If questions arise during the FDA review process,
approval can take longer. Notwithstanding the submission of relevant data, the
FDA may ultimately decide that the NDA, BLA or PLA/ELA does not satisfy its
regulatory criteria for approval and require additional clinical studies. Even
if FDA regulatory clearances are obtained, a marketed product is subject to
continual review and later discovery of previously unknown problems or failure
to comply with the applicable regulatory requirements may result in restrictions
on the marketing of a product or withdrawal of the product from the market as
well as possible civil or criminal sanctions. In addition, after marketing
clearance is secured, the FDA may require additional clinical testing to confirm
safety and efficacy (Phase IV studies) and the manufacturing facility for the
Company's products will be subject to periodic inspections for GMP compliance by
FDA inspectors.
Since 1992, non-biological and biological drugs have been subject to the
Prescription Drug User Fee Act ("PDUFA"). PDUFA requires, among other things,
companies that submit marketing applications for such products to pay fees in
connection with review of such prescription drug applications. In return, the
FDA has committed to reviewing a certain percentage of the marketing
applications within certain time frames. In Fiscal Year 1997, the FDA has
committed to reaching approval, disapproval or additional-data-required
decisions on 90% of non-priority PLAs, BLAs and NDAs within 12 months of
application submission. PDUFA expired on September 30, 1997. Although the
Congress has passed legislation to extend PDUFA for an additional period of
time, there can be no assurance that the extension will be signed by the
President in a timely manner, if at all. Failure of Congress to extend PDUFA
would have a significant adverse effect on the FDA's time frames for reviewing
drug product marketing applications and on the Company's drug applications. See
"Risk Factors -- Government Regulation; No Assurance of FDA Approval."
The Orphan Drug Act of 1983, as amended, generally provides tax and market
exclusivity incentives to manufacturers to undertake development and marketing
of products to treat diseases having a prevalence of no more than 200,000 people
in the United States at the time of application for Orphan Drug designation. In
addition to GENEVAX-TCR, which has received Orphan Drug designation for use in
CTCL, Apollon may pursue Orphan Drug designation, where appropriate, with
respect to other products. A drug that receives Orphan Drug designation by the
FDA and is the first product to receive FDA marketing approval is entitled to a
seven-year exclusive marketing period in the United States for the approved
indication. However, a drug that is considered by the FDA to be different in
chemical structure or use from or that is clinically superior to an approved
Orphan Drug is not barred from receiving FDA approval for marketing during such
seven-year period. Therefore, it is possible, for example, that even if a
DNA-based vaccine or other gene therapy product receives exclusive marketing
approval for a particular indication, a second gene therapy product utilizing
different technology (e.g., viral-based vs. non-viral-based) or a product using
similar technology that is clinically superior can nonetheless be approved by
the FDA at any time. In addition, Congress has considered restrictions on the
designation of Orphan Drugs
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and the benefits available under the Orphan Drug Act for manufacturers of these
drugs. No assurances exist that Orphan Drug status (other than for the CTCL
products) or benefits will be available for any of the Company's drugs.
In addition to the FDA requirements, the NIH has established guidelines for
research involving recombinant DNA molecules, which are utilized by the Company
and certain of its collaborators in their research. These guidelines apply to
all recombinant DNA research which is conducted at or supported by the NIH or
most other governmental entities.
In both domestic and foreign markets, sales of the Company's products, if
any, will be dependent in part on the availability of reimbursements from third
party payors, such as government and private insurance plans. Third party payors
are increasingly challenging the prices charged for medical products and
services. If the Company succeeds in bringing one or more products to market,
there can be no assurance that these products will be considered cost-effective,
that reimbursement will be available or, if available, that the payor's
reimbursement policies will not adversely affect the Company's ability to sell
its products on a profitable basis. See "Risk Factors -- Government Regulation;
No Assurance of FDA Approval."
The Company is also subject to various federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory
and manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with the Company's
research work. The extent of government regulation which might result from any
future legislation or administrative action cannot be accurately predicted.
COMPETITION
Gene delivery and DNA-based therapy are relatively new, rapidly evolving
areas of science in which significant and unexpected technological advances are
likely. Rapid technological development could result in the Company's products
or technologies becoming obsolete before the Company recovers a significant
portion of its related research, development and capital expenditures. The
Company is aware of several development stage and established enterprises,
including major pharmaceutical and biotechnology firms, which are exploring the
field of human gene therapy or are actively engaged in research and development
in areas similar or related to the Company's technology. The Company may also
experience competition from companies that have acquired or may acquire
technology from companies, universities and other research institutions.
Additionally, there are products currently approved by the United States and
other government regulatory agencies that are being sold for the treatment or
prevention of diseases targeted by the Company.
Most of the Company's competitors and potential competitors have
substantially greater product development capabilities and financial,
scientific, marketing and human resources than the Company. Other companies may
succeed in developing products earlier than the Company, completing clinical
trials and obtaining FDA approvals for such products more rapidly than the
Company, or developing products that are more effective, reliable, available or
cost-effective than the Company's product candidates and other potential
products. There can be no assurance that research and development by others will
not render the Company's technology or products obsolete or non-competitive or
result in treatments or cures superior to any therapy or vaccine developed by
the Company or that any therapy or vaccine developed by the Company will be
preferred to any existing or newly developed technologies.
FACILITIES
Apollon leases 46,125 square feet of space in a one-story 60,880 square foot
building in the Great Valley Corporate Center in Malvern, Pennsylvania. The
lease expires September 30, 2003, subject to the
44
<PAGE>
Company's option to renew for an additional five years. The Company has improved
about 23,700 square feet of its leased space with offices, laboratories and
associated utilities.
Apollon expects this building to serve its needs for the foreseeable future.
Apollon may consider the construction of a manufacturing facility to support the
commercialization of the Company's first GENEVAX product candidate and may
require additional manufacturing space if multiple products approach
commercialization.
EMPLOYEES
As of September 30, 1997, the Company had 56 full-time and four part-time
employees, 17 of which hold a Ph.D. or M.D. degree. Of the Company's employees,
47 are engaged directly in full-time or part-time research and product
development efforts. None of the Company's employees is covered by a collective
bargaining agreement. Apollon believes that it maintains good relations with its
employees.
LEGAL PROCEEDINGS
The Company is not presently involved in any material legal proceedings
outside of the ordinary course of business. The Company may in the future be
named as a defendant in lawsuits involving product defects, breach of warranty
or other actions relating to products which it manufactures or distributes.
45
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding the executive officers
and directors of the Company as of June 30, 1997:
<TABLE>
<CAPTION>
AGE POSITION
--- ----------------------------------------------------
<S> <C> <C>
Morton Collins, Ph.D.(1)............................ 61 Chairman of the Board
Vincent R. Zurawski, Jr., Ph.D...................... 51 President, Chief Executive Officer and Director
Richard A. Carrano, Ph.D............................ 56 Vice President, Technology Development and
Regulatory Affairs
Richard B. Ciccarelli, Ph.D......................... 40 Vice President, Research and Development
Richard S. Ginsberg, M.D............................ 45 Vice President, Clinical Research
James G. Murphy..................................... 41 Vice President, Finance and Administration, Chief
Financial Officer and Treasurer
Thomas S. Edgington, M.D............................ 65 Director
Christopher Moller, Ph.D.(1)........................ 43 Director
Hubert J.P. Schoemaker, Ph.D........................ 47 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee
DR. COLLINS has been Chairman of the Board of Apollon since June 1992. Since
1968, Dr. Collins has been a general partner of DSV Partners III and DSV
Management, Ltd., the general partner of DSV Partners IV, an affiliate of the
Company. Dr. Collins is a director of Kopin Corporation, The Liposome Company,
Pressure Systems, Inc., Tandem Computers, Incorporated and Thermotrex
Corporation. He received his MS and Ph.D. degrees in engineering from Princeton
University.
DR. ZURAWSKI founded Apollon in January 1992. He has been President and
Chief Executive Officer and a director of the Company since its inception. Prior
to January 1992, Dr. Zurawski was Senior Vice President and Chief Scientific
Officer at Centocor, Inc., which he co-founded in 1979. Dr. Zurawski received
his Ph.D. in Chemistry from Purdue University. Prior to founding Apollon, Dr.
Zurawski was a Research Fellow at the Massachusetts General Hospital, a Faculty
Member at Harvard Medical School and a Visiting Professor at the Karolinska
Hospital, Stockholm, Sweden.
DR. CARRANO joined Apollon at its inception in January 1992 as Vice
President, Administration and Business Development and has held the position of
Vice President, Technology Development and Regulatory Affairs since June 1995.
Prior to joining Apollon, Dr. Carrano held positions at ICI America, Adria
Laboratories, Centocor, Inc. and Unimed Inc. from 1966 to 1991. Dr. Carrano
received his Ph.D. in Pharmacology and Biochemistry from the University of
Connecticut.
DR. CICCARELLI joined Apollon in December 1994 as Director, Applied Research
and Development, held the position of Associate Vice President, Research and
Development from February 1995 to January 1996, held the position of Vice
President, Biologics and Pharmaceutics Research from January 1996 to January
1997 and was appointed Vice President, Research and Development in January 1997.
Prior to joining Apollon, Dr. Ciccarelli was Assistant Director of Molecular and
Cellular Biology in the Sterling Winthrop Pharmaceuticals Division of Eastman
Kodak, which he joined as a senior research scientist in 1985.
46
<PAGE>
Dr. Ciccarelli received his Ph.D. in Biological Chemistry from Dartmouth College
and was a Damon Runyon-Walter Winchell Cancer Fund postdoctoral fellow at M.I.T.
until 1985.
DR. GINSBERG joined Apollon in October 1995 as Vice President, Clinical
Research. Prior to joining Apollon, Dr. Ginsberg worked for LabCorp, Inc. as
Vice President, Clinical Trials from 1994 to 1995 and for Hoffmann-LaRoche Inc.
as Associate Clinical Director from 1989 to 1994. Previously, Dr. Ginsberg was
Director of Clinical Research of The Liposome Company. Dr. Ginsberg received his
M.D. from Eastern Virginia Medical School.
MR. MURPHY joined Apollon in March 1996 as Vice President, Finance and
Administration, Chief Financial Officer and Treasurer. From January 1995 to
March 1996, Mr. Murphy was Chief Financial Officer and Treasurer of ATX Telecom
Systems, Inc., a wholly owned subsidiary of Amoco Corporation. From March 1989
to December 1994, Mr. Murphy was Chief Financial Officer and a Director of
Infopage, Inc. Mr. Murphy received his B.S. degree from Villanova University and
is a Certified Public Accountant.
DR. EDGINGTON has been a director of Apollon since September 1993. He has
been a Professor in the Departments of Immunology and Vascular Biology at The
Scripps Research Institute since 1965. He is also Adjunct Professor of Pathology
at the University of California, San Diego and was a founder of Corvas
International, Inc., a biopharmaceutical firm with headquarters in San Diego. He
received his undergraduate, graduate education and M.D. at Stanford University.
DR. MOLLER has been a director of Apollon since July 1995. Dr. Moller has
served as Managing Director of Technology Leaders III since January 1994 and as
Managing Director and general partner of Technology Leaders II Management, L.P.,
since January 1994 and in various capacities with its predecessors since January
1990. He is a director of five biotechnology companies including ViroPharma,
Inc. and ChromaVision, Inc. Dr. Moller serves on the board of trustees of the
Lankenau Research Institute. He received his Ph.D. degree in immunology from the
University of Pennsylvania.
DR. SCHOEMAKER has been a director of Apollon since its inception in January
1992. He was a co-founder of Centocor, Inc., where he has served as Chairman of
the Board since 1980. Dr. Schoemaker is also Co-Chairman of the Board of the
Eastern Technology Council, Co-Chairman of the Executive Committee of Technology
Leaders, L.P. and a director of Safeguard Scientifics, Inc. He received his
Ph.D. in biochemistry from the Massachusetts Institute of Technology ("M.I.T.").
All directors hold office until the next annual meeting of shareholders of
the Company and until their successors have been elected and qualified. The
officers of the Company are appointed annually and serve at the discretion of
the Board of Directors.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of the compensation paid by the
Company during the fiscal year ended December 31, 1996 to the Company's Chief
Executive Officer and to each other person who was an executive officer at the
end of the fiscal year ended December 31, 1996 and whose total annual salary and
bonus exceeded $100,000 during such fiscal year (the "Named Executive
Officers").
47
<PAGE>
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------
<S> <C> <C> <C> <C> <C>
NAME AND OPTIONS/ ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SARS (#) COMPENSATION ($)
- --------------------------------- --------- ----------- ------------- ------------- -----------------
Vincent R. Zurawski, Jr.,........ 1996 199,039 -- -- 5,600(1)
Ph.D., President and
Chief Executive Officer
Richard A. Carrano, Ph.D.,....... 1996 145,885 3,000 -- --
Vice President, Technology
Development and
Regulatory Affairs
Richard B. Ciccarelli, Ph.D.,.... 1996 123,933 4,000 12,863 --
Vice President,
Research and Development
Richard S. Ginsberg, M.D.,....... 1996 155,000 5,000 -- 2,863(2)
M.S., Vice President,
Clinical Research
</TABLE>
- ------------------------
(1) Represents certain tax preparation fees paid by the Company.
(2) Represents certain insurance premiums paid by the Company.
EMPLOYMENT AGREEMENTS
In February 1992, Richard A. Carrano entered into an employment agreement
with the Company. The agreement provided for an initial annual base salary of
$120,000, to be reviewed and adjusted periodically, along with participation in
bonus programs and other customary employee benefits. The agreement provided Dr.
Carrano the opportunity to purchase 5,742 shares of Common Stock at fair market
value at the time of purchase, which shares were purchased in June 1992. The
agreement also provides for compensation for Dr. Carrano in the event of his
termination, other than for specified causes. Under the terms of the agreement,
Dr. Carrano has entered into a non-disclosure of inventions and confidentiality
agreement with the Company.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth a summary of the options granted by the
Company during its last fiscal year to the Named Executive Officers during the
fiscal year ended December 31, 1996.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
% OF TOTAL RATES OF STOCK PRICE
OPTIONS EXERCISE APPRECIATION
OPTIONS GRANTED TO OR BASE FOR OPTION TERMS ($)
GRANTED EMPLOYEES IN PRICE EXPIRATION --------------------------
NAME (#)(1) FISCAL YEAR ($/SH) DATE 5% 10%
- --------------------------------------- ----------- ----------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard B. Ciccarelli, Ph.D............ 12,863 8.7 1.6326 4/24/06 13,207 33,468
</TABLE>
- ------------------------
(1) No SARs were granted in the last fiscal year.
48
<PAGE>
NUMBER/VALUE OF UNEXERCISED OPTIONS
The following table sets forth the number of shares acquired upon exercise
of options exercised by the Named Executive Officers during the last fiscal
year, the value realized upon the exercise of such options, the number of shares
issuable on exercise of unexercised options held by such persons as of December
31, 1996 and the value of such unexercised options as of such date.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING
UNEXERCISED OPTIONS/ LSARS VALUE OF UNEXERCISED IN-THE-MONEY
FY-END OPTIONS/LSARS AT FY-END (1)
SHARES ACQUIRED VALUE -------------------------- -----------------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ----------------- ------------- ----------- ------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Vincent R. Zurawski, Jr.,
Ph.D. ...................... 0 0 22,970 68,910 $ 62,499 $ 187,497
Richard A. Carrano, Ph.D. .... 13,322 52,648 2,756 8,728 8,298 26,348
Richard B. Ciccarelli,
Ph.D. ...................... 0 0 7,695 29,056 23,688 84,307
Richard S. Ginsberg,
M.D., M.S. ................. 0 0 5,743 17,227 15,626 46,873
</TABLE>
- --------------------------
(1) Value is measured by the difference between the fair market value of the
Company's Common Stock on December 31, 1996 ($4.35 per share as determined
by the Board of Directors) and the exercise price of the option.
CHANGE OF CONTROL AGREEMENTS
In July 1996, the Company and its executive officers entered into agreements
regarding severance payments in the event of termination in connection with a
change in control of the Company. The Company entered into substantially similar
agreements with Richard A. Carrano, Vice President, Technology Development and
Regulatory Affairs, Richard B. Ciccarelli, Vice President, Research and
Development, Richard S. Ginsberg, Vice President, Clinical Research, James G.
Murphy, Vice President, Finance and Administration and Chief Financial Officer
and Anthony Marcucci, Controller. These agreements provide that the Company or
its successor shall pay severance equal to six months base salary of the
executive if the executive is terminated in connection with a change in control
of the Company. The Company or its successor shall also be obligated to purchase
the securities of the Company owned by the executive, and to pay a sum equal to
the difference between the exercise price of all outstanding, but not yet
exercisable, options granted to the executive and the price paid to effect the
change in control. The Company entered into a similar agreement with Vincent R.
Zurawski, Jr., President and Chief Executive Officer. However, Dr. Zurawski's
agreement provides for a severance payment equal to 24 months of his base
salary, as compared to six months for the other executive officers.
COMPENSATION OF DIRECTORS
Directors do not receive compensation for services on the Board of Directors
or any committee thereof. All of the directors, however, are reimbursed for
their expenses for each Board and committee meeting attended.
During the last fiscal year, the Company paid no consulting fees to any
directors. During the 1993 and 1994 fiscal years, the Company accrued $30,000
for consulting fees payable to Thomas Edgington, which were paid in 1996. Such
consulting fees accrued at the rate of $2,500 per month from October 1, 1993
until September 30, 1994. The Company believes that the terms of its consulting
arrangement with Dr. Edgington were no less favorable than those the Company
could have received from an independent
49
<PAGE>
third party. On June 26, 1997, the Company issued to Dr. Edgington options to
purchase 6,891 shares of Common Stock at an exercise price of $4.35 per share
for services rendered as a director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the last fiscal year, the Compensation Committee of the Board of
Directors consisted of Morton Collins and Christopher Moller. Dr. Moller
replaced Thomas Edgington in March 1996. During the 1993 and 1994 fiscal years,
the Company accrued $30,000 for consulting fees payable to Dr. Edgington, which
were paid in 1996. Morton Collins, a director and Chairman of the Board of the
Company, is a general partner of DSV Management. Ltd. and the general partner of
DSV Partners IV, a principal shareholder of the Company.
1992 OMNIBUS STOCK OPTION PLAN
The Company's 1992 Omnibus Stock Option Plan (the "1992 Stock Option Plan")
was approved by the Board of Directors on June 15, 1992 and by the shareholders
on June 14, 1993. The 1992 Stock Option Plan provides for the grant of both
incentive stock options intended to qualify as such under Section 422 of the
Internal Revenue Code of 1986, as amended and non-qualified stock options. Under
the 1992 Stock Option Plan, the Company is authorized to grant a maximum of
459,400 shares of Common Stock to employees, officers, directors and consultants
of the Company (Eligible Persons). The maximum term is five years for incentive
stock options granted to an Eligible Person who owns, on the date of the grant,
more than 10% of the total combined voting power of all classes of stock of the
Company and ten years for all other options granted under the 1992 Stock Option
Plan. The 1992 Stock Option Plan will terminate on June 15, 2002, unless sooner
terminated by the Board of Directors. The 1992 Stock Option Plan is administered
by the Board, unless the Board delegates administration to a committee of
disinterested directors. As of September 30, 1997, options to purchase 422,379
shares of Common Stock were outstanding under the 1992 Stock Option Plan,
181,252 of which are immediately exercisable.
The 1992 Stock Option Plan provides for the granting of limited stock
appreciation rights ("LSARs") to officers and directors under the 1992 Stock
Option Plan at the discretion of the Board of Directors. Those options with
respect to which a LSAR has been granted are exercisable only during the period
commencing on the first day following the occurrence of a "Triggering Event" as
defined in the 1992 Stock Option Plan and terminate no later than the expiration
of the underlying option. Upon the occurrence of any Triggering Event, the
optionee shall receive from the Company an amount in cash equal to the excess of
the fair market value per share of the Common Stock on the date the Triggering
Event occurs over the related exercise price per share. No LSARs have been
granted as of September 30, 1997.
1997 NON-QUALIFIED STOCK OPTION PLAN
The Company's 1997 Non-Qualified Stock Option Plan (the "1997 Stock Option
Plan") was approved by the Board of Directors on April 16, 1997. The 1997 Stock
Option Plan provides for the grant of non-qualified stock options. Under the
1997 Stock Option Plan, the Company is authorized to grant a maximum of 91,880
shares of Common Stock to employees, officers, directors and consultants of the
Company (Eligible Persons). The maximum term is ten years for all options
granted under the 1997 Stock Option Plan. The 1997 Stock Option Plan will
terminate on April 16, 2007, unless sooner terminated by the Board of Directors.
The 1997 Stock Option Plan is administered by the Board, unless the Board
delegates administration to the Compensation Committee. As of September 30,
1997, options to purchase 34,792 shares of Common Stock were outstanding under
the 1997 Stock Option Plan, none of which are immediately exercisable.
50
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of September 30, 1997, Centocor owned approximately 31% of the equity
shares of the Company on a fully diluted basis. Hubert J.P. Schoemaker, a
director of the Company, is Chairman of the Board of Centocor. Prior to 1994,
Vincent R. Zurawski, Jr., a director and President and Chief Executive Officer
of the Company, served as a consultant to Centocor.
On September 20, 1994, the Company entered into an agreement with Centocor
(the "Facilities Use Agreement"), whereby the Company leases certain
manufacturing space from Centocor. On the same date, the Company issued to
Centocor 200,000 shares of Series B Convertible Preferred Stock pursuant to the
Facilities Use Agreement. The Company issued an additional 200,000 shares of
Series B Convertible Preferred Stock to Centocor on November 22, 1995 pursuant
to the Facilities Use Agreement. Such Convertible Preferred Stock was issued in
lieu of an aggregate $1.0 million owed under this agreement.
In 1994 and 1995, the Company borrowed an aggregate principal amount of $1.0
million from Centocor, which amount was converted into 400,000 shares of Series
B Convertible Preferred Stock and all interest was waived on April 23, 1996. As
further consideration for these loans, the Company issued warrants to Centocor,
giving it the right to purchase a total of 73,504 shares of Common Stock at an
exercise price of $5.44 per share.
On March 6, 1995, the Company and Centocor entered into the Centocor License
and Option Agreement. Pursuant to this agreement, Centocor waived its rights to
certain technology and patents and obtained certain rights to other technology,
in exchange for which it agreed to pay the Company certain milestone payments
and royalties. Centocor also paid to the Company an aggregate of $750,000 under
the Centocor License and Option Agreement as further consideration for the
license and option rights it obtained. The Company received an additional
$75,000 in 1997 under this agreement. See "Business -- Strategic Alliances and
Collaborations -- Corporate Collaborations."
In 1994 and 1995, the Company borrowed an aggregate principal amount of $1.5
million from DSV Partners IV, which amount was converted into 600,000 shares of
Series B Convertible Preferred Stock and all interest was waived on April 23,
1996. As further consideration for these loans, the Company issued warrants to
DSV Partners IV, giving it the right to purchase a total of 110,256 shares of
Common Stock at an exercise price of $5.44 per share. Morton Collins, a director
and Chairman of the Board of the Company, is a general partner of DSV
Management, Ltd., the general partner of DSV Partners IV.
In 1994 and 1995, the Company borrowed an aggregate principal amount of $1.5
million from Technology Leaders Offshore C.V. and Technology Leaders, L.P.,
which amount was converted into 600,000 shares of Series B Convertible Preferred
Stock and all interest was waived on April 23, 1996. As further consideration
for these loans, the Company issued warrants to Technology Leaders Offshore C.V.
and Technology Leaders, L.P. giving them the right to purchase a total of 58,776
and 51,472 shares of Common Stock, respectively, at an exercise price of $5.44
per share. Christopher Moller, a director of the Company, is Managing Director
of the general partner of Technology Leaders, L.P. and Technology Leaders
Offshore C.V. Dr. Schoemaker is Co-Chairman of the Executive Committee of the
general partner of Technology Leaders, L.P. and Technology Leaders Offshore C.V.
In March 1996, pursuant to an agreement between the Company and the
preferred shareholders, $511,000 of interest accrued from the date of issuance
on $4.0 million aggregate principal amount promissory notes was waived, of which
$418,000 was accrued at December 31, 1995. The $511,000 of interest that was
waived was credited to the Company's additional paid-in capital account in 1996.
In April 1996, the preferred shareholders converted the principal amount of
these notes into 1,600,000 shares of the Series B Convertible Preferred Stock as
described above.
During 1996, the Company issued 2,435,286 shares of Series C Convertible
Preferred Stock for $9.7 million ($4.00 per share). Centocor purchased 769,786
shares of the Series C Convertible Preferred Stock for $4.00 per share. The
Company received net proceeds of $9.4 million net of placement fees.
51
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of September 30, 1997, the record and
beneficial ownership of the Company's Common Stock, assuming conversion of the
Convertible Preferred Stock and the AHP Financing, by (i) each person who is
known by the Company to own beneficially more than 5% of the issued and
outstanding shares of Common Stock assuming Conversion, (ii) each of the
Company's directors, (iii) each of the Named Executive Officers, and (iv) all
directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OWNED
--------------------------
<S> <C> <C> <C>
NUMBER OF
SHARES
NAMES AND ADDRESSES BENEFICIALLY BEFORE THE AFTER THE
OF BENEFICIAL OWNERS (1) OWNED (2) OFFERING OFFERING
- ------------------------------------------------------------------------ ----------------- ------------- -----------
5% SHAREHOLDERS
Centocor, Inc.(3)....................................................... 1,943,163 34.0% 23.6%
200 Great Valley Parkway
Malvern, PA 19355
DSV Partners IV(4)...................................................... 1,258,756 21.9 15.2
221 Nassau Street
Princeton, NJ 08542
Chancellor Capital Management, Inc.(5).................................. 689,100 12.2 8.5
153 East 53rd Street
25th Floor
New York, NY 10022
Technology Leaders Offshore C.V.(6)..................................... 401,644 7.0 4.9
800 Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Technology Leaders, L.P.(7)............................................. 351,763 6.2 4.3
800 Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
DIRECTORS AND NAMED EXECUTIVE OFFICERS
Hubert J.P. Schoemaker, Ph.D.(8)........................................ 2,712,649 46.4 32.5
Centocor, Inc.
200 Great Valley Parkway
Malvern, PA 19355
Morton Collins, Ph.D.(9)................................................ 1,258,756 21.9 15.2
DSV Management, Ltd.
221 Nassau Street
Princeton, NJ 02021
Christopher Moller, Ph.D.(10)........................................... 753,407 13.1 9.1
TL Ventures
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Vincent R. Zurawski, Jr., Ph.D.(11)..................................... 155,277 2.7 1.9
Richard A. Carrano, Ph.D.(12)........................................... 31,239 * *
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OWNED
--------------------------
NUMBER OF
SHARES
NAMES AND ADDRESSES BENEFICIALLY BEFORE THE AFTER THE
OF BENEFICIAL OWNERS (1) OWNED (2) OFFERING OFFERING
- ------------------------------------------------------------------------ ----------------- ------------- -----------
<S> <C> <C> <C>
Thomas S. Edgington, M.D.(13)........................................... 19,525 * *
Molecular Biology
Consultants
2362 Avenida de la Playa
La Jolla, CA 92037
Richard B. Ciccarelli, Ph.D.(14)........................................ 13,783 * *
Richard S. Ginsberg, M.D., M.S.(15)..................................... 5,743 * *
All directors and executive officers as a group
(10 persons)(16)...................................................... 4,215,461 69.9% 49.4%
</TABLE>
- ------------------------
* Less than 1%.
(1) Unless otherwise indicated, the business address is in care of the Company.
(2) Except as otherwise indicated in the footnotes to this table, the persons
named in this table have sole voting and investment power with respect to
all shares of stock owned.
(3) Includes 73,504 shares of Common Stock issuable upon the exercise of
warrants.
(4) Includes 110,256 shares of Common Stock issuable upon the exercise of
warrants.
(5) Chancellor Capital Management, Inc. holds these shares in its capacity as
investment manager for an aggregate of four institutions and disclaims
beneficial ownership of such shares.
(6) Includes 58,776 shares of Common Stock issuable upon the exercise of
warrants.
(7) Includes 51,472 shares of Common Stock issuable upon the exercise of
warrants.
(8) Includes 16,079 shares of Common Stock subject to options which are
exercisable or which will become exercisable within 60 days of September 30,
1997. Also includes 1,943,163 shares of Common Stock beneficially owned by
Centocor. Dr. Schoemaker is Chairman of the Board of Centocor and disclaims
beneficial ownership of the 1,943,163 shares beneficially owned by Centocor.
Also includes 51,472 and 58,776 shares of Common Stock issuable upon the
exercise of warrants and 300,291 and 342,868 shares of Common Stock held by
Technology Leaders, L.P. and Technology Leaders Offshore C.V., respectively.
Dr. Schoemaker is Co-Chairman of the Executive Committee of the general
partner of Technology Leaders, L.P. and Technology Leaders Offshore C.V. and
disclaims beneficial ownership of all such shares.
(9) Includes 110,256 shares of Common Stock issuable upon the exercise of
warrants and 1,148,500 shares of Common Stock held by DSV Partners IV. Dr.
Collins is a general partner of DSV Management, Ltd., the general partner of
DSV Partners IV. Dr. Collins disclaims beneficial ownership of the shares
held or exercisable by DSV Partners IV.
(10) Includes 51,472 and 58,776 shares of Common Stock issuable upon the
exercise of warrants held by Technology Leaders, L.P. and Technology Leaders
Offshore C.V., respectively. Also includes 300,291 and 342,868 shares of
Common Stock owned by Technology Leaders, L.P. and Technology Leaders
Offshore C.V., respectively. Dr. Moller is Managing Director of the general
partner of each of Technology Leaders, L.P. and Technology Leaders Offshore
C.V. Dr. Moller disclaims beneficial ownership of all such shares.
(11) Includes 105,662 shares of Common Stock held by Argus Investment Partners,
L.P., of which Dr. Zurawski is the general partner. Also includes 22,970
shares of Common Stock subject to options which are exercisable or which
will become exercisable within 60 days of September 30, 1997.
(12) Includes 3,905 shares of Common Stock subject to options which are
exercisable or which will become exercisable within 60 days of September 30,
1997.
(13) Consists of 10,337 shares of Common Stock subject to options which are
exercisable or which will become exercisable within 60 days of September 30,
1997; and 9,188 shares of Common Stock held by the Thomas S. & Joanne R.
Edgington Trust.
(14) Includes 13,783 shares of Common Stock subject to options which are
exercisable or which will become exercisable within 60 days of September 30,
1997.
(15) Includes 5,743 shares of Common Stock subject to options which are
exercisable or which will become exercisable within 60 days of September 30,
1997.
(16) Includes 88,550 shares of Common Stock subject to options which have been
granted to certain individuals and which are exercisable or which will
become exercisable within 60 days of September 30, 1997. Also includes
105,662 shares of Common Stock beneficially owned by Argus Investment
Partners, L.P., of which Dr. Zurawski is the general partner. See (11)
above. Also includes the shares of Common Stock beneficially owned by
Centocor, DSV Partners IV, Technology Leaders, L.P. and Technology Leaders
Offshore C.V. See (8), (9) and (10) above.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this Offering, the authorized capital stock of the
Company will consist of 60,000,000 shares, $.01 par value per share of which
50,000,000 shares will be designated as Common Stock, par value $.01 per share.
As of September 30, 1997, there were 647,547 shares of Common Stock, par value
$.01 per share issued and outstanding, held of record by 29 shareholders and a
total of 10,335,286 shares of Convertible Preferred Stock issued and outstanding
and convertible into Common Stock (at a conversion rate adjusted for the Reverse
Stock Split), held of record by 43 shareholders.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders. Subject to
preferences that may be applicable to any outstanding Convertible Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preferences of any
outstanding shares of Convertible Preferred Stock. Holders of Common Stock have
no preemptive rights and no right to convert their Common Stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
Common Stock.
OTHER CAPITAL STOCK
Upon completion of this Offering, the Board will have the authority, without
further action by the shareholders, to issue from time to time up to an
additional 10,000,000 shares of capital stock in one or more classes or series
including, but not limited to, shares of Common Stock and to fix the voting
rights, preferences, limitations and special rights, if any, of such capital
stock. The Board, without shareholder approval, can from time to time issue such
capital stock with voting, conversion and other rights which would adversely
affect the voting power and other rights of the holders of Common Stock. Such
capital stock could thus be issued quickly with terms calculated to delay or
prevent a change in control of the Company or to make removal of management more
difficult. Such issuance could have the effect of delaying, deterring or
preventing a change in control of the Company without any further action by the
shareholders. While the Company many consider from time to time the issuance of
such capital stock in connection with corporate collaborations or other
transactions, the Company has no present plans to issue shares of such capital
stock.
WARRANTS
As of September 30, 1997, there were warrants to purchase 294,008 shares of
Common Stock at an exercise price of $5.44 per share outstanding, held by four
holders and a warrant to purchase 122,420 shares of Common Stock at an exercise
price of $8.71 per share held by one holder. On October 3, 1997, the Company
issued a warrant to purchase 68,910 shares of Common Stock at an exercise price
equal to 115% of the initial public offering price to A.H. Investments Ltd. The
exercise price of all warrants is subject to adjustment upon certain stock
dividends, distributions, subdivisions, combinations or reclassifications, or
upon a below market issuance or distribution to all holders of Common Stock. The
warrantholders may elect to receive shares equal to the value of the warrant
without payment of any additional consideration. The warrants may be exercised
in whole or in any part at any time after the date of issuance or exercisability
as applicable until five years after issuance or exercisability as applicable.
The exercise periods for the warrants will expire at varying times beginning on
August 19, 1999 and ending on October 3, 2003. The warrants may be transferred
and assigned at the option of the warrantholder. Upon a
54
<PAGE>
reorganization event of the Company, warrantholders are entitled to protections
so that they will receive the aggregate amount and kind of stock they would have
received prior to the reorganization.
REGISTRATION RIGHTS
After the Offering, holders of 45,940 shares of Common Stock, 4,748,021
shares of Common Stock to be issued upon the Conversion, 485,338 shares of
Common Stock issuable upon exercise of warrants and 250,000 shares of Common
Stock to be issued upon the conversion of a convertible promissory note,
(collectively the "Registerable Shares"), are entitled to certain rights with
respect to the registration of such shares under the Securities Act.
Under agreements with the Company, the holders of these shares have the
right, on not more than two occasions, to require the Company to register such
shares of Common Stock under the Securities Act (a "demand" registration),
provided that the Company is required to effect a demand registration only upon
the request of holders of at least a majority of a series of the Registerable
Shares and only if the shares of Common Stock to be registered exceed 20% of the
shares of Common Stock then held by the holders of the series of the
Registerable Shares. Holders also are entitled to include their shares of Common
Stock in a registered offering of securities by the Company for its own account
or for the account of selling securityholders (a "piggyback" registration). The
holders have waived their right to include their shares of Common Stock in the
Offering. In addition to these demand and piggyback registration rights, these
holders may require the Company to file an unlimited number of registration
statements on Form S-3 under the Securities Act, when available. The Company is
required to bear all registration and selling expenses, other than underwriting
discounts, selling commissions and applicable stock transfer taxes, in
connection with the registration of shares of Common Stock in all demand,
piggyback and Form S-3 registrations.
ANTI-TAKEOVER PROVISIONS
Directors may be removed without cause with the approval of a majority of
the voting power of the stock entitled to vote in the election of Directors. Any
Director elected to fill a vacancy, however created, serves for the remainder of
the term of the Director which he or she is replacing. Shareholders do not have
cumulative voting rights in the election of Directors.
The 1988 BCL includes certain shareholder protection provisions, which will
apply to the Company following the Offering. The Company has decided not to opt
out the various protections of the 1988 BCL. The following is a description of
those provisions of the 1988 BCL that will apply to the Company and that may
have an anti-takeover effect. This description of the 1988 BCL is only a summary
thereof, does not purport to be complete and is qualified in its entirety by
reference to the full text of the 1988 BCL.
(i) Upon a control-share acquisition (acquiring person acquires or
proposes to acquire 20%, 33 1/3% or 50% or more of the voting power of the
Common Stock of the Company) the 1988 BCL operates to suspend the voting
rights of the control shares (the newly acquired shares upon such an
acquisition, plus any shares acquired within 180 days of exceeding a
threshold) of an acquiring person upon a control share acquisition. The
acquiring person can regain his right to vote such control shares upon the
approval of a majority of the outstanding disinterested shares and a
majority of all Common Stock.
(ii) The disgorgement provisions require a controlling person (a person
who acquired, offered to acquire or publicly disclosed the intention of
acquiring at least 20% of the voting power of the Company) to disgorge
"greenmail" profits, or profits realized from the disposition of the
Company's securities within 18 months after becoming a controlling person
and the security was acquired by the controlling person within 24 months
before or 18 months after becoming a controlling person.
55
<PAGE>
(iii) The Control Transaction provisions allow holders of voting shares
of a corporation to "put" their stock to an acquiror for fair value in the
event of a control transaction (the acquisition of 20% of voting power over
the Common Stock of the Company). Fair value is defined as not less than the
highest price paid by the acquiror during a certain 90 day period.
(iv) An interested shareholder (the beneficial owner of 20% of the
voting stock either of a corporation or of an affiliate of the corporation
who was at any time within the five-year period immediately prior to the
date in question the beneficial owner of 20% of the voting stock of the
corporation) cannot engage in a business combination with the corporation
for a period of five years unless: (a) the board approves the business
combination prior to the Interested Shareholder becoming such or the
acquisition of shares in advance or (b) if the interested shareholder owns
80% of such stock, the business combination is approved by a majority of the
disinterested shareholders and the transaction satisfies certain "fair
price" provisions. After the five-year period, the same restrictions apply,
unless the transaction either is approved (a) by a majority of the
disinterested shareholders and satisfies the fair price provisions or (b) by
all shareholders.
(v) Corporations may adopt shareholders' rights plans with
discriminatory provisions (sometimes referred to as poison pills) whereby
options to acquire shares or corporate assets are created and issued which
contain terms that limit persons owning or offering to acquire a specified
percentage of outstanding shares from exercising, converting, transferring
or receiving options and allows the exercise of options to be limited to
shareholders or triggered based upon control transactions. Such poison pills
take effect only in the event of a control transaction. Pursuant to the 1988
BCL, such poison pills may be adopted by the Board without shareholder
approval.
(vi) Shareholders of a corporation would no longer have a statutory
right to call special meetings of shareholders or to propose amendments to
the articles under the provisions of the 1988 BCL.
(vii) In discharging the duties of their respective positions, the board
of directors, committees of the board and individual directors may, in
considering the best interests of the corporation, consider to the extent
they deem appropriate, (i) the effects of any action upon shareholders,
employees, suppliers, customers and creditors of the corporation are
located, (ii) the short-term and long-term interests of the corporation,
including benefits that may accrue to the corporation from its long-term
plans and the possibility that these interests may be best served by the
continued independence of the corporation, (iii) the resources, intent and
conduct (past, stated and potential) of any person seeking to acquire
control of the corporation, (iv) and all other pertinent factors. Further,
the board of directors, committees of the board and individual directors are
not required, in considering the best interests of the corporation or the
effects of any action, to regard any corporate interest or the interests of
any particular group affected by such action as a dominant or controlling
interest or factor. The consideration of the foregoing factors shall not
constitute a violation of the applicable standard of care.
The foregoing provisions may discourage certain types of transactions that
involve a change of control of the Company and ensure a measure of continuity in
the management of the business and affairs of the Company. While the Company
does not currently have a shareholder rights plan or poison pill, the effect of
the above-described provisions may be to deter hostile takeovers at a price
higher than the prevailing market price for the Common Stock and to permit
current management to remain in control of the Company. In some circumstances
certain shareholders may consider these anti-takeover provisions to have
disadvantageous effects. Tender offers or other non-open market acquisitions of
stock are frequently made at prices above the prevailing market price of a
Company's stock. In addition, acquisitions of stock by persons attempting to
acquire control through market purchases may cause the market price of the stock
to reach levels that are higher than would otherwise be the case. These
anti-takeover provisions may discourage any or all such acquisitions,
particularly those of less than all of the Company's shares and may
56
<PAGE>
thereby deprive certain holders of the Company's Common Stock of any opportunity
to sell their stock at a temporarily higher market price.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Co.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding 8,145,568
shares of Common Stock. The 2,500,000 shares sold in the Offering (plus any
additional shares sold upon exercise of the Underwriters' over-allotment option)
will be freely tradeable without restriction unless acquired by affiliates of
the Company. None of the remaining 5,645,568 outstanding shares of Common Stock
have been registered under the Securities Act, which means that they may be
resold only upon registration under the Securities Act or in compliance with an
exemption from the registration requirements of the Securities Act, including
the exemption provided by Rule 144 thereunder.
In general, under Rule 144 as currently in effect, if one year have elapsed
since the later of the date of the acquisition of restricted shares of Common
Stock from either the Company or an affiliate of the Company, the acquiror or
subsequent holder thereof may sell, within any three month period commencing 90
days after the date of this Prospectus, a number of shares that does not exceed
the greater of 1% of the then outstanding shares of Common Stock (81,455 shares
upon completion of the Offering) or the average weekly trading volume of the
Common Stock on the Nasdaq National Market during the four calendar weeks
preceding the date on which notice of the proposed sale is sent to the
Commission. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. If two years have elapsed since the later of the
date of the acquisition of restricted shares of Common Stock from the Company or
any affiliate of the Company, a person who is not deemed to have been an
affiliate of the Company at any time for 90 days preceding a sale would be
entitled to sell such shares under Rule 144 without regard to the volume
limitations, manner of sale provisions or notice requirements.
In addition, of the 5,645,568 shares of Common Stock previously issued by
the Company, including shares of Common Stock issued in the Conversion and the
AHP Financing, 5,271,064 shares (4,975,249 shares of which are subject to the
lock-up agreements described below) will be eligible for sale in the public
market, pursuant to Rule 144, beginning 90 days after the Offering, subject to
the manner of sale, volume and other restrictions of Rule 144 and 50,254 shares
(45,385 shares of which are subject to the lock-up agreements described below)
will be eligible for sale in the public market immediately after the Offering
pursuant to Rule 144(k) and without the restrictions of Rule 144.
The Company and its officers, directors and certain shareholders have agreed
not to offer, sell, contract to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into, or exercisable or exchangeable
for, shares of Common Stock, for a period of 180 days after the date of this
Prospectus without the prior written consent of Smith Barney Inc., except that
the Company may issue Common Stock in connection with its 1992 Stock Option Plan
and the 1997 Stock Option Plan. See "Underwriting."
Prior to the Offering, there has been no public market for the Common Stock
and no prediction can be made as to the effect, if any, that the sale of shares
or the availability of shares for sale will have on the market price for the
Common Stock prevailing from time to time. Nevertheless, sales, or the
availability for sale of, substantial amounts of the Common Stock in the public
market could adversely affect prevailing market prices and the ability of the
Company to raise equity capital in the future.
57
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company has agreed to sell to such Underwriter,
shares of Common Stock which equal the number of shares set forth opposite the
name of such Underwriter below.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Smith Barney Inc.................................................................
Genesis Merchant Group Securities LLC............................................
Cruttenden Roth Incorporated.....................................................
----------
Total............................................................................ 2,500,000
----------
----------
</TABLE>
The Underwriters are obligated to take and pay for all shares of Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., Genesis Merchant Group
Securities LLC and Cruttenden Roth Incorporated are acting as the
representatives (the "Representatives"), propose initially to offer part of the
shares of Common Stock directly to the public at the public offering price set
forth on the cover page hereof and part to certain dealers at a price that
represents a concession not in excess of $ per share under the public
offering price. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to other Underwriters or to certain
other dealers. After the initial public offering, the public offering price and
such concessions may be changed by the Underwriters. The Representatives have
informed the Company that the Underwriters do not intend to confirm sales to
accounts over which they exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of 375,000
additional shares of Common Stock at the public offering price set forth on the
cover page hereof less underwriting discounts and commissions. The Underwriters
may exercise such option to purchase additional shares solely for the purpose of
covering over-allotments, if any, incurred in connection with the sale of the
shares offered hereby. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares as the number set forth next to
such Underwriter's name in the preceding table bears to the total number of
shares in such table.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
In connection with this Offering and in compliance with applicable law, the
Underwriters may overallot (i.e., sell more shares of Common Stock than the
total amount shown on the list of Underwriters and participations which appear
above) and may effect transactions which stabilize, maintain or otherwise affect
the market price of the shares of Common Stock at levels above those which might
otherwise prevail in the open market. Such transactions may include placing bids
for the shares of Common Stock or effecting purchases of the shares of Common
Stock for the purpose of pegging, fixing or maintaining the price of the shares
of Common Stock or for the purpose of reducing a syndicate short position
created in connection with the Offering. A syndicate short position may be
covered by exercise of the option described above in lieu of or in addition to
open market purchases. In addition, the contractual arrangements among the
Underwriters include a provision whereby, if the Underwriters purchase shares of
58
<PAGE>
Common Stock in the open market for the account of the underwriting syndicate
and the securities purchased can be traced to a particular Underwriter or member
of the selling group, the underwriting syndicate may require the Underwriter or
selling group member in question to purchase the shares of Common Stock in
question at the cost price to the syndicate or may recover from (or decline to
pay to) the Underwriter or selling group member in question the selling
concession applicable to the securities in question. The Underwriters are not
required to engage in any of these activities and any such activities, if
commenced, may be discontinued at any time.
The Company, its executive officers and directors, and certain shareholders
of the Company have agreed that, for a period of 180 days after the date of this
Prospectus, they will not, without the prior written consent of Smith Barney
Inc., offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock or any securities convertible into, or exercisable or exchangeable for,
Common Stock except, in the case of the Company, in certain limited
circumstances.
Prior to the Offering, there has been no public market for the shares of
Common Stock. Consequently, the initial public offering price for the shares of
Common Stock has been determined by negotiations between the Company and the
Representatives. Among the factors considered in determining the initial public
offering price were the history of, and the prospects for, the Company's
business and the industry in which it competes, an assessment of the Company's
management, its past and present operations, its past and present earnings and
the trend of such earnings, the prospects for earnings of the Company, the
present state of the Company's development, the general condition of the
securities market at the time of the Offering and the market prices and earnings
of similar securities of comparable companies at the time of the Offering.
The Underwriters have reserved 83,333 shares (assuming a public offering
price of $12.00 per share) of the Common Stock offered hereby for possible sale
to Biogen, which has expressed an interest in purchasing such shares.
Genesis Merchant Group Securities LLC, an underwriter of the Offering, acted
as placement agent in connection with the sale by the Company of 2,435,286
shares of Series C Convertible Preferred Stock in May 1996 for which the Company
received $9.4 million in net proceeds. For its services, Genesis Merchant Group
Securities LLC received customary compensation and reimbursement of its related
expenses, a portion of which was paid in the form of a warrant to purchase
122,420 shares of Common Stock at an exercise price of $8.71 per share. In
addition, pursuant to a financial advisory agreement, the Company paid $35,000
to Genesis Merchant Group Securities LLC in February 1997.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered by this
Prospectus will be passed upon for the Company by Ballard Spahr Andrews &
Ingersoll, Philadelphia, Pennsylvania. Certain legal matters with respect to
patent matters are passed upon for the Company by Woodcock Washburn Kurtz
Mackiewicz & Norris LLP, Philadelphia, Pennsylvania. Certain legal matters
related to the Offering will be passed upon for the Underwriters by Dewey
Ballantine LLP, New York, New York.
EXPERTS
The balance sheets as of December 31, 1995 and 1996 and the statements of
operations, redeemable preferred stock and stockholders' deficit and cash flows
for each of the three years in the period ended December 31, 1996, included in
this Prospectus, have been included herein in reliance on the report, which
includes an explanatory paragraph which refers to the Company's ability to
continue as a going concern, of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
59
<PAGE>
The statements relating to U.S. patent and licensing matters in this
Prospectus under the captions "Prospectus Summary", "Risk Factors -- Patents and
Proprietary Rights; Access to Proprietary Genes and Proteins" and "Business"
have been reviewed and approved by Ratner & Prestia, Berwyn, Pennsylvania,
special patent counsel for the Company, and have been included herein in
reliance upon the review and approval of such firm as experts in U.S. patent
law.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Common Stock offered hereby (including all amendments and
supplements thereto, the "Registration Statement"). As permitted by the rules
and regulations of the Commission, this Prospectus, which constitutes part of
the Registration Statement, omits certain information, exhibits and undertakings
contained in the Registration Statement. For further information with respect to
the Company and the Common Stock offered hereby, reference is made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other documents are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Commission. The
Registration Statement (and the exhibits and schedules thereto), as well as such
reports and other information filed by the Company with the Commission, may be
inspected and copied at the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Room 1400, 75 Park Place, New
York, New York 10007 and Suite 1400, Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such materials may be
obtained from the Public Reference Section of the Commission, Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such information
can also be reviewed through the Commission's Electronic Data Gathering,
Analysis and Retrieval ("EDGAR") system which is publicly available through the
Commission's web site on the Internet (http://www.sec.gov).
60
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
APOLLON, INC.
Report of Independent Accountants.......................................................................... F-2
Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 (unaudited)......................... F-3
Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and the nine months ended
September 30, 1996 and 1997 (unaudited).................................................................. F-4
Statements of Redeemable Preferred Stock and Stockholders' Deficit for the years ended December 31, 1994,
1995 and 1996 and the nine months ended September 30, 1997 (unaudited)................................... F-5
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and the nine months ended
September 30, 1996 and 1997 (unaudited).................................................................. F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
After consummation of the proposed reverse stock split, as described in Note 17,
Coopers & Lybrand L.L.P. will be in a position to render the following report.
Coopers & Lybrand L.L.P.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Apollon, Inc.
Malvern, Pennsylvania
We have audited the accompanying balance sheets of Apollon, Inc. as of December
31, 1995 and 1996, and the related statements of operations, redeemable
preferred stock and stockholders' deficit and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Apollon, Inc. as of December
31, 1995 and 1996 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has negative net worth, suffered recurring losses and
generated net cash outflows from operating activities that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 28, 1997, except as to the information presented in Note 17
for which the date is September 29, 1997
F-2
<PAGE>
APOLLON, INC.
BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
-------------------- SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997
--------- --------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 1,832 $ 9,132 $ 1,576 $ 4,576
Investments available for sale............................... 624 588 170 170
Interest and other receivables............................... 18 172 86 86
Other current assets......................................... 140 143 157 157
--------- --------- ------------- -------------
Total current assets................................... 2,614 10,035 1,989 4,989
Property and equipment, net.................................... 2,104 2,340 1,795 1,795
Intangible and other assets.................................... 1,265 1,226 712 712
--------- --------- ------------- -------------
Total assets........................................... $ 5,983 $ 13,601 $ 4,496 $ 7,496
--------- --------- ------------- -------------
--------- --------- ------------- -------------
LIABILITIES, REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable............................................. $ 522 $ 696 $ 420 $ 420
Accounts payable to stockholder.............................. 282 -- -- --
Accrued expenses............................................. 1,035 815 1,111 1,111
Accrued interest payable to preferred stockholders........... 418 -- -- --
Capital lease obligations, current portion................... 116 139 127 127
Convertible demand notes payable to preferred stockholders... 4,000 -- -- --
--------- --------- ------------- -------------
Total current liabilities.............................. 6,373 1,650 1,658 1,658
Other liabilities.............................................. 152 348 195 195
Capital lease obligations...................................... 161 92 87 87
--------- --------- ------------- -------------
Total liabilities...................................... 6,686 2,090 1,940 1,940
Commitments and contingencies
Redeemable cumulative convertible preferred stocks: Liquidation
preference: $14,368, $29,290 and $30,703 at December 31, 1995
and 1996 and September 30, 1997, respectively................ 14,368 29,290 30,703 --
--------- --------- ------------- -------------
Stockholders' (deficit) equity:
Common stock $.01 par value; authorized 50,000,000 shares;
issued and outstanding 555,135, 619,237, 647,547, and
5,645,568 shares at December 31, 1995 and 1996, June 30,
1997, and pro forma September 30, 1997, respectively....... 6 6 6 56
Additional paid-in capital..................................... -- -- -- 33,653
Accumulated deficit............................................ (15,077) (17,785) (28,153) (28,153)
--------- --------- ------------- -------------
Total stockholders' (deficit) equity................... (15,071) (17,779) (28,147) 5,556
--------- --------- ------------- -------------
Total liabilities, redeemable preferred stock and
stockholders' (deficit) equity....................... $ 5,983 $ 13,601 $ 4,496 $ 7,496
--------- --------- ------------- -------------
--------- --------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
APOLLON, INC.
STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- ----------- ------------- -----------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Contracts.................................................. -- $ 6,750 $ 7,800 $ 3,800 $ 625
Other...................................................... -- 1,075 449 239 86
--------- --------- ----------- ------------- -----------
Total revenues........................................... -- 7,825 8,249 4,039 711
--------- --------- ----------- ------------- -----------
Costs and expenses:
Research and development................................... $ 6,179 5,253 7,310 4,942 7,088
General and administrative................................. 1,538 2,193 3,050 2,120 2,852
--------- --------- ----------- ------------- -----------
Total operating costs and expenses....................... 7,717 7,446 10,360 7,062 9,940
--------- --------- ----------- ------------- -----------
(Loss) income from operations................................ (7,717) 379 (2,111) (3,023) (9,229)
Interest income.............................................. 54 110 373 220 210
Interest expense............................................. (89) (415) (123) (116) (22)
--------- --------- ----------- ------------- -----------
Net (loss) income........................................ $ (7,752) $ 74 $ (1,861) $ (2,919) $ (9,041)
--------- --------- ----------- ------------- -----------
--------- --------- ----------- ------------- -----------
Accretion of redemption value attributable to redeemable
cumulative convertible preferred stock..................... 609 999 1,517 876 $ 1,413
--------- --------- ----------- ------------- -----------
Net loss allocable to common stockholders.................... $ (8,361) $ (925) $ (3,378) $ (3,795) $ (10,454)
--------- --------- ----------- ------------- -----------
--------- --------- ----------- ------------- -----------
Pro forma net loss per share (unaudited)..................... $ (.33) $ (1.59)
----------- -----------
----------- -----------
<CAPTION>
Shares used in computing pro forma net loss per share
(unaudited)................................................ 5,608,888 5,687,791
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
APOLLON, INC.
STATEMENTS OF REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' DEFICIT
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
COMMON STOCK
PAR VALUE, $.01 ADDITIONAL
------------------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1994............................................. 578,266 $ 6 $ 183 $ (5,976)
Shares issued pursuant to exercise of stock options.................. 1,493 -- --
Shares retired....................................................... (22,970) -- --
Shares repurchased................................................... (2,756) -- --
Accreted dividends on Series A and Series B preferred stock.......... (183) (426)
Net loss............................................................. (7,752)
----------- --- ----- -------------
Balance, December 31, 1994........................................... 554,033 6 -- (14,154)
Shares issued pursuant to exercise of stock options.................. 3,352 -- 2
Shares retired....................................................... (2,250) -- --
Issuance of 400,000 shares of Series B redeemable cumulative
convertible preferred stock ($2.50 per share)......................
Accreted dividends on Series A and Series B preferred stock.......... (2) (997)
Net income........................................................... 74
----------- --- ----- -------------
Balance, December 31, 1995........................................... 555,135 6 -- (15,077)
Shares issued pursuant to exercise of stock options.................. 18,162 -- 9
Issuance of 1,600,000 shares of Series B redeemable cumulative
convertible preferred stock ($2.50 per share) upon conversion of
demand notes.......................................................
Waiver of interest expense upon conversion of demand notes........... 511
Issuance of 2,435,286 shares of Series C redeemable cumulative
convertible preferred stock ($4.00 per share), net.................
Increase in carrying value of Series C preferred stock............... (336)
Shares issued for payment of license fees............................ 45,940 -- 150
Accreted dividends on Series A and Series B preferred stock.......... (334) (847)
Net loss............................................................. (1,861)
----------- --- ----- -------------
Balance, December 31, 1996........................................... 619,237 6 -- (17,785)
Shares issued pursuant to exercise of stock options.................. 3,732 -- 4
Shares issued for payment of license fees and other.................. 24,578 -- 82
Accreted dividends on Series A, Series B and Series C preferred
stock.............................................................. (86) (1,327)
Net loss............................................................. (9,041)
----------- --- ----- -------------
Balance, September 30, 1997 (unaudited).............................. 647,547 $ 6 $ -- $ (28,153)
----------- --- ----- -------------
----------- --- ----- -------------
<CAPTION>
REDEEMABLE REDEEMABLE
CUMULATIVE CUMULATIVE
TOTAL COMMON CONVERTIBLE CONVERTIBLE
STOCKHOLDERS' PREFERRED STOCK PREFERRED STOCK
DEFICIT SERIES A SERIES B
------------- --------------- ---------------
<S> <C> <C>
Balance, January 1, 1994............................................. $ (5,787) $ 6,760 $ 5,000
Shares issued pursuant to exercise of stock options.................. --
Shares retired....................................................... --
Shares repurchased................................................... --
Accreted dividends on Series A and Series B preferred stock.......... (609) 541 68
Net loss............................................................. (7,752)
------------- ------ -------
Balance, December 31, 1994........................................... (14,148) 7,301 5,068
Shares issued pursuant to exercise of stock options.................. 2
Shares retired....................................................... --
Issuance of 400,000 shares of Series B redeemable cumulative
convertible preferred stock ($2.50 per share)...................... 1,000
Accreted dividends on Series A and Series B preferred stock.......... (999) 584 415
Net income........................................................... 74
------------- ------ -------
Balance, December 31, 1995........................................... (15,071) 7,885 6,483
Shares issued pursuant to exercise of stock options.................. 9
Issuance of 1,600,000 shares of Series B redeemable cumulative
convertible preferred stock ($2.50 per share) upon conversion of
demand notes....................................................... 4,000
Waiver of interest expense upon conversion of demand notes........... 511
Issuance of 2,435,286 shares of Series C redeemable cumulative
convertible preferred stock ($4.00 per share), net.................
Increase in carrying value of Series C preferred stock............... (336)
Shares issued for payment of license fees............................ 150
Accreted dividends on Series A and Series B preferred stock.......... (1,181) 692 489
Net loss............................................................. (1,861)
------------- ------ -------
Balance, December 31, 1996........................................... (17,779) 8,577 10,972
Shares issued pursuant to exercise of stock options.................. 4
Shares issued for payment of license fees and other.................. 82
Accreted dividends on Series A, Series B and Series C preferred
stock.............................................................. (1,413) 525 561
Net loss............................................................. (9,041)
------------- ------ -------
Balance, September 30, 1997 (unaudited).............................. $ (28,147) $ 9,102 $ 11,533
------------- ------ -------
------------- ------ -------
<CAPTION>
REDEEMABLE TOTAL
CUMULATIVE REDEEMABLE
CONVERTIBLE CUMULATIVE
PREFERRED STOCK CONVERTIBLE
SERIES C PREFERRED STOCK
--------------- ---------------
Balance, January 1, 1994............................................. $ -- $ 11,760
Shares issued pursuant to exercise of stock options..................
Shares retired.......................................................
Shares repurchased...................................................
Accreted dividends on Series A and Series B preferred stock.......... -- 609
Net loss.............................................................
------- -------
Balance, December 31, 1994........................................... -- 12,369
Shares issued pursuant to exercise of stock options..................
Shares retired.......................................................
Issuance of 400,000 shares of Series B redeemable cumulative
convertible preferred stock ($2.50 per share)...................... 1,000
Accreted dividends on Series A and Series B preferred stock.......... 999
Net income...........................................................
------- -------
Balance, December 31, 1995........................................... -- 14,368
Shares issued pursuant to exercise of stock options..................
Issuance of 1,600,000 shares of Series B redeemable cumulative
convertible preferred stock ($2.50 per share) upon conversion of
demand notes....................................................... 4,000
Waiver of interest expense upon conversion of demand notes...........
Issuance of 2,435,286 shares of Series C redeemable cumulative
convertible preferred stock ($4.00 per share), net................. 9,405 9,405
Increase in carrying value of Series C preferred stock............... 336 336
Shares issued for payment of license fees............................
Accreted dividends on Series A and Series B preferred stock.......... 1,181
Net loss.............................................................
------- -------
Balance, December 31, 1996........................................... 9,741 29,290
Shares issued pursuant to exercise of stock options..................
Shares issued for payment of license fees and other..................
Accreted dividends on Series A, Series B and Series C preferred
stock.............................................................. 327 1,413
Net loss.............................................................
------- -------
Balance, September 30, 1997 (unaudited).............................. $ 10,068 $ 30,703
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
APOLLON, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income............................................... $ (7,752) $ 74 $ (1,861) $ (2,919) $ (9,041)
Adjustments to reconcile net (loss) income to net cash (used
for) provided by operating activities:
Depreciation and amortization................................. 536 785 987 681 1,177
Common stock issued for payment of license fees and other..... -- -- -- -- 82
Deferred compensation......................................... -- -- 227 235 (153)
Changes in assets and liabilities:
Interest and other receivables................................ 8 (15) (154) (11) 86
Other assets.................................................. (205) (27) (107) (2) --
Accounts payable.............................................. 335 (504) 174 170 (278)
Accounts payable to stockholder............................... 205 27 (282) (281) --
Accrued expenses and interest................................. 695 407 (70) (381) 296
Other liabilities............................................. 54 27 (31) -- --
Other, net.................................................... (6) (5) 90 76 (14)
--------- --------- --------- ----------- -----------
Net cash (used for) provided by operating activities...... (6,130) 769 (1,027) (2,432) (7,845)
--------- --------- --------- ----------- -----------
Cash flows from investing activities:
Short-term investments, net..................................... 3,351 (130) 36 (1,658) 418
Purchases of property and equipment, net of capital leases...... (291) (355) (1,005) (532) (22)
--------- --------- --------- ----------- -----------
Net cash provided by (used for) investing activities...... 3,060 (485) (969) (2,190) 396
--------- --------- --------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of loan.................................. -- 250 -- -- --
Payment of loan................................................. -- (250) -- -- --
Payment of capital lease obligations, net....................... (170) (331) (118) (112) (111)
Proceeds from issuance of demand notes.......................... 2,750 1,940 -- -- --
Payments of demand notes........................................ -- (690) -- --
Proceeds from issuance of preferred stock, net.................. -- -- 9,405 9,405 --
Proceeds from issuance of common stock.......................... 1 2 9 9 4
--------- --------- --------- ----------- -----------
Net cash provided by (used for) financing activities...... 2,581 921 9,296 9,302 (107)
--------- --------- --------- ----------- -----------
Net (decrease) increase in cash and cash equivalents.............. (489) 1,205 7,300 4,680 (7,556)
Cash and cash equivalents, beginning of period.................... 1,116 627 1,832 1,832 9,132
--------- --------- --------- ----------- -----------
Cash and cash equivalents, end of period.......................... $ 627 $ 1,832 $ 9,132 $ 6,512 $ 1,576
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid for interest...................................... $ 42 $ 44 $ 30 $ 24 $ 23
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Non-cash transactions:
Capital lease additions..................................... $ 205 $ 202 $ 98 $ 98 $ 96
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Preferred stock issued for facilities usage................. $ -- $ 1,000 $ -- -- --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Conversion of demand notes.................................. $ -- $ -- $ 4,000 $ 4,000 --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Waiver of interest on demand notes.......................... $ -- $ -- $ 511 $ 511 --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Common stock issued for payment of license fees and other... $ -- $ -- $ 150 -- $ 82
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
APOLLON, INC.
NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. ORGANIZATION:
Apollon, Inc. (the "Company") is engaged in the business of developing
DNA-based vaccines and other DNA-based gene therapy products for the prevention
and treatment of infectious and autoimmune diseases. Apollon has developed
non-viral, facilitated DNA delivery technology that enhances the uptake of
genetic material into cells and the subsequent expression of encoded proteins.
The Company has focused its initial product development efforts on its
GENEVAX-Registered Trademark- DNA-based vaccines which are directed against
various infectious and autoimmune diseases. The Company was incorporated and
commenced operation on January 31, 1992. The Company was considered a
development stage company for the period from January 31, 1992 (inception date)
to December 31, 1994.
The Company has limited revenues to date and is subject to a number of risks
including the uncertainty of product development, the need to obtain adequate
additional financing to fund the development of its products, competition from
substitute products and larger companies, patent and/or license protection for
its products, processes and technology and the dependence on key personnel and
consultants.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The accompanying financial statements have been prepared on the basis of
accounting principles applicable to a going concern, and accordingly, they do
not give effect to adjustments that may be required should the Company be unable
to continue business operations in its current form and, therefore, be required
to realize its assets and settle its liabilities and contingencies in other than
the normal course of business. The Company had a negative net worth as of
December 31, 1996 and did not generate cash from operating activities during the
year then ended. To fund its operating expenses based on current levels of
expenditures, the Company will rely on its ability to earn revenues by meeting
certain milestones and obtain financing from outside sources. In order to ensure
that the Company will have sufficient capital available to meet anticipated
expenditures, management plans to (1) seek additional financing from outside
sources, (2) continue to focus development efforts to achieve milestones, and
(3) look to eliminate certain recurring expenses in order to reduce current
expenditure levels. There can be no assurances that management will be
successful in carrying out its plans.
CASH, CASH EQUIVALENTS AND INVESTMENTS AVAILABLE FOR SALE:
The Company classifies investments with original maturities of three months
or less as cash equivalents.
Investments available for sale consist of commercial paper and certificates
of deposits, bearing interest at rates which vary from 3.4% to 5.75% with
original maturities of three months to one year and are recorded at fair value.
Unrealized gains and losses, if any, are recorded as a component of
stockholders' equity. There were no unrealized gains and losses at December 31,
1995 and 1996 and September 30, 1997, respectively.
The Company places its cash, cash equivalents and short-term investments
with high credit quality financial institutions. To date, the Company has not
incurred any losses related to these investments.
F-7
<PAGE>
APOLLON, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share and per share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Leased equipment is recorded at
the lesser of cost or the present value of the minimum lease payments.
Depreciation and amortization are recorded using the straight-line method.
Assets are depreciated over their estimated useful lives or over the remaining
terms of the leases, whichever is shorter. Leasehold improvements are amortized
over the lease term or the life of the improvements, whichever is shorter. Asset
depreciable lives are as follows:
<TABLE>
<S> <C>
Computer and laboratory equipment................................. 1-6 years
Furniture and fixtures............................................ 6 years
Leasehold improvements............................................ 5 years
</TABLE>
PATENTS:
Patent expenses are capitalized and recorded at cost and, upon notification
of a patent allowance or related favorable event, are amortized on a
straight-line basis over the estimated useful life of the patent. These
capitalized costs are periodically reviewed by the Company and impairments are
charged to operations when the expected future operating cash flows derived from
such patents are less than their carrying value.
REVENUE RECOGNITION:
For contracts and agreements in which the Company receives non-refundable
fees or milestone payments, revenues are recognized when they are earned in
accordance with the applicable performance requirements and contractual terms.
For contracts and grants under which the Company is reimbursed for expenses,
revenue is recognized as the related expenses are incurred.
RESEARCH AND DEVELOPMENT:
Research and development costs are charged to operations in the period
incurred.
INCOME TAXES:
Income taxes are determined using the asset and liability method. Deferred
taxes are recognized for the tax consequences of temporary differences between
the tax bases of assets and liabilities and their carrying amounts for financial
reporting purposes, by applying the enacted tax rates in effect for the year in
which the differences are expected to reverse. A valuation allowance is
established to reduce the deferred income tax asset to the level at which it is
"more likely than not" that the tax benefits will not be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying value of the Company's short-term financial instruments
approximate their fair values, based on the short-term maturities of these
instruments. As of December 31, 1995 and 1996 and September 30, 1997, the fair
value of the Company's redeemable cumulative convertible preferred stock
approximates its carrying amount, using rates currently available to the Company
for such financial instruments with similar terms and remaining maturities.
F-8
<PAGE>
APOLLON, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share and per share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
STOCK BASED COMPENSATION:
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK
BASED COMPENSATION ("SFAS 123") encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation to employees using the intrinsic value method as prescribed by
Accounting Principles Board Opinion (APB) No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations. Accordingly, compensation cost for stock
options issued to employees is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of grant over the amount an
employee must pay for the stock. Compensation cost related to stock options of
non-employees is recorded at fair value.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRO FORMA NET LOSS PER SHARE (UNAUDITED):
Pro forma net loss per share is computed using the weighted average number
of common shares and common equivalent shares (using the treasury stock method)
outstanding and gives effect to certain adjustments described below. Common
equivalent shares from stock options and warrants are excluded from the
computation as their effect is antidilutive, except that, pursuant to Securities
and Exchange Commission (SEC) Staff Accounting Bulletins and SEC staff policy,
common and common equivalent shares issued during the 12-month period prior to
the proposed initial public offering (the "Offering"--see Note 18) at prices
below the anticipated initial public offering price are presumed to have been
issued in contemplation of the Offering and have been included in the
calculation as if they were outstanding for all periods presented (using the
treasury stock method and an assumed initial public offering price of $12).
Pursuant to the policy of the SEC staff, the calculation of shares used in
computing pro forma net loss per share also includes all series of redeemable
cumulative convertible preferred stock that will automatically convert into
shares of common stock upon completion of the Offering (using the if-converted
method) for all periods presented. Shares issued upon conversion of the
convertible promissory note (see Note 18) have also been included in the
calculation as if they were outstanding for all periods presented using an
assumed initial public offering price of $12.
In addition, the weighted average number of shares used in the calculation
has been adjusted to reflect the Reverse Stock Split (see Note 17) effective
prior to the Offering (see Note 18).
F-9
<PAGE>
APOLLON, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share and per share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The following table sets forth the calculation of total number of shares
used in the computation of pro forma net loss per common share:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER
DECEMBER 31, 30,
1996 1997
------------ ------------
<S> <C> <C>
(UNAUDITED) (UNAUDITED)
Weighted average common shares outstanding........................................... 565,611 644,514
Incremental shares assumed to be outstanding related to common stock, stock options
and warrants granted based on the treasury stock method............................ 45,256 45,256
Redeemable cumulative convertible preferred stock.................................... 4,748,021 4,748,021
Convertible promissory note.......................................................... 250,000 250,000
------------ ------------
Weighted average common and common equivalent shares used in computation of pro forma
net loss per share................................................................. 5,608,888 5,687,791
------------ ------------
------------ ------------
</TABLE>
PRO FORMA BALANCE SHEET (UNAUDITED):
The pro forma balance sheet includes the $3.0 million received on October 2,
1997 in return for a convertible promissory note (See Note 18). Upon the closing
of the Offering, all of the outstanding shares of Series A, B and C redeemable
cumulative convertible preferred stock and the convertible promissory note will
automatically convert into 4,998,021 shares of common stock. The unaudited pro
forma presentation of the September 30, 1997 balance sheet has been prepared
assuming the conversion of the redeemable cumulative convertible preferred stock
into common stock as of September 30, 1997, the most recent balance sheet
included in the accompanying financial statements.
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
The balance sheet at September 30, 1997, the statements of operations and
statements of cash flows for the nine months ended September 30, 1996 and 1997
and the statement of redeemable preferred stock and stockholders' deficit for
the nine months ended September 30, 1997 are unaudited. In the opinion of
management of the Company, such unaudited financial statements include all
adjustments (consisting of normal accruals) necessary for a fair presentation of
financial results for the interim periods. The results of operations for the
nine months ended September 30, 1997 are not necessarily indicative of results
to be expected for the entire year.
NEW ACCOUNTING PRONOUNCEMENTS:
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS 128"). This
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock. This statement
is effective for financial statements issued for periods ending after December
15, 1997 and earlier application is not permitted. This statement requires
restatement of all prior period EPS data presented. The Company will adopt SFAS
128 in the fourth quarter of the fiscal year ending December 31,
F-10
<PAGE>
APOLLON, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share and per share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
1997. The adoption of this accounting standard is not expected to have a
material impact on the financial statements.
During February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129, DISCLOSURE OF INFORMATION
ABOUT CAPITAL STRUCTURE ("SFAS 129"). SFAS 129 requires entities to explain, in
summary form within their financial statements, the pertinent rights and
privileges of the various securities outstanding. Information that shall be
disclosed should include dividend and liquidation preferences, participation
rights, call prices and dates, conversion or exercise prices or rates and
pertinent dates, sinking fund requirements, unusual voting rights, and
significant terms of contracts to issue additional shares. SFAS 129 is effective
for periods ending after December 15, 1997. The adoption of this accounting
standard is not expected to have a material impact on the financial statements.
During June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME ("SFAS
130"). SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS 130 is effective for fiscal years beginning after
December 15, 1997 and reclassification of financial statements for earlier
periods provided for comparative purposes is required. The adoption of this
accounting standard is not expected to have a material impact on the financial
statements.
3. INVESTMENTS AVAILABLE FOR SALE:
Securities classified as available for sale at December 31, 1995 and 1996
and September 30, 1997 are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------- SEPTEMBER 30, 1997
1995 1996 (UNAUDITED)
---------------------- ---------------------- ----------------------
CARRYING CARRYING CARRYING
COST VALUE COST VALUE COST VALUE
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Investments available for sale:
Commercial paper...................... $ 492 $ 492 $ 490 $ 490 $ -- $ --
Certificates of deposit............... 132 132 98 98 170 170
--------- ----- --------- ----- --------- -----
$ 624 $ 624 $ 588 $ 588 $ 170 $ 170
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
</TABLE>
At December 31, 1995 and 1996, respectively, the certificates of deposit
were pledged as collateral until October 31, 1996 and October 31, 1997,
respectively, by the Company for payment obligations under a capitalized lease
agreement for machinery and equipment.
F-11
<PAGE>
APOLLON, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share and per share amounts)
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31, 1995 and
1996 and September 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Computer and laboratory equipment........................ $ 1,903 $ 2,256 $ 2,374
Furniture and fixtures................................... 110 177 177
Leasehold improvements................................... 1,571 2,228 2,228
--------- --------- -------------
3,584 4,661 4,779
Less accumulated depreciation and amortization........... (1,480) (2,321) (2,984)
--------- --------- -------------
$ 2,104 $ 2,340 $ 1,795
--------- --------- -------------
--------- --------- -------------
</TABLE>
Depreciation and amortization expense related to property and equipment for
the years ended December 31, 1994, 1995 and 1996 was $514, $700 and $841,
respectively and $572 and $663 for the nine months ended September 30, 1996 and
1997, respectively. As of December 31, 1995 and 1996 and September 30, 1997,
accounts payable included $19, $66 and $0, respectively, related to purchases of
property and equipment.
Computer and laboratory equipment at December 31, 1995 and 1996 and
September 30, 1997 includes approximately $919, $1,017 and $1,113 of equipment
under capitalized leases, respectively. Accumulated depreciation for this
equipment was $486, $734 and $881 at December 31, 1995 and 1996 and September
30, 1997, respectively.
5. INTANGIBLE AND OTHER ASSETS:
Intangible and other assets, net of accumulated amortization of $131, $278
and $386, consist of the following at December 31, 1995 and 1996 and September
30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- ---------------
<S> <C> <C> <C>
(UNAUDITED)
Patents.................................................... $ 398 $ 488 $ 113
Prepaid facilities cost, net............................... 813 688 594
Other...................................................... 54 50 5
--------- --------- -----
$ 1,265 $ 1,226 $ 712
--------- --------- -----
--------- --------- -----
</TABLE>
F-12
<PAGE>
APOLLON, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share and per share amounts)
6. ACCRUED EXPENSES:
Accrued expenses consist of the following at December 31, 1995 and 1996 and
September 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Research..................................................... $ 404 $ 252 $ 257
Legal........................................................ 164 199 412
Compensation................................................. 59 169 145
License fees................................................. 258 108 73
Other........................................................ 150 87 224
--------- --------- ------
$ 1,035 $ 815 $ 1,111
--------- --------- ------
--------- --------- ------
</TABLE>
7. OTHER LIABILITIES:
Other liabilities consist of the following at December 31, 1995 and 1996 and
September 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- ---------------
<S> <C> <C> <C>
(UNAUDITED)
Deferred compensation.......................................... -- $ 227 $ 74
Deferred rent.................................................. $ 152 121 121
--------- --------- -----
$ 152 $ 348 $ 195
--------- --------- -----
--------- --------- -----
</TABLE>
F-13
<PAGE>
APOLLON, INC.
NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
8. DEBT:
During 1994 and 1995, the Company issued a series of promissory notes
payable to the preferred and common stockholders totaling $2,750 and $1,940,
respectively, bearing interest at a rate of 1% above the prime commercial rate
being charged by PNC Bank, N.A. The proceeds received from these notes was used
to fund operations.
These promissory notes, together with any related accrued interest, were
payable on demand and were convertible into shares of the next series of
convertible preferred stock issued by the Company. During 1995, the Company paid
on demand $690 of these notes plus accrued interest.
In addition, as additional consideration, the Company issued warrants to the
preferred stockholders to purchase 165,381 and 128,627 shares of the Company's
common stock in 1994 and 1995, respectively. The warrants are exercisable at
$5.44 per share, subject to adjustment, and expire on November 9, 1999.
In March 1996, pursuant to a Waiver of Interest agreement between the
Company and the preferred stockholders, $511 of interest accrued from the date
of issuance on the $4,000 promissory notes was waived, of which $418 was accrued
at December 31, 1995. The $511 of interest that was waived was credited to the
Company's additional paid-in capital account in 1996.
In April 1996, the preferred stockholders converted the principal amount of
these notes into 1,600,000 shares of the $2.50 Series B redeemable 8% cumulative
preferred stock, $.01 par value (see Note 9).
9. REDEEMABLE PREFERRED STOCK:
Redeemable cumulative convertible preferred stock consists of the following
at December 31, 1995 and 1996 and September 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Series A 8% redeemable cumulative convertible preferred stock, $.01 par
value; issued and outstanding 3,900,000 shares at December 31, 1995 and
1996 and September 30, 1997 (liquidation preference of $7,885, $8,577 and
$9,102 at December 31, 1995 and 1996 and September 30, 1997,
respectively).............................................................. $ 7,885 $ 8,577 $ 9,102
Series B 8% redeemable cumulative convertible preferred stock, $.01 par
value; issued and outstanding 2,400,000, 4,000,000, and 4,000,000 shares at
December 31, 1995 and 1996 and September 30, 1997, respectively
(liquidation preference of $6,483, $10,972 and $11,533 at December 31, 1995
and 1996 and September 30, 1997, respectively)............................. 6,483 10,972 11,533
Series C 8% redeemable cumulative convertible preferred stock, $.01 par
value; issued and outstanding 2,435,286 shares at December 31, 1996 and
September 30, 1997 (liquidation preference of $9,741 and $10,068 at
December 31, 1996 and September 30, 1997, respectively).................... -- 9,741 10,068
--------- --------- -------------
$ 14,368 $ 29,290 $ 30,703
--------- --------- -------------
--------- --------- -------------
</TABLE>
F-14
<PAGE>
APOLLON, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share and per share amounts)
9. REDEEMABLE PREFERRED STOCK: (CONTINUED)
As of December 31, 1996 and September 30, 1997, the Company has authorized
12,900,000 shares of its preferred stock, $.01 par value.
During 1995, the Company issued an additional 400,000 shares of Series B
redeemable 8% cumulative convertible preferred stock, $.01 par value (Series B)
as consideration for $1,000 ($2.50 per share) of services to be rendered by a
significant stockholder pursuant to a Facilities Use Agreement dated September
20, 1994 between the Company and the significant stockholder (see Note 10).
During 1996, the Company issued 1,600,000 shares of Series B redeemable 8%
cumulative convertible preferred stock, $.01 par value, upon the conversion of
the $4,000 promissory notes ($2.50 per share) by the preferred stockholders (see
Note 8).
During 1996, the Company issued 2,435,286 shares of Series C redeemable 8%
cumulative convertible preferred stock, $.01 par value (Series C) for $9,741
($4.00 per share). The Company received net proceeds of $9,405 after placement
fees. In addition, the placement agent purchased warrants to acquire 122,420
shares of the Company's common stock. The warrants are exercisable at $8.71 per
share, subject to adjustment, and expire on May 1, 2001.
The Series A, Series B and Series C are redeemable at the option of the
preferred stockholder on specified redemption dates as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF PREFERRED
REDEMPTION DATE SHARES REDEEMABLE
- ----------------------------------------------------------------------- -----------------------
<S> <C>
April 30, 1998......................................................... 33-1/3%
April 30, 1999......................................................... 66-2/3%
April 30, 2000......................................................... 100%
</TABLE>
The redemption price for each redeemed preferred share shall be the sum of
the greater of the liquidation price or the fair market value per share plus all
accrued and unpaid preferred dividends to date, whether or not declared, on the
redemption date.
Holders of the Series A, Series B and Series C can convert such shares into
common stock at any time at a conversion ratio of 0.4594-for-one. In addition,
the preferred stock converts automatically into common stock upon the completion
of an initial public offering at a price per share not less than $5.00 and for
total proceeds of at least $15,000. No preferred shares were converted during
1994, 1995, 1996 or through September 30, 1997.
In the event of a liquidation, Series A, Series B and Series C stockholders
are entitled to $1.67 per share, $2.50 per share, and $4.00 per share,
respectively, plus any accrued dividends and any other dividends declared but
unpaid. After the payment of the aforementioned amounts, the remaining assets or
property distributable upon such liquidation shall be divided pro rata among
holders of the Common Stock, Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock.
Dividends on the Series A and the Series C cumulate at the rate of 8% of the
purchase price commencing one year from the date of issuance. Dividends on the
Series B cumulate at the rate of 8% of the purchase price commencing one year
from the date of issuance, except for the initial 2,000,000 shares of Series B
issued during 1993, on which dividends began cumulating on October 30, 1994. As
of
F-15
<PAGE>
APOLLON, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share and per share amounts)
9. REDEEMABLE PREFERRED STOCK: (CONTINUED)
September 30, 1997, the Company has accrued $2,602 of dividends related to the
Series A preferred stock, $1,533 related to the Series B preferred stock and
$327 related to the Series C preferred stock. Series A, Series B and Series C
stockholders have voting rights equivalent to those of common stockholders.
10. RELATED PARTY TRANSACTIONS:
On June 25, 1992, the Company and a significant stockholder entered into a
marketing and development agreement. Under this agreement, the stockholder has
the option to provide funding for the research, experimentation and development
of certain products by the Company and to acquire a royalty-bearing license to
market these products.
In early 1995, this marketing and development agreement was amended such
that the significant stockholder waived its existing funding and
commercialization rights in exchange for an exclusive royalty bearing license to
certain technologies and patents, and an option for a similar license agreement
related to other technologies. In addition, the Company transferred all of its
rights to certain compounds to this stockholder, and was granted a nonexclusive
royalty fee license to any improvements owned by the stockholder related to
certain compounds. In consideration, the Company received $750 upon execution of
this agreement, which is classified as other revenues in the 1995 statement of
operations. Should the Company achieve specific developmental and approval
milestones as defined in the agreement, the stockholder is required to make
certain additional payments to the Company. In April 1997, the Company received
an additional $75 under this agreement.
On September 20, 1994, the Company and a significant stockholder entered
into a facilities use agreement such that the significant stockholder granted to
the Company and its employees an irrevocable license (the "License") to use and
occupy a portion of the significant stockholder's facilities for the development
and manufacture of nucleic acid-based product candidates, genetic vaccine
product candidates and related uses. In consideration for the grant of this
License, the Company, during 1995, issued to the significant stockholder 400,000
shares of $2.50 Series B redeemable 8% cumulative convertible preferred stock,
$.01 par value. The initial term of this agreement commenced on July 1, 1995 and
expires two years following the date that the Company successfully develops and
manufactures in this facility its first genetic vaccine product candidate for
use in connection with human clinical trials. Thereafter, in the absence of
termination notices given by the Company or the significant stockholder, this
agreement renews automatically on a yearly basis with the same terms and
conditions except there shall be no additional consideration payable by the
Company. The cost associated with this agreement ($1,000) has been accounted for
as a prepaid asset and is being amortized over a period of eight years, the term
of the agreement. Amortization expense related to this asset was $62 and $125
for the years ended December 31, 1995 and December 31, 1996, respectively and
$94 for each of the nine months ended September 30, 1996 and 1997, respectively.
In 1995, the Company and a significant stockholder entered into a contract
manufacturing agreement such that the Company shall manufacture certain plasmids
for use in genetic vaccines. In consideration, the Company received $50 in 1995
and $50 in 1996. These amounts are included in other revenues in the 1995 and
1996 statements of operations.
In 1994 and 1995, the Company issued a series of promissory notes payable to
certain preferred and common stockholders. Pursuant to an agreement between the
Company and the preferred stockholders,
F-16
<PAGE>
APOLLON, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share and per share amounts)
10. RELATED PARTY TRANSACTIONS: (CONTINUED)
interest accrued of $511 at March 31, 1996 on the remaining promissory notes was
waived and the notes were converted into Series B convertible preferred stock.
These transactions are more fully described in Note 8 and Note 9.
In June 1995, a significant stockholder agreed to loan the Company $250,
bearing interest at the rate of 1% above the prime commercial rate being charged
by PNC Bank, N.A. This loan was repaid, including interest, in August 1995.
During 1994 and 1995, a significant stockholder managed the medical
insurance program for the Company, for which no fee was charged. As of December
31, 1995, the Company's net amount due to this stockholder was $282. This amount
was paid in full in 1996.
11. STOCK OPTION PLAN:
In 1992, the Company established a stock option plan ("the 1992 Plan") and
authorized a total of 459,400 incentive stock options ("ISOs") and non-qualified
stock options ("NQSOs") which may be issued to employees, officers, directors
and consultants of the Company. Upon the approval of the Company's Board of
Directors, the ISOs and NQSOs may be granted at a price not less than 100% of
the fair market value on the date of the grant. The options become exercisable
one to ten years following the grant, and expire five or ten years from the date
of the grant.
The 1992 Plan provides for the granting of limited stock appreciation rights
(LSARs) at the discretion of the Company's Board of Directors to holders of
options under the 1992 Plan. Those options with respect to which an LSAR has
been granted are exercisable only during the period commencing on the first day
following the occurrence of a "Triggering Event" as defined in the 1992 Plan and
terminate no later than the expiration of the underlying option. Upon the
occurrence of any Triggering Event, the optionee shall receive from the Company
an amount in cash equal to the excess of the fair market value per share of the
Company's common stock on the date the Triggering Event occurs over the related
exercise price per share. No LSARs have been granted as of September 30, 1997.
F-17
<PAGE>
APOLLON, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share and per share amounts)
11. STOCK OPTION PLAN: (CONTINUED)
Activity under the 1992 Plan and the 1997 Plan (see Note 18) during the
years ended December 31, 1995 and 1996 and for the nine months ended September
30, 1997 is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
1995 1996 (UNAUDITED)
------------------------ ------------------------ ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of period............... 177,066 $ .97 310,244 $ 1.26 427,751 $ 1.65
Granted...................................... 150,218 1.58 147,953 2.30 37,547 4.35
Exercised.................................... (3,352) .68 (18,162) .56 (3,732) 1.21
Expired...................................... (13,688) 1.07 (12,284) 1.56 (4,395) 3.28
----------- ----------- ----------- ----------- ----------- -----------
Outstanding, end of period..................... 310,244 $ 1.26 427,751 $ 1.65 457,171 $ 1.86
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Options exercisable at period-end.............. 72,755 135,199 181,252
----------- ----------- -----------
----------- ----------- -----------
Option price range at end of period............ $ .04-$1.63 $ .04-$4.35 $ .04-$4.35
----------- ----------- -----------
----------- ----------- -----------
Weighted-average fair value of options granted
during year.................................. $.78 $1.22
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ------------------------
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICE AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
- --------------------------------------------------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$.04............................................... 22,966 5.50 $ .04 22,966 $ .04
$1.20-$1.63........................................ 368,456 8.39 1.48 112,233 1.34
$4.35.............................................. 36,329 9.79 4.35 -- --
----------- --- ----- ----------- -----------
427,751 8.35 $ 1.65 135,199 $ 1.12
----------- --- ----- ----------- -----------
----------- --- ----- ----------- -----------
</TABLE>
As of December 31, 1995 and 1996 and September 30, 1997, 140,982, 5,313 and
64,041 shares of common stock, respectively, were available for the granting of
additional options.
The Company has adopted the disclosure only provisions of FAS No. 123
"Accounting for Stock-based Compensation." Accordingly, no compensation cost has
been recognized for the Company's 1992 Plan and 1997 Plan. Had compensation cost
for the Company's 1992 Plan and 1997 Plan been determined based on
F-18
<PAGE>
APOLLON, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share and per share amounts)
11. STOCK OPTION PLAN: (CONTINUED)
the fair value at the grant date for awards in 1995 and 1996 consistent with the
provisions of FAS No. 123, the Company's net income (loss) would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
----- ---------
<S> <C> <C>
Net income (loss)--as reported................................................ 74 (1,861)
Net income (loss)--pro forma.................................................. 70 (1,912)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996: dividend yield of 0.00%; expected
volatility of .63%; risk free interest rate of 6.29%; and expected lives based
on actual terms of options granted.
WARRANTS:
In connection with the issuance of Series C redeemable preferred stock, the
Company issued warrants to the placement agent to purchase 122,420 shares of
common stock. The warrants are exercisable upon issuance and expire on May 1,
2001.
12. INCOME TAXES:
The Company utilized net operating loss carryforwards of approximately $1.4
million in 1995 to offset its tax expense for the year.
The principal differences between the carrying value of assets and
liabilities for financial reporting and tax reporting purposes relate to
depreciation and start-up costs.
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1995 and 1996 are shown below. The net deferred tax asset has
been fully reserved with a valuation allowance as of December 31, 1995 and 1996
due to the Company's limited earnings history.
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................................... $ 3,313 $ 4,105
Capitalized research and development costs........................... 609 710
Capitalized start-up costs and other................................. 1,113 985
--------- ---------
Total deferred tax assets................................................ 5,035 5,800
Valuation allowance...................................................... (5,035) (5,800)
--------- ---------
Total deferred tax assets.......................................... $ -- $ --
--------- ---------
--------- ---------
</TABLE>
F-19
<PAGE>
APOLLON, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share and per share amounts)
12. INCOME TAXES: (CONTINUED)
At December 31, 1996, the Company has U.S. Federal operating loss
carryforwards of approximately $12,000 which expire through 2011 and which may
be applied against future taxable income. At December 31, 1996, the Company also
has research and development tax credit carryforwards of approximately $710
available to offset future federal income taxes, which expire between 2007 and
2011. At December 31, 1996, the Company has state operating loss carryforwards
of approximately $750, which expire through 1999, and which may be applied
against future taxable income. The Company's ability to utilize such net
operating loss and research and development credit carryforwards may be subject
to certain limitations due to ownership changes as defined by rules enacted with
the Tax Reform Act of 1986.
13. COMMITMENTS AND CONTINGENCIES:
OPERATING AND CAPITALIZED LEASES:
The Company has a noncancelable operating lease for its plant and office
facility. This lease includes scheduled base rent increases over the term of the
lease.
The future minimum rental commitments under all capitalized and
noncancelable operating leases as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITALIZED
FISCAL YEAR LEASES LEASES
- -------------------------------------------------------------------------- ----------- -------------
<S> <C> <C>
1997...................................................................... $ 305 $ 159
1998...................................................................... 238 98
1999...................................................................... 33 3
2000...................................................................... 32 --
2001...................................................................... 19 --
----- -----
Minimum lease payments.................................................... $ 627 $ 260
-----
-----
Less imputed interest..................................................... 29
-----
Present value of minimum lease payments................................... $ 231
-----
-----
</TABLE>
Total rent expense for operating leases for the years ended December 31,
1994, 1995 and 1996 and the nine month periods ended September 30, 1996 and 1997
amounted to $154, $107, $142, $192 and $206, respectively, net of sublease
payments of $55, $102, $67, $53 and $5, respectively.
RESEARCH AND CONSULTING AGREEMENTS:
The Company has research and consulting agreements with various educational
and medical institutions, scientists and other professionals to support research
and development activities relating to oligonucleotide, hepatitis, allergy and
other nucleic acid based agents. The terms of these agreements expire at various
dates in 1997 and 1998 and most are cancelable at Apollon's option if sufficient
progress is not made on the projects as defined in the agreements. The minimum
payments under these agreements as of December 31, 1996 is $931 and $150 payable
during 1997 and 1998, respectively.
F-20
<PAGE>
APOLLON, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share and per share amounts)
14. PROFIT SHARING PLAN:
Employees participate in a defined contribution profit sharing plan covering
all employees with more than three months service. Under the "401(k)" salary
reduction provisions of the plan, employees may elect to defer up to 15% of
their compensation, subject to statutory limitations, and have the Company
contribute deferred amounts, subject to the approval of the Board of Directors.
A provision of $10 was made for the year ended December 31, 1995 and $0 for the
year ended December 31, 1996 and the nine months ended September 30, 1997.
15. CONTRACT REVENUES:
In July 1995, the Company entered into a research and development agreement
and a manufacturing and supply agreement with Lederle-Praxis Biologics ("LPB"),
a division of American Cyanamid Company, which is a wholly-owned subsidiary of
American Home Products Corporation, for the development of
GENEVAX-Registered Trademark- DNA-based genetic vaccines directed against human
immunodeficiency virus ("HIV"), herpes simplex virus ("HSV"), and human
papilloma virus ("HPV"). Under the terms of these agreements, Apollon has
granted LPB worldwide rights to commercialize the HIV, HSV, and HPV products,
and has retained exclusive worldwide manufacturing rights with respect to these
products. Under the terms of the research and development agreement, LPB will
make certain guaranteed and milestone-related payments to the Company. Under the
terms of the manufacturing and supply agreement, the Company will receive from
LPB a percentage of final retail product sales. In the years ended December 31,
1995 and 1996 and the nine month periods ended September 30, 1996 and 1997, the
Company received guaranteed and milestone-related payments totaling $6,750,
$7,800, $3,750 and $550, respectively.
16. LICENSE AGREEMENTS--UNIVERSITY OF PENNSYLVANIA AND THE WISTAR INSTITUTE:
The University of Pennsylvania ("Penn") and The Wistar Institute ("Wistar")
are joint owners of certain technology including the United States Patent
"Genetic Immunization" and other patent applications, jointly the "Technology".
This Technology has been licensed exclusively, on a worldwide basis, to the
Company. The Technology relates to the Company's genetic immunization research.
The Company has entered into separate License Agreements with Penn and
Wistar. The Penn License Agreement was completed on December 1, 1994 and extends
in perpetuity, except under certain circumstances such as, but not limited to, a
bankruptcy of the Company.
In consideration for the Penn License Agreement, the Company has agreed to
make royalty payments to Penn based upon the sales of products developed using
the Technology. To date, the Company has not made any commercial sales of
products and has made no royalty payments to Penn. The Company recorded a $150
license expense in 1995 and issued 45,940 shares of common stock to Penn in 1996
in lieu of cash payment.
The Company entered into a separate License Agreement with Wistar on January
2, 1997. The Wistar Agreement provides the Company with an exclusive, worldwide
license to the Technology owned by Wistar jointly with Penn. In consideration
for the Wistar License Agreement, the Company has agreed to make license
initiation fee payments and royalty fee payments to Wistar.
In addition, the Company agreed to issue to Wistar 22,970 shares of common
stock of the Company as further consideration for the grant of the license. The
Wistar Agreement extends in perpetuity, except under certain circumstances such
as, but not limited to, a bankruptcy of the Company.
F-21
<PAGE>
APOLLON, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share and per share amounts)
17. REVERSE STOCK SPLIT:
On September 29, 1997, the Company's stockholders approved a 0.4594-for-one
reverse stock split (the "Reverse Stock Split") of the Company's outstanding
common stock to be effected prior to completion of the Offering. All references
to shares of common stock have been retroactively adjusted to reflect the
Reverse Stock Split as of January 1, 1994.
18. SUBSEQUENT EVENTS (UNAUDITED):
1997 STOCK OPTION PLAN:
In April 1997 the Company established a second stock option plan ("the 1997
Plan") and authorized a total of 91,880 NQSOs which may be issued to employees,
officers, directors and consultants of the Company. Upon the approval of the
Company's Board of Directors, the NQSOs may be granted at a price not less than
100% of the fair market value on the date of the grant. The options become
exercisable one to ten years following the grant, and expire ten years from the
date of the grant. Activity under the 1997 Plan has been included in Note 11.
INITIAL PUBLIC OFFERING:
In September 1997, the company's board of directors authorized the filing of
a registration statement with the Securities and Exchange Commission for the
Company's initial public offering of its common stock (the "Offering"). Upon
closing of the Offering, all shares of Series A, Series B and Series C
redeemable cumulative convertible preferred stock outstanding will be
automatically converted into shares of common stock on a 0.4594-for-one basis.
In addition, the convertible promissory note, described below, will be converted
as of the closing date of the Offering. Such conversions are reflected in the
unaudited pro forma stockholders equity at September 30, 1997 in the balance
sheet contained herein. The Company's board of directors authorized and the
stockholders approved an amendment to the Articles of Incorporation, to become
effective upon completion of the Offering, which provides that the Company's
authorized capital stock consists of 60,000,000 shares, par value of $.01 per
share, of which 50,000,000 shares are designated as common stock.
F-22
<PAGE>
APOLLON, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share and per share amounts)
18. SUBSEQUENT EVENTS (UNAUDITED): (CONTINUED)
CONVERTIBLE PROMISSORY NOTE:
On October 2, 1997, the Company issued a $3 million convertible promissory
note payable to A.H. Investments Ltd., an affiliate of American Home Products
Corporation, bearing interest at a rate of 2% above the prime commercial rate
being charged by PNC Bank, N.A. The promissory note, together with any unpaid
accrued interest, will be payable on demand at any time on or after April 3,
1999, or will be automatically converted into shares of the company's common
stock upon the closing of the Offering at a conversion price equal to the
initial public offering price. The proceeds received from this note will be used
to fund operations.
In addition, as additional consideration, the Company issued a warrant to
A.H. Investments Ltd. to purchase 68,910 shares of the Company's common stock.
This warrant is exercisable six months after the closing of the Offering at a
price equal to 115% of the initial public offering price, subject to adjustment,
and expires five years after becoming exercisable.
LICENSE AND OPTION AGREEMENT:
In November 1997, the Company entered into a license and option agreement
with Biogen, Inc. pursuant to which the Company received a license to Biogen's
intellectual property related to DNA sequences encoding hepatitis B viral
antigens and Biogen received the option to market and sell, on an exclusive
basis in Japan HBV product candidates developed by the Company incorporating
Biogen's intellectual property.
F-23
<PAGE>
Figure 1. Cellular and humoral immune responses stimulated by DNA
following facilitated DNA delivery. Cells that contain DNA encoding
antigenic proteins present fragments of these proteins called antigenic
peptides (represented by the yellow beads) to CD8(+) T cells, the
precursors of cytotoxic T cells. The body's cells can also release intact
antigenic proteins or large protein fragments into the surrounding
environment where they are taken up by antigen presenting cells that
fragment the proteins and present them to helper T cells. With the aid of
these helper T cells, B cells that are also directly stimulated by
antigenic protein go on to form plasma cells that release into the
circulation large quantities of antibody specific for the antigenic
protein. In addition, the CD8(+) T cells, with aid from helper T cells, go
on to form cytotoxic T cells.
Figure 2. Facilitated delivery of DNA to cells using bupivacaine. DNA,
which carries the genes of interest and is contained inside membranous
liposomal structures formed by facilitating agents such as bupivacaine,
interact with cell membranes. The DNA is taken up by cells and transported
to the cell nucleus where it supports gene expression and protein
production. In this illustration, the blue spheres represent the liposomal
structures. Cut-a-way versions show the internal DNA in yellow.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT RELATES
IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH
STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary..................................... 3
Risk Factors........................................... 7
Use of Proceeds........................................ 17
Dividend Policy........................................ 17
The Company............................................ 17
Capitalization......................................... 18
Dilution............................................... 19
Selected Financial Data................................ 20
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 21
Business............................................... 26
Management............................................. 46
Certain Relationships and Related Transactions......... 51
Principal Shareholders................................. 52
Description of Capital Stock........................... 54
Shares Eligible for Future Sale........................ 57
Underwriting........................................... 58
Legal Matters.......................................... 59
Experts................................................ 59
Available Information.................................. 60
Financial Statements................................... F-1
</TABLE>
--------------
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,500,000 SHARES
[LOGO]
COMMON STOCK
------------
PROSPECTUS
, 1997
-----------------
SMITH BARNEY INC.
GENESIS MERCHANT GROUP
SECURITIES
CRUTTENDEN ROTH
INCORPORATED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II--INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated amount of various expenses in
connection with the sale and distribution of the securities being registered:
<TABLE>
<S> <C>
SEC Registration fee............................................ $ 11,326
NASD filing fee................................................. 4,238
Nasdaq National Market filing fee............................... 37,864
Printing and engraving expenses................................. 250,000
Legal fees and expenses......................................... 175,000
(including blue sky fees and expenses)
Accounting fees and expenses.................................... 100,000
Transfer agent fees............................................. 2,500
Miscellaneous................................................... 19,072
---------
Total........................................................... $ 600,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Pennsylvania Business Corporation Law of 1988 authorizes the Company to
grant indemnities to directors and officers in terms sufficiently broad to
permit indemnification of such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933.
Article 5 of the Company's By-Laws provides as follows:
5.1 INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHER PERSONS. The
Corporation shall indemnify any director, officer, employee or agent of the
Corporation or any of its subsidiaries who was or is an "authorized
representative" of the Corporation (which shall mean, for the purpose of
this Article, a director or officer of the Corporation or a person serving
at the request of the Corporation as a director, officer, partner, fiduciary
or trustee of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise) and who was or is a "party"
(which shall include for purposes of this Article the giving of testimony or
similar involvement) or is threatened to be made a party to any "proceeding"
(which shall mean for purposes of this Article any threatened, pending or
completed action, suit, appeal or other proceeding of any nature, whether
civil, criminal, administrative or investigative, whether formal or informal
and whether brought by or in the right of the Corporation, its shareholders
or otherwise) by reason of the fact that such person was or is an authorized
representative of the Corporation to the fullest extent permitted by law,
including without limitation indemnification against expenses (which shall
include for purposes of this Article attorneys' fees and disbursements),
damages, punitive damages, judgments, penalties, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection
with such proceeding unless the act or failure to act giving rise to the
claim is finally determined by a court to have constituted willful
misconduct or recklessness. If an authorized representative is not entitled
to indemnification in respect of a portion of any liabilities to which such
person may be subject, the Corporation shall nonetheless indemnify such
person to the maximum extent for the remaining portion of the liabilities.
5.2 ADVANCEMENT OF EXPENSES. The Corporation shall pay the expenses
(including attorneys' fees and disbursements) actually and reasonably
incurred in defending a proceeding on behalf of any person entitled to
indemnification under Section 5.1 in advance of the final disposition of
such proceeding upon receipt of an undertaking by or on behalf of such
person to repay such amount if it shall ultimately be determined that such
person is not entitled to be indemnified by the Corporation as authorized in
this Article and may pay such expenses in advance on behalf of any
II-1
<PAGE>
employee or agent on receipt of a similar undertaking. The financial ability
of such authorized representative to make such repayment shall not be
prerequisite to the making of an advance.
5.3 EMPLOYEE BENEFIT PLANS. For purposes of this Article, the
Corporation shall be deemed to have requested an officer, director, employee
or agent to serve as fiduciary with respect to an employee benefit plan
where the performance by such person of duties to the Corporation also
imposes duties on, or otherwise involves services by, such person as a
fiduciary with respect to the plan; excise taxes assessed on an authorized
representative with respect to any transaction with an employee benefit plan
shall be deemed "fines"; and action taken or omitted by such person with
respect to an employee benefit plan in the performance of duties for a
purpose reasonably believed to be in the interest of the participants and
beneficiaries of the plan shall be deemed to be for a purpose which is not
opposed to the best interests of the Corporation.
5.4 SECURITY FOR INDEMNIFICATION OBLIGATIONS. To further effect, satisfy
or secure the indemnification obligations provided herein or otherwise, the
Corporation may maintain insurance, obtain a letter of credit, act as
self-insurer, create a reserve, trust, escrow, cash collateral or other fund
or account, enter into indemnification agreements, pledge or grant a
security interest in any assets or properties of the Corporation or use any
other mechanism or arrangement whatsoever in such amounts, at such costs and
upon such other terms and conditions as the Board of Directors shall deem
appropriate.
5.5 RELIANCE UPON PROVISIONS. Each person who shall act as an authorized
representative of the Corporation shall be deemed to be doing so in reliance
upon the rights of indemnification provided by this Article.
5.6 AMENDMENT OR REPEAL. All rights of indemnification under this
Article shall be deemed a contract between the Corporation and the person
entitled to indemnification under this Article pursuant to which the
Corporation and each such person intend to be legally bound. Any repeal,
amendment or modification hereof shall be prospective only and shall not
limit, but may expand, any rights or obligations in respect of any
proceeding whether commenced prior to or after such change to the extent
such proceeding pertains to actions or failures to act occurring prior to
such change.
5.7 SCOPE OF ARTICLE. The indemnification, as authorized by this
Article, shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
statute, agreement, vote of shareholders or disinterested directors or
otherwise, both as to action in an official capacity and as to action in any
other capacity while holding such office. The indemnification and
advancement of expenses provided by, or granted pursuant to, this Article
shall continue as to a person who has ceased to be an officer, director,
employee or agent in respect of matters arising prior to such time and shall
inure to the benefit of the heirs, executors and administrators of such
person.
The By-laws of the Company provide that, subject to certain limitations, no
director shall be personally liable to the Company or its shareholders for
monetary damages for any breach of fiduciary duty by such director as a
director.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since August 1, 1994, the Registrant has issued and sold the following
unregistered securities:
1. From August 1994 through April 1995, the Company sold a total of 28
convertible demand notes in the aggregate principal amount of $4.0 million,
together with 28 warrants to purchase an aggregate of 294,008 shares of the
Company's Common Stock at an exercise price of $5.44 per share, to four private
investors. On April 23, 1996, the convertible demand notes were converted into
1,600,000 shares of the Company's Series B Convertible Preferred Stock.
II-2
<PAGE>
2. From June 1995 to August 1995, the Company sold a total of ten demand
notes in the aggregate principal amount of $940,000 to five private investors.
These demand notes were paid in full on August 14, 1995.
3. On September 20, 1994 and November 22, 1995, the Company issued a total
of 400,000 shares of Series B Convertible Preferred Stock in lieu of a $1.0
million cash payment for a license and certain services provided to the Company
under a Facilities Use Agreement between the Company and Centocor, Inc.
4. Through September 30, 1997, the Company granted options to acquire an
aggregate of 392,025 shares of Common Stock at exercise prices ranging from
$1.20 to $4.35 to various directors, officers, employees and consultants.
5. Through September 30, 1997, the Company issued 25,591 shares of Common
Stock upon exercise of options.
6. Through September 30, 1997, options to purchase 33,237 shares of Common
Stock previously granted to former employees and a former director of the
Company expired.
7. In May 1996, the Company sold a total of 2,435,286 shares of its Series C
Convertible Preferred Stock for an aggregate price of $9.7 million, or $4.00 per
share, to private investors.
8. On May 1, 1996, the Company sold a warrant to purchase 122,420 shares of
its Common Stock at an exercise price of $8.71 per share for an aggregate price
of $266,480 pursuant to a Financial Advisory Agreement between the Company and
Genesis Merchant Group Securities LLC.
9. On October 2, 1997, the Company issued a convertible promissory note in
the principal amount of $3.0 million and sold a warrant to purchase 68,910
shares of Common Stock at an exercise price equal to 115% of the initial
offering price in the Offering to one private investor.
The Company believes that the transactions described above were exempt from
registration under Sections 3(a)(9), 3(b) or 4(2) of the Securities Act because
the subject securities were, respectively, either (i) exchanged by the issuer
with its existing security holders exclusively, with no commission or other
remuneration being paid or given directly or indirectly for soliciting such
exchange; (ii) issued pursuant to a compensatory benefit plan pursuant to Rule
701 under the Securities Act; or (iii) sold to a limited group of persons, each
of whom was believed to have been a sophisticated investor or had a pre-existing
business or personal relationship with the Company or its management and was
purchasing for investment without a view to further distribution. Restrictive
legends were placed on stock certificates evidencing the shares and/or
agreements relating to the right to purchase such shares described above.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement.**
3.1 Articles of Incorporation of the Registrant, as amended.++
3.2 Bylaws of the Registrant.++
4.1 Form of certificate evidencing Common Stock of the Registrant.++
4.2 Stock Purchase Agreement, dated as of June 25, 1992, by and among the Registrant and the investors
listed in Exhibit 1(a) thereto.++
4.2(a) Amendment to Stock Purchase Agreement, dated November 15, 1993, among the Registrant and the
Investors.++
4.2(b) Amendment to Stock Purchase Agreement, dated September 20, 1994, among the Registrant and the
Investors.++
4.2(c) Amendment to Stock Purchase Agreement, dated May 1, 1996, among the Registrant and the Investors.++
4.2(d) Amendment to Stock Purchase Agreement, dated September 26, 1997, among the Registrant and the
Investors.++
4.3 Stock Purchase Agreement, dated as of November 15, 1993, by and among the Registrant and the
investors listed on Exhibit 1.1 thereto.++
4.3(a) Amendment to Stock Purchase Agreement dated September 20, 1994, among the Registrant and the
Investors.++
4.3(b) Amendment to Stock Purchase Agreement, dated May 1, 1996, among the Registrant and the Investors.++
4.3(c) Amendment to Stock Purchase Agreement dated September 26, 1997, among the Registrant and the
Investors.++
4.4 Stock Purchase Agreement, dated September 20, 1994, between the Registrant and Centocor, Inc.++
4.5 Stock Purchase Agreement, dated as of May 1, 1996, by and among the Registrant and the investors
listed on Schedule 1.1 attached thereto.++
4.5(a) Amendment No. 1 to Stock Purchase Agreement, dated September 26, 1997, among the Registrant and the
Investors.++
4.6 Warrant, dated as of May 1, 1996, issued to Genesis Merchant Group Securities.++
4.7 Form of Common Stock Warrant.++
4.8 License Agreement, dated as of January 2, 1997, by and between The Wistar Institute of Anatomy and
Biology and the Registrant (included in Exhibit 10.9).*++
4.9 Stock Purchase Agreement dated as of July 17, 1997, between the Registrant and the Trustees of the
University of Pennsylvania.++
4.10 Securities Purchase Agreement, dated September 19, 1997, between the Registrant and A.H. Investments
Ltd.++
4.11 Common Stock Warrant, dated October 3, 1997, issued to A.H. Investments Ltd.++
4.12 Convertible Promissory Note dated October 3, 1997, issued to A.H. Investments Ltd.++
5 Opinion of Ballard Spahr Andrews & Ingersoll regarding legality of securities being registered.**
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.1 1992 Omnibus Stock Option Plan.+++
10.2 1997 Non-Qualified Stock Option Plan.+++
10.3 Research and Development and License Agreement, dated July 19, 1995, between the Registrant and
American Cyanamid Company.*++
10.3(a) Amendment No. 1 to the Research and Development and License Agreement, dated October 3, 1997, between
the Registrant and American Cyanamid Company.*++
10.4 Supply Agreement, dated July 19, 1995, between the Registrant and American Cyanamid Company.*++
10.4(a) Amendment No. 1 to the Supply Agreement, dated October 3, 1997, between the Registrant and American
Cyanamid Company.*++
10.5 License and Option Agreement, dated March 6, 1995, between the Registrant and Centocor, Inc.*++
10.5(a) Amendment to License and Option Agreement, dated May 31, 1995, between the Registrant and Centocor,
Inc.++
10.6 License Agreement, dated December 1, 1994 between the Registrant and the Trustees of the University
of Pennsylvania.*++
10.6(a) Amendment to License Agreement, dated July 17, 1997, between the Registrant and the Trustees of the
University of Pennsylvania.++
10.7 License Agreement, dated December 1, 1994, between the Registrant and the Institute of Biotechnology
and Advanced Molecular Medicine, Inc.*++
10.8 Agreement between the Registrant and the University of Iowa, effective December 3, 1992.*++
10.9 License Agreement, dated as of January 2, 1997, by and between The Wistar Institute of Anatomy and
Biology and the Registrant.*++
10.10 Agreement, dated as of July 24, 1996, between the Registrant and Vincent R. Zurawski, Jr.+++
10.11 Agreement, dated as of July 17, 1996, between the Registrant and Richard Ginsberg.+++
10.12 Agreement, dated as of July 17, 1996, between the Registrant and Richard Ciccarelli.+++
10.13 Agreement, dated as of July 17, 1996, between the Registrant and James Murphy.+++
10.14 Agreement, dated as of July 17, 1996, between the Registrant and Anthony Marcucci.+++
10.15 Agreement, dated as of July 17, 1996, between the Registrant and Richard Carrano.+++
10.16 Facilities Use Agreement, dated September 20, 1994, between the Registrant and Centocor, Inc.*++
10.17 Flex Lease, dated July 8, 1992, between Nairn Great Valley, Inc. and the Registrant.++
10.17(a) First Amendment to Flex Lease, dated January 11, 1993 by and between Nairn Great Valley, Inc. and the
Registrant.++
10.17(b) Second Amendment to Flex Lease, dated November 19, 1993 by and between Nairn Great Valley, Inc. and
the Registrant.++
10.17(c) Third Amendment to Agreement of Lease, dated September 23, 1997 by and between Liberty Property
Limited Partnership and the Registrant.++
10.18 Exclusive License Agreement, dated as of July 9, 1997, by and among the Registrant, [ ] and
[ ].*++
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.19 License and Option Agreement, dated as of November 17,1997, by and between the Registrant and Biogen,
Inc.*
21 Subsidiaries of the Registrant.++
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Ballard Spahr Andrews & Ingersoll (included in Exhibit 5).
23.3 Consent of Ratner & Prestia.
23.4 Consent of Woodcock Washburn Kurtz Mackiewicz & Norris LLP.
24 Power of Attorney (included in signature page).++
27 Financial Data Schedule.
</TABLE>
- ------------------------
+ Constitutes a management contract or compensatory plan.
* Confidential treatment has been requested for certain portions thereof. Such
portions have been filed separately with the Commission.
** To be filed by amendment.
++ Previously filed.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein and the offering such securities at that time shall be deemed to be the
initial bona fide offering thereof.
The Registrant hereby undertakes to provide to the underwriter at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names required by the underwriter to permit
prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused the Amendment No. 1 to this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Malvern,
Pennsylvania, on November 20, 1997.
APOLLON, INC.
By: /s/ VINCENT R. ZURAWSKI, JR.
-----------------------------------------
Vincent R. Zurawski, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
President, Chief Executive
/s/ VINCENT R. ZURAWSKI, JR. Officer and Director
- ------------------------------ (principal executive November 20, 1997
Vincent R. Zurawski, Jr. officer)
Vice President, Finance
and Administration,
/s/ JAMES G. MURPHY Chief Financial Officer
- ------------------------------ and Treasurer (principal November 20, 1997
James G. Murphy financial and accounting
officer)
*
- ------------------------------ Director November 20, 1997
Morton Collins
*
- ------------------------------ Director November 20, 1997
Thomas S. Edgington
*
- ------------------------------ Director November 20, 1997
Christopher Moller
*
- ------------------------------ Director November 20, 1997
Hubert J. P. Schoemaker
*By: /s/ JAMES G. MURPHY
-------------------------
James G. Murphy
ATTORNEY-IN-FACT
II-7
<PAGE>
APOLLON, INC.
REGISTRATION STATEMENT ON FORM S-1
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.19 License and Option Agreement dated as of November 19, 1997 by and between the Registrant and Biogen,
Inc.*
23.1 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Ratner & Prestia.
23.4 Consent of Woodcock Washburn Kurtz Mackiewicz & Norris LLP.
27 Financial Data Schedule.
</TABLE>
- ------------------------
* Confidential treatment has been requested for certain portions thereof. Such
portions have been filed separately with the Commission.
<PAGE>
Exhibit 10.19
THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT
REQUEST. REDACTED MATERIAL IS BRACKETED ON PAGES 5, 6, 7, 9, 10, A-1, B-1,
B-2, B-3, B-6, B-7, B-8, B-9, B-10, B-11, C-7, C-10, C-11, C-12 AND C-14 AND
HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
LICENSE AND OPTION AGREEMENT
This LICENSE AND OPTION AGREEMENT (the "Agreement") is made and entered
into this 17th day of November 1997 (the "Effective Date"), by and between
Biogen, Inc. ("Biogen"), a Massachusetts corporation, with principal offices
located at 14 Cambridge Center, Cambridge, Massachusetts 02142, and Apollon,
Inc. ("Apollon"), a Pennsylvania corporation, with principal offices located at
One Great Valley Parkway, Malvern, Pennsylvania 19355-1423. Each of Biogen and
Apollon are a "Party" to this Agreement and collectively they are the "Parties"
to the Agreement.
INTRODUCTION
1. Biogen is the owner of certain technology, patents and other
proprietary rights related to Hepatitis B virus;
2. Apollon desires a license from Biogen under the aforesaid technology,
patents and proprietary rights, and Biogen is willing to grant to Apollon such a
license on the terms and conditions set forth in this Agreement;
3. Apollon is the owner of certain technology, patents and other
proprietary rights related to DNA-based vaccines; and
4. Biogen desires an option from Apollon to obtain the rights to market
and sell products developed by Apollon under the aforesaid technology, patents
and proprietary rights, and Apollon is willing to grant to Biogen such an option
on the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties, intending to be legally bound, agree as follows:
SECTION 1 DEFINITIONS
As used in this Agreement, the following terms, whether used in the
singular or plural, shall have the following meanings:
<PAGE>
1.1 "Affiliate" shall mean, as applied to either Party, any corporation,
partnership, joint venture or other legal entity which Controls, is Controlled
by, or is under common Control with, such Party. The definition of "Control" is
set forth in Section 4.2 of this Agreement.
1.2 "Apollon Patent Rights" shall mean all Patents throughout the
Territory covering or related to Apollon Technology which Apollon owns on the
Effective Date or as to which Apollon acquires ownership at any time during the
term of this Agreement. Apollon Patent Rights existing as of the Effective Date
are set forth in Appendix A to this Agreement.
1.3 "Apollon Technology" shall mean all Intellectual Property, whether
patentable or not (i) which Apollon owns as of the Effective Date or as to which
Apollon acquires ownership at any time during the term of this Agreement,
related to DNA-based Vaccine Products, and (ii) which is necessary or useful in
order to offer for sale, import, sell or seek approval to market Licensed
Products. For purposes of this Agreement, Apollon Technology specifically
excludes any Intellectual Property, Patent Rights or other rights Apollon
controls or derives under the University Licenses.
1.4 "Biogen Patent Rights" shall mean all Patents throughout the Territory
covering or related to Biogen Technology which Biogen owns or controls on the
Effective Date or as to which Biogen acquires ownership or control at any time
during the term of this Agreement. Biogen Patent Rights existing as of the
Effective Date are set forth in Appendix B to this Agreement.
1.5 "Biogen Technology" shall mean all Intellectual Property, whether
patentable or not (i) which Biogen owns or controls as of the Effective Date or
as to which Biogen acquires ownership or control at any time during the term of
this Agreement, related to DNA sequences encoding Hepatitis B viral antigens,
and (ii) which is necessary or useful in order to discover, research, develop,
make, use, offer for sale, import, sell or seek approval to market Licensed
Products.
1.6 "Clinical Trial Information" shall mean all data and information of
whatever nature specifically developed in connection with the Licensed Products
by either Party under this Agreement and the Supply and License Agreement,
including preclinical and clinical trial protocols, reports and results
(including pharmacological, toxicological, pharmaceutical and other relevant
data) for the Licensed Products, applications for regulatory approval of the
testing, use or sale of Licensed Products, regulatory files and filings
(including master files, INDs, NDAs, BLAs, PLAs, PMAs and the like) made in
connection with the Licensed Products and all licenses from, correspondence
with, or approvals by regulatory authorities for the testing, use or sale of
Licensed Products.
1.7. "DNA-based Vaccine Product" shall mean a vaccine product containing a
DNA sequence encoding an antigen.
-2-
<PAGE>
1.8 "Intellectual Property" shall mean information (general and specific),
developments, discoveries, inventions, patents, patent applications, know-how,
trade secrets, whether or not patented or patentable.
1.9 "License and Supply Agreement" shall mean the License and Supply
Agreement substantially in the form of Appendix C attached to this Agreement and
made a part hereof to be entered into between the Parties in the event Biogen
exercises the Option granted pursuant to Section 3.1 hereof.
1.10 "Licensed Products" shall mean any DNA-based Vaccine Product that (a)
comprises DNA encoding a polypeptide displaying Hepatitis B core, Hepatitis B
surface, and/or Hepatitis B e antigen specificity or antigenicity, and (b) the
manufacture, use, sale, offer for sale, or import of which (i) is covered by a
Valid Claim of any Biogen Patent Rights or Apollon Patent Right in the country
where such Licensed Product is manufactured, used, imported, offered for sale or
sold, and/or (ii) embodies or is developed using any of the Biogen Technology or
Apollon Technology. "Licensed Products" shall not include any Hepatitis B virus
vaccine for human use which contains recombinant Hepatitis B virus antigen, any
Prophylactic Vaccine Product or diagnostic products containing a Hepatitis B
virus antigen, or any DNA-based Vaccine Product, which, when injected into a
recipient, is incorporated into the genome of the recipient. For purposes of
this Agreement, "Prophylactic Vaccine Product" shall mean a DNA-based Vaccine
Product which is introduced to a patient prior to infection by the Hepatitis B
virus.
1.11 "Net Sales" shall mean the gross invoiced amount (not less than cost
and not dependent on whether such invoices have been actually paid) on sales of
Licensed Products sold by a Party and its Affiliates and sublicensees, in bona
fide arms' length transactions less the following items, as determined from the
books and records of the Party making such sale, its Affiliates and
sublicensees, provided that such items do not exceed reasonable and customary
amounts in the country in which such Sale occurred: (i) freight and insurance if
billed separately; (ii) amounts repaid or credited by reason of returns or
rejections; (iii) sales taxes, excise taxes and other taxes (other than income
taxes) levied on the invoiced amount; (iv) cash, trade and quantity discounts
actually given or made; (v) rebates paid pursuant to government regulations; and
(vi) commissions paid to distributors or other sales agencies that are included
in the gross sales price, if supported by receipts provided to Biogen. A sale
of Licensed Products to an Affiliate for re-sale of Licensed Products by such
Affiliate shall not be considered a Sale for the purposes of this provision, but
the re-sale of such Licensed Products by the Affiliate shall be a Sale for
purposes of this Agreement. Any use of Licensed Products by a Party or any of
its Affiliates or sublicensees, other than for quality assurance, quality
control or research purposes, shall be considered a Sale for accounting and
royalty purposes and Net Sales for such use or for Sale by gift shall be the
average sales price of Licensed Products Sold in an arms' length transaction by
such Party and its Affiliates and sublicensees during the applicable royalty
reporting period or, if no such arms' length transaction occurred in such
period, during the last royalty reporting period in which such arms' length
transaction occurred.
-3-
<PAGE>
In the event that consideration in addition to or in lieu of money is
received for the Sale of Licensed Products in an arms' length transaction, the
fair market value of such consideration shall be included in the determination
of Net Sales for such Sale. To the extent that Licensed Products are Sold in
other than an arms' length transaction, Net Sales for such Sale shall be the
average Sale price of Licensed Products if Sold in an arms' length transaction
during the applicable royalty reporting period in the country in which the
non-arms' length transaction occurred.
In the event that Licensed Products are Sold by a Party or any of its
Affiliates or sublicensees in the form of a combination Licensed Product
containing one or more active ingredients in addition to the Licensed Product,
Net Sales for the combination Licensed Product shall be determined by
multiplying actual Net Sales of the combination Licensed Product (determined by
reference to the standard Net Sales definition) during the royalty payment
period by the fraction A/A+B where A is the average Sale price of the Licensed
Product when Sold by the Party and its Affiliates and sublicensees separately in
finished form and B is the average Sale price of the other active ingredients
when Sold separately in finished form in each case during the applicable royalty
reporting period in the country in which the Sale of the combination Licensed
Product was made, or if Sales of both the Licensed Product and the other active
ingredients did not occur in such period, then in the most recent royalty
reporting period in which Sales of both occurred. In the event that such
average Sale price cannot be determined for both the Licensed Product and all
other active ingredients included in the combination Licensed Product, Net Sales
for purposes of determining payments under this Agreement shall be calculated by
multiplying the Sales with respect to the combination Licensed Product by the
fraction C/C+D where C is the standard fully-absorbed cost of the Licensed
Product portion of the combination and D is the sum of the standard
fully-absorbed costs of all other active ingredients included in the combination
Licensed Product, in each case, as determined by using the standard accounting
procedures used by the Party making the Sale, consistently applied. In no event
shall Net Sales with respect to a combination Licensed Product be reduced to
less than fifty percent (50%) of actual Net Sales with respect to such
combination Licensed Product (determined by reference to the standard Net Sales
definition) by reason of any adjustment provision set forth in this paragraph.
1.12 "Patent" shall mean all letters patents and pending patent
applications for patents of the United States and all countries foreign thereto,
including any provisional applications, priority applications, extensions,
reissues, reexaminations, renewals, continuations, continuations-in-part,
divisionals, certificates of invention and supplemental protection certificates.
1.13 "Person" shall mean an individual, a partnership, a joint venture, a
corporation, a trust, a business trust, a limited liability company or limited
liability partnership, an estate, an unincorporated organization, a government
or any department or agency thereof, or any other entity.
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1.14 "Product Development Program" shall mean the development effort
conducted by Apollon, either alone or in partnership with others, to develop
Licensed Products, as such program is described in Section 5 hereof.
1.15 "Sale(s)" or "Sold" shall mean any gift, grant, sale, assignment,
transfer, conveyance or other disposition of a Licensed Product by a Party to
this Agreement or any of its Affiliates or sublicensees to another Person,
except distribution of samples provided at no charge to physicians, hospitals,
or clinics for promotional purposes or for purposes of the Product Development
Program, provided such distribution is not made in exchange for lower prices on
other products sold by such Party or other noncash consideration.
1.16 "Territory" shall mean worldwide.
1.17 "University License" shall mean any license or rights granted to
Apollon, at any time, under any Patent or Intellectual Property by (i) the
Trustees of the University of Pennsylvania; (ii) the Wistar Institute of Anatomy
and Biology; (iii) the Institute of Biotechnology and Advanced Molecular
Medicine; (iv) The General Hospital Corporation; or (v) any other third party
licensor, which are necessary or useful for the development, manufacture, use,
marketing or sale of Licensed Products.
1.18 "Valid Claim" shall mean (i) a claim of a pending patent
application which claim shall not have been canceled, withdrawn, abandoned or
rejected by an administrative agency from which no appeal can be taken; or (ii)
a claim of an issued and unexpired patent which has not lapsed or become
abandoned or declared invalid or unenforceable by a court of competent
jurisdiction or an administrative agency from which no appeal can be or is
taken.
SECTION 2 LICENSE GRANT TO APOLLON
2.1 License Grant to Apollon.
(a) Biogen hereby grants to Apollon, and Apollon hereby accepts from
Biogen, a semi-exclusive, royalty-bearing license, including the right to grant
certain sublicenses as set forth herein, to the Biogen Patent Rights and Biogen
Technology to research and develop, manufacture, have manufactured, use, sell,
have sold, offer for sale and import Licensed Products in the Territory. This
license shall remain in effect unless or until this Agreement is terminated
pursuant to Section 8 hereof.
(b) Each of Biogen and Apollon hereby acknowledge that Biogen has
previously granted a non-exclusive license to Viagene with respect to Hepatitis
B core antigen and Hepatitis B e antigen technology. Biogen hereby agrees that
during the term of this Agreement it will not grant further licenses to the
Biogen Patent Rights and Biogen Technology to any non-Affiliate of Biogen for
the development of a DNA-based Vaccine Product comprised of DNA sequences which
encode Hepatitis B viral-derived antigens without the prior written consent of
Apollon, which consent may be unreasonably withheld. [
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]
2.2 Right to Sublicense. Apollon shall have the right to extend to its
Affiliates the rights and licenses granted to Apollon under this Section 2,
and for purposes hereof, such extension shall not be considered the grant of
a sublicense. Apollon shall have the right to grant, under the license
granted under this Section 2, multiple sublicenses to manufacture Licensed
Products and, in each country in the Territory, one sublicense to sell
Licensed Products. Each of Apollon and its sublicensee shall be entitled to
sell Licensed Products in such country in the Territory. For purposes of
this Agreement, distributors and distribution arrangements shall not be
considered sublicensees of Apollon. Apollon agrees that any sublicenses
granted by it shall prohibit further sublicenses by the sublicensee and shall
provide that the obligations of Apollon to Biogen hereunder, except the
Product Development Program obligations set forth in Section 4 hereof and the
supply obligations described in Section 6 hereof, shall be binding upon the
sublicensee as if it were a party to this Agreement. Apollon agrees to
forward to Biogen a copy of any and all sublicense agreements within thirty
(30) days of the execution of such sublicense agreements. Apollon shall have
the right to grant sublicenses to SmithKline Beecham Corporation or any of
its Affiliates ("SmithKline"), provided, however, that any such sublicense
agreement must include a clause that requires SmithKline to pay to Biogen an
amount equal to [ ] of Biogen's attorneys fees
in the event that Biogen obtains a final non-appealable judgment against
SmithKline in any legal action or arbitration arising in connection with a
dispute under the sublicense agreement.
2.3 Limitations of License Grant. Except as expressly provided in this
Section 2, nothing in this Agreement shall be deemed to grant Apollon any rights
in, or license to, any product, Patent or Intellectual Property of Biogen.
Without limiting the generality of the foregoing, Apollon shall not be granted
any right hereunder to make, have made, use, offer for sale, sell or import any
products which are not Licensed Products.
2.4 License Fee. In consideration of the license granted by Biogen,
Apollon shall pay Biogen a non-creditable, non-refundable, license fee of
$[ ] (the "License Fee") on the Effective Date.
SECTION 3 OPTION GRANT TO BIOGEN
3.1 Option Grant to Biogen. Apollon hereby grants to Biogen an exclusive
option to obtain (i) an exclusive license under the Apollon Technology, with the
right to grant certain sublicenses, to sell, offer for sale and import Licensed
Products manufactured by or for Apollon for sale by Biogen in Japan and (ii)
associated contingent manufacturing rights in the event Apollon is unable or
unwilling to supply such Licensed Products (the "Option"). The Option is
exercisable by Biogen at any time during an initial period (the "Initial
Period") of two (2) years from the Effective Date of this Agreement. Prior to
expiration of such Initial Period, Biogen shall have the opportunity to renew
the Option in six month increments (the "Additional
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Periods"), for a total Additional Period of up to two (2) additional years.
Notice of Biogen's intent to renew the Option must be received by Apollon at
least ninety (90) days prior to the expiration of the then current Initial
Period or Additional Period, as the case may be. The Initial Period and any
Additional Periods are hereinafter collectively referred to as the Option
Period. Biogen shall exercise the Option by providing Apollon with written
notice of its exercise of the Option during the Option Period. Upon exercise of
the Option, a license shall be granted automatically to Biogen through the
execution by the Parties of the License and Supply Agreement. Biogen may
terminate the Option Period at any time upon written notice to Apollon.
3.2 Option Fee. In consideration of the Option granted by Apollon
hereunder, Biogen shall pay Apollon a non-creditable, non-refundable fee of
$[ ] on the Effective Date. In the event that Biogen elects to extend
the Option beyond the Initial Period, Biogen shall pay Apollon an additional
$[ ] fee for each six-month Additional Period beyond the Initial Period.
Such extension fee shall be paid to Apollon at the time notice of Biogen's
intent to renew the Option is sent to Apollon.
3.3 Limitations of Option Grant. Except as expressly provided in this
Section 3, nothing in this Agreement shall be deemed to grant Biogen any rights
in, or license to, any product, Patent or Intellectual Property of Apollon.
Without limiting the generality of the foregoing, Biogen shall not be granted
any right hereunder to make or have made, or to use, sell, have sold, offer for
sale or import Licensed Products anywhere in the Territory other than in Japan.
In addition, nothing in this Agreement shall be deemed to grant Biogen any
rights in, or sublicense to, any product, Patent or Intellectual Property under
the University Licenses.
SECTION 4 ROYALTIES, OTHER PAYMENTS AND FINANCIAL REPORTS
4.1 Royalties to Biogen. Apollon shall pay to Biogen a royalty equal to
[ ] of the Net Sales of Licensed Products made by
Apollon and its Affiliates and sublicensees in all countries in the Territory
except Japan. If Biogen does exercise the Option granted pursuant to Section
3.1 hereof, the provisions of the License and Supply Agreement shall be
applicable to all Sales of Licensed Products in Japan. If Biogen does not
exercise the Option, following the expiration of the Option Period, Apollon
thereafter shall pay to Biogen a royalty equal to [ ]
of the Net Sales of Licensed Products made by Apollon and its Affiliates and
sublicensees in Japan. In no event shall any Net Sales of Licensed Products
be subject to assessment of more than one scheduled royalty, provided that
the highest applicable royalty shall be assessed on any Net Sales. The
obligation to pay royalties hereunder shall continue separately on a
country-by-country basis within the Territory with respect to each Licensed
Product Sold by Apollon, its Affiliates or sublicensees until the date on
which such Licensed Product or the manufacture, use, offer for sale, import
or sale of such Licensed Product is no longer covered by a Valid Claim of
Biogen Patent Rights in such country.
4.2 Change in Control Payments. In the event a change in Control of
Apollon occurs during the term of this Agreement relative to the Control in
existence on the Effective Date,
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Apollon shall make each of the following non-refundable, non-creditable payments
to Biogen upon achievement of each of the following milestones:
Event Payment
----- -------
FDA approval of the first Licensed Product $2,700,000
EMEA approval of the first Licensed Product $2,700,000
"Control" shall mean, including, with correlative meaning, the terms "Controlled
by"and "under common Control with", as used with respect to any Person, the
possession, directly or indirectly, of the power to vote fifty percent (50%) or
more of the outstanding voting securities of such Person, or to direct or cause
the direction of the management or policies of such Person, whether through the
ownership of voting securities, by contract or otherwise. Notwithstanding the
foregoing, in the event Control of Apollon is acquired by any entity other than
an entity qualified as a "Fortune 500 company", a majority-owned subsidiary of a
Fortune 500 company or an entity which is the equivalent thereof, such
acquisition shall not be deemed a change in Control of Apollon for purposes of
this Section 4.2. In the event a change in Control of Apollon occurs, each
payment shall become due and payable in full to Biogen within 30 days of a
change in Control of Apollon if the milestone event was achieved prior to, or
concurrently with, such change in Control. If either milestone event is
achieved subsequent to a change in Control of Apollon, the payment obligation
shall vest on the date such milestone event is achieved and shall be paid in
full to Biogen within 30 days of the date such milestone event is achieved.
4.3 Payment Schedule and Reports. On or before forty-five (45) days
following the end of each calendar quarter occurring after the first commercial
Sale of a Licensed Product, Apollon shall pay to Biogen the royalty payments
owed by it with respect to Net Sales of Licensed Products during such calendar
quarter. Such payment shall be accompanied by a report on a country-by-country
basis showing (i) the aggregate actual Sales volume of Licensed Products by
Apollon and its Affiliates and sublicensees, (ii) aggregate Net Sales,
(iii) gross invoice price(s) of Licensed Product(s) Sold, (iv) deductions from
gross invoice price permitted hereunder and (v) the royalty payable hereunder.
Such payment shall also be accompanied by a copy of any reports received by
Apollon from its Affiliates or sublicensees during the preceding calendar
quarter as shall be pertinent to a royalty accounting hereunder. All reports
shall show all amounts reported in the currency in which Sales were made, and in
United States dollars at the conversion rate described in Section 4.7.
4.4 Books and Records. Apollon and each of its Affiliates and
sublicensees shall maintain such books and records as are necessary to establish
the accuracy of the reports submitted under Section 4.3 for a period of five (5)
years from the date of submission of such reports. Such books and records shall
be maintained on the accrual basis of accounting in accordance with generally
accepted accounting principles.
4.5 Audits. Upon the written request of Biogen, and not more than once in
each calendar year, Apollon shall permit Biogen, at Biogen's expense, to have
access during normal
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business hours to such of the records of Apollon as may be reasonably necessary
to verify the accuracy of the royalty reports provided under this Section 4.
Any audit so requested shall be performed on Biogen's behalf by an independent
accounting firm of nationally recognized standing reasonably satisfactory to
both Parties. If Biogen concludes, based on the audit results, that additional
royalties were owed during the financial periods audited, Apollon shall pay the
additional royalties within fifteen (15) days of the date Biogen delivers to
Apollon a written report so concluding. The costs associated with any audit
conducted under this Section 4.5 shall be paid by Biogen; provided, however, if
the audit correctly discloses that the royalties payable by Apollon for the
audited period are more than one hundred ten percent (110%) of the royalties
actually paid for such period, then Apollon shall pay the reasonable fees and
expenses charged by the accounting firm conducting the audit, and provided,
further, that if Apollon grants a sublicense to SmithKline, then Apollon shall
pay [ ] of such reasonable fees and expenses.
4.6 Confidentiality of Financial Information. Both Parties shall treat
all financial information subject to review under this Section 4, and all
reports generated hereunder, as confidential and shall use such reports and
financial information only for the purposes contemplated by this Section 4.
4.7 Currency. All payments required to be made under this Agreement shall
be made in U.S. dollars. Monetary conversions from the currency of a foreign
country into U.S. dollars shall be made at the exchange rate for buying U.S.
dollars in force on the last business day of the period for which the Net Sales
are reported in accordance with Section 4.3 as reported by The Wall Street
Journal, or on another basis mutually agreed upon by the Parties in writing.
4.8 No Deductions. The royalty payments computed or specified under this
Section 4 are the actual amounts to be paid to Biogen and shall not be reduced
in any way including, but not limited to, by any payment obligations owed to
Apollon or its Affiliates and sublicensees by Biogen under this Agreement. In
the event a Party or its Affiliates or sublicensees are required to make a
deduction or withholding of tax, then the amount payable to the other Party
shall be increased to the extent necessary to ensure that after the making of
such deduction or withholding, the other Party receives and retains an amount
equal to what it would have received and retained had no such deduction or
withholding been made by the paying Party or its Affiliates or sublicensees.
Each Party agrees to assist the other by submitting declarations to the relevant
authorities as may be required with regard to each Party's status in relation to
a deduction or withholding of taxes.
SECTION 5 PRODUCT DEVELOPMENT PROGRAM
5.1 Conduct of Program. Apollon will devote sufficient resources and
commercially reasonable efforts to the diligent conduct of a Product Development
Program, the objects of which are: (i) to develop one or more Licensed
Products; (ii) to conduct preclinical and clinical trials of such Licensed
Products; (iii) to obtain regulatory approvals for the sale of such Licensed
Products in all countries throughout the Territory where Apollon reasonably
believes it is
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commercially prudent to offer Licensed Products for Sale; (iv) to develop
markets for such Licensed Products in such countries; and (v) to sell Licensed
Products in such countries. Without limiting the generality of the foregoing,
Apollon shall:
[
]
In the event Apollon does not achieve one of the foregoing milestone events
within the established time period, Apollon shall extend the Option Period set
forth in Section 3.1 hereof, without charge to Biogen, in an amount of time
equal to the delay between the end of such established time period and actual
achievement of the milestone event. Thereafter, the extension of the Option
Period, and the related extension payments set forth in Section 3.2 hereof,
shall continue. In the event Apollon misses one of the foregoing milestone
events by more than one (1) year, Biogen shall thereafter have the right to
terminate this Agreement or the license granted under Section 2 hereof.
5.2 Reporting. Apollon will report regularly (at least every twelve (12)
months) commencing one year from the Effective Date in writing to Biogen on the
progress of the Product Development Program. Failure to report within sixty
(60) days of the required date will result in an increase in the royalties paid
by Apollon to Biogen under Section 4 hereof in the amount of 0.1% for each such
late report, provided that Apollon shall have thirty (30) days from receipt of
notice from Biogen to cure any such failure to report prior to such increase in
the royalty payments. Biogen may, in its discretion, waive its rights under
this Section 5.2 if the ongoing scientific exchange between the Parties is
sufficiently extensive during any calendar year such that a written report is
unnecessary. Without limiting the generality of the foregoing, Apollon will
furnish Biogen with copies of protocols for completed clinical trials for
Licensed Products and reports on progress and summaries of results of
pre-clinical tests and clinical trials for Licensed Products carried out
pursuant to the Product Development Program (including but not limited to
pharmacological, toxicological, clinical, pharmaceutical and other relevant
data), specifications for Licensed Products, reports on progress in obtaining
relevant government approvals with respect to Licensed Products in the
Territory, and steps taken towards marketing Licensed Products in the Territory.
5.3 Access to Clinical Trial Information. Except as hereafter set forth,
Apollon shall not be obligated to provide any Clinical Trial Information to
Biogen until such time as Biogen has exercised the Option granted hereunder.
Apollon shall provide to Biogen all Clinical Trial Information which is
necessary or useful to Biogen for its evaluation of whether to exercise the
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Option granted pursuant to Section 3.1 hereof. In the event Biogen exercises
the Option, Apollon shall provide Biogen further access to Clinical Trial
Information in accordance with the terms of the License and Supply Agreement.
Biogen and its Affiliates shall provide Apollon and its Affiliates with access
to all Clinical Trial Information developed by Biogen and its Affiliates related
to Licensed Products, including all regulatory filings made by Biogen and its
Affiliates in Japan, and all governmental responses thereto. Notwithstanding
the foregoing, Biogen shall own all of its Clinical Trial Information and
regulatory filings in Japan related to Licensed Products and Apollon shall own
all its Clinical Trial Information and all related reports provided pursuant to
Section 5.2, as well as all regulatory filings made throughout the Territory
except in Japan related to Licensed Products.
5.4 Final Product Specifications. Upon the first submission by Apollon,
its Affiliate or a sublicensee of a BLA(PLA) to the United States Food and Drug
Administration (USFDA) or equivalent agency in any country in the Territory for
approval of the marketing of any Licensed Product, Apollon will furnish Biogen
with a detailed specification for such Licensed Product, and thereafter Apollon
will promptly furnish Biogen with any modifications or updates of such
specification (as so modified or updated, the "Specification").
SECTION 6 SUPPLY AGREEMENT
6.1 Agreement to Supply. Upon the exercise of the Option granted under
Section 3.1 hereof, Apollon shall manufacture, or have manufactured on its
behalf, and sell to Biogen sufficient quantities of Licensed Products to meet
the requirements of Biogen, its Affiliates and sublicensees for use by Biogen,
its Affiliates and sublicensees in the conduct of preclinical and clinical
trials in Japan and for the sale of Licensed Products in Japan. The specific
terms of the agreement to supply, and the related contingent manufacturing
rights, are set forth in Section 5 of the License and Supply Agreement, which
License and Supply Agreement shall be executed by the Parties upon exercise of
the Option granted under Section 3.1 hereof.
6.2 Event of Bankruptcy. For the purposes of this Agreement, the Parties
agree and acknowledge that (i) the grant of rights to Biogen upon the exercise
of the Option is a grant of "Intellectual Property" rights to market and sell,
offer for sale and import, and (ii) in interpreting this Agreement, the
provisions of the Agreement granting such rights are to be governed by, and
Biogen is to have the benefit of a licensee under, Section 365(n) of the United
States Bankruptcy Code, as amended.
SECTION 7 WARRANTIES, LIABILITY AND DISCLAIMERS OF WARRANTY
7.1 Warranty of Title. Biogen warrants and represents that it owns all of
the right, title and interest in and to the Biogen Patent Rights.
7.2 Warranty of Authority. Each of the Parties hereto warrants and
represents to the other Party that, as of the Effective Date (i) it has the
full, right power and authority to enter into this Agreement and to carry out
its obligations hereunder, (ii) this Agreement constitutes the valid
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obligation of such Party, enforceable against it in accordance with its terms,
and (iii) the execution and delivery of this Agreement and the performance of
such Party's obligations hereunder (a) does not conflict with or violate any
requirement of applicable laws or regulations, and (b) does not conflict with,
or constitute a default under, any contractual obligation of such Party.
7.3 DISCLAIMER OF WARRANTY. EXCEPT AS PROVIDED IN SECTION 7.1 ABOVE AND
IN THIS SECTION 7.3, BIOGEN AND APOLLON MAKE NO WARRANTIES OR REPRESENTATIONS
WHATSOEVER, WHETHER EXPRESS OR IMPLIED, HEREUNDER; IN PARTICULAR NEITHER PARTY
MAKES A WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE OR MERCHANTABILITY OF ANY
PRODUCT PRODUCED UNDER THE LICENSE OR OPTION GRANTED HEREBY. MOREOVER, NEITHER
PARTY MAKES ANY REPRESENTATION OR WARRANTY THAT THE MANUFACTURE OR SALE OF
LICENSED PRODUCTS OR THE USE OF LICENSED PRODUCTS BY ANY PERSON OR ENTITY WILL
NOT CONSTITUTE AN INFRINGEMENT OF THE PATENT OR OTHER INTELLECTUAL PROPERTY
RIGHTS OF OTHERS. NOTWITHSTANDING THE FOREGOING, EACH PARTY HEREBY REPRESENTS
AND WARRANTS THAT AS OF THE DATE HEREOF IT HAS NOT RECEIVED WRITTEN NOTICE FROM
ANY THIRD PARTY OF ANY SUCH INFRINGEMENT. IN NO EVENT SHALL EITHER PARTY BE
LIABLE FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OR LOST REVENUES OR
PROFITS.
7.4 Indemnification and Insurance. (a) Apollon shall indemnify and hold
Biogen and its Affiliates and their respective officers and employees harmless
from and against any losses, liabilities, costs and expenses (including court
costs and attorney's fees) arising out of or relating to any suits or
liabilities whatsoever (including claims for product liability) to the extent
arising out of the design, manufacture, use, sale or promotion of Licensed
Products except, in all instances, (i) to the extent caused by Biogen's
promotional or sales practices in connection with the use or Sales of Licensed
Products by Biogen and/or the manufacture of Licensed Products by Biogen under
the License and Supply Agreement, (ii) negligence or intentional misconduct by
Biogen or its Affiliates and their respective officers and employees or (iii)
breach of any term of this Agreement by Biogen or its Affiliates and their
respective officers and employees.
(b) Biogen shall indemnify and hold Apollon and its Affiliates and
their respective officers and employees harmless from and against any losses,
liabilities, costs and expenses (including costs and attorney's fees) to the
extent arising out of, or relating to any suits or liabilities whatsoever
(including claims for product liability) related to, (i) Biogen's promotional
and sales practices in connection with the use or Sales of Licensed Products by
Biogen and/or the manufacture of Licensed Products by Biogen under the License
and Supply Agreement, (ii) negligence or intentional misconduct by Biogen or its
Affiliates and their respective officers and employees or (iii) breach of any
term of this Agreement by Biogen or its Affiliates and their respective officers
and employees.
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(c) A party (the "Indemnitee") that intends to claim indemnification
under this Section 7.4 shall promptly notify the other party (the "Indemnitor")
of any liability or action in respect of which the Indemnitee intends to claim
such indemnification, and the Indemnitor shall have the right to participate in,
and, to the extent the Indemnitor so desires, jointly with any other Indemnitor
similarly noticed, to assume the defense thereof with counsel selected by the
Indemnitor; provided, however, that an Indemnitee shall have the right to retain
its own counsel, with the fees and expenses to be paid by the Indemnitor, if
representation of such Indemnitee by the counsel retained by the Indemnitor
would be inappropriate due to actual or potential differing interests between
such Indemnitee and any other party represented by such counsel in such
proceedings. The indemnity obligations under this Section 7.4 shall not apply
to amounts paid in settlement of any loss, claim, damage, liability or action if
such settlement is effected without the consent of the Indemnitor, which consent
shall not be withheld unreasonably. The Indemnitor may not settle the action or
otherwise consent to an adverse judgment in such action that diminishes the
rights or interests of the Indemnitee without the express written consent of the
Indemnitee. The Indemnitee, its employees and agents, shall cooperate fully
with the Indemnitor and its legal representatives as requested by the Indemnitor
and at the Indemnitor's expense in the investigation of any action, claim or
liability covered by this indemnification.
(d) Biogen and Apollon each shall maintain product liability
insurance with respect to development, manufacture and sales of Licensed
Products by Biogen or Apollon, as the case may be, in such amount as is
customary in the industry. Each party shall be named as an additional insured
insofar as its rights of indemnification hereunder are concerned on any such
policies of the other party. Biogen and Apollon, as applicable, shall each
maintain such insurance for so long as it continues to manufacture or sell any
Licensed Products.
SECTION 8 TERMINATION
8.1 Breach by Apollon. Biogen may terminate this Agreement or the license
granted to Apollon hereunder upon breach by Apollon of the obligation to pay any
amount due hereunder or of any other obligation or condition, effective thirty
(30) days after giving written notice to Apollon of such termination in the case
of a payment breach and ninety (90) days after giving written notice to Apollon
of such termination in the case of a non-payment breach, which notice shall
describe such breach. The foregoing notwithstanding, if the default or breach
is cured or shown to be non-existent or not material within the thirty (30) or
ninety (90) day period, as the case may be, the notice shall be deemed
automatically withdrawn and of no effect.
8.2 Event of Bankruptcy. Upon the occurrence of an event of bankruptcy
with respect to either Party, the other Party may terminate this Agreement or
the licenses, rights or options granted to the bankrupt Party hereunder with
immediate effect by delivering written notice of said termination to the
bankrupt Party.
8.3 Challenge of Patents. Except in jurisdictions in which it would be
illegal to do so, Biogen may immediately terminate this Agreement or the
licenses granted to Apollon hereunder in the event Apollon or any of its
Affiliates files a revocation or nullity proceeding
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with respect to any of the Biogen Patent Rights or challenges the validity of
any of the Biogen Patent Rights. Except in jurisdictions in which it would be
illegal to do so, Apollon may immediately terminate this Agreement or the Option
granted to Biogen hereunder in the event Biogen or any of its Affiliates files a
revocation or nullity proceeding with respect to any of the Apollon Patent
Rights or challenges the validity of any of the Apollon Patent Rights.
The provisions of this Section 8.3 shall be deemed deleted from this
Agreement in any jurisdiction in which the inclusion of such provisions would be
illegal or would make this Agreement or any part hereof unenforceable.
8.4 Breach by Biogen. Apollon may terminate this Agreement and/or the
Option granted to Biogen hereunder in the event Biogen breaches its obligation
to pay any amount due hereunder to Apollon or breaches any other obligation or
condition hereunder, effective thirty (30) days after giving payment breach and
ninety (90) days after giving written notice to Biogen of such termination in
the case of a non-payment breach, which notice shall describe such breach. The
foregoing notwithstanding, if the default or breach is cured or shown to be
non-existent or not material within the thirty (30) or ninety (90) day period,
as the case may be, the notice shall be automatically withdrawn and of no
effect.
8.5 Effect of Termination of Licenses.
(a) In the event Biogen terminates the licenses granted to Apollon
hereunder, in accordance with the other provisions of this Section 8, but does
not terminate this Agreement, then Section 6 related to the agreement to supply
Licensed Products shall continue in effect and Apollon shall be deemed to have
such licenses from Biogen as may be necessary to fulfill its obligations
thereunder.
(b) Apollon may voluntarily terminate the licenses granted to it
under this Agreement at any time on ninety (90) days prior written notice to
Biogen, provided that if Apollon terminates the licenses granted to it hereunder
but does not terminate this Agreement, then, at Biogen's option, Section 6
related to the agreement to supply Licensed Products shall continue in effect
and Apollon shall be deemed to have such licenses from Biogen as may be
necessary to fulfill its obligations thereunder.
8.6 Survival. All provisions of Section 4.6 and Section 10 shall survive
termination of this Agreement.
8.7 No Prejudice. Any termination under this Section 8 shall be without
prejudice to the rights of either Party against the other then accruing or
otherwise accrued under this Agreement.
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SECTION 9 NOTICES
Any notice required or permitted to be given hereunder shall be sent in
writing by registered or certified mail, postage prepaid, return receipt
requested, by telefax, confirmation received, by overnight delivery using a
nationally recognized overnight courier or by hand delivery, addressed to the
Party to whom it is to be given as follows:
If to Biogen: Biogen, Inc.
14 Cambridge Center
Cambridge, Massachusetts 02142
Telefax: (617) 679-2617
Attention: Vice President - Marketing and Sales
With a copy to: Biogen, Inc.
14 Cambridge Center
Cambridge, Massachusetts 02142
Telefax: (617) 679-2838
Attention: Vice President - General Counsel
If to Apollon: Apollon, Inc.
One Great Valley Parkway
Malvern, Pennsylvania 19355-1423
Telefax: (610) 647-9732
Attention: President and CEO
With a copy to: Ballard Spahr Andrews & Ingersoll
1735 Market Street, 51st Floor
Philadelphia, PA 19103
Telefax: (215) 864-8999
Attention: Morris Cheston, Jr.
or to such other address or addresses as may from time to time be given in
writing by either Party to the other as aforesaid. Any notice sent pursuant to
this Section shall be deemed delivered within three (3) days if sent by mail and
within twenty-four (24) hours if sent by telefax, overnight courier or hand
delivery.
SECTION 10 CONFIDENTIALITY
10.1 Obligations. Except for the proper exercise of its rights under this
Agreement, each of the Parties agrees that it and its Affiliates will not
publish or otherwise divulge or deliver to another Person, except their
sublicensees hereunder, or use for its or their own benefit Technology, Patent
Rights, Clinical Trial Information, reports, records, manuals, regulatory
filings or other confidential information disclosed pursuant to this Agreement
(collectively, the "Confidential Information") provided to it by the other Party
without the prior written approval
-15-
<PAGE>
of the Party disclosing such information (the "Disclosing Party") in each
instance. The foregoing obligation shall not be imposed on either Party with
respect to any Confidential Information which it can demonstrate (i) was at the
time of disclosure to it (or thereafter, but prior to its publication,
divulgence or use for the benefit of the Receiving Party or any of its
Affiliates, become through no fault of the Receiving Party or its Affiliates) a
part of the public domain by publication or otherwise; or (ii) was already
properly and lawfully in its possession at the time it was received from the
Disclosing Party; or (iii) was lawfully received from a third party who was
under no obligation of confidentiality to the Disclosing Party with respect
thereto; or (iv) is required by law to be disclosed (but only to the extent of
such required disclosure).
10.2 Confidentiality Agreements. Each Party represents that it has
employment agreements with its and its Affiliate's key employees having
confidentiality commitments consistent with its obligations hereunder and will
require all of its consultants, agents, sublicensees, or others who have access
to any of such Confidential Information of the other Party to execute
confidentiality agreements covering all Confidential Information of the other
Party, and will exercise its best efforts to obtain compliance therewith.
10.3 Remedies. In the event of a breach or a threatened breach of the
terms of this Section 10, the Disclosing Party shall be entitled to an
injunction restraining the Receiving Party and its Affiliates and sublicensees
and their officers, employees, agents and consultants from continuing or
committing such breach, without showing or proving any actual damage. In the
event of such breach, the Disclosing Party shall, in addition to injunctive
relief, be entitled to all other remedies provided by law, including an award of
damages.
SECTION 11 PUBLICITY
If the Parties agree to publicize this Agreement, Biogen and Apollon will
coordinate to issue a joint press release in mutually agreed form concerning the
execution of this Agreement. Such announcement shall be made at such time as
agreed by Biogen and Apollon. Except for such joint release, unless required to
do so by law or by the rules of any exchange or over-the-counter market upon
which any of Biogen's or Apollon's securities are traded or unless such
information has been previously disclosed, neither Party will issue any press
release or make any public disclosure or announcement concerning the terms of
this Agreement or the transactions contemplated hereby without the prior
approval of the other Party hereto. Prior to making any such press release or
public announcement, the Party making such release or public announcement shall
consult with the other Party hereto with respect to the timing and content of
such press release or public announcement at least five (5) business days prior
to the proposed release or announcement. Without limiting the generality of the
foregoing, neither Party shall use the name of the other in connection with the
marketing or sale of Licensed Products without the prior written consent of such
Party.
-16-
<PAGE>
SECTION 12 DISPUTES
Any dispute, claim, or difference arising in connection with this Agreement
or as to the rights or liabilities of the Parties hereunder (each such event
being hereinafter called a "dispute"), shall be referred to arbitration, in
accordance with the Commercial Arbitration Rules (the "Rules") of the American
Arbitration Association (hereinafter referred to as the "Association"), as
supplemented hereby. All arbitration proceedings shall occur in Boston,
Massachusetts. The arbitration panel shall consist of three arbitrators. The
Party initiating arbitration shall nominate one arbitrator (who shall not be
affiliated with such Party) in the request for arbitration and the other Party
shall nominate a second arbitrator (who shall not be affiliated with such Party)
in the answer thereto. The two arbitrators so named will then jointly appoint
the third arbitrator as chairman of the arbitration panel. If either Party
fails to nominate its arbitrator, or if the arbitrators named by the Parties
fail to agree on the person to be named as chairman within sixty (60) days, the
President of the Association shall make the necessary appointments of an
arbitrator or the chairman of the arbitration panel.
The arbitration panel as designated above shall proceed to arbitrate the
dispute by giving notice to all parties of its proceedings and hearings in
accordance with the Association's applicable procedures. Within fifteen (15)
days after all three arbitrators have been appointed, an initial meeting among
the arbitrators and counsel for the Parties shall be held for the purpose of
establishing a plan for administration of the arbitration, including: (i)
definition of issues; (ii) scope, timing and type of discovery, which may at the
discretion of the arbitrators include production of documents in the possession
of the Parties, but may not, without the consent of the Parties, include
depositions; (iii) exchange of documents and filing of detailed statements of
claims and prehearing memoranda; (iv) schedule and place of hearings; and (v)
any other matters that may promote the efficient, expeditious and cost-effective
conduct of the proceeding. The substantive law of the Commonwealth of
Massachusetts shall be applied by the arbitrators to the resolution of the
dispute, provided that the arbitrators shall base their decision on the express
terms, covenants and conditions of this Agreement. The arbitrators shall be
bound to make specific findings of fact and reach conclusions of law, based upon
the submissions and evidence of the Parties, and shall issue a written decision
explaining the basis for the decision and award. The Parties agree that the
arbitrators shall have no power to alter or modify any express provision of this
Agreement or to render any award which, by its terms, effects any such
alteration or modification.
The award of the arbitration panel shall be final and judgment upon such an
award may be entered in any competent court or application may be made to any
competent court for judicial acceptance of such an award and an order of
enforcement. In the event of any procedural matter not covered by the aforesaid
Rules, the procedural law of the Commonwealth of Massachusetts shall govern.
-17-
<PAGE>
SECTION 13 MISCELLANEOUS
13.1 Amendments, Waivers. This Agreement may be amended and any of its
terms or conditions may be waived only by a written instrument executed by both
Parties, or, in the case of a waiver, by the Party waiving compliance. The
failure of any Party at any time to require performance of any provision hereof
shall in no manner affect its rights at a later time to enforce the same. No
waiver by any Party of any condition or term in any instance shall be construed
as a further or continuing waiver of such condition or term or of another
condition or term.
13.2 Force Majeure. Any delays in or failures of performance by any Party
under this Agreement shall not be considered a breach of this Agreement if and
to the extent caused by occurrences beyond the reasonable control of the Party
affected, including, but not limited to: acts of God; acts, regulations or laws
of any government (including, without limitation, import and export
regulations); peril of the sea; strikes or other concerted acts of workers;
fires; floods; explosions; riots; wars; rebellion and sabotage; and any time for
performance hereunder shall be extended by the actual time of delay caused by
such occurrence. Each Party shall promptly give notice to the other of the
start and stop should it be so affected by any of the above-mentioned
occurrences.
13.3 Interest On Late Payments. Each Party shall have the right to charge
the other interest on a per diem basis on all payments which are past due at an
annual rate of two percent (2.0%) over the prime rate then in effect at the
BankBoston or its successors.
13.4 Cooperation. Each Party agrees to cooperate with the other Party in
any and all efforts by such other party to obtain patent term extensions or
other extensions as provided by law in territories where Valid Claims under such
other Party's patents applicable to Licensed Products now or hereafter exist.
13.5 Binding Nature. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the Parties hereto and their respective
successors and permitted assigns.
13.6 Assignment. Neither this Agreement nor any of the rights, interests,
or obligations hereunder shall be assignable by either of the Parties hereto or
by operation of law without the prior written consent of the other Party hereto;
provided, however, that any Party may assign its rights, interests and
obligations hereunder to any entity with which such party may merge or
consolidate or to which such Party may transfer substantially all of its assets,
without obtaining the consent of the other Party. Notwithstanding the
foregoing, either Party may assign its right to receive payments hereunder, and
either Party and its sublicensees will execute any documents or instruments
reasonably required by the other Party in connection with any such assignment.
Any purported assignment in violation of the provisions of this Section shall be
void, and all rights, interests or obligations so assigned thereby shall return
to the assigning Party or its successors.
-18-
<PAGE>
13.7 Severability. The Parties intend this Agreement to be enforced as
written. However, if any provision of this Agreement should be or become
fully or partly invalid or unenforceable for any reason or violate any
applicable law, this Agreement is to be considered divisible as to such
provision and such provision is to be deleted from this Agreement, and the
remainder of this Agreement shall be deemed valid and binding as if such
provision were not included herein. There shall be substituted for any such
provision deemed to be deleted a suitable provision which, as far as is
legally possible, comes nearest to the Parties' original intent.
13.8 Entire Agreement. This Agreement contains the entire agreement
between the Parties hereto with respect to the subject matter set forth
herein and supersedes any and all other agreements, oral or written, in
respect of the subject matter of this Agreement.
13.9 Captions. The captions to the Sections of this Agreement are for
convenience only and shall not be considered in interpreting this Agreement.
13.10 Governing Law. This Agreement shall be governed by and
construed in accordance with the law of the Commonwealth of Massachusetts
without regard to conflict of law provisions.
13.11 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original and all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the Parties hereto have duly caused this Agreement to
be executed in duplicate by their duly authorized representatives as of the
day and year first above written.
BIOGEN, INC. APOLLON, INC.
By: /s/ James R. Tobin By: /s/ Vincent R. Zurawski
------------------------- -------------------------
Name: James R. Tobin Name: Vincent R. Zurawski
Title: President and CEO Title: President and CEO
-19-
<PAGE>
APPENDIX A
APOLLON PATENT RIGHTS
<PAGE>
APPENDIX A
Apollon Patent Rights
1. [ ]
2. [ ], USSN 08/314,060, "Multifunctional Molecular Complexes for Gene
Transfer to Cells", Boutin, [ ]
3. [ ], USSN 08/809,397, "Multifunctional Molecular Complexes for Gene
Transfer to Cells", Boutin, [ ]
4. [ ]
5. [ ]
6. [ ], USSN 08/642,045, "Chimeric Kanamycin Resistance Gene",
Satishchandran, Snyder, [ ]
7. [ ]
8. [ ]
9. [ ]
A-1
<PAGE>
APPENDIX B
BIOGEN PATENT RIGHTS
<PAGE>
B4 - Hepatitis - Murray and Schaller (Pierri) (Flynn)
- ------------------------------------
Filing
Country Serial No. Date Status
- ------- ---------- ------ ------
Argentina 279,403 12/20/79 Patent 237,579
Australia 54170/79 12/24/79 Patent 539,535
[ ]
[ ]
Brunei 37/95 9/95 Patent
B-1
<PAGE>
B4 - Hepatitis - Murray and Schaller (continued) (Pierri) (Flynn)
- ------------------------------------------------
Filing
Country Serial No. Date Status
- ------- ---------- ------ ------
[ ]
Chile 855/79 12/20/79 Patent 32,398
Expired
[ ]
Croatia 381-03/94- 9/22/92 Patent
01/0306 P.940049N
[ ]
Denmark 5480/79 12/20/79 Patent 171,727
B-2
<PAGE>
B4 - Hepatitis - Murray and Schaller (continued) (Pierri) (Flynn)
- ------------------------------------------------
Filing
Country Serial No. Date Status
- ------- ---------- ------ ------
[ ]
European 79303017.2 12/21/79 Patent 13 828
Patent Office (EP 13 828)
Austria
Belgium
France
Italy
Luxembourg
Netherlands
Sweden
Switzerland
West Germany
Great Britain
B-3
<PAGE>
B4 - Hepatitis - Murray and Schaller (continued) (Pierri) (Flynn)
- ------------------------------------------------
Filing
Country Serial No. Date Status
- ------- ---------- ------ ------
European 185201908.2 11/19/85 Patent 182 442
Patent Office (EP 182 442)
(DIV 1)
Austria
Belgium
France
Italy
Luxembourg
Netherlands
Sweden
Switzerland
West Germany
Great Britain
B-4
<PAGE>
B4 - Hepatitis - Murray and Schaller (continued) (Pierri) (Flynn)
- -----------------------------------------------
Filing
Country Serial No. Date Status
- ------- ---------- ------ ------
Finland 794001 12/20/79 Patent 86437
Greece 60822 12/20/79 Patent 73,675
Expired
Hungary BI-601 12/20/79 Patent 196-236
Ireland 2494/79 12/20/79 Patent 53,176
Israel 59007 12/20/79 Patent 59,007
Japan 164945/79 12/20/79 Patent 2530801
B-5
<PAGE>
B4 - Hepatitis - Murray and Schaller (continued) (Pierri) (Flynn)
- ------------------------------------------------
Filing
Country Serial No. Date Status
- ------- ---------- ------ ------
Japan 62-112627 5/11/87 Patent 2512746
(DIV 1)
Japan 62-112628 5/11/87 Patent 2527438
(DIV 2)
Japan 62-112629 5/11/87 Patent 2511961
(DIV 3)
Japan 62-112630 5/11/87 Patent 2511962
(DIV 4)
Macedonia PP-088/94 5/19/94 Patent PP-088/94
[ ]
B-6
<PAGE>
B4 - Hepatitis - Murray and Schaller (continued) (Pierri) (Flynn)
- ------------------------------------------------
Filing
Country Serial No. Date Status
- ------- ---------- ------ ------
Malaysia PI-8701323 8/13/87 Patent
MY-102,686-A
Mexico 92-2875 6/15/92 Patent 184,206
New Zealand 192465 12/20/79 Patent 192,465
[ ]
[ ]
B-7
<PAGE>
B4 - Hepatitis - Murray and Schaller (continued) (Pierri) (Flynn)
- ------------------------------------------------
Filing
Country Serial No. Date Status
- ------- ---------- ------ ------
Portugal 70626 12/21/79 Patent 70,626
Slovenia P79 1 3127 11/17/92 Patent
79 1 3127
[ ]
South Africa 79/6921 12/20/79 Patent 79/6921
Spain 487,106 12/20/79 Patent 487,106
[ ]
B-8
<PAGE>
B4 - Hepatitis - Murray and Schaller (continued) (Pierri) (Flynn)
- ------------------------------------------------
Filing
Country Serial No. Date Status
- ------- ---------- ------ ------
United States 363,763 3/31/82 Patent
(B4A CON) (Murray) 4,710,463
[ ]
[ ]
[ ]
[ ]
B-9
<PAGE>
B4 - Hepatitis - Murray and Schaller (continued) (Pierri) (Flynn)
- ------------------------------------------------
Filing
Country Serial No. Date Status
- ------- ---------- ------ ------
[ ]
[ ]
[ ]
[ ]
[ ]
[ ]
[ ]
[ ]
B-10
<PAGE>
B4 - Hepatitis - Murray and Schaller (continued) (Pierri) (Flynn)
- ------------------------------------------------
Filing
Country Serial No. Date Status
- ------- ---------- ------ ------
[ ]
[ ]
Uruguay 21,021 12/21/79 Patent 11,958
Venezuela 2268/79 12/19/79 Patent 43,357
Yugoslavia P-3127/79 12/20/79 Patent 44.186
[ ]
B-11
<PAGE>
APPENDIX C
FORM OF SUPPLY AND LICENSE AGREEMENT
<PAGE>
SUPPLY AND LICENSE AGREEMENT
This SUPPLY AND LICENSE AGREEMENT (the "Agreement") is made and entered
into this ___ day of ________ ____ (the "Effective Date"), by and between
Biogen, Inc. ("Biogen"), a Massachusetts corporation, with principal offices
located at 14 Cambridge Center, Cambridge, Massachusetts 02142, and Apollon,
Inc. ("Apollon"), a Pennsylvania corporation, with principal offices located
at One Great Valley Parkway, Malvern, Pennsylvania 19355-1423. Each of
Biogen and Apollon are a "Party" to this Agreement and collectively they are
the "Parties" to the Agreement.
INTRODUCTION
1. Apollon is the owner or exclusive licensee under certain licenses of
certain technology, patents and other proprietary rights related to DNA-based
vaccines; and
2. Biogen desires a license from Apollon to market and sell products
developed by Apollon under the aforesaid technology, patents and proprietary
rights, and Apollon is willing to grant to Biogen such license on the terms
and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties, intending to be legally bound, agree as follows:
SECTION 1 DEFINITIONS
As used in this Agreement, the following terms, whether used in the
singular or plural, shall have the following meanings:
1.1 "Affiliate" shall mean, as applied to either Party, any corporation,
partnership, joint venture or other legal entity which controls, is
controlled by, or is under common control with, such Party. "Control" shall
mean, including, with correlative meaning, the terms "controlled by"and
"under common control with", as used with respect to any Person, the
possession, directly or indirectly, of the power to vote fifty percent (50%)
or more of the outstanding voting securities of such Person, or to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by contract or otherwise.
1.2 "Apollon Patent Rights" shall mean all Patents in the United States
or countries foreign thereto covering or related to Apollon Technology which
Apollon owns or controls on the Effective Date or as to which Apollon
acquires ownership or control at any time during the term of this Agreement.
Apollon Patent Rights existing as of the Effective Date are set forth in
Appendix A to this Agreement.
C-1
<PAGE>
1.3 "Apollon Technology" shall mean all Intellectual Property, whether
patentable or not (i) which Apollon owns as of the Effective Date or as to
which Apollon acquires ownership at any time during the term of this
Agreement, related to DNA-based Vaccine Products, and (ii) which is necessary
or useful in order to offer for sale, import, sell or seek approval to market
Licensed Products. For purposes of this Agreement, Apollon Technology
specifically excludes any Intellectual Property, Patent Rights or other
rights Apollon controls or derives under the University Licenses.
1.4 "Apollon and University Technology" shall mean all Intellectual
Property, whether patentable or not (i) which Apollon owns, controls or has
other rights to under University Licenses or otherwise as of the Effective
Date or as to which Apollon acquires ownership or control at any time during
the term of this Agreement, related to DNA-based Vaccine Products, and (ii)
which is necessary or useful in order to discover, research, develop, make,
use, offer for sale, import, sell or seek approval to market Licensed
Products.
1.5 "Biogen Patent Rights" shall mean all Patents in the U.S. or
countries foreign thereto covering or related to Biogen Technology which
Biogen owns or controls on the Effective Date or as to which Biogen acquires
ownership or control at any time during the term of this Agreement. Biogen
Patent Rights existing as of the Effective Date are set forth in Appendix B
to this Agreement.
1.6 "Biogen Technology" shall mean all Intellectual Property, whether
patentable or not (i) which Biogen owns or controls as of the Effective Date
or as to which Biogen acquires ownership or control at any time during the
term of this Agreement, related to DNA sequences encoding Hepatitis B viral
antigens, and (ii) which is necessary or useful in order to discover,
research, develop, make, use, offer for sale, import, sell or seek approval
to market Licensed Products.
1.7 "Clinical Trial Information" shall mean all data and information of
whatever nature specifically developed in connection with the Licensed
Products by either Party under this Agreement and the License and Option
Agreement, including preclinical and clinical trial protocols, reports and
results (including pharmacological, toxicological, pharmaceutical and other
relevant data) for the Licensed Products, applications for regulatory
approval of the testing, use or sale of Licensed Products, regulatory files
and filings (including master files, INDs, NDAs, BLAs, PLAs, PMAs and the
like) made in connection with the Licensed Products and all licenses from,
correspondence with, or approvals by regulatory authorities for the testing,
use or sale of Licensed Products.
1.8 "DNA-based Vaccine Product" shall mean a vaccine product containing
a DNA sequence encoding an antigen.
C-2
<PAGE>
1.9 "Intellectual Property" shall mean information (general and
specific), developments, discoveries, inventions, patents, patent
applications, know-how, trade secrets, whether or not patented or patentable.
1.10 "License and Option Agreement" shall mean the License and Option
Agreement dated as of November 17, 1997 between Apollon and Biogen.
1.11 "Licensed Products" shall mean any DNA-based Vaccine Product that
(a) comprises DNA encoding a polypeptide displaying Hepatitis B core,
Hepatitis B surface, and/or Hepatitis B e antigen specificity or
antigenicity, and (b) the manufacture, use, sale, offer for sale, or import
of which (i) is covered by a Valid Claim of any Biogen Patent Rights or
Apollon Patent Right in the country where such Licensed Product is
manufactured, used, imported, offered for sale or sold, and/or (ii) embodies
or is developed using any of the Biogen Technology or Apollon Technology.
"Licensed Products" shall not include any Hepatitis B virus vaccine for human
use which contains recombinant Hepatitis B virus antigen, any Prophylactic
Vaccine Product or diagnostic products containing a Hepatitis B virus
antigen, or any DNA-based Vaccine Product, which, when injected into a
recipient, is incorporated into the genome of the recipient. For purposes of
this Agreement, "Prophylactic Vaccine Product" shall mean a DNA-based Vaccine
Product which is introduced to a patient prior to infection by the Hepatitis
B virus.
1.12 "Net Sales" shall mean the gross invoiced amount (not less than cost
and not dependent on whether such invoices have been actually paid) on sales
of Licensed Products sold by a Party and its Affiliates and sublicensees, in
bona fide arms' length transactions less the following items, as determined
from the books and records of the Party making such sale, its Affiliates and
sublicensees, provided that such items do not exceed reasonable and customary
amounts in the country in which such Sale occurred: (i) freight and insurance
if billed separately; (ii) amounts repaid or credited by reason of returns or
rejections; (iii) sales taxes, excise taxes and other taxes (other than
income taxes) levied on the invoiced amount; (iv) cash, trade and quantity
discounts actually given or made; (v) rebates paid pursuant to government
regulations; and (vi) commissions paid to distributors or other sales
agencies that are included in the gross sales price, if supported by receipts
provided to Apollon. A sale of Licensed Products to an Affiliate for re-sale
of Licensed Products by such Affiliate shall not be considered a Sale for the
purposes of this provision, but the re-sale of such Licensed Products by the
Affiliate to a third party shall be a Sale for purposes of this Agreement.
Any use of Licensed Products by a Party or any of its Affiliates or
sublicensees, other than for quality assurance, quality control or research
purposes, shall be considered a Sale for accounting purposes and Net Sales
for such use or for Sale by gift shall be the average sales price of Licensed
Products Sold in an arms' length transaction by such Party and its Affiliates
and sublicensees during the applicable payment reporting period or, if no
such arms' length transaction occurred in such period, during the last
payment reporting period in which such arms' length transaction occurred.
C-3
<PAGE>
In the event that consideration in addition to or in lieu of money is
received for the Sale of Licensed Products in an arms' length transaction,
the fair market value of such consideration shall be included in the
determination of Net Sales for such Sale. To the extent that Licensed
Products are Sold in other than an arms' length transaction, Net Sales for
such Sale shall be the average Sale price of Licensed Products if Sold in an
arms' length transaction during the applicable payment reporting period in
the country in which the non-arms' length transaction occurred.
In the event that Licensed Products are Sold by a Party or any of its
Affiliates or sublicensees in the form of a combination Licensed Product
containing one or more active ingredients in addition to the Licensed
Product, Net Sales for the combination Licensed Product shall be determined
by multiplying actual Net Sales of the combination Licensed Product
(determined by reference to the standard Net Sales definition) during the
payment period by the fraction A/A+B where A is the average Sale price of the
Licensed Product when Sold by the Party and its Affiliates and sublicensees
separately in finished form and B is the average Sale price of the other
active ingredients when Sold separately in finished form in each case during
the applicable payment reporting period in the country in which the Sale of
the combination Licensed Product was made, or if Sales of both the Licensed
Product and the other active ingredients did not occur in such period, then
in the most recent payment reporting period in which Sales of both occurred.
In the event that such average Sale price cannot be determined for both the
Licensed Product and all other active ingredients included in the combination
Licensed Product, Net Sales for purposes of determining payments under this
Agreement shall be calculated by multiplying the Sales with respect to the
combination Licensed Product by the fraction C/C+D where C is the standard
fully-absorbed cost of the Licensed Product portion of the combination and D
is the sum of the standard fully-absorbed costs of all other active
ingredients included in the combination Licensed Product, in each case, as
determined by using the standard accounting procedures used by the Party
making the Sale, consistently applied. In no event shall Net Sales with
respect to a combination Licensed Product be reduced to less than fifty
percent (50%) of actual Net Sales with respect to such combination Licensed
Product (determined by reference to the standard Net Sales definition) by
reason of any adjustment provision set forth in this paragraph.
1.13 "Patent" shall mean all letters patents and pending patent
applications for patents of the United States and all countries foreign
thereto, including any provisional applications, priority applications,
extensions, reissues, reexaminations, renewals, continuations,
continuations-in-part, divisionals, certificates of invention and
supplemental protection certificates.
1.14 "Person" shall mean an individual, a partnership, a joint venture, a
corporation, a trust, a business trust, a limited liability company or
limited liability partnership, an estate, an unincorporated organization, a
government or any department or agency thereof, or any other entity.
C-4
<PAGE>
1.15 "Sale(s)" or "Sold" shall mean any gift, grant, sale, assignment,
transfer, conveyance or other disposition of a Licensed Product by a Party to
this Agreement or any of its Affiliates or sublicensees to another Person,
except distribution of samples provided at no charge to physicians,
hospitals, or clinics for promotional purposes or for purposes of the Product
Development Program, provided such distribution is not made in exchange for
lower prices on other products sold by such Party or other noncash
consideration.
1.16 "Territory" shall mean Japan.
1.17 "University License" shall mean any license or rights granted to
Apollon, at any time, under any Patent or Intellectual Property by (i) the
Trustees of the University of Pennsylvania; (ii) the Wistar Institute of
Anatomy and Biology; (iii) the Institute of Biotechnology and Advanced
Molecular Medicine; (iv) The General Hospital Corporation; or (v) any other
third party licensor, which are necessary or useful for the development,
manufacture, use, marketing or sale of Licensed Products.
1.18 "Valid Claim" shall mean (i) a claim of a pending patent
application which claim shall not have been canceled, withdrawn, abandoned or
rejected by an administrative agency from which no appeal can be taken; or
(ii) a claim of an issued and unexpired patent which has not lapsed or become
abandoned or declared invalid or unenforceable by a court of competent
jurisdiction or an administrative agency from which no appeal can be or is
taken.
SECTION 2 LICENSE GRANT TO BIOGEN
2.1 License Grant to Biogen.
(a) Apollon hereby grants to Biogen (i) an exclusive license under
the Apollon Technology, including the right to grant sublicenses as set forth
herein, to use, sell, have sold, offer for sale and import Licensed Products
manufactured by or for Apollon pursuant to the supply arrangements set forth
in Section 5 hereof for sale by Biogen in the Territory, and (ii) in the
event Apollon can no longer supply Licensed Products under the terms of this
Agreement, contingent manufacturing rights under the Apollon and University
Technology to make, have made, use, sell, have sold, offer for sale and
import Licensed Products in the Territory. The license and contingent
manufacturing rights granted hereunder shall remain in effect unless or until
this Agreement is terminated pursuant to Section 7 hereof.
(b) To the extent Apollon has the right to grant sublicenses under
any University Licenses, Apollon hereby grants to Biogen an irrevocable
option to obtain from Apollon at the time Biogen exercises its contingent
manufacturing rights one or more sublicenses under any University License
solely for use by Biogen to manufacture the Licensed Products. Biogen shall
exercise this option only at the time it exercises its contingent
manufacturing rights, by providing written notice to Apollon not less than
ten (10) business days prior to the date
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which Biogen proposes as the effective date for the sublicense. The
sublicense shall be for the same term as the applicable University License
and shall provide to Biogen all of the rights of Apollon under the applicable
University License, solely for use in the manufacture of Licensed Products.
Apollon shall not cause or allow, through any action or inaction, any
impairment in Biogen's ability to obtain any sublicense as provided in this
Section 2.1(b), provided, however, that in the event Apollon obtains a
University License which does not permit Apollon to grant a sublicense to
Biogen, and Apollon had used reasonable efforts to obtain the right to grant
such a sublicense, such event shall not constitute a breach by Apollon of
this Section 2.1(b) or of this Agreement.
2.2 Right to Sublicense. Biogen shall have the right to extend to its
Affiliates the rights and licenses granted to Biogen under this Section 2,
and for purposes hereof, such extension shall not be considered the grant of
a sublicense. Biogen shall have the right to grant sublicenses to sell
Licensed Products under the license granted under this Section 2, provided,
however, that Biogen is entitled to grant within the Territory a total of two
(2) sublicenses to sell Licensed Products. In the event that Biogen grants
more than one (1) sublicense to sell Licensed Products in the Territory, then
Biogen shall be prohibited from selling Licensed Products itself in the
Territory. For purposes of this Agreement, distributors and distribution
arrangements shall not be considered sublicensees of Biogen. Biogen agrees
that any sublicenses granted by it shall prohibit further sublicenses by the
sublicensee and shall provide that the obligations of Biogen to Apollon
hereunder shall be binding upon the sublicensee as if it were a party to this
Agreement. Biogen agrees to forward to Apollon a copy of any and all
sublicense agreements within thirty (30) days of the execution of such
sublicense agreements.
2.3 Limitations of License Grant. Except as expressly provided in this
Section 2, nothing in this Agreement shall be deemed to grant Biogen any
rights in, or license to, any product, Patent or Intellectual Property of
Apollon. Without limiting the generality of the foregoing, Biogen shall not
be granted any right hereunder to make, have made, use, offer for sale, sell
or import any products which are not Licensed Products or to offer for sale,
sell or import Licensed Products other than in the Territory. In addition,
nothing in this Agreement shall be deemed to grant Biogen any rights in, or
sublicense to, any product, Patent or Intellectual Property under the
University Licenses, except as shall be provided upon exercise of the
contingent manufacturing rights granted pursuant to Section 2.1(b).
SECTION 3 FINANCIAL REPORTS
3.1 Payment Schedule and Reports. On or before forty-five (45) days
following the end of each calendar quarter occurring after the first
commercial Sale of a Licensed Product in the Territory, Biogen shall pay to
Apollon the payments owed by it with respect to Net Sales of Licensed
Products during such calendar quarter. Such payment shall be accompanied by a
report showing (i) the aggregate actual Sales volume of Licensed Products by
Apollon and its Affiliates
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and sublicensees, (ii) aggregate Net Sales, (iii) gross invoice price(s) of
Licensed Product(s) Sold, (iv) deductions from gross invoice price permitted
hereunder and (v) the payment made hereunder. Such payment shall also be
accompanied by a copy of any reports received by Biogen from its Affiliates
or sublicensees during the preceding calendar quarter as shall be pertinent
to an accounting hereunder. All reports shall show all amounts reported in
the currency in which Sales were made, and in United States dollars at the
conversion rate described in Section 3.5.
3.2 Books and Records. Biogen and each of its Affiliates and
sublicensees shall maintain such books and records as are necessary to
establish the accuracy of the reports submitted under Section 3.1 for a
period of five (5) years from the date of submission of such reports. Such
books and records shall be maintained on the accrual basis of accounting in
accordance with generally accepted accounting principles.
3.3 Audits.
(a) Upon the written request of Apollon, and not more than once in
each calendar year, Biogen shall permit Apollon, at Apollon's expense, to
have access during normal business hours to such of the records of Biogen as
may be reasonably necessary to verify the accuracy of the financial reports
provided under this Section 3. Any audit so requested shall be performed on
Apollon's behalf by an independent accounting firm of nationally recognized
standing reasonably satisfactory to both Parties. If Apollon concludes,
based on the audit results, that additional payments were owed during the
financial periods audited, Biogen shall pay the additional payments within
fifteen (15) days of the date Apollon delivers to Biogen a written report so
concluding. The costs associated with any audit conducted under this Section
3.3(a) shall be paid by Apollon; provided, however, if the audit correctly
discloses that the payments payable by Biogen for the audited period are more
than one hundred ten percent (110%) of the payments actually paid for such
period, then Biogen shall pay the reasonable fees and expenses charged by the
accounting firm conducting the audit.
(b) Upon the written request of Biogen, and not more than once in each
calendar year, Apollon shall permit Biogen, at Biogen's expense, to have
access during normal business hours to such of the records of Apollon as may
be reasonably necessary to verify the accuracy of the certified
[ ] provided under Section 5.6 hereof. Any audit so
requested shall be performed on Biogen's behalf by an independent accounting
firm of nationally recognized standing reasonably satisfactory to both
Parties. If Biogen concludes, based on the audit results, that the payments
made during the audited period exceeded the payments owed hereunder, Apollon
shall refund the excess payments within fifteen (15) days of the date Biogen
delivers to Apollon a written report so concluding. The cost of such audit
shall be borne by Biogen unless it is established by Biogen that as a result
of an error in the calculation of such certified [ ] Biogen has
overpaid Apollon by at least 2.0% in the audited period, in which event the
cost of such audit will be borne by Apollon.
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3.4 Confidentiality of Financial Information. Both Parties shall treat
all financial information subject to review under this Section 3, and all
reports generated hereunder, as confidential and shall use such reports and
financial information only for the purposes contemplated by this Section 3.
3.5 Currency. All payments required to be made under this Agreement
shall be made in U.S. dollars. Monetary conversions from the currency of a
foreign country into U.S. dollars shall be made at the exchange rate for
buying U.S. dollars in force on the last business day of the period for which
the Net Sales are reported in accordance with Section 3.1 as reported by The
Wall Street Journal, or on another basis mutually agreed upon by the Parties
in writing.
3.6 No Deductions. The payments computed or specified under this
Section 3 are the actual amounts to be paid to Apollon and shall not be
reduced in any way including, but not limited to, by any payments obligations
owed to Biogen or its Affiliates and sublicensees by Apollon under this
Agreement. In the event a Party or its Affiliates or sublicensees are
required to make a deduction or withholding of tax, then the amount payable
to the other Party shall be increased to the extent necessary to ensure that
after the making of such deduction or withholding, the other Party receives
and retains an amount equal to what it would have received and retained had
no such deduction or withholding been made by the paying Party or its
Affiliates or sublicensees. Each Party agrees to assist the other by
submitting declarations to the relevant authorities as may be required with
regard to each Party's status in relation to a deduction or withholding of
taxes.
SECTION 4 OBTAINING REGULATORY APPROVAL IN THE TERRITORY
4.1 Access to Clinical Trial Information. Apollon shall cooperate with
Biogen and its Affiliates in completing the procedures necessary for Biogen
to obtain regulatory approval for the sale, by Biogen and its Affiliates, of
Licensed Products in the Territory. Without limiting the generality of the
foregoing, Apollon shall promptly provide to Biogen and its Affiliates, or at
Biogen's request authorize the supervised access of Biogen and its Affiliates
to all Clinical Trial Information developed by Apollon for Licensed Products
which is useful to obtain regulatory approval for Licensed Products in the
Territory, and Biogen and its Affiliates shall use such Clinical Trial
Information solely to obtain such regulatory approval in the Territory.
Biogen and its Affiliates shall provide Apollon and its Affiliates with
access to all Clinical Trial Information developed by Biogen and its
Affiliates related to Licensed Products, including all regulatory filings
made in the Territory and all governmental responses thereto.
Notwithstanding the foregoing, Biogen shall own all of its Clinical Trial
Information and all related reports provided pursuant to Section 3.1, and
regulatory filings made in the Territory related to Licensed Products and
Apollon shall own all its Clinical Trial Information, as well as all
regulatory filings made worldwide except in the Territory related to Licensed
Products.
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4.2 Final Product Specifications. Upon the first submission by Apollon,
its Affiliate or a sublicensee of a BLA(PLA) to the United States Food and
Drug Administration (USFDA) or equivalent agency in any country in the
Territory for approval of the marketing of any Licensed Product, Apollon will
furnish Biogen with a detailed specification for such Licensed Product, and
thereafter Apollon will promptly furnish Biogen with any modifications or
updates of such specification (as so modified or updated, the
"Specification").
SECTION 5 SUPPLY AGREEMENT
5.1 Agreement to Supply. Apollon shall manufacture, or have
manufactured on its behalf, and sell to Biogen sufficient quantities of
Licensed Products to meet the requirements of Biogen, its Affiliates and
sublicensees for use by Biogen, its Affiliates and sublicensees in the
conduct of preclinical and clinical trials in the Territory and for the sale
of Licensed Products in the Territory. Licensed Products shall be supplied
in finished form, with labeling as specified by Biogen, its Affiliates or
sublicensees.
5.2 Forecasts. Commencing not less than one hundred and eighty (180)
days prior to the expected commencement by Biogen in the Territory of the
equivalent of Phase II or Phase II/III human clinical trials for Licensed
Products, and by the first day of each calendar quarter thereafter, Biogen
will deliver to Apollon a twelve-month rolling forecast of Biogen's
requirements for Licensed Products for preclinical or clinical uses or for
sale of Licensed Products in the Territory, specifying quantities and
shipment dates, as well as methods of packaging and shipment, therefor. Such
forecasts shall be good faith estimates, and all actual orders shall be in
the form of a purchase order received by Apollon at least sixty (60) days
before the specified delivery date. After approval by the applicable
regulatory authority of the sale by Biogen, its Affiliates or sublicensees of
a Licensed Product in the Territory (a "Regulatory Approval") has been
granted, the first three (3) months of each twelve-month rolling forecast
provided thereafter shall constitute a binding firm commitment purchase order
for the quantities of Licensed Products specified therein. Biogen may revise
its schedule of delivery dates, and methods of packaging and shipment, from
time to time upon not less than thirty (30) days prior notice thereof to
Apollon. Apollon shall use its best efforts to supply all quantities ordered
by Biogen, but in no case shall Apollon be obligated to supply revised
quantities which exceed the original schedule furnished in the most recent
forecast showing for such quarter by more than 20% in any quarter. In the
event of a shortage in availability of Licensed Products despite Apollon's
best efforts, Apollon shall allocate available Licensed Products in a fair
and equitable manner.
5.3 Manufacturing. Apollon shall maintain sufficient manufacturing
capacity to fill Biogen's requirements for Licensed Products under this
Agreement as provided in Section 5.2 hereof. Within twenty (20) days of
receiving any rolling forecast or notice of increased requirements, Apollon
shall provide Biogen with written confirmation of the quantities and delivery
dates of Licensed Products that it is prepared to supply for the twelve-month
period.
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5.4 Shipping. Apollon will package and ship Licensed Products to Biogen
in accordance with such instructions as to methods of packaging and shipment
as Biogen shall specify in the purchase order to which any such shipment
pertains. The shipment shall be made to such place as is designated by
Biogen. Apollon shall be solely responsible for compliance with all
applicable export laws and regulations and payment of any applicable export
duties or tariffs. Biogen shall be solely responsible for compliance with
all applicable import laws and regulations and payment of any applicable
import duties or tariffs.
5.5 Pricing. Apollon will supply Licensed Products to Biogen for Sale
in the Territory and Biogen shall pay Apollon [ ]
for the Licensed Products supplied. Apollon will supply Licensed Products
to Biogen for use in the conduct of preclinical and clinical trials and
Biogen will pay Apollon [ ] for the
Licensed Products supplied for such purpose.
5.6 Books and Records. Apollon shall maintain such books and records as
are necessary to establish the accuracy of the
[ ] referenced in Section 5.5 for a period
of five (5) years from the date of delivery of Licensed Products to Biogen.
Such books and records shall be maintained on the accrual basis of accounting
in accordance with U.S. generally accepted accounting principles. On or
before thirty (30) days following the end of each calendar quarter occurring
after the first commercial Sale of a Licensed Product in the Territory,
Apollon shall deliver to Biogen a report of the
[ ] applicable to the Licensed Products
supplied in such calendar quarter and a certificate signed by Apollon's chief
financial officer or designee stating that he or she has verified the
accuracy of such report. Within ninety (90) days after the end of each annual
audit period, Apollon's independent certified public accounting firm shall
deliver to Biogen a certificate stating that it has verified the
[ ] delivered to Biogen during the applicable period as correct.
5.7 Quality and Inspection. Apollon hereby warrants that Licensed
Products sold and delivered hereunder (including all processes, procedures,
facilities and equipment for the manufacture thereof) shall conform to the
requirements for such Licensed Products of the USFDA, including current Good
Manufacturing Practices ("cGMP"), and the requirements of equivalent
regulatory authorities in the Territory, shall not be adulterated or
misbranded within the meaning of the Food, Drug & Cosmetic Act as amended
from time to time, and shall conform to the Specifications for such Licensed
Product developed by Apollon. Biogen shall have the right, after reasonable
notice to Apollon, to conduct cGMP compliance inspections and other
inspections and audits and investigations of Apollon's facilities, equipment
and records from time to time. Apollon shall undertake quality control and
inspection procedures as required by the protocols filed and approved by the
appropriate regulatory agency. If, within thirty (30) days after receiving
any shipment of any Licensed Products, Biogen shall, in its reasonable
judgment, determine and notify Apollon that any of such shipment is
non-conforming, Apollon will, at Biogen's option, either: (i) give Biogen
appropriate credit therefor or (ii) within thirty (30) days
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of Biogen's notice, ship new Licensed Products to Biogen in replacement for
the non-conforming Licensed Products. Biogen shall return any non-conforming
Licensed Products to Apollon at Apollon's expense or otherwise hold or
dispose of them at Apollon's expense as Apollon may direct.
5.8 Title and Risk of Loss. Title to Licensed Products delivered
hereunder shall pass to Biogen at such time as Licensed Products are
delivered to and accepted by Biogen or its agents. Risk of loss shall pass
on delivery F.O.B. Malvern, Pennsylvania.
5.9 Grant of Contingent Manufacturing Rights.
(a) Apollon hereby grants to Biogen the right to manufacture any
Licensed Products with respect to which Apollon is unable or unwilling to
satisfy its obligations pursuant to Section 5.1 hereof. At such time as
Biogen shall be entitled to exercise its rights under this Section 5.9,
Apollon will provide to Biogen with the necessary amendment to this Agreement
to reflect the sublicenses described in Section 2.1(b) hereof, such technical
information in the possession of Apollon relating to the manufacture of
Licensed Products that is then necessary and useful in the manufacture of
Licensed Products, and will otherwise provide Biogen with reasonable
assistance to manufacture such Licensed Products according to the best
systems then known to Apollon. All written materials will be supplied in
English. Apollon shall actively support and participate in a meaningful
manner in the procurement by Biogen of all government approvals requisite for
any such right to manufacture, including the granting of assistance in
accordance with the provisions of Paragraph 5.9(c) hereof. Apollon's
inability or unwillingness to satisfy its obligations pursuant to Section 5.1
hereof shall not be deemed a breach of this Agreement.
(b) If Apollon is unable to supply any quantity of a Licensed
Products required to be supplied by Apollon pursuant to Section 5.1 for
forty-five (45) consecutive days, Biogen shall, pursuant to this Section 5.9,
be entitled to make its entire requirements for such Licensed Products until
such time as Apollon has built inventories for such Licensed Products equal
to twice the average monthly quantity of such Licensed Products sold during
the prior twelve-month period; provided that such inventories have been
manufactured on a production schedule reasonably consistent with that
required to regularly meet Biogen's requirements. In the event that Biogen
shall, pursuant to this Section 5.9, elect to manufacture or have
manufactured its requirements for a Licensed Products:
(i) Apollon shall grant to Biogen reasonable access and the
right to use all Licensed Products information and government approvals and
otherwise assist Biogen in all material respects in this alternate
manufacture and supply; and
(ii) For any Licensed Products manufactured by Biogen, Biogen
shall pay Apollon a royalty equal to [
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], which payment obligation shall continue until
the earlier of termination of manufacture of the Licensed Products by Biogen
hereunder or the date on which such Licensed Product or the manufacture, use,
offer for sale, import or sale of such Licensed Products is no longer covered
by a Valid Claim of Biogen Patent Rights in the Territory.
(c) In the event that Biogen shall exercise its contingent
manufacturing rights pursuant to this Section 5.9:
(i) Apollon shall, from time to time, at the request of
Biogen, arrange to have taken into Apollon's manufacturing facilities, or
those of its permitted subcontractors, technical representatives of Biogen,
for the purpose of instruction in all applicable processes of manufacture for
such Licensed Products. Such representatives shall comply with all of the
ordinary regulations of such facility(s) in respect of visitors.
(ii) At Biogen's request, and at times and for durations
convenient to Apollon, Apollon shall furnish the services of Apollon
scientists and technicians, or any technicians involved in the manufacture of
the applicable Licensed Products, in such numbers as shall be mutually
agreeable to the parties, to advise Biogen in connection with the operation
of such manufacturing facility for manufacture hereunder.
(iii) To the extent Apollon has not already done so,
Apollon shall further provide the names of all suppliers of, and a statement
setting forth Apollon's inventory of, the raw materials used in the
manufacture of the applicable Licensed Products. To the extent consistent
with Apollon's prior written contractual obligations with such suppliers, and
at the request of Biogen, Apollon shall transfer to Biogen such proportion of
such inventories, at prices to be agreed upon by the Parties, and if
requested, temporarily assign an applicable proportion of purchase orders or
other agreements with such suppliers, as applicable, to enable Biogen or its
designee to act as an alternate manufacturer for the applicable Licensed
Products hereunder and to manufacture the quantities of Licensed Products
necessary to meet their requirements.
(d) In the event Biogen shall have exercised its right to
manufacture a Licensed Products pursuant to this Section 5.9, Apollon shall
notify Biogen when it is able and willing to resume manufacture and supply of
such Licensed Products in accordance with its obligations hereunder, and the
parties shall negotiate a reasonable timetable for Apollon to resume the
supply of such Licensed Products hereunder, subject to Biogen's then existing
contractual commitments which shall be reasonable in magnitude and duration.
SECTION 6 WARRANTIES, LIABILITY AND DISCLAIMERS OF WARRANTY
6.1 Warranty of Title. Apollon warrants and represents that it owns all
of the right, title and interest in and to the Apollon Patent Rights.
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6.2 Warranty of Authority. Each of the Parties hereto warrants and
represents to the other Party that, as of the Effective Date (i) it has the
full, right power and authority to enter into this Agreement and to carry out
its obligations hereunder, (ii) this Agreement constitutes the valid
obligation of such Party, enforceable against it in accordance with its
terms, and (iii) the execution and delivery of this Agreement and the
performance of such Party's obligations hereunder (a) does not conflict with
or violate any requirement of applicable laws or regulations, and (b) does
not conflict with, or constitute a default under, any contractual obligation
of such Party.
6.3 DISCLAIMER OF WARRANTY. EXCEPT AS PROVIDED IN SECTIONS 5.7 AND 6.1
ABOVE AND IN THIS SECTION 6.3, APOLLON MAKES NO WARRANTIES OR REPRESENTATIONS
WHATSOEVER, WHETHER EXPRESS OR IMPLIED, HEREUNDER; IN PARTICULAR MAKES NO
WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE OR MERCHANTABILITY OF ANY
PRODUCT PRODUCED UNDER THE LICENSE GRANTED HEREBY. MOREOVER, APOLLON MAKES
NO REPRESENTATION OR WARRANTY THAT THE MANUFACTURE OR SALE OF LICENSED
PRODUCTS OR THE USE OF LICENSED PRODUCTS BY ANY PERSON OR ENTITY WILL NOT
CONSTITUTE AN INFRINGEMENT OF THE PATENT OR OTHER INTELLECTUAL PROPERTY
RIGHTS OF OTHERS. NOTWITHSTANDING THE FOREGOING, APOLLON HEREBY REPRESENTS
AND WARRANTS THAT AS OF THE DATE HEREOF IT HAS NOT RECEIVED WRITTEN NOTICE
FROM ANY THIRD PARTY OF ANY SUCH INFRINGEMENT. IN NO EVENT SHALL APOLLON BE
LIABLE FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OR LOST REVENUES OR
PROFITS.
6.4 Indemnification and Insurance. (a) Apollon shall indemnify and
hold Biogen and its Affiliates and their respective officers and employees
harmless from and against any losses, liabilities, costs and expenses
(including court costs and attorney's fees) arising out of or relating to any
suits or liabilities whatsoever (including claims for product liability) to
the extent arising out of the design, manufacture, use, sale or promotion of
Licensed Products, except (i) to the extent caused by Biogen's promotional or
sales practices in connection with the use or Sales of Licensed Products by
Biogen hereunder and the manufacture of Licensed Products by Biogen pursuant
to Apollon and University Technology upon the exercise of the contingent
manufacturing rights granted hereunder, (ii) negligence or intentional
misconduct by Biogen or its Affiliates and their respective officers and
employees or (iii) breach of any term of this Agreement by Biogen or its
Affiliates and their respective officers and employees.
(b) Biogen shall indemnify and hold Apollon and its Affiliates and
their respective officers and employees harmless from and against any losses,
liabilities (including claims for product liability), costs and expenses
(including costs and attorney's fees) to the extent arising out of (i)
Biogen's promotional and sales practices in connection with the use or Sales
of Licensed Products by Biogen hereunder and the manufacture of Licensed
Products by Biogen pursuant to the Apollon and University Technology upon the
exercise of the contingent
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manufacturing rights granted hereunder, (ii) negligence or intentional
misconduct by Biogen or its Affiliates and their respective officers and
employees or (iii) breach of any term of this Agreement by Biogen or its
Affiliates and their respective officers and employees.
(c) A party (the "Indemnitee") that intends to claim
indemnification under this Section 6.4 shall promptly notify the other party
(the "Indemnitor") of any liability or action in respect of which the
Indemnitee intends to claim such indemnification, and the Indemnitor shall
have the right to participate in, and, to the extent the Indemnitor so
desires, jointly with any other Indemnitor similarly noticed, to assume the
defense thereof with counsel selected by the Indemnitor; provided, however,
that an Indemnitee shall have the right to retain its own counsel, with the
fees and expenses to be paid by the Indemnitor, if representation of such
Indemnitee by the counsel retained by the Indemnitor would be inappropriate
due to actual or potential differing interests between such Indemnitee and
any other party represented by such counsel in such proceedings. The
indemnity obligations under this Section 6.4 shall not apply to amounts paid
in settlement of any loss, claim, damage, liability or action if such
settlement is effected without the consent of the Indemnitor, which consent
shall not be withheld unreasonably. The Indemnitor may not settle the action
or otherwise consent to an adverse judgment in such action that diminishes
the rights or interests of the Indemnitee without the express written consent
of the Indemnitee. The Indemnitee, its employees and agents, shall cooperate
fully with the Indemnitor and its legal representatives as requested by the
Indemnitor and at the Indemnitor's expense in the investigation of any
action, claim or liability covered by this indemnification.
(d) Biogen and Apollon each shall maintain product liability
insurance with respect to development, manufacture and sales of Licensed
Products by Biogen or Apollon, as the case may be, in such amount as is
customary in the industry. Each party shall be named as an additional
insured insofar as its rights of indemnification hereunder are concerned on
any such policies of the other party. Biogen and Apollon, as applicable,
shall each maintain such insurance for so long as it continues to manufacture
or sell any Licensed Products.
SECTION 7 TERMINATION
7.1 Breach by Biogen. Apollon may terminate this Agreement and the
license granted to Biogen hereunder in the event Biogen breaches its
obligation to pay any amount due hereunder to Apollon or breaches any other
obligation or condition hereunder, effective thirty (30) days after giving
payment breach and ninety (90) days after giving written notice to Biogen of
such termination in the case of a non-payment breach, which notice shall
describe such breach. Following such termination, Apollon shall have all
rights to make, have made, use sell and import Licensed Product in the
Territory and Biogen shall assign to Apollon all regulatory or other
approvals relevant to Licensed Products in the Territory. If this Agreement
is terminated but the License and Option Agreement between the Parties
continues, Apollon shall pay to Biogen a royalty equal to [
] of the Net Sales of Licensed Products made by Apollon in the
Territory, which payment obligation shall continue until the earlier of
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termination of the License and Option Agreement or the date on which such
Licensed Products or the manufacture, use, offer for sale, import or sale of
such Licensed Products is no longer covered by a Valid Claim of Biogen Patent
Rights in the Territory. The foregoing notwithstanding, if the default or
breach is cured or shown to be non-existent or not material within the thirty
(30) or ninety (90) day period, as the case may be, the notice shall be
automatically withdrawn and of no effect.
7.2 Event of Bankruptcy. Upon the occurrence of an event of bankruptcy
with respect to either Party, the other Party may terminate this Agreement or
the licenses or rights granted to the bankrupt Party hereunder with immediate
effect by delivering written notice of said termination to the bankrupt Party.
7.3 Challenge of Patents. Except in jurisdictions in which it would be
illegal to do so, Biogen may immediately terminate this Agreement in the
event Apollon or any of its Affiliates files a revocation or nullity
proceeding with respect to any of the Biogen Patent Rights or challenges the
validity of any of the Biogen Patent Rights. Except in jurisdictions in which
it would be illegal to do so, Apollon may immediately terminate this
Agreement or the license granted to Biogen hereunder in the event Biogen or
any of its Affiliates files a revocation or nullity proceeding with respect
to any of the Apollon Patent Rights or challenges the validity of any of the
Apollon Patent Rights.
The provisions of this Section 7.3 shall be deemed deleted from this
Agreement in any jurisdiction in which the inclusion of such provisions would
be illegal or would make this Agreement or any part hereof unenforceable.
7.4 Breach by Apollon. Biogen may terminate this Agreement upon breach
by Apollon of the obligation to pay any amount due hereunder or of any other
obligation or condition, effective thirty (30) days after giving written
notice to Apollon of such termination in the case of a payment breach and
ninety (90) days after giving written notice to Apollon of such termination
in the case of a non-payment breach, which notice shall describe such breach.
The foregoing notwithstanding, if the default or breach is cured or shown to
be non-existent or not material within the thirty (30) or ninety (90) day
period, as the case may be, the notice shall be deemed automatically
withdrawn and of no effect.
7.5 Survival. All provisions of Section 3.6, Section 7.1 and Section 9
shall survive termination of this Agreement.
7.6 No Prejudice. Any termination under this Section 7 shall be without
prejudice to the rights of either Party against the other then accruing or
otherwise accrued under this Agreement.
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SECTION 8 NOTICES
Any notice required or permitted to be given hereunder shall be sent in
writing by registered or certified mail, postage prepaid, return receipt
requested, by telefax, confirmation received, by overnight delivery using a
nationally recognized overnight courier or by hand delivery, addressed to the
Party to whom it is to be given as follows:
If to Biogen: Biogen, Inc.
14 Cambridge Center
Cambridge, Massachusetts 02142
Telefax: (617) 679-2617
Attention: Vice President - Marketing and Sales
With a copy to: Biogen, Inc.
14 Cambridge Center
Cambridge, Massachusetts 02142
Telefax: (617) 679-2838
Attention: Vice President - General Counsel
If to Apollon: Apollon, Inc.
One Great Valley Parkway
Malvern, Pennsylvania 19355-1423
Telefax: (610) 647-9732
Attention: President and CEO
With a copy to: Ballard Spahr Andrews & Ingersoll
1735 Market Street, 51st Floor
Philadelphia, PA 19103
Telefax: (215) 864-8999
Attention: Morris Cheston, Jr.
or to such other address or addresses as may from time to time be given in
writing by either Party to the other as aforesaid. Any notice sent pursuant
to this Section shall be deemed delivered within three (3) days if sent by
mail and within twenty-four (24) hours if sent by telefax, overnight courier
or hand delivery.
SECTION 9 CONFIDENTIALITY
9.1 Obligations. Except for the proper exercise of its rights under
this Agreement, each of the Parties agrees that it and its Affiliates will
not publish or otherwise divulge or deliver to another Person, except their
sublicensees hereunder, or use for its or their own benefit Technology,
Patent Rights, Clinical Trial Information, reports, records, manuals,
regulatory filings
C-16
<PAGE>
or other confidential information disclosed pursuant to this Agreement
(collectively, the "Confidential Information") provided to it by the other
Party without the prior written approval of the Party disclosing such
information (the "Disclosing Party") in each instance. The foregoing
obligation shall not be imposed on either Party with respect to any
Confidential Information which it can demonstrate (i) was at the time of
disclosure to it (or thereafter, but prior to its publication, divulgence or
use for the benefit of the Receiving Party or any of its Affiliates, become
through no fault of the Receiving Party or its Affiliates) a part of the
public domain by publication or otherwise; or (ii) was already properly and
lawfully in its possession at the time it was received from the Disclosing
Party; or (iii) was lawfully received from a third party who was under no
obligation of confidentiality to the Disclosing Party with respect thereto;
or (iv) is required by law to be disclosed (but only to the extent of such
required disclosure).
9.2 Confidentiality Agreements. Each Party represents that it has
employment agreements with its and its Affiliate's key employees having
confidentiality commitments consistent with its obligations hereunder and
will require all of its consultants, agents, sublicensees, or others who have
access to any of such Confidential Information of the other Party to execute
confidentiality agreements covering all Confidential Information of the other
Party, and will exercise its best efforts to obtain compliance therewith.
9.3 Remedies. In the event of a breach or a threatened breach of the
terms of this Section 9, the Disclosing Party shall be entitled to an
injunction restraining the Receiving Party and its Affiliates and
sublicensees and their officers, employees, agents and consultants from
continuing or committing such breach, without showing or proving any actual
damage. In the event of such breach, the Disclosing Party shall, in addition
to injunctive relief, be entitled to all other remedies provided by law,
including an award of damages.
SECTION 10 PUBLICITY
If the Parties agree to publicize this Agreement, Biogen and Apollon will
coordinate to issue a joint press release in mutually agreed form concerning
the execution of this Agreement. Such announcement shall be made at such
time as agreed by Biogen and Apollon. Except for such joint release, unless
required to do so by law or by the rules of any exchange or over-the-counter
market upon which any of Biogen's or Apollon's securities are traded or
unless such information has been previously disclosed, neither Party will
issue any press release or make any public disclosure or announcement
concerning the terms of this Agreement or the transactions contemplated
hereby without the prior approval of the other Party hereto. Prior to making
any such press release or public announcement, the Party making such release
or public announcement shall consult with the other Party hereto with respect
to the timing and content of such press release or public announcement at
least five (5) business days prior to the proposed release or announcement.
Without limiting the generality of the foregoing, neither Party shall use the
name of the other in connection with the marketing or sale of Licensed
Products without the prior written consent of such Party.
C-17
<PAGE>
SECTION 11 DISPUTES
Any dispute, claim, or difference arising in connection with this
Agreement or as to the rights or liabilities of the Parties hereunder (each
such event being hereinafter called a "dispute"), shall be referred to
arbitration, in accordance with the Commercial Arbitration Rules (the
"Rules") of the American Arbitration Association (hereinafter referred to as
the "Association"), as supplemented hereby. All arbitration proceedings shall
occur in Boston, Massachusetts. The arbitration panel shall consist of three
arbitrators. The Party initiating arbitration shall nominate one arbitrator
(who shall not be affiliated with such Party) in the request for arbitration
and the other Party shall nominate a second arbitrator (who shall not be
affiliated with such Party) in the answer thereto. The two arbitrators so
named will then jointly appoint the third arbitrator as chairman of the
arbitration panel. If either Party fails to nominate its arbitrator, or if
the arbitrators named by the Parties fail to agree on the person to be named
as chairman within sixty (60) days, the President of the Association shall
make the necessary appointments of an arbitrator or the chairman of the
arbitration panel.
The arbitration panel as designated above shall proceed to arbitrate the
dispute by giving notice to all parties of its proceedings and hearings in
accordance with the Association's applicable procedures. Within fifteen (15)
days after all three arbitrators have been appointed, an initial meeting
among the arbitrators and counsel for the Parties shall be held for the
purpose of establishing a plan for administration of the arbitration,
including: (i) definition of issues; (ii) scope, timing and type of
discovery, which may at the discretion of the arbitrators include production
of documents in the possession of the Parties, but may not, without the
consent of the Parties, include depositions; (iii) exchange of documents and
filing of detailed statements of claims and prehearing memoranda; (iv)
schedule and place of hearings; and (v) any other matters that may promote
the efficient, expeditious and cost-effective conduct of the proceeding. The
substantive law of the Commonwealth of Massachusetts shall be applied by the
arbitrators to the resolution of the dispute, provided that the arbitrators
shall base their decision on the express terms, covenants and conditions of
this Agreement. The arbitrators shall be bound to make specific findings of
fact and reach conclusions of law, based upon the submissions and evidence of
the Parties, and shall issue a written decision explaining the basis for the
decision and award. The Parties agree that the arbitrators shall have no
power to alter or modify any express provision of this Agreement or to render
any award which, by its terms, effects any such alteration or modification.
The award of the arbitration panel shall be final and judgment upon such
an award may be entered in any competent court or application may be made to
any competent court for judicial acceptance of such an award and an order of
enforcement. In the event of any procedural matter not covered by the
aforesaid Rules, the procedural law of the Commonwealth of Massachusetts
shall govern.
C-18
<PAGE>
SECTION 12 MISCELLANEOUS
12.1 Amendments, Waivers. This Agreement may be amended and any of its
terms or conditions may be waived only by a written instrument executed by
both Parties, or, in the case of a waiver, by the Party waiving compliance.
The failure of any Party at any time to require performance of any provision
hereof shall in no manner affect its rights at a later time to enforce the
same. No waiver by any Party of any condition or term in any instance shall
be construed as a further or continuing waiver of such condition or term or
of another condition or term.
12.2 Force Majeure. Any delays in or failures of performance by any
Party under this Agreement shall not be considered a breach of this Agreement
if and to the extent caused by occurrences beyond the reasonable control of
the Party affected, including, but not limited to: acts of God; acts,
regulations or laws of any government (including, without limitation, import
and export regulations); peril of the sea; strikes or other concerted acts of
workers; fires; floods; explosions; riots; wars; rebellion and sabotage; and
any time for performance hereunder shall be extended by the actual time of
delay caused by such occurrence. Each Party shall promptly give notice to
the other of the start and stop should it be so affected by any of the
above-mentioned occurrences.
12.3 Interest On Late Payments. Each Party shall have the right to
charge the other interest on a per diem basis on all payments which are past
due at an annual rate of two percent (2.0%) over the prime rate then in
effect at the BankBoston or its successors.
12.4 Cooperation. Each Party agrees to cooperate with the other Party in
any and all efforts by such other party to obtain patent term extensions or
other extensions as provided by law in territories where Valid Claims under
such other Party's patents applicable to Licensed Products now or hereafter
exist.
12.5 Binding Nature. This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the Parties hereto and their respective
successors and permitted assigns.
12.6 Assignment. Neither this Agreement nor any of the rights,
interests, or obligations hereunder shall be assignable by either of the
Parties hereto or by operation of law without the prior written consent of
the other Party hereto; provided, however, that any Party may assign its
rights, interests and obligations hereunder to any entity with which such
party may merge or consolidate or to which such Party may transfer
substantially all of its assets, without obtaining the consent of the other
Party. Notwithstanding the foregoing, either Party may assign its right to
receive payments hereunder, and either Party and its sublicensees will
execute any documents or instruments reasonably required by the other Party
in connection with any such assignment. Any purported assignment in
violation of the provisions of this Section shall be void, and all rights,
interests or obligations so assigned thereby shall return to the assigning
Party or its successors.
C-19
<PAGE>
12.7 Severability. The Parties intend this Agreement to be enforced as
written. However, if any provision of this Agreement should be or become
fully or partly invalid or unenforceable for any reason or violate any
applicable law, this Agreement is to be considered divisible as to such
provision and such provision is to be deleted from this Agreement, and the
remainder of this Agreement shall be deemed valid and binding as if such
provision were not included herein. There shall be substituted for any such
provision deemed to be deleted a suitable provision which, as far as is
legally possible, comes nearest to the Parties' original intent.
12.8 Entire Agreement. This Agreement contains the entire agreement
between the Parties hereto with respect to the subject matter set forth
herein and supersedes any and all other agreements, oral or written, in
respect of the subject matter of this Agreement.
12.9 Captions. The captions to the Sections of this Agreement are for
convenience only and shall not be considered in interpreting this Agreement.
12.10 Governing Law. This Agreement shall be governed by and
construed in accordance with the law of the Commonwealth of Massachusetts
without regard to conflict of law provisions.
12.11 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original and all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the Parties hereto have duly caused this Agreement to
be executed in duplicate by their duly authorized representatives as of the
day and year first above written.
BIOGEN, INC. APOLLON, INC.
By: ________________________ By: ________________________
Name: Name:
Title: Title:
C-20
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the registration statement on Form S-1 (File
No. 333-37821) of our report, which includes an explanatory paragraph which
refers to conditions that raise substantial doubt about the Company's ability
to continue as a going concern, dated March 28, 1997, except as to the
information presented in Note 17, for which the date is September 29, 1997,
on our audits of the financial statements of Apollon, Inc. We also consent to
the references to our firm under the caption "Experts" and "Selected
Financial Data".
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
November 20, 1997
<PAGE>
Exhibit 23.3
[RATNER & PRESTIA LETTERHEAD]
November 20, 1997
Mr. James Murphy
Apollon, Inc.
One Great Valley Parkway
Malvern, PA 19355
Dear Jim:
This is to confirm that we hereby consent to the reference to our firm
in the "Experts" section of Amendment No. 1 to Apollon's proposed
Registration Statement on Form S-1, (of which we received earlier today, a
proof copy of those sections understood to be the only sections referring to
patents, licenses or proprietary rights).
Very truly yours,
Ratner & Prestia
/s/ Paul F. Prestia
-------------------
Paul F. Prestia
PFP/bgd
cc: Mary J. Mullany, Esq.
<PAGE>
Exhibit 23.4
[LETTERHEAD OF WOODCOCK WASHBURN
KURTZ MACKIEWICZ & NORRIS LLP]
November 20, 1997
Mr. James Murphy
Apollon, Inc.
One Great Valley Parkway, Ste. 30
Malvern, PA 19355
Dear Jim:
We consent to your including in the Section, under the "Legal Matters"
included in Amendment No. 1 to its Form S-1 for Apollon, Inc., filed this date,
a statement that certain legal matters with respect to patent matters are
passed upon for Apollon by Woodcock Washburn Kurtz Mackiewicz & Norris LLP.
Sincerely,
/s/ Dianne B. Elderkin
-----------------------
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<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF APOLLON, INC. FOR THE THREE-MONTH PERIOD ENDED
SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<CURRENT-ASSETS> 1,989
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<TOTAL-ASSETS> 4,496
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<TOTAL-REVENUES> 711
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<INTEREST-EXPENSE> 22
<INCOME-PRETAX> (9,041)
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