<PAGE> 1
AS FILED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION ON JUNE 25,
1999
REGISTRATION NO. 333-78065
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
VAXGEN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 2834 94-3236309
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
1000 MARINA BOULEVARD, SUITE 200
BRISBANE, CALIFORNIA 94005
(650) 624-1000
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT C. NOWINSKI, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
1000 MARINA BOULEVARD, SUITE 200
BRISBANE, CALIFORNIA 94005
TEL (650) 624-1000
FAX (650) 624-1001
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
AGENT FOR SERVICE)
COPIES TO:
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BENJAMIN F. STEPHENS SUSAN L. PRESTON
WILLIAM W. BARKER KATHRYN A. WALKER
MARK F. HOFFMAN COOLEY GODWARD LLP
GRAHAM & JAMES LLP/RIDDELL WILLIAMS P.S. 5200 CARILLON POINT
1001 FOURTH AVENUE PLAZA, SUITE 4500 KIRKLAND, WASHINGTON 98033
SEATTLE, WASHINGTON 98154 TEL: (425) 893-7700
TEL: (206) 624-3600 FAX: (425) 893-7777
FAX: (206) 389-1708
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
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 the 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 COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
DESCRIPTION OF ARTWORK
Inside Front Cover:
Introductory text: Preventing HIV infection with AIDSVAX
(AIDSVAX is still in the development stage and has not yet obtained FDA
approval)
Graphics on blue background depicting:
(1) gp120 molecule, arrow pointing to gp120
TEXT: HIV virus, gp120
(2) creation of synthetic gp120
TEXT: Synthetic gp120 created by genetic engineering
(3) Injection of AIDSVAX in arm of vaccinee
TEXT: AIDSVAX vaccine, AIDSVAX induces antibodies in blood
(4) binding of antibodies to gp120
TEXT: Protection, Antibodies to gp120 block HIV infection
<PAGE> 3
DESCRIPTION OF ARTWORK
INSIDE BACK COVER:
Graphic depicting: Colored map of the world on blue background with vertical
bars indicating number of people living with HIV/AIDS.
TEXT: People Living with HIV/AIDS
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North America 890,000
Caribbean 330,000
Latin America 1,400,000
North Africa, Middle East 210,000
Western Europe 500,000
Sub Saharan Africa 22,500,000
South and South-East Asia 6,700,000
Eastern Europe, Central Asia 270,000
East Asia and Pacific 560,000
Australia and New Zealand 12,000
Total: 33.4 million
</TABLE>
Source: UNAIDS, AIDS Epidemic Update, Dec. 1998
<PAGE> 4
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. VAXGEN
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION -- JUNE 25, 1999
PROSPECTUS
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3,100,000 Shares
[VAXGEN LOGO]
Common Stock
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VaxGen, Inc. is offering 3,100,000 shares of its common stock in an initial
public offering. Prior to this offering, there has been no public market for
VaxGen's common stock.
VaxGen is developing preventive vaccines for worldwide use against HIV. We are
conducting two large-scale Phase III clinical trials, one in North America and
one in Thailand.
It is anticipated that the public offering price will be between $13.00 and
$15.00 per share. The shares of VaxGen will be quoted in the Nasdaq National
Market under the symbol "VXGN".
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<CAPTION>
Per Share Total
<S> <C> <C>
Public offering price............................. $ $
Underwriting discounts and commissions............ $ $
Proceeds, before expenses, to VaxGen.............. $ $
</TABLE>
SEE "RISK FACTORS" ON PAGES 8 TO 12 FOR FACTORS THAT SHOULD BE CONSIDERED BEFORE
INVESTING IN THE SHARES OF VAXGEN.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
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The underwriters may, under certain circumstances, purchase up to 465,000
additional shares from VaxGen at the public offering price, less underwriting
discounts and commissions. Delivery and payment for the shares will be on
.
PRUDENTIAL SECURITIES PUNK, ZIEGEL & COMPANY
, 1999
<PAGE> 5
TABLE OF CONTENTS
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PAGE
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Prospectus Summary................. 4
Risk Factors....................... 8
Use of Proceeds.................... 13
Dividend Policy.................... 13
Forward-Looking Statements......... 13
Dilution........................... 14
Capitalization..................... 15
Selected Financial Data............ 16
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 17
Business........................... 21
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PAGE
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Management......................... 43
Certain Transactions............... 49
Principal Stockholders............. 50
Description of Capital Stock....... 51
Shares Eligible for Future Sale.... 53
Underwriting....................... 54
Legal Matters...................... 55
Experts............................ 55
Where You Can Find More
Information...................... 56
Index to Financial Statements...... F-1
</TABLE>
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AIDSVAX(R) is a registered trademark of VaxGen. Our web site address is
www.vaxgen.com. Information contained on our web site is not a part of this
prospectus.
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are not
making an offer of these securities in any jurisdiction where the offer or sale
is not permitted. You should not assume that the information contained in this
prospectus is accurate as of any date other than the date on the front cover of
this prospectus.
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3
<PAGE> 6
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
Investors should read the entire prospectus carefully.
VAXGEN
We are developing preventive vaccines for worldwide use against HIV. We are
conducting two large-scale Phase III clinical trials of our AIDSVAX vaccines,
one principally in North America and one in Thailand. To date, we are the only
company to advance an HIV vaccine into Phase III clinical trials. If the Phase
III clinical trials are successful, we will apply to the United States Food and
Drug Administration and foreign regulatory authorities for licenses to
manufacture and sell AIDSVAX in the United States and abroad.
Initial development of AIDSVAX was funded by Genentech at a cost of over
$50 million during a period of nearly ten years. We were formed in November 1995
to complete the development of, and commercialize, AIDSVAX in partnership with
Genentech. Genentech licensed to us the technology necessary for development and
commercialization of AIDSVAX.
The HIV/AIDS Epidemic
HIV/AIDS is one of the largest epidemics in human history. According to the
World Health Organization and UNAIDS:
- in just two decades, over 47 million people have been infected with HIV
worldwide;
- 14 million lives have been claimed by AIDS;
- each day approximately 16,000 individuals become infected with HIV; and
- AIDS is the fourth leading cause of death worldwide, now exceeding
cancer.
We believe that, because of the magnitude and severity of the epidemic, an
HIV vaccine would have one of the largest population-based markets in the
history of modern medicine.
Our Vaccines
Our vaccines are designed to prevent infection by HIV, rather than treat
established infection. Because AIDSVAX contains synthetic copies of proteins
from the surface of HIV, it is incapable of causing HIV infection. Humans
vaccinated with AIDSVAX form antibodies against HIV which, in laboratory tests,
bind to the virus and neutralize its infectivity. Vaccination with AIDSVAX also
stimulates immune memory, training the immune system to mobilize rapidly in the
event of future exposure to HIV.
We believe that AIDSVAX will be successful for the following reasons:
- EFFICACY: In Phase II clinical trials, all human volunteers vaccinated
with AIDSVAX developed neutralizing antibodies to HIV. In chimpanzees,
vaccination with AIDSVAX protected chimps against infection upon
subsequent injection with infectious HIV. The level of neutralizing
antibodies in humans vaccinated with AIDSVAX equaled or exceeded that
observed in vaccinated chimps.
- SAFETY: In Phase I/II clinical trials, none of the 2,000 human volunteers
vaccinated with AIDSVAX had serious side effects.
- HIV COVERAGE: AIDSVAX is designed to neutralize the majority of HIV
subtypes and strains encountered during natural infection in the regions
where we are conducting Phase III clinical trials.
- BROAD USE: AIDSVAX has no clinical impact on people previously infected
with HIV. We believe, therefore, that AIDSVAX will be used without
requiring the prescreening of recipients. This is particularly
advantageous in populations where there is a high rate of HIV-infected
people.
- MANUFACTURING: Genentech has manufactured AIDSVAX in commercial
quantities.
- VACCINE RATIONALE: The design of AIDSVAX follows that of previous
successful vaccines, such as hepatitis B vaccine. The blocking of HIV
infection by neutralizing antibody conforms with generally accepted
principles of vaccinology.
4
<PAGE> 7
Our Clinical Trials
We are conducting Phase III clinical trials of AIDSVAX to determine whether
AIDSVAX protects humans from HIV infection by sexual transmission or injection
drug use. Phase III clinical trials are large-scale trials to test for efficacy
and further safety. The North American Phase III trial is designed for 5,400
volunteers. It is being conducted in 56 clinics across the United States. It is
also being tested in one clinic in Puerto Rico, one clinic in Canada and one
clinic in The Netherlands. In Thailand, the Phase III clinical trial is designed
for 2,500 volunteers and is being conducted in 17 clinical sites in Bangkok.
To gain regulatory approval for AIDSVAX, we believe the vaccine must
demonstrate, at statistical significance, efficacy of at least 30%. This is
based on meetings and documented discussions we have had with the FDA and its
Vaccines and Related Biological Products Advisory Committee.
Our clinical protocol provides for two opportunities to measure efficacy:
- An independent monitoring board will conduct an interim analysis
approximately midway through the observation period of each clinical
trial. Should AIDSVAX demonstrate 30% efficacy, the independent
monitoring board will recommend termination of, and we will terminate,
the trial and we will submit an application for regulatory approval.
- If 30% efficacy has not been shown by the time of the interim analysis,
we will have a second opportunity to determine the vaccine's efficacy at
the completion of the trial.
Under the current timetable, the interim analysis for each clinical trial
will be conducted in the second half of 2001.
Our Strategic Relationships
We intend to use Genentech as our partner to manufacture and distribute
AIDSVAX. Genentech has exclusive options to manufacture and market AIDSVAX on
specified financial terms. If Genentech does not exercise its options, we have
the right to pursue third party arrangements, with Genentech providing the
transfer of technology necessary to manufacture AIDSVAX.
We will work with two federal agencies in relation to our North American
Phase III trial: the Centers for Disease Control and Prevention and the National
Institute for Allergy and Infectious Diseases. The Centers for Disease Control
and Prevention have proposed to co-sponsor the Phase III trial and to fund $8.0
million over a period of four years. The National Institute for Allergy and
Infectious Diseases is working with us on a $4.6 million program related to the
Phase III clinical trial. The purpose of this program is to obtain and store
specimens for studies on the immune system.
We also intend to work selectively with other companies that are developing
vaccines for HIV. For example, we are working with Pasteur Merieux Connaught to
co-develop an alternative HIV vaccine. This vaccine will combine technologies
and components provided by Pasteur Merieux Connaught and us. We anticipate that
such a combination vaccine could enter Phase III clinical trials by 2001.
We believe we have a strong competitive lead in the development of an HIV
vaccine. We are the only company worldwide with Phase III clinical trials of an
HIV vaccine underway. In addition to having the advantage of lead-time, we also
have an exclusive license from Genentech to a portfolio of U.S. and foreign
patents on AIDSVAX and associated technology, consisting of 88 issued patents
and 47 pending patent applications.
Our Management Team
Our management team, together with Genentech, has extensive experience in
the international arena of HIV research, public health policy, and the practical
aspects of developing, manufacturing and marketing biological products. Our
President is Donald Francis, M.D. During his 20-year tenure at the Centers for
Disease Control, he was involved in the control or eradication of several
epidemics, including a major epidemic of cholera in Africa, smallpox in India
and the first known outbreak of the Ebola virus. He subsequently was the lead
clinician for the Phase III trial of the hepatitis B vaccine. Our Chairman of
the Board and Chief Executive Officer is Robert Nowinski, Ph.D. Dr. Nowinski is
a pioneering executive in the biotechnology industry, having founded three
publicly-traded biotechnology companies: Genetic Systems Corporation in 1981,
ICOS Corporation in 1989, and PathoGenesis Corporation in 1991. Our Senior Vice
President, Research & Development is Phillip Berman, Ph.D., who is an inventor
of AIDSVAX and a former senior scientist at Genentech.
VaxGen, Inc. was incorporated in Delaware in November 1995. Our principal
executive offices are located at 1000 Marina Boulevard, Suite 200, Brisbane, CA
94005, and our telephone number is (650) 624-1000.
5
<PAGE> 8
THE OFFERING
Shares offered by VaxGen.................... 3,100,000 shares
Total shares outstanding after this
offering.................................... 10,785,161 shares(1)
Use of proceeds............................. To complete Phase III clinical
trials of AIDSVAX in North
America and Thailand, develop
data management systems, apply
for regulatory approval and for
working capital and other
general corporate purposes.
Proposed Nasdaq National Market symbol...... VXGN
(1) Reflects a one-for-two reverse stock split effective on April 9, 1999, and
does not include: (a) 1,159,171 shares of common stock issuable on exercise
of stock options outstanding at May 31, 1999 at a weighted average exercise
price of $8.60 per share; (b) 593,650 shares of common stock reserved for
future issuance under our 1996 stock option plan; (c) 28,929 shares of
common stock reserved for future issuances under our 1998 Director Stock
Option Plan; (d) 459,825 shares of common stock issuable on exercise of
warrants at May 31, 1999 at a weighted average exercise price of $7.49 per
share; and (e) exercise of the underwriters' over-allotment option.
6
<PAGE> 9
SUMMARY FINANCIAL INFORMATION
The following tables reflect selected financial information since
inception. The "as adjusted" column of the balance sheet data reflects the
estimated net proceeds from the sale of 3,100,000 shares of common stock to be
sold in this offering at an assumed initial public offering price of $14.00 per
share.
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<CAPTION>
PERIOD FROM
NOVEMBER 27, 1995 YEAR ENDED THREE MONTHS ENDED
(INCEPTION) TO DECEMBER 31, MARCH 31,
DECEMBER 31, ---------------------------- -------------------
1995 1996 1997 1998 1998 1999
----------------- ------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Loss from operations.......... $(30) $(2,054) $(3,946) $(10,176) $(1,163) $(4,044)
Net loss...................... $(30) $(2,082) $(3,060) $ (9,163) $ (857) $(3,760)
==== ======= ======= ======== ======= =======
Net loss per share -- basic
and diluted................. $ -- $ (1.90) $ (0.60) $ (1.48) $ (0.14) $ (0.49)
==== ======= ======= ======== ======= =======
Weighted average shares
outstanding -- basic and
diluted..................... -- 1,093 5,096 6,185 6,066 7,619
</TABLE>
<TABLE>
<CAPTION>
AT AT MARCH 31, 1999
DECEMBER 31, -------------------------
1998 ACTUAL AS ADJUSTED(1)
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(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investment securities....... $19,468 $20,607 $60,007
Working capital........................................ 17,866 19,318 58,718
Total assets........................................... 21,472 22,693 62,093
Stockholders' equity................................... 19,398 20,896 60,296
</TABLE>
7
<PAGE> 10
RISK FACTORS
You should carefully consider the following risk factors, in addition to
the other information set forth in this prospectus, before purchasing shares of
common stock of VaxGen. Each of these risk factors could adversely affect our
business, operating results and financial condition, as well as adversely affect
the value of an investment in our common stock.
IF WE ARE UNABLE TO COMMERCIALIZE OUR SOLE PRODUCT CANDIDATE, AIDSVAX, WE MAY
NOT HAVE REVENUES TO CONTINUE OPERATIONS. AIDSVAX is our only product candidate.
We do not know whether the current or planned formulations of AIDSVAX will be
effective in preventing HIV infection. The overall scientific knowledge of HIV
is limited. Although our research has indicated that AIDSVAX contains a protein
that is critical in the infection process, other proteins may be necessary to
develop an effective vaccine.
Our success will depend entirely on the success of AIDSVAX. In particular,
we must be able to:
- establish the safety, purity and potency of AIDSVAX in humans;
- obtain regulatory approvals for AIDSVAX, including a preapproval of the
manufacturing facility; and
- successfully commercialize AIDSVAX through collaborative relationships.
If we are unable to commercialize AIDSVAX, we do not have other products
from which to derive revenue.
IF WE ARE NOT ABLE TO DEMONSTRATE THE EFFICACY OF AIDSVAX IN OUR CLINICAL
TRIALS OR OUR CLINICAL TRIALS ARE DELAYED, WE MAY NOT BE ABLE TO OBTAIN
REGULATORY CLEARANCE TO MARKET AIDSVAX IN THE UNITED STATES OR ABROAD ON A
TIMELY BASIS, OR AT ALL. Clinical testing is a long, expensive and uncertain
process. We cannot assure you that the data collected from our clinical trials
will be sufficient to support approval of AIDSVAX by the FDA or any foreign
regulatory authorities, that the clinical trials will be completed on schedule
or, even if the clinical trials are successfully completed and on schedule, that
the FDA or any foreign regulatory authorities will ultimately approve AIDSVAX
for commercial sale.
To gain FDA regulatory approval for the sale of AIDSVAX in the United
States, we believe, based on discussions with the FDA and the vote of its
Vaccine and Related Biological Products Advisory Committee, that we will need to
demonstrate that the AIDSVAX vaccine reduces the level of HIV infection by at
least 30% at a statistically significant level. These discussions and the vote
of the Vaccine and Related Biological Products Advisory Committee, however, are
not binding on the FDA. In the context of our United States clinical trial,
which represents a small sampling from the entire population, this means that in
order to establish 30% efficacy at a statistically significant level there must
be an observed reduction in the incidence of HIV in the group receiving the
vaccine compared to the control group of between 45% to 65%, or possibly a
higher percentage, depending on various factors that will have a bearing on the
statistical significance of the clinical trial results. These factors include
the number of patients ultimately enrolled in the study, the rate of HIV
infection in the control group and the length of time associated with the
clinical observation period. We anticipate that the efficacy required to obtain
regulatory approval to market AIDSVAX in foreign countries will vary from one
country to another and may differ significantly from that required by the FDA.
We cannot assure you that the data collected from our United States or Thai
clinical studies will demonstrate the required level of efficacy to permit the
commercialization of AIDSVAX in the Unites States, in Thailand or in any other
foreign country.
Our trials could be delayed for a variety of reasons, including:
- delays in enrolling volunteers;
- lower than anticipated retention rate of volunteers in the trial; or
- serious adverse events related to the vaccine.
8
<PAGE> 11
Results of previous animal trials may not be relevant for determining the
protective effect of AIDSVAX against HIV infection in humans. Preclinical and
clinical data can be interpreted in different ways, which could delay, limit or
prevent regulatory approval. Serious adverse events related to the vaccine
during our Phase III clinical trials could cause the trials to be prematurely
terminated. Negative or inconclusive results could cause the trials to be
unacceptable for submission to regulatory authorities.
IF WE FAIL TO COMPLY WITH EXTENSIVE REGULATIONS ENFORCED BY DOMESTIC AND
FOREIGN REGULATORY AUTHORITIES, THE COMMERCIALIZATION OF AIDSVAX COULD BE
PREVENTED OR DELAYED. AIDSVAX is subject to extensive government regulations
related to development, clinical trials, manufacturing and commercialization.
The process of obtaining FDA and other regulatory approvals is costly, time
consuming, uncertain and subject to unanticipated delays.
The FDA may refuse to approve an application if it believes that any
applicable regulatory criteria are not satisfied. The FDA may also require
additional testing to establish the safety, purity and potency of AIDSVAX.
Moreover, if regulatory approval of a product is granted, the approval may be
limited to specific indications or limited with respect to its distribution. For
instance, the FDA may approve the licenses for only high risk populations.
Foreign regulatory authorities may apply similar limitations or may refuse to
grant any approval.
The FDA may refuse to approve an application if it believes that applicable
regulatory criteria are not satisfied. The FDA may also require additional
testing for safety and efficacy. Moreover, if regulatory approval of a product
is granted, the approval may be limited to specific indications or limited with
respect to its distribution. For instance, the FDA may approve the licenses for
only high risk populations. Foreign regulatory authorities may apply similar
limitations or may refuse to grant any approval.
There can be no assurance that the FDA will approve the AIDSVAX
manufacturing processes or that manufacturing facilities will pass an FDA
preapproval inspection for AIDSVAX. Should Genentech elect not to manufacture
AIDSVAX, we must secure a third party manufacturer. We cannot assure you that we
will successfully identify a third party manufacturer or that its facilities
will pass an FDA preapproval inspection for AIDSVAX. At a minimum, the FDA will
require equivalence testing between Genentech produced AIDSVAX and third party
produced AIDSVAX. Depending upon differences in manufacturing processes, the FDA
may also require additional clinical studies to establish the safety, purity and
potency of AIDSVAX. Any failure to obtain or delay in obtaining such approvals
would have a material adverse effect on our business, financial condition and
results of operation.
Even after United States regulatory approval for AIDSVAX is obtained, the
license will be subject to continual review, and newly discovered or developed
safely or efficacy data may result in revocation of the marketing license.
Moreover, if and when such approval is obtained, the marketing of AIDSVAX will
be subject to extensive regulatory requirements administered by the FDA and
other regulatory bodies, including adverse event reporting requirements and the
FDA's general prohibition against promoting products for unapproved or
"off-label" uses. The AIDSVAX manufacturing facilities are also subject to
continual review and periodic inspection and approval of manufacturing
modifications. Domestic manufacturing facilities are subject to biennial
inspections by the FDA and must comply with the FDA's Good Manufacturing
Practices regulations. In complying with these regulations, manufacturers must
spend funds, time and effort in the areas of production, record keeping,
personnel and quality control to ensure full technical compliance. The FDA
stringently applies regulatory standards for manufacturing. Failure to comply
with any of these postapproval requirements can, among other things, result in
warning letters, product seizures, recalls, fines, injunctions, suspensions or
revocations of marketing licenses, operating restrictions and criminal
prosecutions. We plan to pursue marketing authorization in Thailand based on the
results from the Thai trial. The Thai government also has a regulatory process
that we will need to follow before we can commercialize AIDSVAX in that country.
No assurances can be given that we will obtain marketing authorization from the
Thai government. Any such enforcement action could harm our business.
Unanticipated changes in existing requirements or the adoption of new
requirements could also have a material adverse effect on VaxGen.
9
<PAGE> 12
VaxGen and the manufacturer of AIDSVAX also are subject to numerous
federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and hazardous substance disposal. There can be no assurance that we will
avoid incurring significant costs to comply with such laws and regulations in
the future, or that such laws or regulations will not have a material adverse
effect on VaxGen.
The European Union, Japan and other countries also extensively regulate
pharmaceuticals, including biological drug products. No assurance can be given
that we will be able to obtain other countries' approvals for AIDSVAX.
WE HAVE ONLY A LIMITED OPERATING HISTORY AND WE EXPECT TO CONTINUE TO GENERATE
LOSSES. To date, we have engaged primarily in research, development and clinical
testing. At March 31, 1999, we had an accumulated deficit of approximately $18.1
million. We sustained net losses of approximately $2.1 million in 1996, $3.1
million in 1997 and $9.2 million in 1998, and $3.8 million for the three months
ended March 31, 1999. We expect to incur substantial losses for at least an
additional four to five years.
IF WE NEEDED ADDITIONAL FUNDS, AND ARE UNABLE TO RAISE THEM, WE WOULD HAVE TO
CURTAIL OR CEASE OPERATIONS. We cannot be certain that our existing capital
resources, together with the net offering proceeds and anticipated funding from
the Centers for Disease Control and Prevention and the National Institute of
Allergy and Infectious Diseases, will be sufficient to support our current and
planned operations through commercialization of AIDSVAX. We do not expect
AIDSVAX to be commercially available for at least four years. AIDSVAX has not
received regulatory approval for commercial sale. If taken to completion, the
Phase III clinical testing necessary before we can file an application with the
FDA for product approval will take at least 36 months from the date of this
prospectus. Once the testing is completed, we will need to analyze the data and
prepare our biologics license application for submission to the FDA, which
typically takes between three and six months to be accomplished. The FDA review
process could take at least an additional six months. We anticipate that it will
take at least six months after obtaining regulatory approval for Genentech or
another third party to begin commercialization of AIDSVAX. As a result, we do
not believe that AIDSVAX will be on the market before 2003.
We may need to raise additional funds if:
- AIDSVAX is not sufficiently safe, pure and potent to commercialize in its
current formulation;
- our Phase III clinical trials are delayed, are not successful or are more
costly than currently estimated;
- commercialization of AIDSVAX is delayed for any other reason;
- additional trials are required; or
- we do not receive the anticipated funding from the Centers for Disease
Control and Prevention or the National Institute of Allergy and
Infectious Diseases.
We cannot assure you that we will be able to raise sufficient funds in the
future. If we fail to raise sufficient funds, we would have to curtail or cease
operations.
WE RELY ON GENENTECH FOR THE MANUFACTURE OF AIDSVAX. OUR INABILITY TO
MANUFACTURE AIDSVAX, AND OUR DEPENDENCE ON GENENTECH, MAY DELAY OR IMPAIR OUR
ABILITY TO GENERATE REVENUES, OR ADVERSELY AFFECT OUR PROFITABILITY. We have no
manufacturing facilities. We are entirely dependent on third parties to produce
AIDSVAX. To date, we have relied on Genentech for this purpose. Genentech
currently has an exclusive option to manufacture AIDSVAX. We believe that
Genentech is the manufacturer best able to produce AIDSVAX. Our license
agreement with Genentech does not specify the price we will be required to pay
Genentech to manufacture AIDSVAX.
If Genentech does not manufacture AIDSVAX, we will need to locate and
engage another manufacturer. The cost and time to establish manufacturing
facilities to produce AIDSVAX would be substantial. As a result, using a
manufacturer other than Genentech could delay bringing AIDSVAX to market. This
delay could require us to raise additional funds.
10
<PAGE> 13
We cannot assure you that we will be able to enter into an agreement with a
third party to manufacture AIDSVAX. We also have no way to determine the price
we would be charged by a third party to manufacture AIDSVAX if Genentech does
not manufacture AIDSVAX. Any manufacturer other than Genentech would have to
prove both to us and to the FDA and to other regulatory authorities that its
manufacturing process, facilities, procedures, and personnel comply with
government regulations and that it consistently produces the same product that
was made by Genentech and tested in the Phase III clinical trials. If
manufacturing is done by a company other than Genentech, we may have to do
additional clinical trials to show the therapeutic equivalence of the product
made by the other company to the Genentech product.
WE RELY ON GENENTECH FOR THE SALE, MARKETING AND COMMERCIALIZATION OF AIDSVAX.
OUR LACK OF SALES AND MARKETING PERSONNEL, AND OF DISTRIBUTION RELATIONSHIPS,
MAY IMPAIR OUR ABILITY TO GENERATE REVENUES. We have no sales, marketing or
commercialization capability. Genentech currently has an exclusive option to
market and distribute AIDSVAX. We intend to rely on Genentech to provide an
established distribution system and sales force to market AIDSVAX. If Genentech
does not elect to exercise its option to market and distribute the product, we
will need to locate and engage another partner to market and commercialize
AIDSVAX. We cannot assure you that we will be able to establish marketing or
commercialization arrangements with third parties in a timely manner or on
favorable terms.
POLITICAL OR SOCIAL FACTORS MAY DELAY OR REDUCE REVENUES BY DELAYING OR
IMPAIRING OUR ABILITY TO MARKET AIDSVAX. Products developed for use in
addressing the HIV/AIDS epidemic have been, and will continue to be, subject to
competing and changing political and social pressures. The political and social
response to the HIV/AIDS epidemic has been highly charged and unpredictable.
These pressures can transcend national barriers. They may delay or cause
resistance to bringing our product to market or limit pricing of our product.
IF GENENTECH TERMINATES OUR LICENSE AGREEMENT, WE MAY NOT BE ABLE TO DEVELOP
OR MARKET AIDSVAX ON COMMERCIALLY REASONABLE TERMS, OR AT ALL. We cannot conduct
our business without the technology we license from Genentech. Our license
agreement with Genentech permits Genentech to terminate the agreement, or
terminate the exclusivity of our license, if we:
- fail to use due diligence in developing, seeking regulatory approval for,
marketing or commercializing products covered by the Genentech license
agreement;
- fail to file the first market approval application for AIDSVAX with the
FDA prior to May 2002, subject to potential extension for up to two years
in certain circumstances, any other extension being Genentech's sole
decision;
- breach the license agreement and fail to cure the breach within the time
period provided in the agreement;
and we are not able to cure these breaches within the period provided in the
Genentech license agreement. Genentech may also terminate the agreement at any
time if we fail to maintain a tangible net worth of at least $1 million.
FAILURE TO RETAIN KEY MANAGEMENT EMPLOYEES COULD ADVERSELY AFFECT OUR ABILITY
TO OBTAIN FINANCING, CONDUCT CLINICAL TRIALS, OR DEVELOP AIDSVAX. We are highly
dependent on our senior management and scientific staff, particularly Dr. Donald
Francis, our President, Dr. Robert Nowinski, our Chairman and Chief Executive
Officer, and Dr. Phillip Berman, our Senior Vice President, Research &
Development. These individuals have played a critical role in developing the
vaccine, raising financing and conducting clinical trials. The loss of the
services of any of these key members of senior management may prevent us from
achieving our business objectives.
11
<PAGE> 14
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WE MAY BE UNABLE TO
PREVENT OTHER COMPANIES FROM USING OUR TECHNOLOGY IN COMPETITIVE PRODUCTS. IF WE
INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WE MAY BE PREVENTED FROM
DEVELOPING OR MARKETING AIDSVAX. We rely on patent and other intellectual
property protection to prevent our competitors from manufacturing and marketing
AIDSVAX. Our technology, including technology licensed from Genentech, will be
protected from unauthorized use by others only to the extent that it is covered
by valid and enforceable patents or effectively maintained as trade secrets. As
a result, our success depends on our ability, and Genentech's ability, to:
- obtain patents;
- protect trade secrets;
- operate without infringing upon the proprietary rights of others; and
- prevent others from infringing on our proprietary rights.
We cannot be certain that our patents or patents that we license from
Genentech will be enforceable and afford protection against competitors. We
cannot assure you that our operations or technology will not infringe
intellectual property rights of others. If we infringe the intellectual property
of others, there can be no assurance that we would be able to obtain licenses to
use the technology on commercially reasonable terms or at all.
IF WE BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS, THEY MAY REDUCE DEMAND FOR
AIDSVAX OR RESULT IN DAMAGES THAT EXCEED OUR INSURANCE LIMITATION. We face an
inherent risk of exposure to product liability suits in connection with AIDSVAX
vaccines being tested in human clinical trials and products that may be sold
commercially. We may become subject to a product liability suit if AIDSVAX
causes injury, or if vaccinated individuals subsequently become infected with
HIV. Regardless of merit or eventual outcome, product liability claims may
result in decreased demand for a vaccine, injury to our reputation, withdrawal
of clinical trial volunteers and loss of revenues.
THIS OFFERING'S NET PROCEEDS MAY BE ALLOCATED IN WAYS WITH WHICH YOU AND OTHER
STOCKHOLDERS MAY NOT AGREE. Management will have significant flexibility in
applying the net proceeds of this offering and could be used for purposes other
than those contemplated at the time of the offering.
PURCHASERS OF COMMON STOCK IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND
SUBSTANTIAL DILUTION. You will experience an immediate and substantial dilution
in net tangible book value of $8.41 per share, assuming an initial public
offering price of $14.00 per share.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD LOWER OUR STOCK
PRICE AND IMPAIR OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS. The market
price of our common stock could drop due to sales of a large number of shares of
our common stock or the perception that these sales could occur. These factors
could also make it more difficult to raise funds through future offerings of
common stock.
After this offering, we will have 10,785,161 shares of common stock
outstanding. If the underwriters exercise their over-allotment option in full,
we will have 11,250,161 shares outstanding. All shares of common stock sold in
this offering will be freely tradeable without restrictions under the securities
act, except for any shares purchased by one of our affiliates, which will be
limited by Rule 144 under the Securities Act. Our officers and directors and a
majority of stockholders holding common stock have entered into lock-up
agreements pursuant to which they have agreed not to offer or sell any shares of
common stock currently held by them for a period of 180 days after this
offering. Also, Prudential Securities may, at any time and without notice, waive
the terms of these lock-up agreements. Upon expiration of this lock-up period
shares may be sold in the future without registration. See Underwriting for a
more detailed discussion. The remaining 7,685,161 shares are "restricted
securities," which means that the shares are subject to restrictions on free
transfer imposed by federal securities rules.
12
<PAGE> 15
USE OF PROCEEDS
The net proceeds to VaxGen from the sale of the common stock in this
offering, assuming a public offering price of $14.00 per share, are estimated to
be $39.4 million after deducting underwriting discounts and commissions and
offering expenses. If the underwriters exercise their over-allotment option in
full, this figure will increase to $45.4 million. We intend to use these net
proceeds as follows:
- to complete Phase III clinical trials of AIDSVAX, including the costs to
engage medical clinics to perform the clinical trials;
- development and operation of laboratory and data management systems;
- costs of obtaining regulatory approvals; and
- administrative costs and general corporate purposes.
We have not determined the amount of net proceeds to be used for each of
the specific purposes indicated. Accordingly, we will have broad discretion to
use the proceeds as we see fit. Pending such uses, we will invest the net
proceeds in short-term, investment grade, interest-bearing securities or
guaranteed obligations of the United States government.
DIVIDEND POLICY
We have not declared or paid dividends. We do not anticipate declaring or
paying dividends in the foreseeable future.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements largely on our current expectations and projections
about future events and financial trends affecting the financial condition of
our business. These forward-looking statements are subject to a number of risks,
uncertainties and assumptions about VaxGen, including, among other things:
- general economic and business conditions;
- our expectations and estimates concerning future financial performance,
financing plans and the impact of competition;
- anticipated trends in our business;
- existing and future regulations affecting our business; and
- other risk factors set forth under "Risk Factors" in this prospectus.
In addition, in this prospectus, the words "believe", "may", "will",
"estimate", "continue", "anticipate", "intend", "expect" and similar
expressions, as they relate to VaxGen, our business or our management, are
intended to identify forward-looking statements.
13
<PAGE> 16
DILUTION
Purchasers of common stock will experience immediate and substantial
dilution in the net tangible book value of the common stock from the initial
public offering price. Net tangible book value per share is equal to the amount
of total net tangible assets less total liabilities divided by the number of
outstanding shares. After giving effect to the application of the sale of
3,100,000 shares of common stock at an assumed initial public offering price of
$14.00 per share and after the deduction of underwriting discounts and
commissions and estimated offering expenses, VaxGen would have had a net
tangible book value at March 31, 1999 of $60.3 million, or $5.59 per share. This
is an immediate increase in net tangible book value of $2.87 per share to
existing stockholders and an immediate and substantial dilution of $8.41 per
share to new investors purchasing common stock in this offering. The following
table illustrates the per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price.............................. $14.00
Net tangible book value at March 31, 1999................. $2.72
Increase attributable to new investors.................... 2.87
-----
Net tangible book value after the offering......................... 5.59
------
Dilution in net tangible book value to new investors............... $ 8.41
======
</TABLE>
The following table summarizes, at March 31, 1999, the differences between
existing stockholders and new investors in this offering with respect to the
number of shares of common stock purchased from VaxGen, the total consideration
paid to VaxGen, and the average consideration paid per share before the
deduction of underwriting discounts and commissions and estimated offering
expenses paid by VaxGen.
<TABLE>
<CAPTION>
SHARES PURCHASED(1)(2) TOTAL CONSIDERATION
----------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- -------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 7,685,161 71.3% $42,239,000 49.3% $ 5.50
New investors...................... 3,100,000 28.7% $43,400,000 50.7% $14.00
---------- ----- ----------- -----
Total.................... 10,785,161 100.0% $85,639,000 100.0%
========== ===== =========== =====
</TABLE>
- ---------------
(1) If the underwriters' over-allotment option is exercised in full, the number
of shares purchased by investors in the offering will be increased to
3,565,000.
(2) Reflects a one-for-two reverse stock split effective on April 9, 1999, and
does not include: (a) 1,159,171 shares of common stock issuable on exercise
of stock options outstanding at May 31, 1999 at a weighted average exercise
price of $8.60 per share; (b) 593,650 shares of common stock reserved for
future issuance under our 1996 stock option plan; (c) 28,929 shares of
common stock reserved for future issuances under our 1998 Director Stock
Option Plan; (d) 459,825 shares of common stock issuable on exercise of
warrants at May 31, 1999 at a weighted average exercise price of $7.49 per
share; and (e) exercise of the underwriters' over-allotment option.
14
<PAGE> 17
CAPITALIZATION
The following table sets forth at March 31, 1999, the capitalization of
VaxGen on an actual basis and as adjusted to reflect the application of
estimated net proceeds of $39.4 million from the sale of 3,100,000 shares of
common stock offered by us at an assumed initial public offering price of $14.00
per share. This table should be read in conjunction with the financial
statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and investment securities............ $ 20,607 $ 60,007
-------- --------
Long-term obligations....................................... 66 66
Stockholders' equity:
Preferred stock, $0.01 par value, 20,000,000 shares
authorized, none outstanding........................... -- --
Common stock, $0.01 par value, 20,000,000 shares
authorized, 7,685,161 shares issued and outstanding,
actual; 10,785,161 shares issued and outstanding, as
adjusted(1)............................................ 77 108
Additional paid-in capital................................ 38,886 78,255
Accumulated other comprehensive income.................... 28 28
Deficit accumulated during the development stage.......... (18,095) (18,095)
-------- --------
Total stockholders' equity.................................. 20,896 60,296
-------- --------
Total capitalization........................................ $ 20,962 $ 60,362
======== ========
</TABLE>
- ---------------
(1) Reflects a one-for-two reverse stock split effective on April 9, 1999, and
does not include: (a) 1,159,171 shares of common stock issuable on exercise
of stock options outstanding at May 31, 1999 at a weighted average exercise
price of $8.60 per share; (b) 593,650 shares of common stock reserved for
future issuance under our 1996 stock option plan; (c) 28,929 shares of
common stock reserved for future issuances under our 1998 Director Stock
Option Plan; (d) 459,825 shares of common stock issuable on exercise of
warrants at May 31, 1999 at a weighted average exercise price of $7.49 per
share; and (e) exercise of the underwriters' over-allotment option.
15
<PAGE> 18
SELECTED FINANCIAL DATA
This selected financial information should be read with the financial
statements, related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this prospectus. The
statement of operations data for the years ended December 31, 1996, 1997 and
1998 and the balance sheet data at December 31, 1996, 1997 and 1998 are derived
from our audited financial statements. The statement of operations data and
balance sheet data for and at the periods ended December 31, 1995 and March 31,
1999 and for the period ended March 31, 1998 are derived from our unaudited
financial statements.
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 27,
1995
(INCEPTION) THREE MONTHS
THROUGH YEAR ENDED DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, ---------------------------- -----------------
1995 1996 1997 1998 1998 1999
------------ ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses
Research and development........ $ (3) $(1,683) $(3,146) $ (6,831) $ (716) $(3,038)
General and administrative...... (27) (371) (800) (3,345) (447) (1,006)
---- ------- ------- -------- ------- -------
Loss from operations............... (30) (2,054) (3,946) (10,176) (1,163) (4,044)
Total other income (expense),
net............................. -- (28) 886 1,013 306 284
---- ------- ------- -------- ------- -------
Net loss........................... $(30) $(2,082) $(3,060) $ (9,163) $ (857) $(3,760)
==== ======= ======= ======== ======= =======
Net loss per share -- basic and
diluted......................... $ -- $ (1.90) $ (0.60) $ (1.48) $ (0.14) $ (0.49)
==== ======= ======= ======== ======= =======
Weighted average shares
outstanding -- basic and
diluted......................... -- 1,093 5,096 6,185 6,066 7,619
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
---------------------------------- MARCH 31,
1995 1996 1997 1998 1999
---- ------- ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investment
securities.................................. $ -- $ 38 $23,880 $19,468 $20,607
Working capital (deficiency).................. (15) (1,458) 19,843 17,866 19,318
Total assets.................................. 11 229 24,301 21,472 22,693
Long-term obligations......................... 15 795 -- -- 66
Total stockholders' equity (deficit).......... (30) (2,069) 19,882 19,398 20,896
</TABLE>
16
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the "Selected Financial Data," financial statements and related notes included
elsewhere in this prospectus.
OVERVIEW
Initial development of AIDSVAX was funded by Genentech at a cost of over
$50 million over a period of nearly ten years. In November 1995, we were formed
to continue development of AIDSVAX in partnership with Genentech. In connection
with our formation, Genentech licensed to us the technology necessary for
completing development and commercialization of AIDSVAX.
Since our formation, we have focused on developing and testing AIDSVAX. We
recently commenced two Phase III clinical trials, one principally in North
America and one in Thailand to determine efficacy of AIDSVAX. The North American
Phase III clinical trial is being conducted in 59 clinical centers and is
designed for 5,400 trial volunteers. The Thai Phase III clinical trial is being
conducted in 17 clinical centers in Bangkok and is designed for 2,500 trial
volunteers.
In 1996, we entered into two agreements with Genentech: a services
agreement and a license agreement. The services agreement defines the parties'
day-to-day working relationship. Pursuant to this agreement, Genentech provides
limited research and development, regulatory filings, and other administrative
assistance. The services agreement was extended in January 1999 for two years.
Under the license agreement, among other things, Genentech has committed to
make limited amounts of AIDSVAX, and may elect to manufacture more AIDSVAX.
Genentech has an option to manufacture AIDSVAX on specified financial terms. If
Genentech does not exercise its option to manufacture, then we have the right to
pursue third party manufacturing and marketing arrangements. Genentech also has
a marketing option to obtain an exclusive worldwide license to use, market and
sell AIDSVAX. The option is exercisable for 90 days after we submit our first
filing with the FDA to obtain a license for AIDSVAX.
If Genentech exercises the marketing option:
- Genentech is required to pay us a fee equal to 33% of our total
development costs including clinical testing, to date for the licensed
product; and
- we and Genentech will share net profits from sales of the licensed
products, 30% and 70%, respectively, for sales within the United States
and 70% and 30%, respectively, for sales outside the United States.
In the event that Genentech does not exercise the marketing option, we will
retain the right to market AIDSVAX and will pay Genentech a royalty on all sales
of licensed products equal to:
- 25% of our net sales and our sublicensees' net sales of the licensed
products worldwide, so long as any commercial vaccine component has been
manufactured and supplied by Genentech; or otherwise
- 15% of our total net sales and our sublicensees' net sales of the
licensed products worldwide.
To date, we have generated no operating revenues. We anticipate only modest
revenues from government or other grants or from collaborations with other
entities over the next three to five years. We have incurred losses since
inception as a result of research and development and general and administrative
expenses in support of our operations. As of March 31, 1999, we had a deficit
accumulated during the development stage of $18,095,000. We anticipate incurring
substantial losses over at least the next four to five years as we complete our
clinical trials, apply for regulatory approvals, continue development of our
technology and expand our operations.
17
<PAGE> 20
We believe that the net proceeds from this offering together with
anticipated funding from the Centers for Disease Control and Prevention and the
National Institute for Allergy and Infectious Diseases will be sufficient to
complete our Phase III clinical trials, apply for regulatory approval in the
United States and Thailand, and bring AIDSVAX to market. However, we may require
additional funds. We do not currently have other sources of financing. Our
future capital requirements depend on several factors, including:
- the progress of our Phase III clinical trials;
- the progress of other internal research and development projects;
- the need for leasehold improvements to facilities and the purchase of
additional capital equipment;
- the availability of government research grants; and
- whether the timing of revenue from AIDSVAX is delayed.
Our employment agreements with three of our executive officers provide for
issuance of an aggregate of 325,757 shares of common stock if:
- our stock trades at an average price of $28.00 per share over a 30-day
period; or
- we are acquired in a transaction at a price greater than $28.00 per
share.
If the shares are issued, we will record a one-time, non-cash expense equal
to the aggregate value of the shares on the date the $28.00 per share condition
is met.
In April 1999 the terms of an officer's options were modified in connection
with his resignation. This modification will result in a second quarter non-cash
charge to compensation expense of approximately $600,000 representing the
difference between the exercise price of the options which otherwise would have
expired and the fair value of the underlying stock.
In May 1999 we issued warrants to purchase common stock to an individual in
connection with settling a dispute over an employment agreement. As a result of
the warrant issuance, we will record a non-cash compensation expense of
approximately $2,000,000 in the second quarter of 1999.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998
Research and development expense
Research and development expense increased 324% from $716,000 for the three
months ended March 31, 1998 to $3,038,000 for the three months ended March 31,
1999. This increase was primarily due to the ramping up of our North American
and Thai Phase III clinical trials, including fees paid to third parties
associated with conducting the trials and an increase in our internal staff for
the purposes of working on the trials.
General and administrative expense
General and administrative expense increased 125% from $447,000 for the
three months ended March 31, 1998 to $1,006,000 for the three months ended March
31, 1999. This increase was primarily due to additional personnel, professional
service fees and costs associated with maintaining our larger office facilities.
Total other income (expense), net
Other income (expense), net, consisting primarily of interest income,
decreased slightly from $306,000 for the three months ended March 31, 1998 to
$284,000 for the three months ended March 31, 1999. This was primarily
attributable to lower average balances of cash, cash equivalents and investment
securities.
18
<PAGE> 21
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Our activities in 1998 were focused on preparing for and commencing our
Phase III clinical trials of AIDSVAX, developing data management systems,
continuing research and development of AIDSVAX, and private financing
activities.
Research and development expense
Research and development expense increased 117% from $3,146,000 in 1997 to
$6,831,000 in 1998. This increase was primarily due to additional personnel,
retaining consultants and contracting with clinics to facilitate the North
American Phase III clinical trial that began in June 1998. The increase was
partially offset by decreased vaccine production costs, as no vaccine production
was required in 1998.
General and administrative expense
General and administrative expense increased 318% from $800,000 in 1997 to
$3,345,000 in 1998. This increase was primarily due to an additional $900,000 in
costs associated with efforts to increase public awareness of the North American
Phase III clinical trial, an additional $800,000 in compensation expense
associated with additional personnel and, an additional $345,000 in higher rent
and related insurance costs associated with our move to larger facilities in
September 1998.
Total other income (expense), net
Other income (expense), net, consisting primarily of interest income
increased 14% from $886,000 in 1997 to $1,013,000 in 1998. This increase was due
to higher average balances of cash, cash equivalents, and investment securities
throughout the year resulting from our private placement completed in May 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Our activities in 1997 were focused on working with Genentech to develop
and produce bivalent vaccine for use in our AIDSVAX clinical trials and on
private financing activities.
Research and development expense
Research and development expense increased 87% from $1,683,000 in 1996 to
$3,146,000 in 1997. This increase was primarily due to an additional $913,000 in
payments to Genentech for development and production of bivalent vaccine, an
additional $319,000 in compensation expense as we added clinical and data
management personnel in preparation of human clinical trials, and an additional
$155,000 in costs associated with Phase I and Phase II clinical trials for our
bivalent AIDSVAX vaccine.
General and administrative expense
General and administrative expense increased 116% from $371,000 in 1996 to
$800,000 in 1997. This increase was primarily due to higher compensation expense
associated with additional personnel necessary to support operations.
Total other income (expense), net
Other income (expense), net in 1996 of ($28,000) represents interest
expense on outstanding long term debt. In 1997, we earned other income
(expense), net of $886,000, which represents primarily income earned on
investments of cash, cash equivalents and investment securities.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investment securities were $20,607,000 at March
31, 1999. We have financed our operations since inception through capital
commitments from Genentech and private placements of equity securities.
Genentech has provided us $1,000,000 since inception through a line of
19
<PAGE> 22
credit, which was subsequently converted to equity, and invested an additional
$1,002,000 through purchases of common stock in 1997. Genentech has no
obligation to fund our operations in the future. In the quarter ended March 31,
1999, we received net proceeds of $5,273,000 from private financing activities.
In 1998, we received net proceeds of $8,604,000 from private financing
activities. In 1997, we received net proceeds of $25,001,000 from private
financing activities including funds received from Genentech. To date, inflation
has not had a material effect on our business.
Since our inception, investing activities, other than purchases and sales
of investment securities, have consisted entirely of equipment acquisitions. At
March 31, 1999, our investment in equipment and leasehold improvements was
$1,508,000, and we had committed to the expenditure of more than $1,400,000 for
leasehold improvements and equipment to develop laboratory space. Net cash used
in the three months ended March 31, 1999 for operating activities was
$3,999,000. Net cash used in 1998 for operating activities was $11,810,000.
Expenditures in both periods were a result of increased research and development
costs and general and administrative expenses.
We anticipate that the net proceeds from this offering will enable us to
meet our anticipated expenditures over the next three years, including, among
other things:
- expanding our facilities;
- supporting our clinical trial efforts; and
- continuing internal research and development.
We anticipate receiving an aggregate of approximately $12,600,000 from the
Centers for Disease Control and Prevention and the National Institute for
Allergy and Infectious Diseases commencing in September 1999. We believe these
funds will enable us to meet anticipated operating expenditures for an
additional year. In addition to covering general operating expenditures, the
funds will be used to fund research costs and costs associated with obtaining
and storing clinical specimens, as part of the sponsored programs. These funds
would be received as reimbursements for expenses to be incurred over the
duration of the trials. The timing and procedures for payment are to be
determined pursuant to further discussions with each agency.
At December 31, 1998, we had net operating loss carryforwards of
approximately $14,000,000 to offset any future federal taxable income. If not
utilized, the tax net operating loss carryforwards will begin to expire in 2010.
We also had research and development tax credit carryforwards at December 31,
1998, of approximately $440,000 for federal income tax purposes.
YEAR 2000 COMPLIANCE
Many computer systems and software products are coded to accept only two
digit entries in the date code field. Beginning in the year 2000 these date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. Systems that are not year 2000 compliant may cease to
function. As a result, in less than one year computer systems and software used
by many companies may need to be upgraded to be year 2000 compliant.
We have completed the process of determining whether there are any critical
areas of our business that are not year 2000 compliant. We presently estimate
that the total cost of addressing any year 2000 problems will be less than
$5,000. In arriving at this conclusion, we assumed that the year 2000
assessment, remediation and contingency plans of our third party suppliers will
be fulfilled in a timely manner and without significant cost to us.
Based on web site information published by Genentech, our only material
third party supplier, we do not believe that their year 2000 compliance will
have a material adverse effect on us.
20
<PAGE> 23
BUSINESS
We were formed in November 1995 to complete the development of, and
commercialize, AIDSVAX, a preventive HIV vaccine. The original AIDSVAX
technology was developed by Genentech and then licensed exclusively to us. We
are currently testing AIDSVAX in humans in two large-scale Phase III clinical
trials. These are the first Phase III clinical trials ever conducted for an HIV
vaccine. If the Phase III clinical trials are considered successful, we plan to
apply to the FDA and foreign regulatory authorities for licenses to manufacture
and sell AIDSVAX in the United States, Thailand and abroad.
Our vaccine is designed to prevent infection by HIV, rather than treat
established infection. AIDSVAX contains synthetic copies of the proteins from
the surface of HIV. Since the vaccine contains no genetic material, vaccination
with AIDSVAX is incapable of causing HIV infection. Instead, humans vaccinated
with AIDSVAX form antibodies against HIV. In laboratory tests these antibodies
bind to the virus and neutralize its infectivity. Vaccination with AIDSVAX
stimulates immune memory, training the immune system to mobilize rapidly upon
exposure to HIV.
We are conducting two Phase III clinical trials of AIDSVAX to determine if
AIDSVAX will prevent infection by HIV. Our North American Phase III clinical
trial of AIDSVAX is being conducted in 56 clinics across the United States, as
well as in one clinic in Puerto Rico, one clinic in Canada and one clinic in The
Netherlands. This trial is designed for 5,400 volunteers. In Thailand, we are
conducting a second Phase III clinical trial designed for 2,500 volunteers in 17
clinical sites in Bangkok. Based on meetings and documented discussions with the
FDA and its Vaccines and Related Biological Products Advisory Committee, we
believe that the requirement for regulatory approval is 30% efficacy, at
statistical significance, of HIV infection in volunteers vaccinated with
AIDSVAX.
Our strategy is to develop, test and obtain regulatory approval for various
formulations of AIDSVAX. The first two approvals we plan to obtain are in the
United States for the formulation being tested in the United States trial and in
Thailand for the formulation being tested in the Thai trial. We intend to use
Genentech as our partner for manufacturing and distribution. Genentech has
exclusive options to manufacture and market AIDSVAX products. If Genentech does
not exercise its options, we have the right to pursue third party arrangements,
with Genentech providing the transfer of technology necessary for manufacturing
the vaccine.
VACCINES
Vaccines are preventive, not curative. As a result, vaccines are
particularly suited to address epidemics, even those the magnitude of HIV/AIDS.
Vaccines prevent infection by activating the immune system to neutralize
infectious viruses. The immune system's initial response to a virus is to
produce antibodies. The antibodies bind to the virus and prevent it from
entering cells. If a virus cannot enter a cell, it is unable to multiply and
dies within a few hours in the host. This protection against infection is called
neutralization.
Most virus infections cause lifelong immunity after natural infection. This
is because the immune system remembers that it has encountered the virus before.
Upon a subsequent encounter, it mounts such a rapid immune response that it
kills the virus before it can establish a productive infection.
Vaccines also induce long term memory against viruses. The immune system is
trained by vaccination with viral proteins or live viruses to rapidly respond to
and prevent subsequent viral infection.
HIV AND AIDS
HIV is the virus that causes AIDS, a lethal disease characterized by the
gradual deterioration of the human immune system. Although the disease is
manifested in many ways, the problem common to all patients is the destruction
of essential immune cells known as T lymphocytes, or T cells. Destruction of
these T cells by HIV makes the body particularly vulnerable to opportunistic
infections and cancers that typify AIDS and ultimately cause death. Blocking HIV
infection would prevent AIDS.
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HIV is transmitted by three predominant means. One is sexual contact. The
second is exposure to blood from an infected person, such as sharing needles in
drug use. The third is transmission from infected mothers to their newborns.
The HIV/AIDS epidemic is one of the largest epidemics in human history. Its
spread across the world has been documented by UNAIDS and the World Health
Organization. According to UNAIDS and the World Health Organization:
- in 1998, 1.1% of the world's adult population was living with HIV/AIDS;
- approximately 16,000 new infections occur each day worldwide;
- in Sub Saharan Africa, 8.0% of the adult population is infected with HIV;
and
- in several African countries, HIV has infected between 20% and 26% of the
adult population.
In Thailand, initial infections with HIV were not reported until the
mid-1980s. It is now estimated that almost 800,000 people (2.3% of the country's
adult population) have already been infected. HIV infection has now penetrated
China, India and Indonesia, some of the most populated areas of the world. AIDS
is currently one of the top five fatal diseases worldwide.
An estimated 860,000 people in North America are currently infected with
HIV. In North America, 44,000 new infections occur each year. According to an
earlier independent report, AIDS is one of the leading causes of death in adults
ages 25 to 44 in the United States.
Table 1 presents the UNAIDS/WHO estimates on total population, adults, and
estimated number of HIV infections throughout the world. These statistics lead
us to believe that a market for an HIV vaccine could reach three billion people.
Should this market include pediatric use, the number could exceed four billion.
TABLE 1. REPORT ON GLOBAL HIV/AIDS EPIDEMIC
<TABLE>
<CAPTION>
POPULATION
----------------------------------------
ESTIMATED
CURRENT
ADULTS HIV
1997 TOTAL 15-49 INFECTION
---------- --------- -------------
(THOUSANDS)
<S> <C> <C> <C>
GEOGRAPHICAL AREA
North America.......................................... 302,000 156,000 860
Latin America.......................................... 455,000 241,000 1,300
Western Europe......................................... 400,000 201,000 480
Eastern Europe & Central Asia.......................... 373,000 193,000 190
East Asia & Pacific.................................... 1,452,000 815,000 420
South & Southeast Asia................................. 1,860,000 955,000 5,800
North Africa & Middle East............................. 322,000 164,000 210
Sub Saharan Africa..................................... 593,000 268,000 21,000
--------- --------- ------
WORLD TOTAL............................................ 5,757,000 2,993,000 30,260
========= ========= ======
</TABLE>
- ---------------
Source: "The Report on Global HIV Epidemic," UNAIDS, the Joint United Nations
Programme on HIV/AIDS and the World Health Organization, June 1998.
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Progress has recently been made in treating HIV infection. Current HIV
therapies slow multiplication of the virus and delay onset of AIDS. They do not
cure HIV infection or AIDS. Costs of these drugs generally exceed $12,000 per
year per patient. Considering costs, difficulties in compliance with complex
drug regimens and the development of resistance to these drugs, we believe such
therapies will be available only to a small fraction of the HIV-infected
population. Thus, we believe they will probably have a minimal impact on the
worldwide epidemic.
THE HIV INFECTION PROCESS
A virus cannot replicate without entering a host cell. To make new
infectious virus particles, a virus must enter a cell and overtake its metabolic
machinery. If a virus cannot gain entry into a cell, it is incapable of
surviving for more than a few hours in the body.
Viruses are varied in their structure and use different ways to enter
cells. HIV is a spherical virus that maintains its genetic information inside
its protein core. This core is surrounded by an outer coat called the envelope
(Figure 1). The envelope has protein projections, called glycoproteins, that
extend out from its surface. Glycoproteins enable HIV to bind to, and
subsequently enter, human cells. The principal glycoprotein on the envelope of
HIV is called gp120. To present the proper orientation for infection, the gp120
proteins are organized on the virus surface in clusters of three.
FIGURE 1. DIAGRAMMATIC REPRESENTATION OF HIV
[GRAPHIC DEPICTING HIV VIRUS WITH GP120 PROTEINS]
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HIV uses gp120 to bind to the surface of cells through a specific sequence
of interactions between the virus and its target cell (Figure 2). This involves
a two-step "lock and key" mechanism. The first step in this process involves the
attachment of gp120 onto a part of the target cell's surface called the CD4
receptor (Panel 2, below). A second step occurs soon thereafter, as the gp120
protein changes shape and then interacts with another target cell molecule
called the chemokine receptor (Panel 3). When this two-step process has been
completed, the virus gains entry by fusing through the target cell membrane
(Panel 4).
FIGURE 2. INFECTION OF CELLS BY HIV
[FOUR GRAPHICS DEPICTING THE STAGES OF INFECTION OF CELLS BY HIV]
Once inside the cell, the viral envelope opens and the core of the virus is
released. The release of the viral core into the cell initiates a replication
cycle that produces thousands of new virus particles per infected cell. As it
multiplies, HIV kills infected T cells and releases new infectious virus into
fluid or blood surrounding the cell. This cycle of:
- T cell infection;
- viral multiplication;
- T cell death; and
- re-infection of new T cells
leads to the destruction of an essential line of immunologic defense.
Substantial reduction of T cells ultimately causes increased susceptibility to
the opportunistic infections and cancers that are characteristic of AIDS.
In addition to T cells, HIV also infects, and may reside in, blood
scavenger cells called macrophages. While infection of macrophages is not a
primary cause of AIDS, it is important in the biology of HIV and in our strategy
to prevent infection by the virus.
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GENETIC VARIATION IN HIV
AIDS is a single disease throughout the world. At the beginning of the
epidemic, probably all HIV was limited to Africa. HIV, like any other virus,
underwent mutation to create distinct subtypes. People infected with a single
subtype of HIV then exported their infection to other places, such that
different subtypes became predominant in different geographical areas.
Subsequently, HIV underwent further mutation to create individual strains of
each subtype.
Although the potential genetic variation in HIV might appear limitless,
only a small number of mutations confer advantage to the virus. As a result,
there are a limited number of viral subtypes and strains. We believe these fall
into particular patterns providing a logical basis to formulating a vaccine for
HIV. We also believe that the major subtypes of gp120 have been identified.
Although minor subtypes are identified periodically, no new major subtypes have
been identified in the last 15 years.
SUBTYPES. There are five major subtypes of HIV. These are labeled "A"
through "E," according to their order of discovery. The major difference between
each subtype is a genetic variation in a region of the gp120 protein known as
the chemokine-binding site.
The major subtypes of HIV tend to be distributed along geographical lines.
This is consistent with the general understanding of how HIV has spread
throughout the world. Virtually all HIV in the Americas, Europe, the Caribbean
and Australia is subtype B. The vast majority of HIV in Thailand and in the
Pacific Rim countries is subtype E. Subtype C virus has emerged as the most
rapidly expanding HIV in Africa, China and India. The remaining subtypes A and D
occur primarily in Africa and in limited areas around the world.
STRAINS. Each subtype of HIV is further subdivided into strains. Four
strains arise from two mutations in specific regions of the gp120 protein: a
subregion in the chemokine-binding site and a subregion in the CD4-binding site.
These strains are of key importance in that they have different patterns of
infection and they each react with different antibodies.
- Chemokine-binding site. HIV has mutated at the chemokine-binding site to
yield two distinct strains, known as T-tropic and M-tropic. Each of these
strains binds to a chemokine receptor on a target cell. In the T-tropic
strains, the gp120 protein binds to a chemokine receptor on T cells. In
the M-tropic strains, the gp120 protein binds to a chemokine receptor
found on macrophages, as well as on T cells.
- CD4-binding site. HIV has also mutated at the CD4-binding site to yield
two additional strains: CD4(a) and CD4(b). Each of these strains binds
with slight differences to the CD4 receptor which occurs on human T
cells.
SUBTYPE/STRAIN COMBINATIONS. In summary, there are five major worldwide
subtypes of HIV: A through E. Each subtype has two different strains that bind
to chemokine receptors on T cells and macrophages. These strains are further
subdivided by two variations in the CD4-binding site on gp120. Each of these
strains requires different antibodies for neutralization.
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As shown in Figure 3, a single subtype of HIV may have at least four
different strains. We believe other subtypes of HIV have similar types of
variations at their receptor-binding sites.
FIGURE 3. GENETIC VARIATION IN SUBTYPE B HIV THAT INFLUENCE INFECTION
[Graphic depicting subtype B strains]
To construct a successful vaccine, we need to consider the entire range of
variation in gp120 and assure that we cover each of the sites on the gp120
protein that are open to attack by antibodies. Fortunately, as indicated above,
most of the variable sites on gp120 have only one or two principal forms. By
careful examination, we have been able to identify pairs of HIV viruses whose
gp120 proteins, when combined together in a vaccine, enhance the overall
antibody response. We believe this antibody response covers virtually the entire
range of HIV genetic variations currently known in North America and in
countries of South Asia and the Pacific Rim.
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THE DESIGN OF AIDSVAX
AIDSVAX is designed to stimulate antibodies to cell receptor-binding sites
on gp120. Figure 4 shows how we believe antibodies block the HIV infection
process. As depicted in Panels 2 and 3 below, there are several sites on gp120
that bind to individual cell receptors. The attachment of antibodies to these
specific gp120 sites blocks the binding of the virus to these receptors on the
cell surface (Panels 3 and 4). The result is that HIV cannot attach to the cell
surface and its infectivity is neutralized.
FIGURE 4. DEPICTION OF ANTIBODIES BLOCKING HIV INFECTION
[Four graphics depicting the stages of antibodies blocking HIV infection]
In 1992, Genentech genetically engineered a version of the gp120 protein.
Antibodies to this gp120 protein bound to a neutralizing site found on 65% of
subtype B viruses. This virus was labeled B(MN) and was believed to represent
the majority of HIV in the United States. Subsequently, synthetic gp120 of HIV
B(MN) was incorporated into a monovalent AIDSVAX formulation, designated AIDSVAX
B. The monovalent formulations contain synthetic gp120 of a single type of HIV.
Genentech used this AIDSVAX B formulation to vaccinate humans in Phase I
and Phase II clinical trials. Phase I trials were used to test for dosage and
safety. Phase II trials were used to determine whether the vaccine stimulated
the desired immune system response.
Antibodies obtained from 100% of those vaccinated with AIDSVAX B
neutralized the B(MN) virus in laboratory tests. Further tests demonstrated that
these antibodies bound to the gp120 protein of all HIV subtype B viruses tested.
However, in laboratory tests and Phase II clinical trials, antibodies to B(MN)
neutralized, to a greater extent, HIV of T-tropic strains as compared to HIV of
M-tropic strains.
To improve the breadth of the immune response, we identified a second
virus, B(GNE8), from the M-tropic strain, and a synthetic version of its gp120
protein was added to the vaccine. The resulting bivalent vaccine, AIDSVAX B/B',
which is designed to address two HIV strains, considerably expanded the
vaccine's breadth of neutralization. While the monovalent vaccine could
stimulate the production of four different types of antibodies that reacted with
binding-sites to cell receptors, the bivalent vaccine
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could stimulate the production of seven. We believe that these seven antibodies
cover virtually all known strains of HIV in North America.
As a general strategy, we plan to develop AIDSVAX formulations that will
stimulate antibodies against multiple binding sites on gp120. Our goal is to
expand the range of antibodies that are stimulated by a vaccine to neutralize a
broader group of HIV. A practical application of this strategy has been the
conversion of AIDSVAX from a monovalent to a bivalent formulation.
STATISTICAL MODEL OF MONOVALENT AND BIVALENT AIDSVAX
We generated a statistical model based on the known distribution of the
four receptor-binding sites on gp120 and their frequency in different HIV
strains in the United States (Figure 5). A comparison was then made between the
neutralizing antibodies which could be stimulated by vaccination with either a
monovalent or bivalent formulation of AIDSVAX.
FIGURE 5. RELATIVE ADVANTAGE OF BIVALENT VS. MONOVALENT VACCINES
[GRAPHIC DEPICTING NEUTRALIZATION OF MONOVALENT VACCINES (B(MN) AND B(GNE8)) AND
BIVALENT VACCINE (B(MN) PLUS B(GNE8))]
Each pie chart in Figure 5 represents the statistical equivalent of 100% of
currently known HIV, or the virus population, in the United States. Each chart
also reflects the calculated frequency at which antibodies stimulated by the
monovalent or bivalent vaccines would bind with HIV in this virus population.
According to this statistical model, the percentage of HIV in the virus
population that would fail to bind antibody is depicted by the white area. The
percentage of HIV which would bind one neutralizing antibody is lightly shaded,
while viruses which would bind two, three or four different neutralizing
antibodies are shown in darker shaded areas.
This analysis indicates that the monovalent B(MN) vaccine would fail to
stimulate antibodies against 14% of HIV in the statistical virus population. The
bivalent vaccine, which combines the gp120 proteins from B(MN) and B(GNE8),
covers more than 99% of the statistical virus population, with at least two
different neutralizing antibodies binding to each virus particle. According to
this model, over 50% of the HIV
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viruses would react with four neutralizing antibodies, each antibody stimulated
against different cell-binding sites on gp120 proteins.
While the statistical model indicates that bivalent AIDSVAX would induce a
broader range of antibodies than monovalent AIDSVAX, there can be no assurance
that the statistical model will predict the actual efficacy of AIDSVAX in human
trials.
FORMULATIONS OF AIDSVAX
AIDSVAX consists of two biologically active ingredients: antigens and an
adjuvant. An antigen is the ingredient in vaccines that activates the human
immune system response. The antigen in AIDSVAX is synthetic gp120 protein. An
adjuvant is an active ingredient in vaccines that improves the human immune
system response by attracting immune cells into the region where the vaccine is
injected. The adjuvant in AIDSVAX is alum, or aluminum hydroxide. Since the
vaccine contains only a synthetic fragment of the virus and no genetic material,
it is incapable of causing HIV infection.
Three different formulations of the AIDSVAX vaccine have been developed and
clinically tested in Phase I/II trials. These include: monovalent AIDSVAX B for
HIV infections in North America and Europe bivalent AIDSVAX B/B' for HIV
infections in North America and Europe, and bivalent AIDSVAX B/E for HIV
infections in Southeast Asia.
INITIAL TESTING OF AIDSVAX IN CHIMPANZEES
The chimpanzee is the only laboratory animal susceptible to HIV infection.
In the initial protection trials conducted by Genentech, chimpanzees were
vaccinated with three doses of monovalent AIDSVAX B. The vaccinated animals,
along with unvaccinated control animals, were then injected intravenously with
high doses of infectious HIV of the same strain that was used for the
preparation of the vaccine. None of the AIDSVAX vaccinated animals became
infected with HIV. All of the unvaccinated control chimpanzees became infected
with HIV.
In subsequent trials, chimpanzees were vaccinated with AIDSVAX B(MN) and
then infected with a different strain of HIV known as B(SF2). Despite this
difference, vaccination with AIDSVAX B(MN) conferred immunity and protection
against infection with the B(SF2) strain, while vaccination of control animals
with a placebo had no protective effect. The cross-protection observed in this
experiment documented that AIDSVAX could successfully protect animals from
infectious HIV having a genetic composition distinctly different from the virus
used to make the vaccine. Based on the results of the chimpanzee trials,
Genentech sought and received regulatory approval to commence human clinical
trials to test the safety and efficacy of AIDSVAX in humans.
HUMAN CLINICAL TRIALS
Human clinical trials for vaccines involve three steps:
- Phase I -- tests for dosage and safety;
- Phase II -- larger-scale tests for safety, as well as a determination
of whether the vaccine stimulates antibodies and immune memory; and
- Phase III -- multi-center, placebo-controlled, double-blind tests to
determine protection conferred by vaccination. These efficacy tests
are performed in volunteers who have a high risk of HIV infection.
PHASE I TRIALS -- DOSAGE AND SAFETY, MONOVALENT AIDSVAX B
Phase I trials with monovalent AIDSVAX B vaccine were conducted by
Genentech. AIDSVAX B was clinically evaluated in 671 HIV-negative volunteers and
662 HIV-positive volunteers. None of the vaccinees reported serious side
effects. Some vaccinees occasionally experienced pain at the injection site, as
is common with many vaccines.
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AIDSVAX B was tested at three doses: 100 [u]g, 300 eg and 600 [u]g of
gp120. The 300 [u]g dose was consistently found to be most effective,
stimulating a higher antibody response without serious side effects.
The clinical trial results also indicated that monovalent AIDSVAX B, at all
three doses tested, did not alter the progression of ongoing HIV infection. We
intend to apply to the FDA for broad use of the vaccine in high-risk groups
without prescreening for HIV infection.
PHASE II TRIALS -- ANTIBODY STIMULATION, MONOVALENT AIDSVAX B
One hundred forty HIV-negative volunteers were vaccinated and boosted three
times with monovalent AIDSVAX B vaccine. Vaccinations were given at time 0, 1
month and 6 months with an additional booster at 12 or 15 months. Antibodies
stimulated by vaccination with AIDSVAX B were measured for their ability to
neutralize HIV in culture tests. All of the vaccinated volunteers produced
antibody in their blood that neutralized infectivity of HIV B(MN), the strain
that was used for preparation of AIDSVAX. These neutralization tests were
considered of key importance since they measured the actual biological activity
of the vaccine-stimulated antibodies.
Memory of the immune response to HIV in the same volunteers was measured by
examination of neutralizing antibody levels stimulated by sequential booster
shots. All vaccine recipients produced high levels of neutralizing antibody with
boosting. These antibody levels gradually declined with time. Each booster shot,
however, resulted in a rapid antibody response of even higher concentration,
demonstrating a memory recall of the antibody response. This is strong evidence
of immune memory being stimulated by the vaccine. We believe that such memory
will be key for protection, enabling the educated immune system to ward off HIV
infection before it establishes itself.
PHASE I/II TRIALS -- BIVALENT AIDSVAX
We believe that, since an antibody to a single receptor-binding site can
cause neutralization, antibodies to multiple receptor-binding sites will result
in yet broader neutralization. On this basis we developed and tested two
formulations of bivalent AIDSVAX.
We conducted two Phase II trials in the United States and Thailand in 214
HIV-negative volunteers. The trials used two bivalent formulations of AIDSVAX.
The volunteers were vaccinated and then given one booster one month later. The
vaccine tested in the United States was AIDSVAX B/B'. The vaccine tested in
Thailand was AIDSVAX B/E. Each of the vaccines was selected for the known
prevalence of these virus subtypes in the particular countries tested. The
trials were also designed to compare the results of bivalent AIDSVAX to those of
monovalent AIDSVAX. Four factors were monitored:
- safety;
- dosage;
- antibody stimulation; and
- production of antibodies that would neutralize strains used in bivalent
AIDSVAX.
The vaccine did not cause any serious side effects. Vaccinees occasionally
experienced pain at the injection site, as is common with many vaccines. In a
dose response study, the bivalent AIDSVAX demonstrated the same results as those
observed with the monovalent vaccine.
The Phase II studies also demonstrated the stimulation of antibodies to
receptor-binding sites on gp120 proteins that were contained in the respective
vaccines. AIDSVAX B/B' stimulated antibodies to M-tropic and T-tropic HIV found
in the United States. AIDSVAX B/E stimulated antibodies to M-tropic and T-tropic
HIV found in Thailand. In contrast, the monovalent vaccine stimulated a narrower
range of antibodies, primarily to T-tropic strains.
We believe these findings support our hypothesis that a combination of
gp120 proteins in the bivalent vaccine would stimulate antibodies to a broader
range of HIV strains.
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PHASE III CLINICAL TRIALS FOR AIDSVAX
In June 1996, we met with the FDA and its Vaccine and Related Biological
Products Advisory Committee to review the statistical protocol and conduct of
our North American Phase III clinical trial. At this meeting, a discussion and
vote was conducted on the issue of whether the interim analysis could be used to
determine vaccine efficacy. By a vote of 12-0 in favor, it was agreed
". . . that the data safety monitoring board will . . . recommend that the study
be terminated if the trial detects an efficacy of greater than 30%." In such a
case, the halt of the trial would be followed by vaccination of the placebos and
application for licensure of the vaccine.
In May 1998, the FDA informed us that the data from our Phase I/II studies
were acceptable and that we could proceed to Phase III clinical trials
principally in North America. The first volunteers in the Phase III clinical
trial were vaccinated in June 1998.
The Thai FDA is the governmental body involved in final approval to
manufacture and market medical products. As part of the Thai FDA review, the
Thai Ministry of Public Health has several subcommittees involved in making key
decisions. In the area of HIV/AIDS, this includes the Technical Subcommittee on
AIDS Vaccine, the Ethical Review Committee of the Research Committee, Ministry
of Public Health, and the National Committee on Prevention and Reduction of
AIDS, which includes the Institutional Review Boards from the participating
institutions in the clinical trial.
In May 1998, we outlined our plans for Phase III clinical trials in
Thailand and in February 1999, we received an import license from the Thai FDA
with approval to begin Phase III clinical trials. In March 1999, the first
volunteers in Bangkok were vaccinated, initiating the Phase III clinical trial.
The formulation of AIDSVAX that we are testing in the United States is
different from the formulation being tested in Thailand. Different formulations
are necessary because the strains of HIV virus are different in the two
locations. The FDA has indicated that it may be possible to use data from a
successful outcome in the Thai study to support licensure of AIDSVAX in the
United States. It is currently unclear, however, how the data from the Thai
formulation of the vaccine will support licensure in the United States, if at
all.
Trial Design
We are currently conducting two large, placebo-controlled, double-blind,
Phase III clinical trials, one principally in North America and the other in
Thailand. A placebo-controlled, double-blind trial is one in which one group of
volunteers receives a placebo and the other group receives the experimental
vaccine, and neither the volunteers nor the clinicians knows whether a volunteer
is receiving the placebo or the experimental vaccine. The test group of
volunteers receives AIDSVAX while the placebo group receives a
comparable-appearing placebo containing alum alone. All vials of vaccine and
placebo are coded. During the trials, neither volunteers nor researchers know
which volunteers are given the vaccine or placebo until the Phase III clinical
trials are completed or stopped by the independent review board. Each volunteer
is vaccinated a total of seven times, including six boosters, during a 30-month
period. The purpose of the six boosters, one each six months, is to stimulate
high antibody levels throughout the entire trial period. During each visit, the
volunteers receive counseling on how to avoid the risk of HIV infection.
Follow-up with volunteers will continue for at least six months after the last
vaccination is administered.
Volunteers in North America consist of HIV-negative homosexual men and
HIV-negative women who have HIV-infected sexual partners or high risk sexual
behavior. Volunteers in Thailand consist of HIV-negative intravenous drug users
with a high risk for blood-borne transmission of HIV. In both North America and
Thailand, the volunteers are recruited, vaccinated and monitored by clinics with
HIV expertise and experience with these particular population groups.
The size of each Phase III clinical trial was established by a statistical
model that included: (1) the probability of demonstrating a 30% efficacy at
statistical significance in inhibiting HIV infection; (2) the rate of infection
of the volunteer group; and (3) assumptions concerning the rate of retention of
the volunteers in the trial for a 36 month clinical observation period.
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Within these parameters, the clinical trial in North America is designed
for 5,400 volunteers, randomized 2:1 for vaccine:placebo recipients. The trial
in Thailand is designed for 2,500 volunteers, randomized 1:1 for vaccine:placebo
recipients. The trial in North America is occurring in 56 clinical sites across
the United States. It is also being conducted in one clinic in Puerto Rico, one
clinic in Canada and one clinic in The Netherlands. The trial in Thailand is
occurring in 17 methadone clinics under direction of the Bangkok Metropolitan
Administration.
Each Phase III clinical trial is conducted in two overlapping steps:
(1) recruitment of volunteers during an estimated 12 to 14 month period;
and
(2) a 36 month clinical observation period.
For each individual, the 36 month observation period begins on the day of their
first vaccination. As a result, the entire clinical trial will be completed upon
recruitment of the volunteers and completion of their collective 36 month
observation periods.
As part of the study design, an interim efficacy analysis will be performed
in each clinical trial. In the Thai trial, the interim analysis will be
conducted 18 months after recruitment has been completed. In our North American
trial, the interim analysis will be conducted 24 months after recruitment has
been completed (Figure 6). Under the current timetable, the interim analysis for
each clinical trial will be conducted in the second half of 2001.
FIGURE 6. DESIGN OF THE PHASE III CLINICAL TRIALS OF BIVALENT AIDSVAX
[GRAPHIC DEPICTING TIMING OF PHASE III CLINICAL TRIALS]
Enlistment of Clinical Sites and Volunteers
We enlist clinical sites based on their ability to perform clinical trials,
and to recruit the appropriate type and number of volunteers for the Phase III
clinical trials. Our North American trial calls for approximately 1,700
HIV-negative volunteers to be recruited from an already established group of
at-risk
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individuals at 12 clinical centers. These centers, currently sponsored by the
National Institutes of Health as part of a vaccine preparedness trial, have over
the past four years established a system for the recruitment of at-risk
volunteers. The trial design further calls for the remaining 3,700 HIV-negative
volunteers to be recruited by the 47 additional clinical sites. Based on
experience at the 12 clinical centers, we are assuming an incidence of 1.5% HIV
infection per year, and a retention rate of at least 80% for volunteers for the
entire 36 month observation period.
In Thailand, a group of injection drug users is being recruited through a
combined effort of the Bangkok Metropolitan Administration, Mahidol University
and the Centers for Disease Control and Prevention. The trial design calls for
an estimated 600 HIV-negative volunteers to be recruited from an already
established group and for the remaining 1,900 HIV-negative volunteers to be
recruited from injection drug users in the Bangkok population. Based on prior
experience, we are assuming a 6% to 8% incidence of HIV in these groups, with a
retention rate of over 75% during the 36 month observation period.
Conduct of the Phase III Clinical Trials
We have a clinical team of 24 full-time employees who assist and monitor
the 59 clinical sites that are engaged in the North American AIDSVAX trials.
This clinical team organizes and monitors:
- the clinical testing sites;
- data management;
- the central contract laboratory for HIV testing;
- sample handling and shipping; and
- biostatistics.
Audit and monitoring functions are conducted by an outside clinical research
organization, which audits the clinical sites for compliance with the Phase III
procedures, data recording, medical records and the use of good clinical
practice, as defined by the FDA.
In Thailand, we have employed or have on contract a full-time staff of
three. Our Bangkok office is directed by a project manager and a Thai physician
who provide interface between us and Thai institutions involved in the Phase III
clinical trials. An additional 51 people in Thailand are involved in
administration and conduct of the trials.
Each clinical site has agreed to conduct its activities according to the
United States and Thai FDA-reviewed Phase III protocol. The protocol sets
standard procedures for all sites and laboratories. Following each visit of
volunteers to the clinical site, data are recorded in both the volunteers'
permanent medical chart, as well as on a case report form, which is forwarded to
us. The trial design calls for over 600,000 case report forms to be gathered and
entered into the database for the North American Phase III clinical trial alone.
The Phase III protocol also requires clinical sites to report any serious
adverse event to us within 24-hours. Any serious adverse events are to be
immediately examined in detail by our clinical monitors. If deemed a serious
event related to the vaccine, the event is to be promptly reported to the FDA.
The protocol requires all other adverse events to be recorded on the case report
forms and provided to the FDA for review on a periodic basis.
Interim Analysis and Completion of the Phase III Clinical Trials
A single independent data and safety monitoring board oversees the clinical
trials in North America and Thailand. The ten-person monitoring board consists
of prominent clinicians, AIDS specialists, vaccinologists and statisticians. The
board contains seven members from the United States and three from Thailand. A
former Deputy Director of the Centers for Disease Control and Prevention serves
as Director of the monitoring board.
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The monitoring board will periodically evaluate the safety of the trial at
6, 12, 24 and 36 months. The initial six-month safety review was conducted in
March 1999. No serious adverse events related to the vaccine were observed.
The monitoring board will conduct an interim efficacy analysis
approximately midway through the observation period of each clinical trial.
If the trial results demonstrate 30% or greater efficacy, at statistical
significance, at the time of the interim analysis, the monitoring board will
recommend that we, and we will, terminate the trial. We will then vaccinate the
placebo group in order to conform with ethical requirements. We are in the
process of preparing the mandate for the monitoring board. If the interim
efficacy analysis does not demonstrate sufficient statistical power to halt the
trial, it will continue until its scheduled completion.
Following the close of the Phase III clinical trials, either at the time of
the interim efficacy analysis or at the conclusion of the complete trial, the
code for vaccine/placebo will be released. Analysis of the database will be
performed independently by the external statistician. In addition to examining
the data, the external statistician will prepare the final report which will be
entered into the biologics license application.
Determination of Efficacy
The primary endpoint of the Phase III clinical trials will be to determine
the quantitative effect of AIDSVAX in high risk volunteers. To gain FDA
regulatory approval for the sale of AIDSVAX in the United States, we believe,
based on discussions with the FDA and the recommendations of its Vaccine and
Related Biological Products Advisory Committee, that we will need to demonstrate
that the AIDSVAX vaccine reduces the level of HIV infection by at least 30% at a
statistically significant level. Statistical significance means that if the
clinical trial were repeated, an efficacy of greater than 30% would be observed
95 times out of 100. While these discussions and the vote of the Vaccine and
Related Biological Products Advisory Committee are not binding on the FDA, they
are generally followed. In the context of our United States clinical trial,
which represents a small sampling from the entire population, this means that in
order to establish a 30% efficacy at a statistically significant level there
must be an observed reduction in the incidence of HIV in the group receiving the
vaccine compared to the control group of between 45% to 65%, or possibly a
higher percentage, depending on various factors that will have a bearing on the
statistical significance of the clinical trial results. These factors include
the number of patients ultimately enrolled in the study, the rate of HIV
infection in the control group and the length of time associated with the
clinical observation period. We anticipate that the efficacy required to obtain
regulatory approval to market AIDSVAX in foreign countries will vary from one
country to another and may differ significantly from that required by the FDA.
A secondary endpoint of the Phase III clinical trials will be to determine
qualitative effects of AIDSVAX on potential HIV infections. This is performed in
case the vaccine induces meaningful immunity, but the immune response is not of
sufficient strength to fully prevent infection. For this purpose, multiple blood
samples are drawn from each volunteer throughout the Phase III clinical trials.
This allows us to determine more precisely the time of infection. Each of the
blood samples also can be examined for levels of circulating virus, or viral
load. From this, we can determine if vaccinated individuals have suppressed
their HIV infections relative to those in the placebo group.
If the infection is transient, or if the level of HIV is maintained in
vaccine recipients at low levels, this might indicate that the vaccine is
slowing the progression of HIV infection. In therapeutic studies it is known
that suppression of viral load correlates with an extension of life. Therefore,
should we find that AIDSVAX causes a qualitative reduction in HIV infection, we
might submit this data to support our primary regulatory application or, if
justified, as a stand-alone submission.
In addition to HIV antibody testing of all blood samples, a subset of
volunteers, 5% of the total, will be monitored throughout the trial period with
a variety of immunological tests. These tests will be performed to determine
details of the immune response, with the goal of identifying an immune correlate
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of protection against infection. Such a correlate might include, for example, a
determination of the minimum antibody level required to obtain protection. We
believe the finding of a correlate of protection both supports the scientific
rationale of the vaccine and provides a measurement by which the vaccine may be
improved. We believe finding a correlate of protection would be viewed favorably
in the context of any regulatory applications submitted to the FDA.
THE MARKET FOR AIDSVAX
We have developed formulations of AIDSVAX which focus on HIV found in some
of the major regions of the world. Our first bivalent vaccine, AIDSVAX B/B9, is
directed against the predominant HIV subtype in the Americas, Europe, the
Caribbean and Australia. Our second bivalent vaccine, AIDSVAX B/E, is directed
against the predominant HIV subtypes in Southeast Asia, the Pacific Rim,
Indonesia and southern portions of China (Figure 7). Based on the populations of
these regions, the market for the two current formulations of AIDSVAX could
cover approximately half of the world's population, or nearly three billion
people.
FIGURE 7. POTENTIAL MARKETS FOR THE AIDSVAX B/B' AND AIDSVAX B/E VACCINES
[GRAPHIC DEPICTING MAP OF THE WORLD AND WORLDWIDE MARKETS FOR AIDSVAX B/B' AND
AIDSVAX B/E]
We also have plans to develop two additional AIDSVAX vaccines -- one for
subtype C virus, which would be directed against viruses in China, India and
Africa, and one for subtype A and D viruses, which are commonly found in Sub
Saharan Africa and parts of South America. We believe that four vaccines
directed against the A, B, C, D and E subtypes of HIV would effectively address
the worldwide spread of the HIV/AIDS epidemic.
Influence of Vaccine Improvements
We believe we will be able to rapidly develop new formulations of AIDSVAX.
This would enhance our ability to address geographically defined markets. This
process provides for a continued basis of product improvement. We have
accomplished this with our two bivalent formulations of AIDSVAX.
We expect successive formulations of AIDSVAX to improve product efficacy,
as well as the breadth of protection against different HIV subtypes. In
addition, we will seek to create vaccines that require fewer
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booster shots and that can be used over larger areas of the world. Thus, we
expect that an initial vaccine could be gradually enhanced, resulting in
corresponding increases in the size of the market for the vaccine.
On the basis of our ongoing discussions with the FDA, we believe that
improvements will be accomplished as amendments to our initial regulatory
license, rather than as applications for entirely new products. This approach,
if successful, would result in considerable savings of time and cost associated
with future product development.
Comparison to Other Vaccines
We believe that hepatitis B vaccine serves as a useful model to predict
demand for a prospective HIV vaccine. Hepatitis B is one of the most recent
vaccines to be introduced on a worldwide basis. The pattern of infection and the
at-risk groups with hepatitis B are comparable to those with HIV. Hepatitis B
and HIV are transmitted by sexual contact and blood products. In the United
States, the highest risk groups for hepatitis B and HIV are injection drug users
and homosexual men.
The hepatitis B vaccine received FDA approval in 1981. Since its
introduction, more than 20 million people in the United States and 500 million
worldwide have received the hepatitis B vaccine. Considering that hepatitis B
vaccination requires three doses for full immunization, we calculate that 1.5
billion doses of hepatitis B vaccine have been used worldwide. The Centers for
Disease Control and Prevention, the World Health Organization, the American
Medical Association and most other major health organizations have supported
adding a hepatitis B vaccine to the regimen of childhood vaccines. Forty-two
states in the United States now require it for school admission. Approximately
1.2 million people annually received hepatitis B shots in the United States,
with a cost for children of approximately $25.00 to $55.00 per dose, or $75.00
to $165.00 for the entire vaccination.
We believe that, given the relative healthcare needs, the market for an HIV
vaccine will be considerably larger than the market for hepatitis B vaccine.
Further, we believe that adoption of an HIV vaccine will occur more rapidly,
both domestically and worldwide. This conclusion is supported by a UNAIDS study,
which predicts that, within a decade, the worldwide need for HIV vaccine will
exceed 650 million doses annually.
SALES AND MARKETING
We intend to rely on third parties for sales and marketing of AIDSVAX. We
believe that our resources are better utilized developing new formulations of
AIDSVAX, rather than developing and maintaining a sales and marketing
organization. Genentech currently has an option to obtain an exclusive worldwide
license to use, market and sell AIDSVAX. If AIDSVAX is approved for sale and
Genentech does not exercise its option to market AIDSVAX, we intend to enter
into agreements for marketing and distribution with other partners and will pay
a predetermined royalty to Genentech.
We anticipate that AIDSVAX will be sold by Genentech or a licensed third
party through existing vaccine distribution channels in the United States and
the rest of the world. This would result in several tiers of pricing that range
from private reimbursement in the United States to government reimbursement in
Europe to purchase by the World Health Organization for distribution to nations
with underdeveloped economies. In the United States, vaccine distribution is
further divided among pediatricians, general practitioners and the public health
service.
Currently 83% of children worldwide receive the basic schedule of pediatric
vaccines through a network of for-profit and non-profit institutions. We expect
that an effective HIV vaccine will also be broadly distributed worldwide in a
similar manner.
Apart from distribution, a number of variables will influence price,
including:
- efficacy of the vaccine;
- safety;
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- manufacturing cost;
- recommendations from expert medical panels;
- the perceived need in a particular population; and
- in some cases, government regulations requiring vaccination.
Due to these and other factors, we have not yet determined a pricing schedule
for AIDSVAX.
Several non-profit and government organizations have begun efforts to
prepare for the eventual distribution of an HIV vaccine. For example, the State
of California passed a bill committing the state to spend $20 million to
purchase one million doses of HIV vaccine if and when developed. In addition,
the International AIDS Vaccine Initiative has started a campaign to fund the
development and purchase of an HIV vaccine for the developing world.
MANUFACTURING
We do not have any manufacturing facilities of our own. We intend to rely
on third parties to manufacture AIDSVAX. We believe that our resources are
better utilized developing new vaccines, rather than entering into the capital
intensive business of manufacturing.
Our license agreement with Genentech gives Genentech an option to
manufacture any AIDSVAX formulation supplied beyond those it has already agreed
to supply. If Genentech does not exercise its option to manufacture AIDSVAX, the
license agreement allows us to enter into manufacturing agreements with third
parties and pay a predetermined royalty to Genentech. If we utilize a third
party, the license agreement provides that Genentech must transfer the required
manufacturing technology and know-how to the third party.
Genentech has developed a proprietary method for producing synthetic gp120
protein. This method has enabled Genentech to clone and express gp120 genes from
two dozen HIV strains. Utilizing genetic engineering, a fragment of coding
information from HIV, consisting of the gp120 gene, is cloned from HIV into
mammalian cells. We have an exclusive license from Genentech to all of these
genes and the technical know-how to produce the synthetic gp120 proteins.
Specifically, for any formulation of AIDSVAX, the gp120 gene is inserted
into Chinese hamster ovary cells which act as cellular factories that can
produce commercial quantities, measured in kilograms, of gp120 protein. The
production of gp120 in Chinese hamster ovary cells assures both genetic
consistency and structural integrity of the synthetic product. As a result, the
synthetic form is virtually identical to the natural form of gp120 that occurs
in HIV viral particles. Since only a fragment of HIV is used in this process,
there is no production of infectious HIV, and the final product is incapable of
causing infection or disease.
LICENSE AND SERVICES AGREEMENTS WITH GENENTECH
We have entered into a license agreement with Genentech which in part
defines the working relationship between the companies. The licensed technology
relates to the development of a vaccine based on, containing, incorporating or
using the recombinant gp120 subunit protein developed by Genentech for use to
prevent, but not treat, HIV infection and/or AIDS. Genentech has granted us an
exclusive license to all patents and patent applications directly related to
this technology and proprietary know-how necessary for this technology that
Genentech is free to license or sublicense. Certain of the licensed technology
is sublicensed to us under licenses from third parties to Genentech. We, as the
exclusive licensee of Genentech, have assumed all of Genentech's obligations
under these third-party license agreements. The initial term of the license
agreement is 15 years from the commercial introduction date of a licensed
product and will be determined on a country-by-country, product-by-product
basis.
In addition to granting us rights to use Genentech's gp120 technology and
certain adjuvant technology for developing a licensed product, the license
agreement provides for Genentech to have rights to elect to
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manufacture and supply AIDSVAX for clinical testing and commercial sale. In
addition to its rights to elect to manufacture vaccine, Genentech supplied us,
cost-free, with its stock of approximately 300,000 doses of the B(MN) gp120
protein for testing in our Phase III clinical trials. We will use the B(MN)
gp120 protein following successful completion of formulation with alum, vialing
and quality assurance/control testing, for which we will bear Genentech's costs
and expenses. Genentech also supplied us with agreed-upon amounts of up to two
additional gp120 proteins, B(GNE8) and E(244) for use in combination with the
currently manufactured B(MN) gp120 for clinical trials. For the additional
antigens, we paid Genentech its fully burdened manufacturing costs.
The license agreement provides for flexibility related to manufacturing.
Should Genentech elect not to manufacture any vaccine supplies beyond those it
has already agreed to supply, we may elect to use a third party for our
manufacturing and marketing requirements. If we utilize a third party, Genentech
must transfer the required manufacturing technology and know-how to the third
party.
Genentech also has an option, to obtain an exclusive worldwide license to
use, market and sell licensed products. This option is exercisable for 90 days
after we make our first filing with the FDA for marketing approval of a licensed
product. If Genentech exercises the marketing option:
- Genentech is required to pay us a fee equal to 33% of our total
development costs including clinical testing, to date for the licensed
product;
- we and Genentech will share net profits from sales of the licensed
products, 30% and 70%, respectively, for sales within the United States
and 70% and 30%, respectively, for sales outside the United States;
- future developmental costs will be apportioned between the parties based
on their respective profit share in a particular country; and
- the parties will establish a committee with an equal number of
representatives from each company to oversee the development and
commercialization of additional licensed products.
While the agreement specifies the formula used to calculate net profits, the
calculation of individual components of the formula are subject to future
negotiations and/or determination.
In the event that Genentech does not exercise the marketing option, then,
in lieu of sharing net profits from the licensed products, we will pay Genentech
a royalty on all sales of licensed products equal to:
- 25% of our net sales and our sublicensees' net sales of the licensed
products worldwide, so long as any commercial vaccine component has been
manufactured and supplied by Genentech; or otherwise
- 15% of our total net sales and our sublicensees' net sales of the
licensed products worldwide.
Under the license agreement, we are required to use due diligence in
developing, seeking regulatory approval for, marketing and commercializing
licensed products. Development and commercialization of licensed products will
be our sole business goal. In connection with reaching this goal, we are
required to achieve the filing of the first market approval for a licensed
product with the FDA no later than the fifth anniversary of the closing of our
1997 private placement. If we are unable to meet this milestone due to certain
agreed-upon events or circumstances, we may request an extension from Genentech
and we and Genentech can agree to a new date for the milestone, subject to a
two-year limit on such extensions. If we are unable to meet a milestone for any
reason other than the agreed-upon events or circumstances, any extension granted
will be at Genentech's sole discretion. If we fail to exercise our due
diligence, Genentech has the right to convert our exclusive license to a
non-exclusive license, and may be entitled to terminate the license.
Either party may terminate the license agreement upon the other party's
default or bankruptcy. In addition, Genentech may terminate the license
agreement if we fail to:
- maintain a tangible net worth of at least $1 million; or
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- to meet a due diligence milestone within two years of the date originally
set for such milestone, unless Genentech waives such two-year limit in
its sole discretion.
We have also entered into a services agreement with Genentech pursuant to
which Genentech has agreed to provide us with administrative, research, process
science, manufacturing, clinical and regulatory support, primarily by making the
services of certain Genentech personnel available to us. We will reimburse
Genentech for all of Genentech's costs and expenses relating to the provision of
these services. Either party may terminate the services agreement upon a breach
which continues uncured for more than 60 days or upon the occurrence of
bankruptcy or similar events. In addition, the services agreement will
automatically terminate upon any termination of the license agreement. The term
of the services agreement was recently extended until December 31, 2000.
LICENSED PATENTS
Under the license agreement, we have licensed from Genentech exclusive
rights to a portfolio of United States and foreign patents. These patents cover
nine families of subject matter. We have six issued United States patents and
nine pending United States patent applications. With foreign filings, we have 82
issued patents and 38 are still pending. The technology claimed in these patents
and applications involves a range of HIV vaccine product development activities,
including the cloning and expression of recombinant virus glycoproteins for use
as vaccine products and sustained release formulations of HIV gp120. Also
claimed by patent filings are specific compositions of matter for the components
of our vaccine products, and proprietary production, recovery and purification
process technology. Together, these filings provide intellectual property that
we believe will enhance the value of our products.
Under the license agreement, Genentech has retained title to the licensed
patents and patent applications and other licensed technology previously owned
by Genentech, while we will retain title to any improvements developed by us.
Both parties will jointly own any improvements to the licensed patents and
patent applications or other licensed technology developed or invented jointly.
If Genentech exercises its marketing option under the license agreement,
Genentech will have a fully paid-up, non-exclusive, worldwide license under all
improvements to the licensed knowhow or patent rights that we own. Furthermore,
Genentech will have such a license if Genentech terminates the license agreement
before the expiration of the 15-year term or if we voluntarily terminate the
license agreement. Genentech will remain responsible for the filing, prosecution
and maintenance of all licensed patent rights, in consultation with us, at our
expense.
We have been informed that Chiron Corporation has filed oppositions against
two of Genentech's European patents that are licensed to us. Genentech, with our
assistance, has filed responses to both oppositions, but the outcome of each
opposition has yet to be determined. We have also been informed by the United
States Department of Health that we may need to obtain a license under one or
more of its United States and foreign patents involving molecular clones of
HIV-1 viral strains MN-STI and BA-L. We are currently exploring the advisability
of obtaining such a license. In the interim, we have recently filed an
opposition to a European equivalent of the United States Department of Health
patent and are awaiting the outcome of the opposition.
GOVERNMENT COLLABORATIONS
We have established collaborative relationships with two federal government
agencies: (1) The Centers for Disease Control and Prevention; and (2) National
Institute of Allergy and Infectious Diseases. We are in the process of
negotiating grants with both of these agencies.
Our collaboration with the Centers for Disease Control and Prevention would
be conducted in both the United States and Thailand. In the United States, the
Centers for Disease Control have proposed to co-sponsor our Phase III clinical
trial, starting in the Fall of 1999. The proposal provides that the Centers for
Disease Control would fund $8.0 million over four years to support our Phase III
clinical trial sites, as well as to provide funds for new research into our HIV
vaccine trials. In Thailand, the Centers for Disease Control are assisting in
the measurement of viral loads in vaccinees and placebos, as well as examining
HIV subtypes and strains in the at-risk population.
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The National Institute of Allergy and Infectious Diseases is forming a
collaboration with us to obtain and store clinical specimens from our North
American Phase III clinical trial. The proposal provides that it would fund $4.6
million for this program. We also have an ongoing collaboration with the AIDS
Vaccine Evaluation Group, a clinical consortium financed by the National
Institute of Allergy and Infectious Disease. In this collaboration we are
providing AIDSVAX to clinical sites for Phase I/II clinical trials of new
combination vaccines.
COMMERCIAL RELATIONSHIP WITH PASTEUR MERIEUX CONNAUGHT
On April 10, 1998, we signed a non-binding letter of intent with Pasteur
Merieux Connaught to co-develop an alternative vaccine regimen, called the
prime/boost. The letter of intent has recently been extended through November
1999. The prime/boost utilizes two independent vaccines administered
sequentially. A Pasteur Merieux Connaught vaccine would be administered
initially, followed by a bivalent gp120 vaccine. Should it prove efficacious,
the alternative vaccine regimen would be developed, clinically tested, and if
approved by regulatory agencies, marketed by Pasteur Merieux Connaught. We would
serve as a scientific co-developer and a source for bivalent formulations of
AIDSVAX, a critical component of the regimen. We would share significantly in
profits made from the sale of both vaccine components -- the Pasteur Merieux
Connaught vaccine, as well as AIDSVAX.
Phase I human trials of the initial Pasteur Merieux Connaught prime/boost
vaccine regimen have been conducted by the AIDS Vaccine Evaluation Group, an
NIH-sponsored clinical consortium. In early studies of the Pasteur Merieux
Connaught product, the combination vaccine incorporated monovalent gp120
provided by Chiron Vaccines as the boost. Subsequently, Pasteur Merieux
Connaught and the AIDS Vaccine Evaluation Group altered their plans and
requested us to provide our formulations of bivalent gp120 as a replacement for
the Chiron product. From this request arose the letter of intent and a plan to
co-develop a new vaccine regimen.
Currently, we and Pasteur Merieux Connaught are planning collaborative
studies with our respective vaccines. During this time we are also negotiating a
long-term co-development agreement with Pasteur Merieux Connaught. Should an
agreement be reached on final terms, we will supply 100% of Pasteur Merieux
Connaught's requirements for our bivalent gp120. Pasteur Merieux Connaught would
pay our fully burdened costs plus 10% for all vaccines purchased from us. In
addition, Pasteur Merieux Connaught would pay a royalty to us from Pasteur
Merieux Connaught's sales of both vaccines in the regimen.
Genentech holds exclusive options for the manufacture and marketing of
AIDSVAX. The non-binding letter of intent with Pasteur Merieux Connaught has
certain conflicts with our license agreement with Genentech. This conflict will
require resolution between us and Genentech. The issue is now under discussion,
and we will resolve it prior to our entering a final business agreement with
Pasteur Merieux Connaught. Upon resolution of the business issues with Genentech
and the Pasteur Merieux Connaught agreement, Genentech will then join us in
negotiations with Pasteur Merieux Connaught.
COMPETITION
We estimate that approximately 30 other companies have been engaged in
research to produce an HIV vaccine. Only AIDSVAX and one other vaccine have
progressed Phase II testing. AIDSVAX is the only HIV vaccine to commence Phase
III clinical trials. Chiron Vaccines is currently developing a DNA-based HIV
vaccine that incorporates gp120.
Two other notable efforts at producing HIV vaccines have failed. A
collaboration between Merck & Co., Inc. and Repligen Corporation was terminated
because their vaccine failed to elicit HIV-neutralizing antibodies. Similarly,
MicroGeneSys, Inc. designed a vaccine that failed in early stage human testing.
It appears that the principal differences between these vaccines and ours has
been the choice of viral protein as antigen or the methods used for
manufacturing.
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We believe that we now lead all competitors worldwide in the development of
an HIV preventive vaccine. Of the two HIV vaccines that have reached human
clinical trials, we have full control of the leading product, AIDSVAX, and we
plan to become a partner in the second with Pasteur Merieux Connaught.
GOVERNMENT REGULATION
AIDSVAX is subject to federal regulation, by the federal government,
principally by the FDA under the Public Health Services Act, the Food, Drug and
Cosmetic Act and other laws, and by state and local governments. Such
regulations govern or influence, among other things, the testing, manufacture,
safety and efficacy requirements, labeling, storage, record keeping, licensing,
advertising, promotion, distribution and export of such products.
AIDSVAX is classified by the FDA as a biological drug product. The steps
ordinarily required before a biological drug product may be marketed in the
United States include:
- preclinical laboratory and animal testing;
- the submission to the FDA of an Investigational New Drug Application,
which must become effective before clinical trials may commence;
- adequate and well-controlled clinical trials to establish the safety,
purity and potency of the biological drug product and to characterize how it
behaves in the human body;
- the submission to the FDA of a biologics license application;
- FDA review of the biologics license application;
- satisfactory completion of an FDA preapproval inspection of the
manufacturing facilities; and
- FDA approval of the license application, including approval of all
product labeling.
In connection with obtaining approval to proceed with Phase III clinical
trials and in determining the trial protocol, VaxGen has met with the FDA and
its Vaccines and Related Biological Product Advisory Committee of the FDA. FDA's
advisory committees are composed of outside experts who assist FDA in product
reviews and provide advice on various issues. While the recommendations of these
committees are not binding on the FDA, they are commonly followed. In connection
with the Phase III clinical trials the FDA sought and received advice from the
Vaccines and Related Biological Products Advisory Committee regarding the
clinical development program and clinical study designs for AIDSVAX.
Preclinical testing includes laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety, purity and potency of each product. Preclinical safety tests must be
conducted by laboratories that comply with FDA regulations regarding Good
Laboratory Practices. The results of the preclinical tests together with
manufacturing information and analytical data are submitted to the FDA as part
of the Investigational New Drug Application and are reviewed by the FDA before
the commencement of clinical trials. Unless the FDA objects to an
Investigational New Drug Application by placing the study on clinical hold, the
Investigational New Drug Application will become effective 30 days following its
receipt by the FDA. The FDA may suspend clinical trials at any time on various
grounds, including a finding that patients are being exposed to unacceptable
health risks. If the FDA does place the study on clinical hold, the sponsor must
usually resolve all of FDA's concerns before the study can proceed.
Clinical trials involve the administration of the investigational product
to humans under the supervision of qualified principal investigators. Clinical
trials are conducted in accordance with Good Clinical Practices under protocols
submitted to the FDA as part of the Investigational New Drug Application. In
addition, each clinical trial is approved and conducted under the auspices of an
institutional review board and with the patients' informed consent. The
institutional review board will consider, among other things, ethical factors,
the safety of human subjects and possibility of liability of the institutions
conducting the trial.
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Clinical trials are conducted in three sequential phases; however, the
phases may overlap. The goal of a Phase I clinical trial is to establish initial
data about safety and tolerance of the biological agent in humans. In Phase II
clinical trials, evidence is sought about the desired immune response of a
biological agent in a limited number of patients. Additional safety data and
dosing regimen information are also gathered from these studies. The Phase III
clinical trial program consists of expanded, large-scale, multi-center studies
of persons who are susceptible to the targeted disease. The goal of these
studies is to obtain sufficient evidence of the safety, purity and potency of
the proposed product. Our Phase III clinical trials of AIDSVAX are being
conducted on persons at risk for HIV infection but who test HIV negative prior
to enrollment in the trial. The FDA also frequently requests that sponsors
conduct Phase IV studies after licensing to gain additional information about
the biological drug product in a wider population.
All data obtained from this comprehensive program, in addition to detailed
information on the manufacture and composition of the product, are submitted in
a biologics license application to the FDA for review and approval for the
manufacture, marketing and commercial shipments of AIDSVAX. FDA approval of the
biologics license application is required before marketing may begin in the
United States. The FDA also may, at any time, require the submission of product
samples and testing protocols for lot-by-lot confirmatory testing by the FDA
prior to commercial distribution. This means a specific lot of vaccine cannot be
released for commercial distribution until the FDA has authorized such release.
Similar types of regulatory processes will be encountered as efforts are made to
market the vaccine internationally. We will be required to assure product
performance and manufacturing processes from one country to another.
For commercialization of AIDSVAX, the manufacturing processes described in
our biologics license application must receive FDA approval and the
manufacturing facility must successfully pass an inspection prior to approval of
AIDSVAX for sale within the United States. The pre-approved inspection assesses
whether, for example, the facility complies with the FDA's good manufacturing
practices. These practices include elaborate testing, control, documentation,
record keeping and other quality assurance procedures. If Genentech does not
exercise its option to manufacture AIDSVAX, we must pursue third party
manufacturing arrangements. For marketing outside the United States, we will be
subject to the regulatory requirements of other countries, which vary from
country to country, including marketing approval requirements. The regulatory
approval process in other countries includes requirements which vary from
country to country and the time needed to secure approval may be longer or
shorter from that required for FDA approval.
EMPLOYEES
As of April 15, 1999, we had 52 employees: 24 are clinical staff, 12 are
research and development staff and 16 are management/administration staff. None
of our employees is subject to a collective bargaining agreement, and we believe
that our relations with our employees are good.
FACILITIES
Our executive offices are located in Brisbane, California, in an office
building in which we lease approximately 16,000 square feet. The lease agreement
terminates in July 2005, and we have an option to renew for a successive
five-year period. We also lease approximately 10,000 square feet of laboratory
space in South San Francisco under a lease agreement that terminates in March
2006. We have an option to renew for a successive five-year period. We believe
that our facilities are sufficient to support our operations for at least the
next 24 months.
In Thailand, we lease office space at Mahidol University and at Taksin
Hospital in Bangkok. We will lease this space through the duration of the Thai
Phase III clinical trials.
LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings or claims.
42
<PAGE> 45
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTOR NOMINEES AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert C. Nowinski(1)(4)............... 52 Chairman, Chief Executive Officer
Donald P. Francis(1)(4)................ 56 President, Director
Phillip W. Berman(4)................... 49 Senior Vice President, Research &
Development -- Director
John G. Curd........................... 53 Senior Vice President, Medical Affairs
Carter A. Lee.......................... 46 Senior Vice President, Finance & Administration
Stephen C. Francis(3)(4)............... 58 Director
Roberta R. Katz(5)..................... 51 Director Nominee
Ruth B. Kunath(5)...................... 47 Director Nominee
William D. Young(1)(2)(3).............. 54 Director
</TABLE>
- ---------------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
(4) Member of the Genentech Contract Committee
(5) The director nominees have agreed to join the board of directors shortly
after consummation of the offering. We anticipate that each director nominee
will become a member of the Compensation, Audit and Genentech Contract
Committees.
ROBERT C. NOWINSKI, PH.D. Dr. Nowinski co-founded VaxGen in November 1995
and has served as a director and Chairman of the Board since inception and our
Chief Executive Officer since April 1999. In 1991, Dr. Nowinski founded
PathoGenesis, Corporation, a publicly-held biotechnology company and served as
Chairman of the Board until 1995. In 1989, Dr. Nowinski founded ICOS
Corporation, a publicly-held biotechnology company, where, from 1989 through
1991, Dr. Nowinski served as Chief Executive Officer and President. In 1981, Dr.
Nowinski founded Genetic Systems Corporation, a publicly-held biotechnology
company, where, from 1981 to 1985, Dr. Nowinski held various executive positions
including Chairman of the Board, Chief Executive Officer, President and
Scientific Director. Following the merger of Genetic Systems Corporation with
Bristol-Myers Company, from 1988 to 1989, Dr. Nowinski served as Vice-President
of New Technology for Bristol-Myers Company at its headquarters in New York.
Prior to such time, Dr. Nowinski was a Professor of Microbiology and Immunology
at the University of Washington and Head of the Virology Program at the Fred
Hutchinson Cancer Research Center in Seattle, Washington. During his academic
career, Dr. Nowinski authored over 100 scientific publications. Dr. Nowinski
received a B.S. from Beloit College and a Ph.D. in immunology from Cornell
University Sloan-Kettering Division.
DONALD P. FRANCIS, M.D., D.SC. Dr. Francis co-founded VaxGen in November
1995 and has served as our President and as a director since inception. From
1993 to 1995, Dr. Francis directed HIV vaccine clinical research at Genentech.
Prior to joining Genentech, Dr. Francis served from 1973 to 1993 in various
positions at the Centers for Disease Control. During this period, Dr. Francis
established and directed the HIV laboratory for the Centers for Disease Control
and served as an Assistant Director, Viral Diseases Program. At that time, he
was also a principal investigator in one of the two Phase III clinical trials
that led to licensure of the hepatitis B vaccine in the United States. In 1976,
Dr. Francis was the lead epidemiologist on the first clinical team to encounter
and control Ebola virus. Prior to such time, Dr. Francis had a central role in
the World Health Organization's smallpox eradication program, which eradicated
smallpox from the world. Dr. Francis received an M.D. from Northwestern
University and completed his training in pediatrics at Los Angeles County/USC
Medical Center. Dr. Francis received a doctorate in virology from the Harvard
School of Public Health. Dr. Francis is the brother of Stephen Francis.
PHILLIP W. BERMAN, PH.D. Dr. Berman has served as our Senior Vice
President, Research & Development since April 1999. Dr. Berman served as our
Vice President of Research & Development from
43
<PAGE> 46
November 1997 to April 1999, and has served as a director since October 1997.
From 1982 to 1997, Dr. Berman served in various capacities with Genentech,
including Senior Scientist, Molecular Biology Department, and Staff Scientist,
Department of Immunology and also Department of Process Sciences. Since 1984,
Dr. Berman has had research responsibilities in Genentech's AIDS Vaccine Project
and is an inventor of AIDSVAX. Dr. Berman received an A.B. in biology from the
University of California, Berkeley, a Ph.D. in biochemistry from Dartmouth
College and performed post doctoral research at the Neurobiology Laboratory of
the Salk Institute and the Department of Biochemistry and Biophysics at the
University of California, San Francisco.
JOHN G. CURD, M.D. Dr. Curd has served as our Senior Vice President,
Medical Affairs, since April, 1999. From 1991 to April 1999, Dr. Curd held
various positions at Genentech, including Director,
Immunology/Oncology/Infectious Disease, Senior Director and Head of Clinical
Science and Vice President of Clinical Development. From 1978 to 1991, Dr. Curd
held several research and clinical positions at The Scripps Clinic, a
world-renowned research foundation and medical clinic, including Head, Division
of Rheumatology and Vice Chairman, Department of Medicine. He received a B.A.
from Princeton University and an M.D. from Harvard Medical School.
CARTER A. LEE Mr. Lee has served as General Manager and Senior Vice
President, Finance & Administration since September 1998. From 1991 to 1997, Mr.
Lee served as Senior Vice President and Chief Financial Officer of Diefenbach
Elkins International, Inc., a corporate branding consultancy. From 1990 to 1991,
Mr. Lee served as Vice President, Finance & Administration of EDAW, Inc., a
worldwide landscape architecture and planning firm for projects such as theme
parks and destination resorts. From 1987 to 1990, Mr. Lee served as Vice
President and Corporate Controller of Landor Associates, a strategic design
consulting firm. Prior to such time, Mr. Lee served in various positions at
Coopers & Lybrand, including Senior Accountant and Supervising Consultant. Mr.
Lee received a B.A. from the University of California, Berkeley, and an M.B.A.
from California State University, Hayward.
STEPHEN C. FRANCIS Mr. Francis has served as a director since October 1996.
Mr. Francis has served as Vice-Chairman and Chief Risk Oversight Officer at
Fischer, Francis, Trees & Watts, an investment management firm which he
co-founded in 1972. Mr. Francis is a member and former chairman of the Treasury
Borrowing Committee, which advises the United States Treasury, and is a member
of the Stanford University Graduate School of Business Advisory Council. Mr.
Francis received an A.B. from Dartmouth College and an M.B.A. from Stanford
University. Mr. Francis is the brother of Donald Francis.
ROBERTA R. KATZ Ms. Katz is a director nominee who has agreed to join the
board of directors shortly after consummation of the offering. Ms. Katz is the
Chief Executive Officer of The Technology Network. Ms. Katz joined Netscape
Communications Corporation in May 1995 as Vice President, General Counsel and
Secretary. From January 1996 to April 1999, Ms. Katz served as Senior Vice
President, General Counsel and Secretary of Netscape, where she was a member of
the team that negotiated the Netscape/ America Online merger. From March 1993
until joining Netscape, Ms. Katz served as Senior Vice President and General
Counsel of McCaw Cellular Communications, where she was a member of the team
that negotiated the AT&T/McCaw merger. In addition, from March 1992 until
joining Netscape, Ms. Katz served as Senior Vice President and General Counsel
of LIN Broadcasting Company, a subsidiary of McCaw. In March 1998, Ms. Katz was
named as one of the 50 Most Influential Women Attorneys in America by the
National Law Journal. She is an author of Justice Matters: Rescuing the Legal
System for the 21st Century. Ms. Katz received a B.A. from Stanford University,
a Ph.D. in anthropology from Columbia University and a J.D. from the University
of Washington School of Law.
RUTH B. KUNATH Ms. Kunath is a director nominee who has agreed to join the
board of directors shortly after consummation of the offering. Ms. Kunath has
managed the Vulcan Venture Biotechnology Portfolio, managing public and private
biotech and emerging healthcare investments since 1992. Prior to her employment
at Vulcan Ventures, Ms. Kunath managed Seattle Capital Management equity assets
as Senior Portfolio Manager for the healthcare sector of Bank of America Capital
Management. Ms. Kunath received a B.A. from DePaul University and is a Certified
Financial Analyst.
44
<PAGE> 47
WILLIAM D. YOUNG Mr. Young has served as a director since November 1995.
Since 1997, Mr. Young has served as the Chief Operating Officer of Genentech,
where he has been employed since 1980. Mr. Young serves on the board of
directors of IDEC Pharmaceuticals and Energy Biosystems Corp. He received a B.S.
in chemical engineering from Purdue University and an M.B.A. from Indiana
University.
BOARD OF DIRECTORS AND OFFICERS
The size of the board of directors is currently set at seven members.
Directors hold office until the next annual meeting at which time their terms
expire and their successors are elected. Officers are appointed by the board of
directors for one year terms.
AUDIT COMMITTEE
The audit committee makes recommendations to the board of directors about
the selection of independent auditors, reviews the results and scope of the
audit and other services provided by our independent auditors, and evaluates our
internal controls. The audit committee consists of Mr. Stephen Francis and Mr.
William Young. Upon joining the board of directors, Ms. Katz and Ms. Kunath will
become members of this committee.
COMPENSATION COMMITTEE
The compensation committee reviews and approves the compensation and
benefits for our executive officers, administers our stock option plans and
makes recommendations to the board of directors about compensation matters. The
compensation committee consists of Mr. William Young. Upon joining the board of
directors, Ms. Katz and Ms. Kunath will become members of this committee.
EXECUTIVE COMMITTEE
The executive committee may act on behalf of the board of directors on all
matters except those concerning filling vacancies on the board, executive
compensation, audits or individual contracts or financial obligations exceeding
$3,000,000. The executive committee consists of Dr. Robert Nowinski, Dr. Donald
Francis and Mr. William Young.
GENENTECH CONTRACT COMMITTEE
The Genentech contract committee considers matters relating to agreements
with Genentech. The Genentech contract committee consists of Dr. Robert
Nowinski, Dr. Donald Francis, Dr. Phillip Berman and Mr. Stephen Francis. Upon
joining the board of directors, Ms. Katz and Ms. Kunath will become members of
this committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Decisions about executive compensation are made by the compensation
committee. No member of the compensation committee or executive officer of
VaxGen has an interlocking relationship with executive officers or directors of
another company.
45
<PAGE> 48
EXECUTIVE COMPENSATION
The following table depicts amounts paid during the last fiscal year as
compensation to our chief executive officer and our three most highly
compensated executive officers, other than the chief executive officer, who were
serving as executive officers at the end of fiscal 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------- --------------------------------
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) SECURITIES UNDERLYING OPTIONS(#)
--------------------------- --------- -------- --------------------------------
<S> <C> <C> <C>
Robert C. Nowinski, Chairman(1)............. $250,000 $ -- 60,000
Donald P. Francis, President................ 250,000 75,000 15,000
Phillip W. Berman, Vice President, Research
& Development(2).......................... 175,000 35,000 15,000
Robert F. Pacquer, Vice President,
Finance(3)................................ 150,730 -- 200,000
</TABLE>
- ---------------
(1) Dr. Nowinski was appointed Chief Executive Officer on April 22, 1999.
(2) Dr. Berman was appointed Senior Vice President, Research & Development on
April 22, 1999.
(3) Mr. Pacquer resigned from VaxGen as of March 15, 1999.
The following table depicts stock option plan activity during the fiscal
year ended December 31, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE
------------------------------------------------------------ AT ASSUMED ANNUAL
% OF TOTAL RATES OF
NUMBER OF OPTIONS EXERCISE STOCK PRICE
SECURITIES GRANTED TO OR APPRECIATION
UNDERLYING EMPLOYEES BASE FOR OPTION TERM
OPTIONS IN PRICE EXPIRATION ---------------------
NAME GRANTED(#) 1998 ($/SH) DATE 5%($) 10%($)
---- ------------------ ------------ ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert C. Nowinski............... -- -- -- -- -- --
Donald P. Francis................ -- -- -- -- -- --
Phillip W. Berman................ -- -- -- -- -- --
Robert F. Pacquer(1)............. 200,000(2) 45.7 7.00 1/2/08 880,000 2,231,000
</TABLE>
- ---------------
(1) Mr. Pacquer resigned from VaxGen as of March 15, 1999.
(2) Under the terms of Mr. Pacquer's employment agreement, he received an option
to purchase 200,000 shares. Under the terms of Mr. Pacquer's resignation,
this amount was reduced as follows: (a) as of March 15, 1999, 77,500 of Mr.
Pacquer's options were exercisable until March 31, 2000; and (b) if we
complete our initial public offering by September 1, 1999, an additional
10,000 shares will become exercisable until March 31, 2000. The balance of
Mr. Pacquer's options have terminated.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT
(#) FISCAL YEAR-END ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------------- -------------------------
<S> <C> <C>
Robert C. Nowinski............................ --/-- --/--
Donald P. Francis............................. --/-- --/--
Phillip W. Berman............................. 50,000/150,000 125,000/375,000
Robert F. Pacquer(1).......................... 50,000/150,000 125,000/375,000
</TABLE>
- ---------------
(1) Mr. Pacquer resigned from VaxGen as of March 15, 1999.
46
<PAGE> 49
EMPLOYMENT AGREEMENTS
Dr. Nowinski's employment agreement provides for a base annual salary of
$250,000 through 2002. On April 22, 1999, our board of directors approved an
increase in Dr. Nowinski's annual salary to $300,000. Dr. Nowinski will receive
a performance bonus of 125,000 shares of common stock if either the market value
of our common stock reaches an average of $28.00 per share over a 30-day period
or we are acquired in an acquisition that results in a purchase price of at
least $28.00 per share. In the event of a change of control or termination prior
to the end of the term of his employment agreement, we may be required to pay
all salary due to Dr. Nowinski. Upon termination of employment, Dr. Nowinski has
agreed not to compete with us for one year.
Dr. Francis' employment agreement provides for a base salary of $250,000
through 2002. On April 22, 1999, our board of directors approved an increase in
Dr. Francis' annual salary to $275,000. Dr. Francis may receive an annual bonus
of up to 30% of his base salary as determined in the discretion of the board of
directors. Dr. Francis will also receive a performance bonus of 125,000 shares
of common stock if either the market value of our common stock reaches an
average of $28.00 per share over a 30-day period or we are acquired in an
acquisition that results in a purchase price of at least $28.00 per share. In
the event of a change of control or termination of employment prior to the end
of the five-year term, we may be required to pay all salary due to Dr. Francis.
Upon termination of employment, Dr. Francis has agreed not to compete with us
for one year.
Dr. Berman's employment agreement provides for a base salary of $175,000
through November 2000. On April 22, 1999, our board of directors approved an
increase in Dr. Berman's annual salary to $200,000. Dr. Berman may receive an
annual bonus of up to 20% of his base salary as determined in the discretion of
the board of directors. Dr. Berman will also receive a performance bonus of
75,757 shares of common stock if either the market value of our common stock
reaches an average of $28.00 per share over a 30-day period or we are acquired
in an acquisition that results in a purchase price of at lease $28.00 per share.
In the event of a change of control or termination of employment prior to the
expiration of the three-year term, we may be required to pay Dr. Berman's base
salary for twelve months following his termination. Upon termination of
employment, Dr. Berman has agreed not to compete with us for one year.
Dr. Curd's employment agreement provides for an annual base salary of
$225,000 through May 2003. Dr. Curd may also receive an annual bonus of up to
30% of his base salary and up to 10,000 shares of stock options with an exercise
price equal to fair market value, as determined in the discretion of the board
of directors. We have agreed to pay Dr. Curd a bonus of up to $50,000, to be
paid over the period of his four-year contract. We have also agreed to assume
Dr. Curd's loan for $96,822 outstanding with Genentech and accept an
interest-free promissory note from Dr. Curd. Dr. Curd agrees to retire the
outstanding loan by the termination of this agreement. Dr. Curd has received an
option to purchase up to 125,000 shares of common stock that vests over a
four-year period. In the event of a change of control, Dr. Curd may receive a
one-time bonus of 37,500 shares of common stock. In the event of termination
prior to the expiration of the four-year term, we may be required to pay Dr.
Curd's base salary for twelve months following his termination. Upon termination
of employment, Dr. Curd has agreed not to compete with us for one year.
Mr. Lee's employment agreement provides for a base salary of $185,000
through March 2003. Mr. Lee may also receive an annual bonus of up to 20% of his
base salary, and 10,000 shares of stock options with an exercise price equal to
fair market value, as determined in the discretion of the board of directors.
Mr. Lee has received an option to purchase up to 125,000 shares of common stock
that vests over a four-year period. In the event of a change of control, Mr. Lee
may receive a one-time bonus of 37,500 shares of common stock. In the event of
termination prior to the expiration of the four-year term, we may be required to
pay Mr. Lee's base salary for twelve months following his termination. Upon
termination of employment, Mr. Lee has agreed not to compete with us for one
year.
47
<PAGE> 50
DIRECTOR COMPENSATION
We reimburse directors for out-of-pocket and travel expenses incurred while
attending board of director and committee meetings. Directors are also paid
$1,000 per meeting attended in person and $500 for participation by conference
call. Directors who are not also employees receive an annual option to purchase
up to the lesser of: (1) $20,000 worth of common stock at an exercise price
equal to the fair market value of the stock on the date of grant; and (2) 2,857
shares of common stock. Employee directors are also eligible to receive option
grants.
1996 STOCK OPTION PLAN
We adopted a 1996 stock option plan for our officers, directors, key
employees and consultants. Options to purchase shares of common stock are
authorized to be issued to participants through either incentive stock options
or nonqualified stock options. On April 1, 1999, our shareholders approved an
increase of 1,250,000 in the number of shares reserved for issuance under the
1996 plan, to a total of 1,750,000 shares of common stock reserved for issuance;
options are subject to adjustment. The 1996 plan is administered by our board of
directors but may also be administered by a committee appointed by our board of
directors. The exercise price of options is not less than the fair market value
of the common stock on the date of grant, except that the exercise price of
nonqualified stock options shall not be less than 85% of the fair market value
at the date of the grant. Options granted under the 1996 plan have a maximum
term of ten years. Options vest at a rate of 25% per year over a four-year
period unless otherwise provided by the board of directors. In no event may the
board of directors specify a vesting schedule that permits an option to vest at
a rate less than 20% per year, however. Nonqualified stock options granted to
non-employee directors will vest at the rate of 40% on the date of grant and 60%
on the first anniversary of the date of grant. The 1996 plan expires ten years
from the date of adoption, unless sooner terminated by the board of directors.
As of May 31, 1999, there were a total of 1,150,600 options outstanding under
the 1996 plan.
1998 DIRECTORS STOCK OPTION PLAN
We adopted a 1998 director stock option plan for our non-employee
directors. The plan provides for the issuance of 37,500 shares of common stock
to non-employee directors through annual options. Options are subject to
adjustment. The plan provides for grant of initial options to non-employee
directors on May 6, 1998. Annual option grants will automatically be made to
non-employee directors on the annual meeting date in each subsequent year. The
exercise price of the initial options is $7.00 per share. The exercise price of
the each annual option is the fair market value of our common stock on the
annual grant date. Each initial option is fully vested upon grant. Each annual
option fully vests on the first anniversary of its grant date, subject to
certain meeting attendance requirements. The board of directors may terminate
the 1998 director plan at any time. As of May 31, 1999, there were a total of
8,571 options outstanding under the 1998 director plan.
401(k) PLAN
We maintain a 401(k) profit sharing benefit plan intended to qualify under
Section 401 of the Internal Revenue Code of 1986, as amended. The plan covers
all employees who satisfy certain minimum age eligibility requirements. Under
the profit sharing portion of the plan, we may make an annual contributions for
the benefit of eligible employees in an amount determined by us. Under the
401(k) portion of the plan, eligible employees may make pretax elective
contributions of their compensation, subject to maximum limits on contributions
prescribed by law.
48
<PAGE> 51
CERTAIN TRANSACTIONS
The following is a summary of certain related party transactions since
January 1996 to which we were or are a party or in which certain of our
executive officers, directors or greater than 10% stockholders had or have a
direct or indirect material interest. We believe that each of these agreements
was made on terms at least as fair to us as could have been obtained from
unaffiliated third parties.
We entered into a credit agreement dated December 19, 1995 with Genentech
under which Genentech financed our formation by means of a $1,000,000 line of
credit. We borrowed $780,000 under the credit agreement in 1996 and $205,000 in
1997. Our obligations under the credit agreement were converted into 142,857
shares of common stock in March 1997 at a price of $7.00 per share.
We issued 1,150,000 shares of common stock to Genentech, 500,000 shares of
common stock to Dr. Donald P. Francis, and 250,000 shares of common stock to Dr.
Robert C. Nowinski on April 10, 1996 for a purchase price of $0.02 per share. We
also issued 133,333 shares of common stock to Dr. Francis, 66,666 shares of
common stock to Dr. Nowinski, and 20,000 shares of common stock to Stephen C.
Francis on October 29, 1996 for a purchase price of $0.02 per share.
We entered into a services agreement dated January 1, 1996 with Genentech
under which Genentech agreed to provide us with administrative and other
services. Under the services agreement Genentech has provided us with expertise
in process sciences, regulatory affairs, virology and the manufacturing of
clinical supplies of AIDSVAX. We paid Genentech $1,442,000, $2,352,000 and
$690,000 in years 1996-1998. The initial services agreement expired December 31,
1998 but was renewed through December 31, 2000.
We entered into a license agreement dated May 1, 1996 with Genentech under
which Genentech granted us an exclusive license to specified patents and
proprietary know-how relating to the development of a vaccine to prevent HIV
infection and/or AIDS. The Genentech license agreement is described in further
detail in "Business -- License and Services Agreement with Genentech."
We entered into a warrant agreement with Genentech on March 15, 1996 under
which Genentech could purchase that number of shares of our common stock
necessary to maintain Genentech's 25% ownership on a fully-diluted basis. The
purchase price for any shares purchased under this agreement would be market
price. The warrant expired January 11, 1999, at the completion of our 1998
private placement. We have granted Genentech registration rights with respect to
all of its securities. They do not hold any further rights to acquire our common
stock.
We issued 142,857 shares of common stock to Genentech in March 1997 in
connection with our 1997 private placement for a purchase price of $7.00 per
share.
We entered into a sublease agreement dated September 3, 1997 with Genentech
covering office space located on the premises leased by Genentech in South San
Francisco. We are no longer occupying this space. Under the sublease we paid
Genentech a monthly rental of $5,985 through September 1998.
49
<PAGE> 52
PRINCIPAL STOCKHOLDERS
The following table sets forth information about the beneficial ownership
of common stock of:
- each director, director nominee, our chief executive officer and our
three most highly compensated executive officers;
- directors and executive officers as a group; and
- 5% beneficial owners.
The information is this table is as of May 31, 1999 and as adjusted to
reflect the sale of common stock in the offering.
<TABLE>
<CAPTION>
BENEFICIALLY OWNED SHARES(1)
--------------------------------------
PRIOR TO OFFERING AFTER OFFERING
-------------------- --------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT PERCENT
------------------------------------ --------- ------- -------
<S> <C> <C> <C>
Genentech, Inc............................................. 1,522,354 19.8% 14.1%
1 DNA Way
South San Francisco, California 94080
Donald P. Francis(2)....................................... 648,333 8.4 6.0
c/o VaxGen, Inc.
1000 Marina Boulevard, Suite 200
Brisbane, California 94005
Robert C. Nowinski(3)...................................... 369,166 4.8 3.4
Phillip W. Berman(4)....................................... 65,000 * *
Stephen C. Francis(5)...................................... 42,857 * *
Roberta R. Katz(6)......................................... -- -- --
Ruth B. Kunath(7).......................................... 263,158 3.4 2.4
William D. Young(8)........................................ 1,522,354 19.8 14.1
All executive officers and directors as a group (7
persons)(9).............................................. 2,910,868 37.2 26.6
</TABLE>
- ---------------
* Less than 1%.
(1) Includes shares underlying options or warrants exercisable within 60 days of
May 31, 1999. Except as indicated, persons named in the table have sole
voting and investment power with respect to all shares of common stock owned
by them.
(2) Includes 15,000 shares issuable on exercise of outstanding options
exercisable within 60 days of May 31, 1999.
(3) Includes 60,000 shares issuable on exercise of outstanding options
exercisable within 60 days of May 31, 1999.
(4) Includes 65,000 shares issuable on exercise of outstanding options
exercisable within 60 days of May 31, 1999.
(5) Includes 2,857 shares issuable upon exercise of outstanding options
exercisable within 60 days of May 31, 1999.
(6) Ms. Katz is a director nominee who has agreed to join the board of directors
shortly after consummation of the offering. Ms. Katz will be granted an
option to purchase up to 20,000 shares of common stock upon commencement of
service on the board of directors. The stock option vests over four years.
(7) Ms. Kunath is a director nominee who has agreed to join the board of
directors shortly after consummation of the offering. Ms. Kunath manages the
Vulcan Venture Biotechnology Portfolio as an employee of Vulcan Ventures,
Inc. Vulcan Ventures Inc. owns 263,158 shares of common stock. Ms. Kunath
disclaims any beneficial ownership of Vulcan Ventures shares except to the
extent of any pecuniary interest therein. Ms. Kunath will be granted an
option to purchase up to 20,000 shares of common stock upon commencement of
service on the board of directors. The stock option vests over four years.
(8) Mr. Young is Chief Operating Officer of Genentech. Mr. Young disclaims any
beneficial ownership of Genentech shares except to the extent of any
pecuniary interest therein.
(9) Includes an aggregate of 142,857 shares of common stock issuable on exercise
of outstanding options exercisable within 60 days of May 31, 1999.
50
<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
The following is a description of the material terms of our capital stock
and charter documents. While complete in material respects, this description is
nonetheless a summary and is qualified in each instance by reference to the full
text of these documents.
Our certificate of incorporation authorizes 40,000,000 shares of capital
stock, consisting of 20,000,000 shares of common stock, $0.01 par value, and
20,000,000 shares of preferred stock, $0.01 par value.
COMMON STOCK
We have 20,000,000 shares of common stock authorized, of which 7,685,161
shares are outstanding as of May 31, 1999. There are approximately 768
stockholders of record. Holders of common stock are entitled to one vote per
share. There are no cumulative voting or preemptive rights. Holders of common
stock are entitled to receive their share of any dividends declared by the board
of directors. In the event of liquidation, dissolution or winding up, holders of
common stock are entitled to their share of remaining assets following payment
to creditors. All the outstanding shares of common stock are fully paid, validly
issued and non-assessable. As of May 31, 1999, we had outstanding options to
purchase 1,159,171 shares of common stock.
PREFERRED STOCK
The board of directors is authorized to issue 20,000,000 shares of
preferred stock in one or more series and to fix the rights, preferences and
privileges of those shares without further action by stockholders. Any shares of
preferred stock so issued may have priority over the common stock with respect
to dividend, liquidation and other rights. No preferred stock has been issued.
WARRANTS
As of May 31, 1999, there are outstanding warrants to purchase 459,825
shares of common stock. All of these warrants are currently exercisable.
In connection with our 1997 financing we granted a contractual right to one
private unaffiliated investor to maintain his proportionate stock ownership
position. This right will expire March 31, 2002.
ANTI-TAKEOVER PROVISIONS IN CHARTER DOCUMENTS
Our certificate of incorporation does not provide for cumulative voting in
connection with the election of directors. Genentech is currently our largest
single stockholder, owning approximately 20% of our common stock. Our officers
and directors as a group own approximately 37% of our common stock. While these
percentages will decrease after this offering, Genentech and our officers and
directors acting together could influence the direction and control of our
business.
Our bylaws provide that special meetings of stockholders may be called only
by the board of directors, the Chairman of the Board, the President, or any
holder or holders of at least 10% of our voting stock. The bylaws also provide
that stockholders seeking to bring business before an annual or special meeting
must provide timely notice in writing. To be timely, a stockholder's notice must
be transmitted:
(1) not less than 20 days nor more than 60 days before a meeting to
act on a plan of merger or consolidation or a proposed sale, lease,
exchange or other disposition of our assets; or
(2) not less than 10 days nor more than 60 days before any other
meeting.
The bylaws also contain specific requirements for the form of a stockholder's
notice. These provisions have anti-takeover effects that may deter a change in
control of us.
51
<PAGE> 54
REGISTRATION RIGHTS
In connection with our prior private financings, we granted registration
rights with respect to:
(1) 3,607,047 shares of common stock sold in the 1997 private
placement;
(2) 1,570,010 shares of common stock sold in the 1998 private
placement; and
(3) 372,354 shares of common stock sold to Genentech.
These registration rights generally grant to the holders up to three "piggyback"
registrations and two "demand" registrations, subject to customary cutback
provisions.
DELAWARE LAW
VaxGen is subject to Section 203 of the Delaware General Corporation Law,
which prevents an "interested stockholder," defined as a person who owns or
within three years did own 15% or more of a corporation's outstanding voting
stock, from engaging in a business combination with a publicly-held Delaware
corporation for three years following the date that person became an interested
stockholder. An exception is made where the business combination is approved in
a prescribed manner. A corporation may at its option exclude itself from the
coverage of Section 203 by amending its certificate of incorporation or bylaws
by action or its stockholders. We did not elect to exclude ourselves.
DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
Our certificate of incorporation eliminates the personal liability of
directors to us or our stockholders for money damages resulting from breaches of
their fiduciary duty to the fullest extent permitted by Delaware General
Corporation Law. This provision does not eliminate the liability of directors
for:
(1) acts or omissions not in good faith that involve intentional
misconduct or a knowing violation of law;
(2) improper declarations of dividends;
(3) transactions from which a director derived an improper personal
benefit; or
(4) breaches of directors' duty of loyalty to us or our stockholders.
Our bylaws contain provisions requiring the indemnification of our directors to
the fullest extent permitted by applicable law. We also have the ability to
indemnify officers, employees and agents to the same extent as directors. Our
bylaws also permit us to secure insurance on behalf of any director, officer,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether the bylaws permit such indemnification. The
employment agreements of Drs. Nowinski and Francis contain indemnification
provisions. We have entered into an indemnification agreement with Ms. Katz and
Ms. Kunath both director nominees, under which we have agreed to indemnify them
with respect to any liability in connection with this offering to the fullest
extent permitted by law.
TRANSFER AGENT
The transfer agent for the common stock is ChaseMellon Shareholder
Services, Seattle, Washington.
52
<PAGE> 55
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. The market price of our common stock could drop due to sales of a large
number of shares of our common stock or the perception that such sales could
occur. These factors could also make it more difficult to raise funds through
future offerings of common stock.
After this offering, 10,785,161 shares of common stock will be outstanding.
A total of 11,250,161 shares will be outstanding if the underwriters exercise
their over-allotment option in full. Of these shares, all of the shares sold in
this offering, including shares, if any, issued on exercise of the underwriter's
over-allotment option, will be freely tradable without restriction under the
Securities Act except for any shares purchased by "affiliates" of VaxGen as
defined in Rule 144 under the Securities Act. The remaining 7,685,161 shares are
"restricted securities" within the meaning of Rule 144 under the Securities Act.
The restricted securities generally may not be sold unless they are registered
under the Securities Act or sold pursuant to an exemption from registration,
such as the exemption provided by Rule 144 under the Securities Act.
Our officers and directors and a majority of shareholders have entered into
lock-up agreements pursuant to which they have agreed not to offer or sell any
shares of common stock they currently own, for a period of 180 days after the
date of this prospectus without the prior written consent of Prudential
Securities, on behalf of the underwriters. In addition to the shares subject to
lock-up agreements, 1,319,497 shares of common stock may not be sold in
accordance on Rule 144 before December 1999. Prudential Securities may, at any
time and without notice, waive any of the terms of these lock-up agreements
specified in the underwriting agreement. Following the lock-up period, these
shares will not be eligible for sale in the public market without registration
under the Securities Act unless such sales meet the conditions and restrictions
of Rule 144 as described below.
In general, under Rule 144 as currently in effect, any person, or persons
whose shares are aggregated, including an affiliate, who has beneficially owned
shares for a period of at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of: (1)
1% of the then-outstanding shares of common stock; and (2) the average weekly
trading volume in the common stock during the four calendar weeks immediately
preceding the date on which the notice of such sale on Form 144 is filed with
the SEC. Sales under Rule 144 are also subject to certain provisions relating to
notice and manner of sale and the availability of current public information
about VaxGen. In addition, a person, or persons whose shares are aggregated, who
has not been an affiliate of VaxGen at any time during the 90 days immediately
preceding a sale, and who has beneficially owned the shares for at least two
years, would be entitled to sell such shares under Rule 144(k) without regard to
the volume limitation and other conditions described above. The foregoing
summary of Rule 144 is not intended to be a complete description.
As soon as practicable following the consummation of this offering, VaxGen
intends to file a registration statement under the Securities Act to register
the shares of common stock available for issuance pursuant to its stock option
plans after the effective date of such registration statement will be available
for sale in the open market subject to the lock-up period and, for affiliates of
VaxGen, subject to certain conditions and restrictions of Rule 144.
53
<PAGE> 56
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below, for whom Prudential Securities Incorporated and Punk, Ziegel & Company
L.P. are acting as representatives. We are obligated to sell, and the
underwriters are obligated to purchase, all of the shares offered on the cover
page of this prospectus, if any are purchased. Subject to conditions specified
in the underwriting agreement, each underwriter has severally agreed to purchase
the shares indicated opposite its name:
<TABLE>
<CAPTION>
NUMBER
OF SHARES
UNDERWRITERS ---------
<S> <C>
Prudential Securities Incorporated..........................
Punk, Ziegel & Company L.P..................................
---------
Total....................................................... 3,100,000
=========
</TABLE>
The underwriters may sell more than the total number of shares offered on
the cover page of this prospectus and they have, for a period of 30 days from
the date of this prospectus, an over-allotment option to purchase up to 465,000
additional shares from us. If any additional shares are purchased, the
underwriters will severally purchase the shares in the same proportion as per
the table above.
The representatives of the underwriters have advised us that the shares
will be offered to the public at the offering price indicated on the cover page
of this prospectus. The underwriters may allow to selected dealers a concession
not in excess of $ per share and these dealers may reallow a concession not
in excess of $ per share to certain other dealers. After the shares are
released for sale to the public, the representatives may change the offering
price and the concessions. The representatives have informed us that the
underwriters do not intend to sell shares to any investor who has granted them
discretionary authority.
We have agreed to pay the underwriters the following fees, assuming both no
exercise and full exercise of the underwriters' over-allotment option to
purchase additional shares:
<TABLE>
<CAPTION>
TOTAL FEES
---------------------------------------------
FEE WITHOUT EXERCISE OF FULL EXERCISE OF
PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------- --------------------- ---------------------
<S> <C> <C> <C>
Fees paid by us................................ $ $ $
</TABLE>
In addition, we estimate that we will spend approximately $1,000,000 in
expenses for this offering. We have agreed to indemnify the underwriters against
liabilities, including liabilities under the Securities Act or contribute to
payments that the underwriters may be required to make in respect of these
liabilities.
We, our officers and directors, and a majority of shareholders of VaxGen
have entered into lock-up agreements, under which we and they agreed not to
offer or sell any shares of common stock or securities convertible into or
exchangeable or exercisable for shares of common stock for a period of 180 days
from the date of this prospectus without the prior written consent of Prudential
Securities on behalf of the underwriters. Prudential Securities may, at any time
and without notice, waive the terms of these lock-up agreements specified in the
underwriting agreement.
Prior to this offering, there has been no public market for the common
stock of VaxGen. The public offering price, negotiated between VaxGen and the
representatives, is based upon various factors such as our financial and
operating history and condition, its prospects, the prospects for the industry
we are in and prevailing market conditions.
54
<PAGE> 57
Prudential Securities, on behalf of the underwriters, may engage in the
following activities in accordance with applicable securities rules:
- Over-allotments involving sales in excess of the offering size, creating
a short position. Prudential Securities may elect to reduce this short
position by exercising some or all of the over-allotment option.
- Stabilizing and short covering: stabilizing bids to purchase the shares
are permitted if they do not exceed a specified maximum price. After the
distribution of shares has been completed, short covering purchases in
the open market may also reduce the short position. These activities may
cause the price of the shares to be higher than would otherwise exist in
the open market.
- Penalty bids permitting the representatives to reclaim commissions from a
syndicate member for the shares purchased in the stabilizing or short
covering transactions.
Such activities, which may be commenced and discontinued at any time, may
be effected on the Nasdaq National Market, NYSE in the over-the-counter market
or otherwise.
Each underwriter has represented that it has complied and will comply with
all applicable laws and regulations in connection with the offer, sale or
delivery of the shares and related offering materials in the United Kingdom,
including:
- the Public Offers of Securities Regulations 1995;
- the Financial Services Act 1986; and
- the Financial Services Act 1986 (Investment Advertisements) (Exemptions),
Order 1996 (as amended).
We have asked the underwriters to reserve shares for sale at the same
offering price directly to our employees and other business affiliates or
related third parties. The number of shares available for sale to the general
public in the offering will be reduced to the extent such persons purchase the
reserved shares.
The Roman Arch Fund L.P. and The Roman Arch Fund II L.P., an internal
employee private equity fund of Prudential Securities Incorporated, own an
aggregate of 16,000 shares.
LEGAL MATTERS
Graham & James LLP/Riddell Williams P.S., Seattle, Washington, passed on
the validity of the shares. Principals of Graham & James LLP/Riddell Williams
P.S. beneficially own 22,000 shares. Cooley Godward LLP, Kirkland, Washington,
passed on legal matters for the underwriters.
EXPERTS
The financial statements of VaxGen as of December 31, 1997 and 1998, and
for each of the years in the three-year period ended December 31, 1998 and for
the period from November 27, 1995 (inception) through December 31, 1998, have
been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
55
<PAGE> 58
WHERE YOU CAN FIND MORE INFORMATION
We filed a registration statement on Form S-1 with the SEC covering sale of
the common stock, of which this prospectus is a part. This prospectus does not
contain all of the information in the registration statement, portions of which
are omitted as permitted by SEC rules. Statements in this prospectus about
documents filed as exhibits, while complete in material respects, are
nonetheless summaries. Reference is made to each exhibit for a full description.
In each case, summary descriptions are qualified by reference to complete
exhibits. You may read or copy any document filed by us at the SEC's Public
Reference Room located at 450 5th Street, NW, Washington, D.C. 20549. You may
obtain information about the Public Reference Room by calling the SEC for
further information at 1-800-SEC-0330. Our filings are also available at the
SEC's web site at www.sec.gov.
56
<PAGE> 59
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity (Deficit) and
Comprehensive Loss........................................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
The Board of Directors
VaxGen, Inc.:
We have audited the accompanying balance sheets of VaxGen, Inc. (a
development stage enterprise) as of December 31, 1997 and 1998, and the related
statements of operations, stockholders' equity (deficit) and comprehensive loss,
and cash flows for each of the years in the three-year period ended December 31,
1998 and the period from November 27, 1995 (inception) through December 31,
1998. 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 audits 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 VaxGen, Inc. (a development
stage enterprise) as of December 31, 1997 and 1998, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1998 and the period from November 27, 1995 (inception)
through December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Seattle, Washington
February 5, 1999, except as to note 9(b),
which is as of April 1, 1999
F-2
<PAGE> 61
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1997 1998 1999
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents....................... $ 641,000 $ 6,818,000 $ 7,931,000
Investment securities........................... 23,239,000 12,650,000 12,676,000
Interest receivable............................. 152,000 112,000 148,000
Prepaid expenses and other current assets....... 230,000 360,000 294,000
----------- ------------ ------------
Total current assets.................... 24,262,000 19,940,000 21,049,000
Property and equipment, net....................... 33,000 1,258,000 1,423,000
Other assets...................................... 6,000 274,000 221,000
----------- ------------ ------------
Total assets............................ $24,301,000 $ 21,472,000 $ 22,693,000
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to Genentech............................ $ 3,792,000 $ 260,000 $ 500,000
Accounts payable................................ 237,000 1,483,000 248,000
Accrued liabilities............................. 390,000 331,000 963,000
Current portion of long-term obligations........ -- -- 20,000
----------- ------------ ------------
Total current liabilities............... 4,419,000 2,074,000 1,731,000
----------- ------------ ------------
Long-term obligations............................. -- -- 66,000
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized
20,000,000 shares; none issued or
outstanding.................................. -- -- --
Common stock, $0.01 par value. Authorized
20,000,000 shares; issued and outstanding
6,109,401 shares at December 31, 1997,
7,101,248 shares at December 31, 1998 and
7,685,161 shares at March 31, 1999........... 61,000 71,000 77,000
Additional paid-in capital...................... 24,985,000 33,619,000 38,886,000
Accumulated other comprehensive income --
unrealized gain on investment securities..... 8,000 43,000 28,000
Deficit accumulated during the development
stage........................................ (5,172,000) (14,335,000) (18,095,000)
----------- ------------ ------------
Total stockholders' equity.............. 19,882,000 19,398,000 20,896,000
Commitments and contingencies
----------- ------------ ------------
Total liabilities and stockholders'
equity................................ $24,301,000 $ 21,472,000 $ 22,693,000
=========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 62
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
NOVEMBER 27, NOVEMBER 27,
1995 1995
(INCEPTION) THREE MONTHS (INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH ENDED MARCH 31, THROUGH
--------------------------------------- DECEMBER 31, ------------------------- MARCH 31,
1996 1997 1998 1998 1998 1999 1999
----------- ----------- ----------- ------------ ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating expenses:
Research and development:
Genentech charges.......... $ 1,435,000 $ 2,348,000 $ 681,000 $ 4,467,000 $ 190,000 $ 240,000 $ 4,707,000
Other...................... 248,000 798,000 6,150,000 7,196,000 526,000 2,798,000 9,994,000
----------- ----------- ----------- ------------ ----------- ----------- ------------
(1,683,000) (3,146,000) (6,831,000) (11,663,000) (716,000) (3,038,000) (14,701,000)
General and administrative:
Genentech charges.......... 7,000 4,000 9,000 20,000 -- -- 20,000
Other...................... 364,000 796,000 3,336,000 4,523,000 447,000 1,006,000 5,529,000
----------- ----------- ----------- ------------ ----------- ----------- ------------
(371,000) (800,000) (3,345,000) (4,543,000) (447,000) (1,006,000) (5,549,000)
----------- ----------- ----------- ------------ ----------- ----------- ------------
Loss from operations....... (2,054,000) (3,946,000) (10,176,000) (16,206,000) (1,163,000) (4,044,000) (20,250,000)
Other income (expense), net:
Investment income, net....... -- 905,000 1,013,000 1,918,000 306,000 285,000 2,203,000
Interest
expense -- Genentech....... (28,000) (19,000) -- (47,000) -- -- (47,000)
Interest expense -- other.... -- -- -- -- -- (1,000) (1,000)
----------- ----------- ----------- ------------ ----------- ----------- ------------
Total other income
(expense), net........... (28,000) 886,000 1,013,000 1,871,000 306,000 284,000 2,155,000
Net loss................... $(2,082,000) $(3,060,000) $(9,163,000) $(14,335,000) $ (857,000) $(3,760,000) $(18,095,000)
=========== =========== =========== ============ =========== =========== ============
Basic and diluted loss per
share........................ $ (1.90) $ (0.60) $ (1.48) $ (0.14) $ (0.49)
=========== =========== =========== =========== ===========
Weighted average shares used
in computing basic and
diluted loss per share....... 1,093,000 5,096,000 6,185,000 6,066,000 7,619,000
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 63
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE OTHER TOTAL
-------------------- PAID-IN DEVELOPMENT COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE INCOME EQUITY (DEFICIT)
--------- ------- ----------- ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at inception (November
27, 1995)..................... -- $ -- $ -- $ -- $ -- $ --
Net and total comprehensive loss
for the period from inception
to December 31, 1995.......... -- -- -- (30,000) -- (30,000)
--------- ------- ----------- ------------ -------- -----------
Balance at December 31, 1995.... -- -- -- (30,000) -- (30,000)
Shares issued at $0.02 per share
from April through October
1996:
Genentech for technology...... 1,150,000 11,000 12,000 -- -- 23,000
Other founders for cash....... 980,000 10,000 10,000 -- -- 20,000
Net and total comprehensive
loss.......................... -- -- -- (2,082,000) -- (2,082,000)
--------- ------- ----------- ------------ -------- -----------
Balance at December 31, 1996.... 2,130,000 21,000 22,000 (2,112,000) -- (2,069,000)
Sale of shares in private
placement at $7.00 per share
from March through June 1997
for cash, net of issue costs
of $2,248,000................. 3,607,047 36,000 22,965,000 -- -- 23,001,000
Sale of shares to Genentech
concurrent with private
placement in March 1997 at
$7.00 per share for cash...... 285,714 3,000 1,997,000 -- -- 2,000,000
Genentech exercise of warrants
at $0.02 per share in October
1997 for cash................. 86,640 1,000 1,000 -- -- 2,000
Comprehensive loss:
Net loss...................... -- -- -- (3,060,000) -- (3,060,000)
Unrealized gain on investment
securities.................. -- -- -- -- 8,000 8,000
--------- ------- ----------- ------------ -------- -----------
Total comprehensive
loss.................. -- -- -- -- -- (3,052,000)
--------- ------- ----------- ------------ -------- -----------
Balance at December 31, 1997.... 6,109,401 61,000 24,985,000 (5,172,000) 8,000 19,882,000
Exercise of employee stock
options at $7.00 per share in
June and July 1998 for cash... 5,750 -- 40,000 -- -- 40,000
Sale of shares in private
placement in December 1998 at
$9.50 per share for cash, net
of issue costs of $764,000.... 986,097 10,000 8,594,000 -- -- 8,604,000
Comprehensive loss:
Net loss...................... -- -- -- (9,163,000) -- (9,163,000)
Unrealized gain on investment
securities.................. -- -- -- -- 35,000 35,000
--------- ------- ----------- ------------ -------- -----------
Total comprehensive
loss.................. -- -- -- -- -- (9,128,000)
--------- ------- ----------- ------------ -------- -----------
Balance at December 31, 1998.... 7,101,248 71,000 33,619,000 (14,335,000) 43,000 19,398,000
Sale of shares in private
placement in January 1999 at
$9.50 per share for cash, net
of issue costs of $264,000
(unaudited)................... 583,913 6,000 5,267,000 -- -- 5,273,000
Comprehensive loss (unaudited):
Net loss...................... -- -- -- (3,760,000) -- (3,760,000)
Net unrealized loss on
investment securities....... -- -- -- -- (15,000) (15,000)
--------- ------- ----------- ------------ -------- -----------
Total comprehensive
loss.................. -- -- -- -- -- (3,775,000)
--------- ------- ----------- ------------ -------- -----------
Balance at March 31, 1999
(unaudited)................... 7,685,161 $77,000 $38,886,000 $(18,095,000) $ 28,000 $20,896,000
========= ======= =========== ============ ======== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 64
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
NOVEMBER 27, NOVEMBER 27,
1995 1995
(INCEPTION) THREE MONTHS (INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH ENDED MARCH 31, THROUGH
----------------------------------------- DECEMBER 31, ------------------------- MARCH 31,
1996 1997 1998 1998 1998 1999 1999
----------- ------------ ------------ ------------ ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................. $(2,082,000) $ (3,060,000) $ (9,163,000) $(14,335,000) $ (857,000) $(3,760,000) $(18,095,000)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization........ 3,000 4,000 92,000 99,000 4,000 80,000 179,000
Amortization of
discounts on
investment
securities.......... -- (229,000) (154,000) (383,000) (75,000) (39,000) (422,000)
Changes in assets and
liabilities:
Interest
receivable........ -- (152,000) 40,000 (112,000) (5,000) (36,000) (148,000)
Prepaid expenses and
other current
assets............ (2,000) (228,000) (130,000) (360,000) 35,000 66,000 (294,000)
Other assets........ -- (1,000) (150,000) (162,000) -- 53,000 (109,000)
Payable to
Genentech......... 1,442,000 2,350,000 (3,532,000) 260,000 (3,608,000) 240,000 500,000
Accounts payable and
accrued
liabilities....... 35,000 566,000 1,187,000 1,814,000 1,644,000 (603,000) 1,211,000
----------- ------------ ------------ ------------ ----------- ----------- ------------
Net cash used in
operating
activities........ (604,000) (750,000) (11,810,000) (13,179,000) (2,862,000) (3,999,000) (17,178,000)
----------- ------------ ------------ ------------ ----------- ----------- ------------
Cash flows from investing
activities:
Purchases of investment
securities.............. -- (28,957,000) (25,600,000) (54,557,000) (4,996,000) (3,097,000) (57,654,000)
Sales of investment
securities.............. -- 5,955,000 36,378,000 42,333,000 7,883,000 3,095,000 45,428,000
Purchases of property and
equipment............... -- (34,000) (1,315,000) (1,349,000) (44,000) (159,000) (1,508,000)
Long-term lease
deposits................ -- -- (120,000) (120,000) -- -- (120,000)
----------- ------------ ------------ ------------ ----------- ----------- ------------
Net cash provided by
(used in)
investing
activities........ -- (23,036,000) 9,343,000 (13,693,000) 2,843,000 (161,000) (13,854,000)
----------- ------------ ------------ ------------ ----------- ----------- ------------
Cash flows from financing
activities:
Stock issuances:
Issued to Genentech..... 23,000 1,002,000 -- 1,025,000 -- -- 1,025,000
Issued to other
founders.............. 15,000 5,000 -- 20,000 -- -- 20,000
Private placements...... -- 25,249,000 9,368,000 34,617,000 -- 5,537,000 40,154,000
Issuance costs of
private placements.... (176,000) (2,072,000) (764,000) (3,012,000) -- (264,000) (3,276,000)
Exercise of employee
stock options......... -- -- 40,000 40,000 -- -- 40,000
Loans from Genentech...... 780,000 205,000 -- 1,000,000 -- -- 1,000,000
----------- ------------ ------------ ------------ ----------- ----------- ------------
Net cash provided by
financing
activities........ 642,000 24,389,000 8,644,000 33,690,000 -- 5,273,000 38,963,000
----------- ------------ ------------ ------------ ----------- ----------- ------------
Increase in cash and
cash
equivalents....... 38,000 603,000 6,177,000 6,818,000 (19,000) 1,113,000 7,931,000
Cash and cash equivalents at
beginning of period....... -- 38,000 641,000 -- 641,000 6,818,000 --
----------- ------------ ------------ ------------ ----------- ----------- ------------
Cash and cash equivalents at
end of period............. $ 38,000 $ 641,000 $ 6,818,000 $ 6,818,000 $ 622,000 $ 7,931,000 $ 7,931,000
=========== ============ ============ ============ =========== =========== ============
Supplemental schedule of
noncash financing
activities:
Issuance of stock through
conversion of Genentech
note payable............ $ -- $ 1,000,000 $ -- $ 1,000,000 $ -- $ -- $ 1,000,000
=========== ============ ============ ============ =========== =========== ============
Equipment acquired through
capital leases
(unaudited)............. $ -- $ -- $ -- $ -- $ -- $ 86,000 $ 86,000
=========== ============ ============ ============ =========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 65
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF DEVELOPMENT STAGE ACTIVITIES
VaxGen, Inc. ("Company") is a development stage biotechnology company
formed to develop a vaccine (AIDSVAX) intended to eradicate HIV. The Company was
incorporated on November 27, 1995 and since that date its principal activities
have included defining and conducting research programs, conducting animal and
human clinical trials, raising capital and recruiting scientific and management
personnel.
The Company's development activities involve inherent risks. These risks
include, among others, dependence on key personnel and determination of
patentability of the Company's products and processes. The Company is dependent
on Genentech to provide certain research and development support and vaccine
production (note 4). In addition, the Company has only one product candidate
which has not yet obtained Food and Drug Administration approval. Successful
future operations depend upon the Company's ability to obtain approval for and
commercialize AIDSVAX.
(b) INTERIM FINANCIAL STATEMENTS
The financial information as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 is unaudited. These interim financial statements
have been prepared on substantially the same basis as the audited financial
statements and in the opinion of management, contain all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation of the
financial information set forth therein.
(c) CASH EQUIVALENTS
All short-term investments with an original maturity at date of purchase of
three months or less are considered to be cash equivalents. Cash equivalents
consisting of commercial paper amounted to $572,000 and $6,490,000 at December
31, 1997 and 1998, respectively.
(d) INVESTMENT SECURITIES
Investment securities are classified as available-for-sale and carried at
market value with unrealized gains and losses excluded from the statement of
operations and reported as other comprehensive income. Realized gains and losses
on sales of investment securities are determined on the specific identification
method and are included in investment income, net.
(e) PROPERTY AND EQUIPMENT
Equipment, consisting of computers and other office equipment, is
depreciated using the straight-line method over the assets' estimated useful
lives of three to ten years. Leasehold improvements are amortized using the
straight-line method over the shorter of the assets' estimated useful lives or
the remaining term of the lease.
(f) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
F-7
<PAGE> 66
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(g) INCOME TAXES
Deferred income taxes are provided based on the estimated future tax
effects of temporary differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates that are expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is established to reduce deferred tax assets to the amount expected to
be realized.
(h) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has financial instruments other than cash and investment
securities, consisting of interest receivable, accounts payable, and a payable
to Genentech. The fair value of these financial instruments approximates their
carrying amount due to their short-term nature.
(i) STOCK-BASED COMPENSATION
The Company accounts for its stock option plans for employees and
non-employee members of the Board of Directors in accordance with the provisions
of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations. Accordingly, compensation expense
related to employee stock options is recorded if, on the date of grant, the fair
value of the underlying stock exceeds the exercise price. It is expected that an
interpretation of APB 25 will be issued which will require that non-employee
director stock option grants be accounted for using a fair-value based method of
accounting similar to Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation, with a resulting charge to
compensation expense. It is expected that such interpretation will impact
options granted to non-employee directors after December 15, 1998. No options
were granted to non-employee directors from December 16, 1998 to March 31, 1999.
The Company applies the disclosure only requirements of SFAS No. 123, which
allows entities to continue to apply the provisions of APB 25 for transactions
with employees, and to provide pro forma results of operations disclosures for
employee stock option grants as if the fair-value-based method of accounting in
SFAS 123 had been applied to these transactions.
(j) COMPREHENSIVE LOSS
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income (Statement 130),
which establishes new rules for the reporting and display of comprehensive
income and its components. Statement 130 requires companies to report, in
addition to net income or loss, other components of comprehensive income or
loss. Unrealized gain on securities included in comprehensive loss for 1998 is
net of the reclassification adjustment for realized losses included in net loss
of $6,000. Adoption of Statement 130 had no effect on the Company's results of
operations or financial position as reported in the financial statements.
(k) LOSS PER SHARE
Basic loss per share is computed on the basis of the weighted average
number of shares outstanding for the reporting period. Diluted loss per share is
computed on the basis of the weighted average number of common shares plus
dilutive potential common shares outstanding using the treasury stock method.
Potential dilutive common shares consist of shares issuable to holders of
unexercised employee stock options and warrants outstanding. Options and
warrants to purchase, in the aggregate, approximately
F-8
<PAGE> 67
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
419,000, 751,000, 419,000 and 751,000 shares of common stock outstanding at
December 31, 1997 and 1998 and March 31, 1998 and 1999 (unaudited),
respectively, were not included in the calculation of diluted loss per share
because the representative share increments would be antidilutive. No options or
warrants were outstanding at December 31, 1996.
(l) 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 dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(m) IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the discounted future cash flows expected to be
generated by such assets. Assets to be disposed of are reported at the lower of
their carrying amount or fair market value less costs to sell.
(n) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
(o) BUSINESS SEGMENTS
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131 (SFAS 131), Disclosures about Segments of an Enterprise and Related
Information. SFAS 131 requires an enterprise to report segment information based
on how management internally evaluates the operating performance of its business
units (segments). The Company's operations are confined to one business segment,
the discovery and development of vaccines that immunize against certain
infectious diseases.
(2) INVESTMENT SECURITIES
The following summarizes the Company's investment securities at December
31:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1997:
Commercial paper............................ $17,733,000 $ 4,000 $-- $17,737,000
Government obligations...................... 5,498,000 4,000 -- 5,502,000
----------- ------- --- -----------
$23,231,000 $ 8,000 $-- $23,239,000
=========== ======= === ===========
1998:
Commercial paper............................ $ 3,962,000 $ 4,000 $-- $ 3,966,000
Government obligations...................... 8,645,000 39,000 -- 8,684,000
----------- ------- --- -----------
$12,607,000 $43,000 $-- $12,650,000
=========== ======= === ===========
</TABLE>
F-9
<PAGE> 68
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Amortized cost and market value of investment securities at December 31,
1998 by contractual maturity are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepare
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED MARKET
MATURITIES COST VALUE
---------- ----------- -----------
<S> <C> <C>
Due in 1 year or less..................................... $10,613,000 $10,637,000
Due between 1 year to 5 years............................. 1,994,000 2,013,000
----------- -----------
$12,607,000 $12,650,000
=========== ===========
</TABLE>
Investment income, net, includes interest of $0, $905,000 and $1,005,000
earned on investments and gains of $0, $0 and $8,000 realized upon the sale of
investments for 1996, 1997 and 1998, respectively.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
------- ----------
<S> <C> <C>
Furniture and equipment..................................... $34,000 $1,057,000
Leasehold improvements...................................... -- 292,000
------- ----------
34,000 1,349,000
Less accumulated depreciation and amortization.............. 1,000 91,000
------- ----------
$33,000 $1,258,000
======= ==========
</TABLE>
(4) RELATIONSHIP WITH GENENTECH
The Company was founded in 1995 to develop and commercialize an HIV vaccine
in partnership with Genentech. In 1996, in return for an equity interest
(1,150,000 shares or 54% of the then outstanding and subscribed shares) in the
Company, rights to maintain 25% ownership of the Company's common stock (through
common stock warrants), a seat on the Board of Directors and certain
manufacturing and marketing rights to the vaccine, Genentech granted the Company
an exclusive license to certain technology.
Genentech financed the formation of the Company by means of a $1,000,000
line of credit. Additionally, Genentech and the Company entered into an
agreement whereby Genentech could convert the line of credit plus additional
capital totaling $2,000,000 into shares of the Company's common stock concurrent
with an initial private placement in March 1997. The conversion resulted in the
issuance of 285,714 shares of common stock. Upon the final closing of the
private placement, Genentech exercised its option to retain a 25% common stock
ownership interest and thereby acquired an additional 86,640 shares of common
stock for cash. At December 31, 1998, Genentech retained warrants for the
exercise of additional common stock in the event of a second private placement
in excess of $10 million or an Initial Public Offering (IPO). Such warrants were
exercisable at the issue price per share of the additional capital raised and
would allow Genentech to maintain its 25% ownership interest. The warrants
expired unexercised at the completion of the Company's 1998 private placement in
January 1999. Genentech has no rights beyond the second financing (whether by
private placement or IPO) to maintain its 25% ownership position.
The license agreement between the Company and Genentech, in part, defines
the working relationship between the companies. Genentech has granted the
Company an exclusive license to all patents and proprietary know-how that
Genentech is free to license or sublicense related to the development of a
F-10
<PAGE> 69
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
vaccine to prevent HIV infection. Certain of the licensed technology is
sublicensed or assigned to the Company under licenses from third parties to
Genentech. The Company, as the exclusive licensee of Genentech, has assumed all
of Genentech's obligations under these third-party license agreements. Such
obligations consist primarily of royalties on product sales. However, the
vaccine in its current form does not incorporate any technology sublicensed or
assigned to the Company for which there is an obligation under licenses from
third parties. The initial term of the license agreement is 15 years from the
commercial introduction date of a licensed product and will be determined on a
country-by-country, product-by-product basis. In addition, upon entering the
agreement, Genentech transferred to the Company 300,000 doses of the vaccine.
Under the license agreement, the Company is required to use due diligence in
developing, seeking regulatory approval for, and marketing and commercializing
the vaccine. Due diligence is defined in the agreement as meaning that the
development and commercialization of the vaccine will be the Company's sole
business goal, with an expenditure of time, effort and funding that is
commensurate with such goal.
In connection with reaching this goal, the Company is required to achieve
the filing of the first market approval for a product with the FDA not later
than the fifth anniversary of the closing of the 1997 private placement, which
occurred in 1997. The Company and Genentech can agree to extend this
requirement, subject to a two-year limit. If the Company fails to exercise due
diligence, Genentech has the right to convert the exclusive license to a
non-exclusive license, and may be entitled to terminate the license. Genentech
may terminate the license agreement if the Company fails to: (1) maintain a
tangible net worth of at least $1,000,000; or (2) meet certain due diligence
milestones within two years of the date originally set for such milestones.
As part of the license agreement, Genentech has an option to manufacture
the vaccine and a one-time option to be responsible for marketing the vaccine
worldwide. Should Genentech exercise its marketing option, Genentech will pay a
license fee to the Company equal to 33% of the Company's developmental costs of
the initial AIDSVAX product (including the Phase III clinical trials and
regulatory submissions), as well as a percentage of ongoing profits on the sales
of the vaccine. If Genentech does not elect its marketing option, it will
receive a royalty on product sales; the royalty rate depends on whether
Genentech elects to manufacture the vaccine being sold commercially.
The Company has a service contract with Genentech originally expiring
December 31, 1998, whereby Genentech supplies research, vaccine production, and
administrative and regulatory support to the Company. Expenses incurred by
VaxGen for 1996, 1997 and 1998 were $1,442,000, $2,352,000 and $690,000,
respectively, under the contract. In excess of 95% of costs represent research
and development expenses in each period and the remainder are general and
administrative expenses. The contract has been extended under similar terms
through December 31, 2000.
Prior to September 1998, the Company leased office space from Genentech.
Rent expense under this lease was $0, $18,000, and $80,000 in 1996, 1997, and
1998, respectively.
Management believes that the terms of the agreement provide Genentech full
reimbursement for specifically identified actual direct costs as well as
indirect and overhead costs incurred related to the Company. Charges for
indirect and overhead costs are based upon a percentage of direct costs.
Management believes this method results in a reasonable allocation of costs to
the Company.
(5) PRIVATE PLACEMENT STOCK OFFERINGS
In 1997, the Company completed a private placement sale of 3,607,047 shares
of its common stock at a price of $7.00 per share resulting in proceeds of
$23,001,000, net of issuance costs of $2,248,000. A total of 149,270 shares in
this private placement were sold to related parties. In conjunction with the
1997
F-11
<PAGE> 70
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
private placement and under agreements with the Company, Genentech converted a
$1,000,000 line of credit with the Company and invested an additional $1,000,000
in the Company in return for 285,714 shares of the Company's common stock.
Additionally, in October 1997, Genentech exercised its option to maintain a 25%
ownership interest in the Company (note 4) which resulted in the issuance of
86,640 shares of the Company's common stock in October 1997.
In 1998, the Company initiated a second private placement sale of its
common stock at a price of $9.50 per share. The first closing and issuance of
common shares in the private placement was completed in December 1998 and
resulted in the sale of 986,097 shares of the Company's common stock and
proceeds of $8,604,000, net of issuance costs of $764,000. A total of 33,629
shares in the first closing were sold to related parties. The second closing and
issuance of common shares in the private placement was completed in January 1999
(note 9).
(6) STOCK OPTIONS AND WARRANTS
(a) STOCK OPTION PLANS
1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the Plan) has 500,000 shares of
common stock reserved for grant. Options granted under the Plan may be
designated as qualified or nonqualified at the discretion of the compensation
committee of the Board of Directors. At December 31, 1998, 61,750 shares were
available for grant under the Plan.
Generally, options granted under the Plan vest and may be exercised over a
four-year period in increments of 25% each year beginning one year from the date
of grant; however, options can vest upon grant. All options expire no later than
ten years from the date of grant. Qualified stock options are exercisable at not
less than the fair market value of the stock at the date of grant and
nonqualified stock options are exercisable at prices determined at the
discretion of the Board of Directors, but not less that 85% of the fair market
value of the stock at the date of grant. All Board approved options have been
granted at an exercise price of $7.00 per share.
1998 Director Stock Option Plan
In 1998, the Board of Directors approved the 1998 Director Stock Option
Plan (the Director Plan) for nonemployee directors. Under the Director Plan,
37,500 shares of common stock are reserved for grant. On May 6, 1998,
nonemployee directors were granted options to purchase 8,571 shares of the
Company's common stock at an exercise price of $7.00 per share. Such options
vested immediately. Under the Director Plan, options will automatically be
granted to nonemployee directors on the date of the annual shareholders'
meeting. The exercise price of each annual option grant is to be the fair market
value of the Company's common stock on the grant date. Each annual option grant
fully vests on the first anniversary of its grant date, subject to certain
meeting attendance requirements. At December 31, 1998, 28,929 shares were
available for grant under the Director Plan.
F-12
<PAGE> 71
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of stock option plans follows:
<TABLE>
<CAPTION>
STOCK OPTIONS
-------------------------
WEIGHTED
AVERAGE
EXERCISE PRICE
SHARES PER SHARE
------- --------------
<S> <C> <C>
Outstanding at
December 31, 1996......................................... -- $ --
Granted................................................... 200,000 7.00
Exercised................................................. -- --
Canceled.................................................. -- --
------- -----
Outstanding at
December 31, 1997......................................... 200,000 7.00
Granted................................................... 271,071 7.00
Exercised................................................. (5,750) 7.00
Canceled.................................................. (24,250) 7.00
------- -----
Outstanding at
December 31, 1998......................................... 441,071 $7.00
======= =====
</TABLE>
At December 31, 1998, options to purchase 116,696 shares were vested and
exercisable under stock option plans. The weighted average remaining contractual
life of stock options outstanding at December 31, 1998 is 9.0 years.
Had compensation cost pursuant to the plans been determined consistent with
SFAS 123, the Company's net loss and loss per share would have been adjusted to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net loss -- as reported................................... $(3,060,000) $(9,163,000)
Net loss -- pro forma..................................... $(3,005,000) $(9,333,000)
Loss per share -- basic and diluted, as reported.......... $(0.60) $(1.48)
Loss per share -- basic and diluted, pro forma............ $(0.60) $(1.51)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions used for grants in 1997
and 1998: expected dividend yield of 0%; expected volatility of 0%; risk-free
interest rate of 6.0%; and expected lives of four years. Using these
assumptions, the fair value of options granted in 1997 and 1998 was estimated as
$0.74 per share.
During 1998, the Board of Directors approved for grant options to purchase
174,925 shares of the Company's common stock at an exercise price of $7.00 per
share and 302,900 shares at an exercise price of $9.50 per share. However, since
the grant of such options would cause the number of shares outstanding to exceed
the number of shares reserved for grant under the Plan, the Company's
shareholders must approve an increase in the number of shares reserved for grant
under the Plan. Because the shareholders must first approve an increase in the
number of shares reserved for grant, the financial effect of the grants, if any,
has not been reported in these financial statements (note 9b).
F-13
<PAGE> 72
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(b) COMMON STOCK WARRANTS
In connection with the Company's 1997 private placement, certain
consultants were issued warrants to purchase approximately 219,000 shares of the
Company's common stock exercisable at $7.00 per share through June 2007. No
warrants have been exercised to date.
The Company similarly agreed to issue warrants to purchase approximately
91,000 shares of the Company's common stock exercisable at $9.50 per share to
certain consultants in connection with the Company's 1998 private placement.
Such warrants were earned in December 1998 and January 1999. The warrants are to
be exercisable through 2009. No warrants have been exercised to date.
Additionally, in connection with the 1997 private placement, the Company
granted an unrelated party a first option to maintain its approximately 4.8%
interest in the Company. Such right allows the party the option to acquire a
proportionate number of shares at an equivalent price to maintain its ownership
percentage through March 31, 2002. The party exercised its option in connection
with the 1998 private placement.
(7) INCOME TAXES
The Company has reported no income tax benefits due to limitations on the
recognition of deferred tax assets for financial reporting purposes.
The tax effects of temporary differences and carryforwards that give rise
to deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1997 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Research and experimentation credit carryforwards......... $ 195,000 $ 440,000
Net operating loss carryforwards.......................... 1,705,000 4,758,000
Other..................................................... 49,000 50,000
---------- ----------
Total gross deferred tax assets................... 1,949,000 5,248,000
Less valuation allowance.................................. 1,949,000 5,248,000
---------- ----------
Net deferred tax assets........................... $ -- $ --
========== ==========
</TABLE>
Based on the weight of available evidence, including cumulative losses
since inception and expected future losses, the Company has determined that it
is more likely than not the entire deferred tax asset amount will not be
realized and, therefore, a valuation allowance has been provided on all gross
deferred tax assets.
The increases in the valuation allowance for deferred tax assets of
$1,203,000 in 1997 and $3,299,000 in 1998 are primarily attributable to
increases in net operating loss and tax credit carryforwards.
At December 31, 1998 the Company had net operating loss carryforwards of
approximately $13,995,000 and research and experimentation credit carryforwards
of approximately $440,000 which are available to offset future Federal taxable
income and income taxes, respectively, if any, and expire beginning in 2010.
(8) COMMITMENTS
(a) LEASES
The Company leases office facilities under cancelable operating leases,
which expire from 1999 to 2005. Until September 1998, the Company also leased
office space from Genentech.
F-14
<PAGE> 73
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In August 1998, the Company commenced a lease for office space at Mahidol
University in Bangkok, Thailand, ending at the conclusion of Phase III clinical
trials in Thailand. The lease requires monthly payments of $2,000. Additionally,
the Company began renovation of project office space at Taksin Hospital, also in
Bangkok. The Company is required to pay up to $100,000 for renovations, for
which the Company will receive use of the facility for a five-year term at no
additional cost.
The Company entered into a 62-month laboratory lease commencing January 1,
1999 which requires the Company to expend a minimum of $500,000 in leasehold
improvements, in addition to its scheduled lease payments.
Minimum annual payments, excluding required leasehold improvements and
renovations, under the foregoing leases, are as follows:
<TABLE>
<S> <C>
1999...................................................... $571,000
2000...................................................... 625,000
2001...................................................... 650,000
2002...................................................... 652,000
2003...................................................... 677,000
Thereafter................................................ 877,000
</TABLE>
Rent expense for 1996, 1997 and 1998 was $12,000, $66,000 and $353,000,
respectively.
(b) EMPLOYMENT AGREEMENTS
The Company has employment contracts with certain members of management
ending from 2000 to 2003. Such agreements provide for discretionary bonuses and
annual increases in compensation as determined by the Board of Directors.
Minimum compensation under these contracts aggregates $1,085,000 annually. The
employment contracts with three members of management also provide for the
issuance of an aggregate of 325,757 shares of the Company's common stock to
these individuals if the Company is acquired in an acquisition that results in a
purchase price of at least $28.00 per share or once the per share value of the
Company's common stock has attained an average price of $28.00 over a 30 day
period. This represents four times the per share value of the Company's common
stock based on the 1997 private placement. If the shares are issued as a result
of the common stock reaching an average value of $28.00 per share, the Company
will record an immediate non-cash charge to expense equal to the per share value
of the common stock to be issued. For example, if the per share value of the
stock upon issuance is $28.00, the charge to expense will be $9,100,000.
(c) CLINICAL TRIALS
In connection with Phase III clinical trials, the Company has contracted
with or will contract for the services of 50 to 60 medical clinics. The clinics
will provide the location, clinicians, oversight, and volunteers for the three
year testing of the Company's vaccine. Payment will be made over the period
based on the number of volunteers vaccinated, the number of return visits and
the subsequent testing and follow-up of these volunteers. Total commitments are
estimated to aggregate approximately $25,000,000, of which the Company had paid
approximately $2,400,000 as of December 31, 1998. Estimated future payments are
as follows:
<TABLE>
<S> <C>
1999........................................................ $7,900,000
2000........................................................ 5,450,000
2001........................................................ 5,350,000
2002........................................................ 3,900,000
</TABLE>
F-15
<PAGE> 74
VAXGEN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) SUBSEQUENT EVENTS
(a) In connection with the Company's 1998 private placement, the final
closing and issuance of 583,913 shares of common stock for proceeds of
$5,273,000, net of issue costs of $264,000, occurred on January 11, 1999. A
total of 2,000 shares were sold to related parties in the final closing.
(b) On April 1, 1999, the shareholders concurrently approved a one-for-two
reverse split of the number of shares of issued and outstanding common stock of
the Company effective April 9, 1999 and a reduction in the number of common
shares authorized from 30,000,000 to 20,000,000. These financial statements and
the notes thereto reflect these changes for all periods presented.
Additionally, on April 1, 1999, the shareholders of the Company approved an
increase in the number of shares reserved for grant under the 1996 stock option
plan to 1,750,000 shares. This represents the measurement date for previously
granted but unapproved options (note 6a). As a result, the Company recorded
deferred compensation in the amount of $2,587,000 representing the excess of the
fair market value of the common shares on April 1, 1999 ($14.00 per share) over
the exercise price of the options. Additionally, the Company recorded an
immediate charge to expense of $456,000 for the portion of the vesting period
elapsed at April 1. The deferred compensation will be amortized to expense over
the remaining vesting period.
F-16
<PAGE> 75
- --------------------------------------------------------------------------------
Until ___ , all dealers effecting transactions in these securities, whether or
not participating in this offering, 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.
- --------------------------------------------------------------------------------
[VAXGEN LOGO]
PRUDENTIAL SECURITIES
PUNK, ZIEGEL & COMPANY
- --------------------------------------------------------------------------------
<PAGE> 76
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee*........ $ 14,866
NASD filing fee............................................. 5,848
Nasdaq listing fee.......................................... 78,875
Legal fees and expenses..................................... 300,000
Accountants' fees and expenses.............................. 100,000
Printing and engraving expenses............................. 200,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous expenses...................................... $ 290,411
----------
Total............................................. $1,000,000
==========
</TABLE>
- ---------------
* All expenses other than the SEC registration fee, the NASD filing fee and the
Nasdaq listing fee are estimates.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933. Our amended and restated
certificate of incorporation and amended and restated bylaws provide for
indemnification of directors, officers, employees and other agents to the
maximum extent permitted by Delaware General Corporation Law. The underwriting
agreement also provides for cross-indemnification among VaxGen and the
underwriters with respect to certain matters, including matters arising under
the federal securities laws. We have entered into an indemnification agreement
with Ms. Katz, a director nominee, under which we have agreed to indemnify Ms.
Katz with respect to any liability in connection with this offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since November 27, 1995, we have issued and sold the following unregistered
securities (adjusted to reflect the one-for-two reverse split):
(1) On April 10, 1996, we issued 1,150,000 shares of common stock to
Genentech, 500,000 shares of common stock to Donald P. Francis, and 250,000
shares of common stock to Robert C. Nowinski, at a purchase price of $0.02
per share for an aggregate purchase price of $38,000. Each of these
purchases are insiders of VaxGen. We relied on Section 4(2) and Rule 701
for exemption.
(2) On October 29, 1996, we issued an aggregate of 230,000 shares of
common stock to certain accredited investors at a purchase price of $0.02
per share for an aggregate purchase price of $4,600; including 133,333
shares to Donald P. Francis, 66,666 shares to Robert C. Nowinski, and
20,000 shares to Stephen C. Francis. We relied on Section 4(2) and Rule 506
for exemption.
(3) From March 12, 1997 through December 31, 1997, we issued an
aggregate of 3,607,047 shares of common stock to certain accredited
investors at a price of $7.00 per share for an aggregate amount of
$25,249,329; including 6,414 shares to Robert C. Nowinski. We also issued
an aggregate of 372,354 shares of common stock to Genentech at an average
price of $5.38 per share for an aggregate amount of $2,002,000. We relied
on Section 4(2) and Rule 506 for exemption.
(4) From December 4, 1998 through January 11, 1999, we issued an
aggregate of 1,570,010 shares of common stock to certain accredited
investors at a price of $9.50 per share for an
II-1
<PAGE> 77
aggregate amount of $14,915,095; including 20,000 shares to Stephen C.
Francis. We relied on Section 4(2) and Rule 506 for exemption.
(5) From November 17, 1997 through April 30, 1998, we granted options
to employees under the 1996 stock option plan to purchase an aggregate of
637,425 shares of common stock at an exercise price of $7.00 per share. We
relied on Rule 701 for exemption.
(6) From January 1, 1999 through May 31, 1999, we granted options to
employees and consultants under the 1996 stock option plan to purchase an
aggregate of 720,375 shares of common stock at an exercise price of $9.50
per share. We relied on Rule 701 for exemption.
(7) On April 1, 1999 we granted options to employees under the 1996
stock option plan to purchase an aggregate of 8,000 shares of common stock
at an exercise price of $13.40 per share. We relied on Rule 701 for
exemption.
(8) On May 6, 1998 we granted options to three directors under the
1998 director stock option plan to purchase an aggregate of 8,571 shares of
common stock at an exercise price of $7.00 per share. We relied on Rule 701
for exemption.
(9) On July 25, 1997 we issued aggregate warrants to purchase up to
218,947 shares of common stock in connection with our 1997 private
placement. We relied on Section 4(2) and Rule 506 for exemption.
(10) We issued aggregate warrants to purchase up to 90,878 shares of
common stock in connection with our 1998 private placement to consultants.
We relied on Section 4(2) and Rule 506 for exemption.
(11) On May 14, 1999 we issued warrants to one individual to purchase
up to 150,000 shares of common stock at an exercise price of $7.00 per
share. We relied on Section 4(2) for exemption.
(12) As of May 31, 1999 we have issued an aggregate of 5,750 shares of
common stock to employees on exercise of options. We received an aggregate
consideration of $40,250 for such shares. We relied on Rule 701 for
exemption.
No underwriters were engaged in connection with these issuances and sales.
II-2
<PAGE> 78
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<C> <S>
1.1+ Form of Underwriting Agreement
3.1+ Amended and Restated Certificate of Incorporation
3.2+ Amended and Restated Bylaws
4.1+ Specimen stock certificate
5.1+ Opinion of Graham & James LLP/Riddell Williams P.S.
10.1+ Registration Rights Agreement between VaxGen and Genentech,
dated as of May 5, 1997
10.2+ 1996 Registration Rights Agreement between VaxGen and
certain stockholders
10.3+ 1998 Registration Rights Agreement between VaxGen and
certain stockholders
10.4+ 1996 Stock Option Plan
10.5+ 1998 Director Stock Option Plan
10.6+ Form of stock option agreement
10.7+ Form of common stock warrant
10.8+ Right of First Option Agreement between VaxGen and Leon A.
Greenblatt, dated March 14, 1997
10.9+ Amended and Restated Employment Agreement between VaxGen and
Robert C. Nowinski, dated January 1, 1998
10.10+ Amended and Restated Employment Agreement between VaxGen and
Donald P. Francis, dated January 1, 1998
10.11 Amended and Restated Employment Agreement between VaxGen and
Phillip W. Berman, dated as of June , 1999
10.12+ Employment Agreement between VaxGen and John G. Curd, dated
as of May 3, 1999
10.13+ Employment Agreement between VaxGen and Carter A. Lee, dated
as of April 1, 1999
10.14+ License Agreement with Genentech, dated as of May 1, 1996
10.15+ Services Agreement with Genentech, dated as of January 1,
1999
10.16+ Letter of Intent for Supply Development Agreement between
VaxGen and Pasteur Merieux Serums et Vaccins (Pasteur
Merieux Connaught), dated April 10, 1998
10.16.1+ Amendment to Letter of Intent for Supply Development
Agreement between VaxGen and Pasteur Merieux Serums et
Vaccins (Pasteur Merieux Connaught), dated May 3, 1999
10.17+ Form of trial clinic agreement
10.18+ Lease Agreement between VaxGen and Oyster Point Tech Center
LLC, dated October 26, 1998
10.19+ Lease Agreement between VaxGen and Spieker Properties, L.P.,
dated May 20, 1998.
23.1+ Consent of Graham & James LLP/Riddell Williams P.S.
(included in Exhibit 5.1)
23.2 Consent of KPMG LLP
23.3+ Consent of Roberta R. Katz
23.4+ Consent of Ruth B. Kunath
24.1+ Power of attorney (included on page II-5)
27.1+ Financial data schedule
</TABLE>
- ---------------
+ Previously filed.
II-3
<PAGE> 79
ITEM 17. UNDERTAKINGS
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.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes:
(1) That 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) That 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 of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 80
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Seattle, Washington
on June 25, 1999.
VAXGEN, INC.
By: /s/ Robert C. Nowinski
------------------------------------
Robert C. Nowinski, Chairman of
the Board and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Robert C. Nowinski Chairman of the Board and June 25, 1999
- ----------------------------------------------------- Chief Executive Officer
Robert C. Nowinski (Principal Executive
Officer)
/s/ Donald P. Francis+ President and Director June 25, 1999
- -----------------------------------------------------
Donald P. Francis
/s/ Carter A. Lee+ Senior Vice President, June 25, 1999
- ----------------------------------------------------- Finance & Administration
Carter A. Lee (Principal Financial
Officer)
/s/ Phillip W. Berman+ Senior Vice President, June 25, 1999
- ----------------------------------------------------- Research & Development,
Phillip W. Berman Director
/s/ Stephen C. Francis+ Director June 25, 1999
- -----------------------------------------------------
Stephen C. Francis
/s/ William D. Young+ Director June 25, 1999
- -----------------------------------------------------
William D. Young
+By: /s/ Robert C. Nowinski
------------------------------------------------
Robert C. Nowinski
Attorney-in-fact
</TABLE>
II-5
<PAGE> 81
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ----------- ------------
<C> <S> <C>
1.1+ Form of Underwriting Agreement..............................
3.1+ Amended and Restated Certificate of Incorporation...........
3.2+ Amended and Restated Bylaws.................................
4.1+ Specimen stock certificate..................................
5.1+ Opinion of Graham & James LLP/Riddell Williams P.S. ........
10.1+ Registration Rights Agreement between VaxGen and Genentech,
dated as of May 5, 1997.....................................
10.2+ 1996 Registration Rights Agreement between VaxGen and
certain stockholders........................................
10.3+ 1998 Registration Rights Agreement between VaxGen and
certain stockholders........................................
10.4+ 1996 Stock Option Plan......................................
10.5+ 1998 Director Stock Option Plan.............................
10.6+ Form of stock option agreement..............................
10.7+ Form of common stock warrant................................
10.8+ Right of First Option Agreement between VaxGen and Leon A.
Greenblatt, dated March 14, 1997............................
10.9+ Amended and Restated Employment Agreement between VaxGen and
Robert C. Nowinski, dated January 1, 1998...................
10.10+ Amended and Restated Employment Agreement between VaxGen and
Donald P. Francis, dated January 1, 1998....................
10.11 Amended and Restated Employment Agreement between VaxGen and
Phillip W. Berman, dated as of June , 1999................
10.12+ Employment Agreement between VaxGen and John G. Curd, dated
as of May 3, 1999...........................................
10.13+ Employment Agreement between VaxGen and Carter A. Lee, dated
as of April 1, 1999.........................................
10.14+ License Agreement with Genentech, dated as of May 1, 1996...
10.15+ Services Agreement with Genentech, dated as of January 1,
1999........................................................
10.16+ Letter of Intent for Supply Development Agreement between
VaxGen and Pasteur Merieux Serums et Vaccins (Pasteur
Merieux Connaught), dated April 10, 1998....................
10.16.1+ Amendment to Letter of Intent for Supply Development
Agreement between VaxGen and Pasteur Merieux Serums et
Vaccins (Pasteur Merieux Connaught), dated May 3, 1999......
10.17+ Form of trial clinic agreement..............................
10.18+ Lease Agreement between VaxGen and Oyster Point Tech Center
LLC, dated October 26, 1998.................................
10.19+ Lease Agreement between VaxGen and Spieker Properties, L.P.,
dated May 20, 1998..........................................
23.1+ Consent of Graham & James LLP/Riddell Williams P.S.
(included in Exhibit 5.1)...................................
23.2 Consent of KPMG LLP.........................................
23.3+ Consent of Roberta R. Katz..................................
23.4+ Consent of Ruth B. Kunath...................................
24.1+ Power of attorney (included on page II-5)...................
27.1+ Financial data schedule.....................................
</TABLE>
- ---------------
+ Previously filed.
<PAGE> 1
EXHIBIT 10.11
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of __________ by and between
Phillip Berman, a resident of California ("Berman"), and VaxGen, Inc. a Delaware
corporation (the "Company").
WITNESSETH:
WHEREAS, the Company desires to continue to employ Berman as the Senior
Vice President of Research and Development and Berman desires to be so employed.
WHEREAS, the Company and Berman desire to set forth in writing the terms
of their agreement with respect to Berman's continued employment.
WHEREAS, this Agreement replaces and supersedes the Employment Agreement
executed by and between Berman and the Company on October, 1997.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants contained herein, the parties agree as follows:
1. Term. Berman's employment, which began on November 15, 1997, will
continue in its initial term of three years, expiring on November 14, 2000.
Thereafter, Berman's employment will be automatically renewed for successive
one-year terms, unless notice of termination is given by either party to the
other at least thirty days before the expiration of the then current term.
2. Duties. Berman will perform such executive and administrative duties
consistent with his position as Senior Vice President of Research and
Development of the Company as are reasonably assigned to him by the Board and
will be given such executive and administrative powers and authority as may be
needed to carry out those duties. Berman shall report directly to the President
of VaxGen. Berman will be responsible as Senior Vice President of Research and
Development for all activities regarding research in the basic sciences and in
clinical research (including laboratory clinical support) required for the
Company's development of its HIV vaccine, as well as other products. The Company
will provide to Berman an office, laboratory space and staff in South San
Francisco as are required for the performance of his duties. Berman agrees to
serve as Director of the Company and the Company agrees to cause Berman to be
elected to the Board of Directors.
3. Compensation. The Company will pay Berman an annual base salary of
$200,000. Berman's annual base salary will be payable in equal installments not
less frequently than monthly. Berman shall be entitled to an annual bonus of up
to 30% of salary, such bonus to be determined solely by the Company's Board of
Directors. Berman's salary and bonus will be considered annually for potential
increase by the Compensation Committee of the Board of Directors.
1
<PAGE> 2
4. Stock Options.
(a) Initial Stock Option Grant. Berman received incentive and
non-qualified options to purchase 200,000 shares of Common Stock of VaxGen at
$7.00 per share (with as many shares allocated to an incentive stock option as
is permissible under applicable laws). The stock options will continue to be
administered according to the VaxGen Stock Option Plan and shall vest over time
as indicated in the Stock Option Plan; provided, however, that the option
agreements shall provide that the vesting of the options shall accelerate in
full immediately upon occurrence of any of the following events: (i) Change of
Control (as defined below) of VaxGen; (ii) full enrollment of Phase III clinical
trials of VaxGen B/E and B/B vaccines or (iii) termination of Berman's
employment without cause or by Berman for Good Reason (as defined below). Upon
an occurrence of event described in (iii) above, the right to exercise all
nonqualified stock options shall be extended to one year from the date of
termination.
(b) Change of Control. In the event the Company undergoes a
change of control (a "Change of Control") by virtue of (a) its sale or exchange
of stock (resulting in the shareholders of the Company holding less than 50% of
its outstanding equity and underlying options and warrants) in a transaction or
series of transactions occurring in any 12 month period, and/or (b) Genentech
increases its holding in the Company to a level of 50% or more of the Company's
outstanding equity, underlying options and warrants in a transaction or series
of transactions, in addition to the acceleration of vesting as described in
paragraph 4(a) above, Berman shall receive a one time bonus of 75,757 shares of
common stock.
(c) Stock Option Bonus. Berman shall be entitled to an annual
stock option bonus of a grant of up to 15,000 additional stock options, such
bonus to be determined solely by the Company's Board of Directors.
5. Success Bonus. In recognition of the success of the Company, Berman
shall received a one-time success bonus. Success shall be considered to have
been achieved if either of the following tests is met (either of which shall be
an Event of Success): (i) the public market valuation of a share of the
Company's stock as computed on a 30-day trailing average is equal to or greater
than 4 times the valuation of the initial private placement ($7.00 per share),
or (ii) there is an acquisition of the Company through tender offer or otherwise
in which all shareholders have the opportunity to participate and realize a
value equal to or greater than 4 times the valuation of the initial private
placement ($7.00 per share). The Company shall notify Berman when an Event of
Success has occurred. In either case, Berman shall be entitled to receive a
success bonus of 125,000 shares of common stock which shall be delivered to
Berman at Berman's request within 24 months of becoming entitled to receive such
shares. The effective date of this section shall be the date on which the
transfer of control occurs.
6. Expenses. The Company will reimburse Berman for travel, entertainment
and other expenses reasonably incurred by him in connection with his employment
under this Agreement upon presentation of appropriate vouchers or receipts.
7. Benefits. Berman shall have the right, on the same basis as other
members of senior management of VaxGen, to participate in and to receive
benefits under any of VaxGen's
2
<PAGE> 3
employee benefit plans, in effect from time to time. In addition, Berman shall
be entitled to the benefits afforded to other members of senior management under
VaxGen's vacation, holiday and business expense reimbursement policies.
8. Early Termination of Employment. Employment under this Agreement will
terminate prior to expiration of the term upon any of the following:
(a) Death. Berman's employment hereunder shall terminate upon his
death.
(b) Disability. The Company may terminate Berman's employment
hereunder if he has been unable to perform his duties hereunder for a period of
six consecutive months and if he has not resumed on a full-time basis the
performance of such duties within thirty days after written notice from the
Company of its intent to terminate his employment due to disability.
(c) Cause. The Company may terminate Berman's employment
hereunder for Cause. For purposes of this Agreement, the term "Cause" means (1)
willful and repeated failure by Berman to perform his duties hereunder which is
not remedied within thirty days after written notice from the Company, (ii)
conviction of Berman for a felony, or (iii) Berman's dishonesty that is
demonstrably injurious to the Company.
(d) Termination by Berman. Berman may terminate his employment
hereunder for Good Reason. For purposes of this Agreement, the term "Good
Reason" shall mean (1) the Company substantially reducing Berman's duties,
position, authority or responsibility hereunder and not reinstating the same
within thirty days after written notice from Berman, or (ii) breach by the
Company of its obligations under this Agreement if not remedied within thirty
days after written notice from Berman.
9. Benefits Upon Termination.
(a) Voluntary Termination, Termination for Cause Due to Death or
Disability. In the event of Berman's voluntary termination from employment with
VaxGen or termination of Berman's employment as a result of his death or
disability or for Cause, Berman shall be entitled to no compensation or benefits
from VaxGen other than those earned under paragraph 3 above through the date of
his termination or in the case of any stock options, vested through the date of
his termination.
(b) Termination Without Cause or For Good Reason: If Berman's
employment is terminated by VaxGen for any reason other than for cause or by
Berman for Good Reason, Berman shall be entitled to the following separation
benefits:
(i) all accrued compensation (including pro-rated target
bonus) and benefits through the date of termination;
(ii) continued payment of Berman's salary at his Base
Salary rate, less applicable withholding, for twelve (12) months following his
termination; and
3
<PAGE> 4
(iii) acceleration of vesting of his options as provided
in paragraph 4(a) above.
10. Restrictive Covenants.
(a) Confidential Information. Berman acknowledges that, during
the course of his employment with the Company, he will have access to
confidential information and biological materials not generally known outside
the Company (whether conceived or developed by Berman or others) and
confidential information and biological materials entrusted to the Company by
third parties, including, without limitations, trade secrets, techniques,
formulae, biological materials, marketing and other business plans, data,
strategies and forecasts (collectively, "Confidential Information"). Any
Confidential Information conceived or developed by Berman during employment will
be the exclusive property of the Company. Except as may be necessary in
connection with the Company's business, Berman will not (during or after his
employment with the Company) disclose Confidential Information to any third
person, firm or entity or use Confidential Information for his own purposes or
for the benefit or any third person, firm or entity. In his work for the
Company, Berman will refrain from unauthorized use or disclosure of information
and biological materials owned by former employers or other third parties.
(b) Inventions. Berman will promptly disclose to the Company any
discoveries, inventions, formulae and techniques, whether or not patentable,
made, conceived or first reduced to practice by him, either alone or together
with others, during his employment with the Company (collectively, the
"Inventions"). Berman hereby assigns to the Company all of his right, title and
interest in and to any Inventions. Berman will execute such documents and take
such other actions as may be reasonably requested by the Company (at the
Company's expense) to enable the Company to apply for, obtain, maintain and
enforce patents on any of the Inventions or to facilitate the transfer or
assignment of any of the Company's rights with respect to the Inventions and
patents.
(c) Company Documents. Upon the termination of his employment,
Berman will deliver to the Company all documents and other tangible property
containing Confidential Information which are then in his possession or control.
(d) Covenant Not to Compete. Berman acknowledges that his duties
hereunder and the services he will provide to the Company are of a special,
unique, unusual and extraordinary character, which gives this Agreement
particular value to the Company, and that it would be difficult to employ any
individual or individuals to replace Berman in the performance of such duties
and services. Therefore, during employment with the Company, and for a one year
period following termination of employment, Berman will not, directly or
indirectly, enter into, organize, control, engage in, be employed by, serve as a
consultant to, be an officer or director of or have any direct or indirect
investment in any business, person, partnership, association, firm or
corporation engaged in any business activity (including, but not limited to,
research, development, manufacturing, selling, leasing, licensing or providing
services) which is competitive with the business and/or scientific activities
that the Company is developing or
4
<PAGE> 5
exploiting during Berman's employment with the Company. Nothing contained in
this Agreement shall be construed to prevent Berman from owning at any time,
directly or indirectly, as much as 5% of any class of equity securities issued
by any corporation or other entity which are publicly traded and registered
under the Securities and Exchange Act of 1934, as amended.
11. Indemnification. The Company will indemnify Berman to the fullest
extent permitted by law and will hold him harmless from and against any claim,
liability or expense (including reasonable attorneys' fees) made against or
incurred by Berman in connection with his relationship with the Company. This
obligation will include, without limitation, prompt payment in advance of any
and all costs of defending the same, including attorney's fees.
12. No Impediment to Agreement. Except as otherwise disclosed herein,
Berman hereby represents to the Company that he is not, as of the date hereof,
and will not be, during employment with the Company, employed under contract,
oral or written, by any other person, firm or entity and is not and will not be
bound by the provisions of any restrictive covenant or confidentiality agreement
which would constitute an impediment to, or restriction upon, his ability to
enter into this Agreement and to perform the duties of his employment.
13. Notices. Any notice under this Agreement must be in writing and will
be deemed to have been given when personally delivered or mailed by first-class
or express mail to the recipient at the following address (or such other address
as shall be specified by prior written notice):
To the Company: VaxGen, Inc.
Attn: Donald P. Francis
50 1 Forbes Boulevard
South San Francisco, CA 94090
Copy to: Dr. Phillip Berman
95 Cheyenne Point
Portola Valley, CA 94028
14. Severability. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law. If any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law in any jurisdiction, such
invalidity, illegality or unenforceability will not affect any other provision
or the interpretation of this Agreement in any other jurisdiction.
15. Governing Law. This Agreement shall be governed by and construed in
accordance with the lam of the State of Delaware, without regard to the law of
conflicts.
16. Successors and Assigns. The services and duties to be performed by
Berman hereunder are personal and may not be assigned. This Agreement shall be
binding upon and inure to the benefit of the Company, its successors and
assigns, and Berman, his heirs. and representatives.
5
<PAGE> 6
17. Complete Agreement. This Agreement constitutes the entire agreement
between the parties concerning the subject matter hereof and supersedes all
prior agreements between the parties concerning the subject matter hereof.
18. Waiver. Failure by either party to insist upon strict adherence to
any one or more of the provisions of this Agreement on one or more occasions
shall not be construed as a waiver, nor shall it deprive that party of the right
to require strict compliance thereafter.
19. Survival. The obligations set forth in paragraphs 10(a) and 11 shall
survive termination of this Agreement.
20. Amendments. No amendment hereto, or waivers or releases of
obligations or liabilities hereunder, shall be effective unless agreed to in
writing by the parties hereto
21. Withholding. The Company may deduct and withhold from the payments
to be made to Berman hereunder any amounts required to be deducted and withheld
by the Company under the provisions of any statute, law, regulation or ordinance
now or hereafter enacted.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date first above written.
VaxGen, Inc.
By:
-------------------------------
Its:
-------------------------------
- ----------------------------------
Phillip Berman
6
<PAGE> 1
EXHIBIT 23.2
[KPMG LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
VaxGen, Inc. :
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Seattle, Washington
June 25, 1999
