SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported):
August 21, 1998
AVANT Immunotherapeutics, Inc.
(f/k/a T Cell Sciences, Inc.)
(Exact Name of Registrant as specified in its charter)
Delaware 0-15006 13-3191702
(State or other jurisdiction (Commission File (I.R.S. Employer
of incorporation) Number) Identification No.)
119 Fourth Avenue, Needham, MA 02494-2725
(Address of principal executive offices and zip code)
(781) 433-0771
(Registrant's telephone number, including area code)
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Item 5. Other Events
On August 21, 1998, AVANT Immunotherapeutics, Inc. (f/k/a "T Cell Sciences,
Inc.," herein referred to as the "Registrant," the "Company" or "AVANT")
acquired (the "Merger") Virus Research Institute, Inc., a Delaware corporation
("VRI"), pursuant to an Agreement and Plan of Merger dated as of May 12, 1998
(the "Agreement") by and among the Registrant, TC Merger Corp., a Delaware
corporation and wholly-owned subsidiary of the Registrant and VRI. Under the
terms of the Agreement, VRI became a wholly-owned subsidiary of AVANT. The
following is a discussion of the business and operations of AVANT, including T
Cell Diagnostics, Inc. and its newly acquired subsidiary VRI. The following
discussion supplements, but does not replace, the description of the
Registrant's business included in Item 1 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997.
DESCRIPTION OF AVANT
General
AVANT is a biopharmaceutical company that uses novel applications of
immunology to prevent and treat diseases caused by both the enemy within
(autoimmune diseases, cardiovascular diseases, cancer and inflammation) and the
enemy without (infectious diseases and organ transplant rejection). Each of the
Company's products address large market opportunities for which current
therapies are inadequate or non-existent.
AVANT's products derive from a broad set of complementary technologies with
the ability to inhibit the complement system, regulate T and B cell activity,
and enable the creation and delivery of preventative and therapeutic vaccines.
The Company is using these technologies to develop vaccines and
immunotherapeutics that prevent or treat disease caused by infectious organisms,
and drugs and treatment vaccines that modify undesirable activity by the body's
own proteins or cells.
Complement Inhibitors: AVANT is developing a new class of therapeutics that
inhibit the complement system, a key triggering mechanism for the inflammatory
response. Medical problems that result from excessive complement activation
represent multi-billion dollar market opportunities. These include reperfusion
injury -- the vascular and tissue damage that occurs following a heart attack,
stroke or surgical procedure where the patient's blood supply is shut off and
then restored; hyperacute or chronic organ rejection following transplantation;
acute inflammatory injury to the lungs; autoimmune diseases; and Alzheimer's
disease. In a Phase I/II trial, AVANT's first complement product, TP10,
demonstrated positive clinical efficacy and safety in patients with reperfusion
injury following lung transplantation. The Company is also in preclinical
development with a second complement inhibitor, TP20, which inhibits neutrophils
and can be targeted to specific sites.
Atherosclerosis Treatment Vaccine: AVANT is developing a novel treatment
vaccine aimed at increasing levels of high-density lipoprotein (HDL, or
so-called "good" cholesterol). Low levels of HDL are associated with an
increased risk of atherosclerosis, which in turn leads to heart disease and
stroke, among other health problems. The vaccine stimulates the production of
antibodies to cholesteryl ester transfer protein (CETP), which mediates the
balance between HDL and low-density lipoprotein (LDL, or "bad" cholesterol). In
preclinical studies, the CETP vaccine increased HDL levels and significantly
reduced atherosclerotic lesions in blood vessels as compared with an untreated
control group. AVANT plans to initiate clinical trials of its CETP vaccine
during the first half of 1999.
T Cell Regulators: Based on 15 years of research, AVANT has developed a
world-leading
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understanding of the T cell-mediated immune response and the signal transduction
pathways involved in its control. The T cell antigen receptor (TCAR) program,
now under development by Astra AB, aims to treat autoimmune diseases by
selectively inhibiting disease-causing immune cells without impairing normal
immune functions. Astra plans to initiate Phase II clinical trials in multiple
sclerosis with a product from this program in the second half of 1998.
Vaccines and Immunotherapeutics: AVANT is developing both preventive
vaccines against important human pathogens, and treatment vaccines and
immunotherapeutics that fight disease by turning the immune system against
chronic viral infections, cancerous cells, or harmful proteins made by the body
itself.
Preventative Vaccines for Infectious Diseases: The Company has developed
several novel delivery technologies that address shortcomings in currently
available delivery methods as well as provide new methods of vaccine delivery.
These vaccine delivery systems, which are based on a novel polymer (Adjumer(TM)
and Micromer(TM) vaccines) have the potential to improve existing injectable
vaccines and to permit intranasal and oral vaccine delivery. The Company
currently has several vaccines in clinical development on its own and with
corporate partners.
Therapore Immunotherapeutics: Therapore is a proprietary technology that
uses an injectable bacterial protein system to deliver protein and peptide
antigens into human cells in order to generate potent cell-mediated immune
responses against those antigens. The Company plans to employ Therapore to
develop novel immunotherapeutics for the treatment of chronic viral infections
and cancers. AVANT expects to initiate human clinical trials of its first
Therapore-based product, a treatment vaccine for melanoma, in the first half of
1999.
The executive offices of AVANT are located at 119 Fourth Avenue, Needham,
Massachusetts 02494, and AVANT's telephone number is (781) 433-0771.
Strategy
AVANT's strategy is to utilize its expertise to design and develop vaccine
and immunotherapeutic products that have significant and growing market
potential; to establish commercial alliances that permit funding of clinical
development and rapid commercialization; and to retain rights to certain
important market opportunities.
Develop Novel Vaccine and Immunotherapeutic Delivery Systems. AVANT is
developing a portfolio of vaccine and immunotherapeutic delivery systems to
address shortcomings in currently available delivery methods, as well as to
provide new methods of vaccine and immunotherapeutic product delivery. AVANT's
vaccine delivery systems, which are based on a novel polymer, have the potential
to improve existing injectable vaccines and to permit intranasal and oral
delivery of vaccines. These systems may be applicable to most of the vaccines in
routine use and may enable the introduction of new vaccines to prevent bacterial
or viral diseases for which there is currently no adequate treatment or
prevention. AVANT intends to pursue the broad application of its current vaccine
and immunotherapeutic delivery systems, as well as to continue to invest in the
development of new vaccine and immunotherapeutic delivery technologies.
Develop Proprietary Vaccines. AVANT is currently developing several
proprietary vaccines believed to have significant commercial promise. AVANT is
continuing to seek licenses for suitable antigens to be used to develop vaccines
with a significant market potential. AVANT believes that the development of its
own proprietary vaccines complements its development of novel vaccine and
immunotherapeutic delivery
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systems and that its ability to combine its vaccine and immunotherapeutic
delivery technology with its own proprietary antigens may lead to the
introduction of new vaccines and immunotherapeutic products with significant
competitive advantage.
Develop Immunotherapeutic Products. AVANT is developing Therapore, a
proprietary technology that uses a bacterial protein system for the injectable
delivery of proteins and peptides to generate potent cell-mediated immune
responses. Based on preclinical research, including animal studies conducted to
date, AVANT believes that Therapore will be able to deliver both peptide and
protein antigens into human cells, which may lead to the development of potent
cell-mediated immune responses. AVANT believes Therapore could be a core
technology in the development of novel immunotherapeutic products and that the
development of these products complements its development of novel vaccine
delivery systems and proprietary vaccines. AVANT intends to pursue the broad
application of Therapore across the field of persistent viral infections and
certain cancers.
Establish Collaborations for Product Development and Commercialization.
AVANT has entered into and intends to seek additional collaborative agreements
with established vaccine and pharmaceutical companies to develop vaccines and
immunotherapeutic products utilizing AVANT's delivery systems and its
collaborators' antigens. By entering into these collaborations, AVANT believes
it may benefit from the antigen development work already performed by its
collaborators and from access to their extensive clinical testing capabilities,
wide distribution and marketing infrastructure and market presence. This
strategy may permit AVANT to take advantage of the expertise of its
collaborators and thereby expedite commercialization of products incorporating
AVANT's technologies.
AVANT intends to seek collaborators who will assume responsibility for
completing clinical testing of certain of the Company's proprietary vaccines and
immunotherapeutics which are currently being developed by the Company and for
manufacturing and marketing those products. AVANT intends to develop such
proprietary vaccines and immunotherapeutics to a point at which such
collaborations could be established and could be commercially favorable to the
Company. AVANT believes that this strategy will allow the successful market
introduction of products incorporating AVANT's technologies without AVANT
incurring the substantial costs associated with Phase II and III clinical
development.
Therapeutic Drug Discovery Programs
Complement Inhibition. AVANT is developing a new class of therapeutics that
inhibit a part of the immune system called the complement system. The complement
system is a series of proteins that are important initiators of the body's acute
inflammatory response against disease, infection and injury. Excessive
complement activation also plays a role in certain persistent inflammatory
conditions. When complement is activated, it helps to identify and eliminate
infectious pathogens and damaged tissue. In certain situations, however,
excessive complement activation may destroy viable and healthy tissue and tissue
which, though damaged, might recover. This excessive response compounds the
effects of the initial injury or introduces unwanted tissue destruction in
clinical situations such as organ transplants, cardiovascular surgeries and
treatment for heart attacks. Independent, published studies have reported that
AVANT's lead compound, TP10, a soluble form of naturally occurring Complement
Receptor 1, effectively inhibits the activation of the complement cascade in
animal models. AVANT believes that regulation of the complement system could
have therapeutic and prophylactic applications in several acute and chronic
conditions, including reperfusion injury from surgery or ischemic disease, organ
transplant, multiple sclerosis, Alzheimer's disease, rheumatoid arthritis, and
myasthenia gravis. In the United States, several million people are afflicted
with these complement-mediated conditions.
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AVANT started the complement program in 1988. From 1989 through 1994, TP10
was under development in a joint program with SmithKline Beecham, p.l.c.
("SmithKline") and Yamanouchi Pharmaceutical Co. ("Yamanouchi"). During 1994,
AVANT and SmithKline negotiated various amendments to the agreement and, in
February 1995, the two companies agreed to a mutual termination by which AVANT
regained all rights to the program except for co-marketing rights in Japan,
which are retained by SmithKline and Yamanouchi.
Under AVANT's direction, in 1995 the first Phase I clinical trial of TP10
in 24 patients at risk for ARDS was completed. Results of this trial were
presented in October 1995 at The American College of Chest Physicians meeting. A
second Phase I safety trial for reperfusion injury was completed in December
1995 in 25 patients with first-time myocardial infarctions. This study was
presented at the American Heart Association's Joint Conference on Thrombosis,
Arteriosclerosis and Vascular Biology in February 1996. In each trial, TP10
demonstrated excellent safety and pharmacokinetic profiles, had a terminal phase
half-life of at least 72 hours and was able to inhibit complement activity in a
dose-dependent manner.
Based on these favorable results, in January 1996, AVANT initiated a Phase
IIa trial in patients with established ARDS. This trial was an open-label,
single-dose feasibility trial to determine the potential for efficacy of TP10 in
reducing neutrophil accumulation in the lungs and improved clinical outcome of
patients with ARDS. During the second half of 1996, AVANT initiated a series of
steps, including broadening enrollment criteria, to modify this trial to improve
the rate of patient accrual. In December 1997, AVANT completed this Phase IIa
trial after it had enrolled nine patients with ARDS arising from a number of
different medical conditions. The trial results showed that patients receiving
TP10 tended towards improved respiratory performance and improved blood
oxygenation. Because the trial included few patients and no placebo control was
used, no definitive claims about efficacy could be made.
In August 1996, AVANT began enrollment in a Phase I/II clinical trial in
patients undergoing lung transplantation. A goal of the trial was to determine
the ability of TP10 to reduce reperfusion injury and improve lung function in
patients with end-stage pulmonary disease who were undergoing lung transplant
surgery. This study was a randomized, placebo-controlled, double-blind trial
consisting of single dosages of 10 mg/kg of TP10 as an intravenous infusion over
30 minutes. The trial was conducted at multiple centers in North America and
included a total of 59 patients. In May 1997, AVANT announced the completion of
patient accrual. In October 1997, AVANT presented positive preliminary results
from the efficacy portion of the trial. In April 1998, AVANT presented final
trial results at the International Society of Heart and Lung Transplantation
conference. The final results showed that TP10 therapy appeared safe and well
tolerated and demonstrated significant efficacy. Treated patients undergoing
cardiopulmonary by-pass as part of the transplantation procedure showed
significantly decreased intubation time and time on ventilation and a trend
toward reduced time in the intensive care unit.
In October 1997, AVANT announced it had entered into a collaborative
agreement with Novartis Pharma AG, Basel, Switzerland ("Novartis") relating to
the development of TP10 for use in xenotransplantation (animal organs into
humans) and allotransplantation (human to human organ transplantation). Under
the agreement, AVANT will receive annual option fees and supplies of TP10 for
clinical trials, the combination of which is valued at up to approximately $5
million, in return for granting Novartis a two-year option to license TP10 with
exclusive worldwide (except Japan) marketing rights. Should Novartis exercise
its option to license TP10 and continue development, AVANT will receive an
equity investment, licensing fees and milestone payments based upon attainment
of certain development and regulatory goals, which has an approximate aggregate
value of up to $25 million. AVANT may also receive funding for research as well
as royalty payments on eventual product sales.
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In addition to TP10, AVANT has identified other product candidates to
inhibit activation of the complement system. The lead candidate under research
evaluation is a form of sCR1, (TP10), which has been modified by the addition of
sLe(x) carbohydrate side chains ("sCRlsLe(x)"). sLe(x) is a carbohydrate which
mediates binding of neutrophils to selectin proteins, which appear on the
surface of activated endothelial cells as an early inflammatory event.
Selectin-mediated binding of neutrophils to activated endothelial cells is a
critical event in inflammation. The sCR1sLe(x) molecule has demonstrated
increased functional benefits in in vitro and early in vivo experiments. During
1996, AVANT confirmed the presence of the desired carbohydrate structures and
their function in in vivo experiments and confirmed the presence of both anti-
complement and selectin-binding functions in in vitro experiments. During 1997,
AVANT produced additional sCR1sLe(x) material and began preclinical studies in
disease-relevant animal models. In November 1997, AVANT received a notice of
allowance of claims from the U.S. Patent and Trademark Office for a patent
covering sCR1sLe(x).
sCR1sLe(x) may create new and expanded opportunities for AVANT in
complement and selectin- dependent indications such as stroke and myocardial
infarction. AVANT believes that sCR1sLe(x) has the ability to target the
complement-inhibiting activity of sCR1 to the site of inflammation and, at the
same time, inhibit the leukocyte/endothelial cell adhesion process.
CETP Vaccine. AVANT is developing a therapeutic vaccine against endogenous
cholesteryl ester transfer protein which may be useful in reducing risk factors
for atherosclerosis. CETP is a key intermediary in the balance of high-density
lipoprotein ("HDL") and low-density lipoprotein ("LDL"). AVANT is developing a
vaccine to stimulate an immune response against CETP which it believes may
improve the ratio of HDL to LDL cholesterol and reduce the progression of
atherosclerosis. AVANT has conducted preliminary studies of rabbits which had
been administered the CETP vaccine and fed a high- cholesterol, high-fat diet.
In these studies, vaccine-treated rabbits exhibited reduced lesions in their
blood vessels compared to a control group of untreated rabbits which developed
significant blood vessel lesions. These studies have demonstrated, in animal
models, AVANT's ability to break immune tolerance, produce autoreactive
antibodies to CETP and reduce the development of blood vessel lesions.
Atherosclerosis is one of the leading causes of morbidity and mortality in
the United States and most of the Western world. Current pharmacologic
treatments require daily administration and can result in high costs and poor
patient compliance. A vaccine directed at lowering CETP activity, such as the
one being developed by AVANT, may offer several advantages over conventional
approaches, including requiring less frequent dosing, lower costs, reduced side
effects, and improved patient compliance.
In September 1996, the National Institutes of Health (the "NIH") awarded
AVANT a $100,000, Phase I Small Business Innovation Research ("SBIR") grant for
the development of a novel transgenic rat atherosclerosis model, affording
better comparison to human atherosclerosis. In February 1997, the NIH awarded
AVANT a second $100,000 Phase I SBIR grant to develop a novel plasmid-based
vaccine to prevent or treat atherosclerosis. In September 1997, AVANT was
awarded a $678,000 Phase II SBIR grant from the NIH which provides funding over
a two year period for the continued development of the novel transgenic rat
model of atherosclerosis. In January 1998, AVANT received a $96,000 Phase I SBIR
grant from the NIH for the development of a novel peptide vaccine to prevent or
treat atherosclerosis.
AVANT plans to initiate clinical trials of its CETP vaccine during the
first half of 1999.
T Cell Regulators. In early 1992, AVANT entered into a joint development
program with Astra AB ("Astra") to develop products resulting from AVANT's
proprietary TCAR technology, which utilizes T cell antigen receptor for
selectively targeting T cells involved in autoimmune diseases such as multiple
sclerosis
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and rheumatoid arthritis. The original agreement was modified in December 1993
with Astra assuming all responsibility for the development of the lead antibody
products and AVANT retaining leadership of the first peptide product candidate.
Under the original and modified agreements, AVANT received funding support of
approximately $15 million in the early years with the potential of up to $17
million of additional funding based on clinical progress. By the end of 1995,
AVANT had received substantially all of the original funding payments.
In December 1996, AVANT amended its agreement with Astra to transfer
certain of its rights to the TCAR technology, including two therapeutic
products, ATM027 and ATP012, to Astra, which is solely responsible for further
clinical development and commercialization. Under the amended agreement, AVANT
could receive royalties from product sales, as well as milestone payments which
may total up to $4 million as certain clinical milestones are achieved.
In June 1997, AVANT announced that it received a milestone payment from
Astra as one of the products derived from AVANT's TCAR program entered clinical
trials for the treatment of multiple sclerosis. In February 1998, Astra
announced that Phase I data has shown an effect on the target cells and that
there have been no serious adverse effects in the study to date. Astra also
announced that it is scheduling Phase II studies to begin later in 1998.
Small Molecule Immunoregulators. As a direct result of over thirteen years
of experience working with T cells and building on AVANT's evaluation
capabilities in molecular and cellular immunology and small-animal immunology
models, AVANT has developed a proprietary screening platform to identify small
molecule compounds which may regulate T cell activation. These whole cell
screens are based on signal transduction and gene regulation directed to
cytokine gene targets. T cell activation plays an important role in solid organ
transplant rejection as well as in certain autoimmune diseases. AVANT is seeking
to develop an alternative treatment to existing immunosuppressants such as
Cyclosporin and FK506 which, due to their toxicity, have limited application.
AVANT's basic approach is to combine the biological skills and proprietary
screens it has developed with the small molecule libraries created by other
biotechnology companies.
In March 1996, AVANT announced the first of a series of collaboration
agreements designed to utilize AVANT's proprietary T cell screening and
functional assay technology platform to identify small molecule immunoregulatory
therapeutic compounds. AVANT entered into a strategic alliance with ArQule,
Inc., which provides access to ArQule's proprietary non-peptidic small molecule
arrays. AVANT also signed a collaborative agreement with MYCOsearch, Inc.,
(which was subsequently acquired by OSI Pharmaceuticals, Inc.) which enables
AVANT to screen that company's natural products libraries. In December 1997,
AVANT completed its initial screening program with OSI Pharmaceuticals, Inc. In
October 1997, AVANT entered into a strategic alliance with Repligen, Inc.
("Repligen"), which provides access to Repligen's proprietary, combinatorial
chemical library. Under each of these agreements, AVANT and its partners will
share rights to compounds identified using AVANT's screens. As of March 1998,
AVANT had identified a number of immunostimulator and immunosuppressor compounds
from its screening activities. The company is seeking to license these compounds
to pharmaceutical companies for further development.
Vaccine and Immunotherapeutic Overview
The Vaccine Market. Vaccines have long been recognized as a safe and
cost-effective method for preventing infection caused by certain bacteria and
viruses. The Centers for Disease Control and Prevention (the "CDC") have
estimated that every dollar spent on vaccination saves $16 in healthcare costs.
There are
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currently 16 vaccines in routine use in the United States against such
life-threatening infectious organisms as tetanus, diphtheria, poliovirus,
hepatitis A virus, hepatitis B virus, Haemophilus influenzae B, measles, mumps
and rubella. From 1990 to 1996, annual worldwide vaccine sales increased from
$1.6 billion to $4.0 billion, a compound annual growth rate of approximately
16.5%. AVANT believes that this growth rate may accelerate as a result of
advances in vaccine technologies and formulations that address the shortcomings
of existing vaccines. Areas of potential improvement include enhancement of
immune responses, which could lead to a reduction in the number of doses
required for effective protection as well as effective immunization in a higher
percentage of the population, and delivery of vaccines through methods other
than injection. The vaccine market is expected to expand due to the introduction
of new vaccines utilizing purified antigens, produced as a result of advances in
molecular biology. AVANT also believes that the growing awareness and incidence
of certain infectious diseases, such as H. pylori, hepatitis C virus, HIV1 and
HSV2 infection, together with the availability of new vaccines, could further
expand the vaccine market.
The Immune System and Vaccines. The function of the human immune system is
to respond to pathogens, including infectious bacteria and viruses, that enter
the body. However, a pathogen may establish an infection and cause disease
before it is eliminated by an immune response. Antibodies are produced as part
of the immune response to antigens, which are components of the pathogen. These
antibodies can continue to circulate in the human body for many years, providing
continued protection against reinfection by the same pathogen.
Protective antibodies can be produced in both the systemic and mucosal
branches of the immune system. The systemic immune system produces IgG
antibodies to protect against infection occurring in blood and deep tissue. The
mucosal immune system produces IgA antibodies that protect against infection
occurring in the mucosal layer lining the digestive, respiratory and
genitourinary tracts. Mucosal immunity may act as a first line of defense, by
attacking pathogens at the point of entry into the body, prior to systemic
penetration, as well as by targeting certain pathogens such as H. pylori,
influenza and rotavirus that propagate exclusively at the mucosal layer.
Vaccines are a pre-emptive means of generating a protective antibody
response. A vaccine consists of either a weakened pathogen or pathogen-specific,
non-replicating antigens which are deliberately administered to induce the
production of antibodies. When weakened pathogens are used as a vaccine, they
replicate in the body, extending presentation to the immune system and inducing
the production of antibodies without causing the underlying disease. When
non-replicating antigens are used as a vaccine, they must be delivered in
sufficient quantity and remain in the body long enough to generate an effective
antibody response. To achieve this goal, many vaccines require multiple
administrations. Of the 16 vaccines currently in routine use, 14 are delivered
by injection and stimulate only systemic immunity. Only polio and typhoid
vaccines can be administered orally and induce both a mucosal and a systemic
immune response. Both of these vaccines are live, weakened pathogens that
localize in the intestines and do not require a separate vaccine delivery
system.
Adjuvants. The antigens contained in many injectable vaccines will not
produce an immune response sufficient to confer protection against infection and
require the use of an adjuvant to sustain the presentation of the antigens to
the human immune system. Alum (aluminum hydroxide) is the only adjuvant
currently approved by the United States Food and Drug Administration (the "FDA")
for commercial use in humans. While alum has gained widespread use, it does not
sufficiently enhance the immune response to permit administration of many
existing injected vaccines in a single dose. In the case of certain vaccines,
such as influenza, alum is ineffective as an adjuvant.
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AVANT believes that alum may not prove to be sufficiently effective for use
with a number of the new purified recombinant antigens being developed. Further,
alum cannot be used for mucosal delivery of vaccines. Accordingly, AVANT
believes that there is a significant need for a new adjuvant that is safe, works
with a wide variety of antigens, and induces a protective immune response with
only one or two injections. These attributes could result in certain benefits,
including cost savings and improved patient compliance.
Vaccine and Immunotherapeutic Delivery Systems
AVANT is developing a portfolio of proprietary vaccine delivery systems
designed to improve the efficacy of existing vaccines, and permit the
development of new vaccines and immunotherapeutics for the prevention and/or
treatment of infectious diseases and certain cancers. The following table
summarizes AVANT's two main vaccine delivery systems and Therapore:
<TABLE>
<CAPTION>
DELIVERY DELIVERY POTENTIAL
SYSTEM COMPOSITION METHOD BENEFITS (1) STATUS (1)
- -------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Adjumer(TM) Water Soluble Injectable Enhanced Phase II influenza
Polymer systemic immune conducted;
response; fewer analysis of results
injections ongoing
Micromer(TM) Polymer Intranasal or oral Systemic and Late stage
Microparticles mucosal immune preclinical
responses; no development
injection
Therapore Genetically Injectable Enhanced cell- Preclinical
Engineered mediated research
Bacterial Protein immunity
Vector
</TABLE>
- ------------
(1) The summary information included in the above table is qualified in its
entirety by the detailed discussion of each of the vaccine and immunotherapeutic
delivery systems that follows and which appears under "Vaccine and
Immunotherapeutic Development Programs" below.
Vaccine and Immunotherapeutic Development Programs
Adjumer(TM). AVANT is developing Adjumer(TM), a proprietary vaccine
delivery system, as an adjuvant to enhance the immune response to injected
vaccines. The water soluble nature of Adjumer(TM), which utilizes a
polyphosphazene polymer ("PCPP"), facilitates a simple aqueous-based
manufacturing process for vaccines, thereby preserving the integrity of the
antigen.
In preclinical studies conducted by AVANT, Adjumer(TM) demonstrated
sustained presentation of influenza, hepatitis B, HSV2, HIV1 and tetanus
antigens to the immune system. In those preclinical studies, single
intramuscular injections of Adjumer(TM)-formulated vaccines elicited a higher
immune response than
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both alum-formulated vaccines and non-adjuvanted vaccines as measured by
resulting IgG antibody levels. In additional preclinical studies, an
Adjumer(TM)-formulated influenza vaccine using lower antigen doses sustained
higher antibody levels over a longer time period than both alum-formulated
vaccines and non- adjuvanted vaccines. In certain other preclinical studies
Adjumer(TM)-formulated vaccines produced an effective immune response in a
higher percentage of animals than in animals receiving existing vaccine
formulations. Furthermore, in these studies, as well as tests conducted using
Adjumer(TM) alone, AVANT observed no material adverse reactions when Adjumer(TM)
was administered at effective levels.
Based on these preclinical results, AVANT believes that an
Adjumer(TM)-formulated vaccine may provide a number of benefits over existing
injected vaccines. These benefits include reducing the number of doses required
for an effective immune response, thereby improving compliance; providing cost
savings as a result of the reduction in the number of doses and the amount of
antigen required; and increasing the time period over which immune protection
can be sustained. In addition, based on the results of these preclinical
studies, AVANT believes that an Adjumer(TM)-formulated vaccine may be able to
induce an immune response in a number of subjects who would not otherwise
respond to existing vaccines. The first human clinical trials of a vaccine using
Adjumer(TM) as a delivery system commenced in 1996.
AVANT and Pasteur Merieux Connaught ("PMC"), the leading worldwide supplier
of influenza vaccine, are currently collaborating on the development of an
Adjumer(TM)-formulated vaccine for influenza. Influenza accounts for an average
of 20,000 deaths annually in the United States; the greatest number of
fatalities occur among the elderly. In preclinical studies conducted by AVANT
and PMC, an Adjumer(TM)- formulated influenza vaccine produced a significantly
enhanced and longer-lived immune response than one of the influenza vaccines
currently on the market. PMC completed Phase I human clinical trials of the
Adjumer(TM)-formulated influenza vaccine in France during 1997. A total of 48
young and 41 elderly adults participated in this study, which was designed to
measure the safety and level of immune response to the vaccine. Based on the
results of the study, which showed the Adjumer(TM)-formulated vaccine was well
tolerated and elicited improved responses, a Phase II safety and immunogenicity
study was initiated by PMC during 1997. A total of 430 elderly adults
participated in the Phase II study, which was conducted in Peru. Preliminary
results of the Phase II clinical trial confirmed that the Adjumer(TM)-formulated
vaccine was well tolerated. However, results of the Phase II study appear to be
inconsistent in certain respects with Phase I results. The degree of improvement
in immune responses elicited by the Adjumer(TM) influenza vaccine was less in
comparison to the control group than was elicited in the Phase I study. In the
Phase II study the control group receiving the unadjuvanted vaccine generated
higher immune responses than observed in the Phase I study control group. AVANT
and PMC are currently analyzing and assessing the results of the Phase II study
to determine the appropriate next steps to take with the clinical development of
the product.
PMC is continuing to investigate the use of Adjumer(TM) in other vaccines.
AVANT understands that PMC plans to initiate Phase I trials of
Adjumer(TM)-formulated vaccines for RSV in late 1998 and for Lyme disease in
early 1999.
Rotavirus Vaccine. AVANT is also developing a novel vaccine against
rotavirus infection. Rotavirus, a major cause of diarrhea and vomiting in
infants, affects approximately 80% of the approximately 4 million infants born
each year in the United States. As a result, on an annual basis, about 500,000
infants require medical attention and 50,000 are hospitalized. The economic
burden in the United States is estimated at over $1 billion in direct and
indirect costs. AVANT anticipates that in the United States a vaccine against
rotavirus disease will become a universal pediatric vaccine. AVANT has completed
Phase I clinical trials of the orally delivered live human rotavirus vaccine
selected to elicit a broadly protective immune response to the most prevalent
strains of rotavirus. During 1997, AVANT completed a
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Phase I/II clinical trial designed to define the optimal vaccine dose and
optimal age for immunization. Based on the assessment of the safety and
immunogenicity of the vaccine, AVANT initiated a Phase II efficacy study in
1997. This trial, conducted at four U.S. medical centers, was designed to
examine the vaccine's ability to prevent rotavirus disease and to further study
the safety of the vaccine. A total of 215 infants were enrolled in the study and
have been immunized with the vaccine. In August 1998, the company announced
positive results from this trial. The results showed that approximately 90
percent of the vaccinated infants were protected from rotavirus disease and
demonstrated a statistical significance at p<0.001. Examination of the safety
data revealed only mild transient symptoms in a small number of infants.
As discussed under "Collaborative Agreements", subject to the successful
completion of the Phase II clinical trial and the development by SmithKline of a
viable manufacturing process, SmithKline will assume financial responsibility
for all subsequent clinical and development activities.
Micromer(TM). AVANT is conducting ongoing research on Micromer(TM), a
proprietary vaccine delivery system designed to facilitate the mucosal
(intranasal or oral) delivery of antigens and stimulate both the systemic and
mucosal branches of the immune system.
In preclinical studies conducted by AVANT, several Micromer(TM)-formulated
antigens delivered intranasally elicited both a mucosal ("IgA") immune response
and a systemic ("IgG") immune response. IgA antibodies were detected at all
mucosal sites, and the level of IgG antibodies was comparable to the level
obtained through Adjumer(TM)-formulated injections of the same antigen. A
Micromer(TM)-formulated influenza vaccine required only a single, intranasal
dose to provide an immune response sufficient to protect the animals against
subsequent infection by the influenza virus. In addition to conducting further
research on the Micromer(TM)-formulated influenza vaccine, AVANT has commenced
research on additional Micromer(TM)-formulated vaccines. AVANT is currently
conducting animal studies in preparation for a Phase I trial of a
Micromer(TM)-formulated influenza vaccine.
Therapore. During 1997, AVANT received an exclusive worldwide license to
Therapore from Harvard College. AVANT believes that Therapore will be the core
of a novel technology for the development of immunotherapeutics. AVANT is
conducting preclinical research to evaluate this system for the treatment of
persistent viral infections, such as Hepatitis B, Hepatitis C and HIV, and
certain cancers including melanoma.
Therapore is composed of two bacterial proteins that in in vitro tests have
delivered peptides or proteins into human cells to utilize normal cellular
processes to induce potent cell-mediated immune responses. These responses
include the generation of long-lived cytotoxic T-lymphocytes ("CTL") and
alterations in the amounts of cellular cytokines produced. Both responses are
considered necessary for the effective treatment of persistent viral infections
and the resolution of certain cancers. Potential products utilizing Therapore
technology could include peptides or proteins from viruses such as Hepatitis B,
Hepatitis C and HIV, all of which cause persistent infections, and from a range
of cancers, including breast, colon, lung, melanoma and prostate. Each of these
indications represents a large market with a need for safe and effective
treatments.
Early stage preclinical research studies indicate that Therapore may be
distinguished from other delivery systems. AVANT believes that the therapeutic
and preventative potential of Therapore is significant for two reasons: (i) the
targeting of Therapore is highly efficient, such that in in vitro tests potent
cell-mediated immune responses have been induced by the delivery of minute
quantities of Therapore constructs; and (ii) Therapore has the potential to
deliver large peptides and proteins for processing by
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normal cellular mechanisms, which may permit broad immune coverage in humans. As
a result of these characteristics, AVANT believes that Therapore-delivered
antigens will be capable of producing an enhanced cell-mediated response with
fewer injections than other products currently under development by AVANT's
competitors.
AVANT is currently conducting animal studies in preparation for a Phase I
trial of a Therapore formulated Melanoma immunotherapeutic vaccine during the
first half of 1999.
Diagnostic Business
In March 1996, AVANT realigned certain of its operations and sold the
operations and research product line of its wholly-owned subsidiary, T Cell
Diagnostics, Inc. to Endogen, Inc. ("Endogen") for $3.0 million, while retaining
AVANT's TRAx diagnostic product franchise. AVANT received a five year
convertible subordinated note for $2.0 million combined with approximately $1.0
million used to repay obligations under AVANT's operating lease. AVANT
recognized a gain on this transaction of $0.3 million. On February 10, 1997,
AVANT received approximately $1.8 million following the conversion of the
remaining balance of the Endogen note into shares of Endogen common stock, which
were subsequently sold.
AVANT retained all rights to the TRAx(R) product franchise and has agreed
to source the manufacture of TRAx(R) kits from Endogen in a separate supply
contract. TCD signed a sales and distribution contract for the United States
market with Diamedix Corporation ("Diamedix") in December 1995. Diamedix is a
wholly-owned subsidiary of Ivax Corporation with a history of selling enzyme
immunoassays in the in vitro diagnostics market. The contract covers the TRAx(R)
microtiter plate format products. AVANT is focusing its efforts on establishing
a partnership for the TRAx(R) technology.
Collaborative Agreements
Novartis. In October 1997, AVANT announced it had entered into a
collaborative agreement with Novartis relating to the development of TP10 for
use in xenotransplantation (animal organs into humans) and allotransplantation
(human to human organ transplantation). Under the agreement, AVANT will receive
annual option fees and supplies of TP10 for clinical trials, the combination of
which is valued at up to approximately $5 million, in return for granting
Novartis a two-year option to license TP10 with exclusive worldwide (except
Japan) marketing rights. Should Novartis exercise its option to license TP10 and
continue development, AVANT will receive an equity investment, licensing fees
and milestone payments based upon attainment of certain development and
regulatory goals, which has an approximate aggregate value of up to $25 million.
AVANT may also receive funding for research as well as royalty payments on
eventual product sales.
Yamanouchi. AVANT started the complement program in 1988. From 1989 through
1994, TP10 was under development in a joint program with SmithKline and
Yamanouchi. During 1994, AVANT and SmithKline negotiated various amendments to
the agreement and, in February 1995, the two companies agreed to a mutual
termination by which AVANT regained all rights to the program except for
co-marketing rights in Japan, which are retained by SmithKline and Yamanouchi.
Pasteur Merieux Connaught. AVANT is a party to two license agreements
entered into in December 1994 and August 1995 with PMC relating to Adjumer(TM)-
and Micromer(TM)-formulated vaccines, respectively, for the prevention of a
variety of infectious diseases. Under the agreements PMC has been granted the
exclusive right to make, use and sell Adjumer(TM)- and Micromer(TM)-formulated
vaccines for
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prevention of influenza, Lyme disease and diseases caused by meningococcus and
the co-exclusive right (exclusive, except for the right of AVANT or one other
person licensed by AVANT) to make, use and sell Adjumer(TM)- and
Micromer(TM)-formulated vaccines directed against five other pathogens,
including pneumococcus and RSV. The licenses to PMC apply to specified
territories, including North and South America, Europe, Africa, Thailand and the
countries of the former Soviet Union. AVANT has retained rights to make, use,
sell and license Adjumer(TM)- and Micromer(TM)-formulated vaccines against the
subject infections in most of the Far East, including China and Japan, subject
to certain geographical extension rights available to PMC.
PMC made a $3.0 million equity investment in AVANT in December 1994 upon
the execution of the agreement relating to Adjumer(TM). In addition, in
connection with this collaboration, in 1996 PMC made milestone payments of $4.5
million to AVANT and an additional equity investment of $1.0 million in AVANT.
Contingent upon achieving certain milestones, PMC has agreed to pay AVANT up to
an additional $6.2 million in connection with the development of
Adjumer(TM)-formulated vaccines for influenza and Lyme disease. Contingent upon
achieving certain milestones, PMC has also agreed to make payments, on a product
by product basis with respect to the development of other Adjumer(TM)- and
Micromer(TM)-formulated vaccines. PMC is required to fund all costs associated
with the development and commercialization, including the costs of clinical
trials, of any vaccines it elects to develop utilizing AVANT's technology. In
addition, AVANT will be entitled to royalties based on net sales of any vaccine
products developed and sold by PMC pursuant thereto.
In connection with its agreement relating to Micromer(TM), PMC sponsored
research at AVANT into Micromer(TM)-formulated vaccines directed against
influenza and parainfluenza virus ("PIV"). This arrangement, pursuant to which
AVANT received $2.5 million, covered a two-year period that ended in 1997.
Under the agreement relating to Adjumer(TM), AVANT was required to use
commercially reasonable efforts to establish a process capable of yielding
quantities of clinical grade PCPP for use by PMC in clinical studies. AVANT has
satisfied this requirement. In addition, AVANT has facilitated the production of
commercial grade PCPP in a contractor's current Good Manufacturing Practice
("cGMP") compliant manufacturing facility according to agreed upon
specifications. The PMC agreement, while reserving to PMC the right to
manufacture PCPP, anticipates that AVANT will supply PCPP under a cost-plus
supply agreement.
Pasteur Merieux-Oravax. AVANT has a collaborative arrangement with Pasteur
Merieux-Oravax ("PM-O") for the use of its VibrioVec(TM) bacterial delivery
system. The agreement grants to PM-O a worldwide license to use VibrioVec(TM)
for the delivery of specific H. pylori antigens. A license issue fee as well as
research support payments totaling $1.0 million has been paid to AVANT under
this agreement. The agreement also provides for future milestone payments and
royalties on net sales of any future products developed by PM-O. An option
previously granted to PM-O for the use of PCPP in the delivery of H. pylori
vaccines has expired.
SmithKline. During 1997, AVANT entered into an agreement with SmithKline to
collaborate on the development and commercialization of AVANT's oral rotavirus
vaccine. Rotavirus infection causes acute diarrhea and dehydration in infants.
Under the terms of the agreement, SmithKline received an exclusive worldwide
license to commercialize AVANT's rotavirus vaccine. AVANT was responsible for
continuing the Phase II clinical efficacy study of the rotavirus vaccine which
was completed in August 1998. Subject to the development by SmithKline of a
viable manufacturing process, SmithKline is required to assume responsibility
for all subsequent clinical trials and all other development activities.
SmithKline
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made an initial license payment in 1997 upon execution of the agreement and has
agreed to make further payments upon the achievement of certain milestones. In
addition, AVANT will be entitled to royalties based on net sales of the
rotavirus vaccine.
Heska Corporation. In January 1998, AVANT entered into an agreement with
Heska Corporation ("Heska") whereby Heska was granted the right to use PCPP in
certain animal health vaccines. The agreement provides for the payment of
license fees, milestone and royalties based on net sales of PCPP-formulated
animal vaccines.
Competition
Competition in the biotechnology and vaccine industries is intense. AVANT
faces competition from many companies in the United States and abroad, including
a number of large pharmaceutical companies, firms specialized in the development
and production of vaccines, adjuvants and vaccine and immunotherapeutic delivery
systems and major universities and research institutions. Most of AVANT's
competitors have substantially greater resources, more extensive experience in
conducting preclinical studies and clinical testing and obtaining regulatory
approvals for their products, greater operating experience, greater research and
development and marketing capabilities and greater production capabilities than
those of AVANT. There can be no assurance that AVANT's competitors will not
develop technologies and products that are safer or more effective than any
which are being developed by AVANT or which would render AVANT's technology and
products obsolete and noncompetitive, and AVANT's competitors may succeed in
obtaining FDA approval for products more rapidly than AVANT. There can be no
assurance that the vaccines and immunotherapeutic products under development by
AVANT and its collaborators will be able to compete successfully with existing
products or products under development by other companies, universities and
other institutions or that they will obtain regulatory approval in the United
States or elsewhere. AVANT believes that the principal competitive factors in
the vaccine and immunotherapeutic market are product quality, measured by
efficacy and safety, ease of administration and price.
AVANT's competitive position will also depend upon its ability to attract
and retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the often lengthy period between technological conception and commercial sales.
Manufacturing
AVANT has no manufacturing facilities, no experience in volume
manufacturing and plans to rely upon collaborators or contractors to manufacture
its proposed products for both clinical and commercial purposes. AVANT believes
that there is currently sufficient capacity worldwide for the production of its
potential products by AVANT's collaborators or through contract manufacturers.
To date, AVANT has been arranging with contract manufacturers for the
manufacture of PCPP in quantities sufficient for preclinical and clinical
studies, and for clinical trial supplies of AVANT's rotavirus vaccine candidate.
If commercialized, manufacture of the AVANT rotavirus vaccine will be the
responsibility of SmithKline, which has received from AVANT a world-wide
exclusive license to commercialize this vaccine.
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AVANT has a contract for the development and initial supply of the starting
materials for PCPP but does not yet have a written contract with a manufacturer
for commercial production of PCPP. AVANT has facilitated the production of
commercial grade PCPP in a contractor's cGMP manufacturing facility according to
agreed upon specifications. The PMC agreement, while reserving to PMC the right
to manufacture PCPP, anticipates that AVANT will supply PCPP under a cost-plus
supply agreement. AVANT has also entered into an arrangement with an academic
institution for process development related to its Therapore system. The
manufacturing processes for AVANT's other vaccine and immunotherapeutic delivery
systems and vaccines utilize known technologies. AVANT believes that the
products it currently has under development can be readily scaled up to permit
manufacture in commercial quantities. However, there can be no assurance that
AVANT will not encounter difficulties in scaling up the manufacturing processes.
AVANT intends to establish manufacturing arrangements with manufacturers
that comply with the FDA's requirements and other regulatory standards, although
there can be no assurance that AVANT will be able to do so. In the future, AVANT
may, if it becomes economically attractive to do so, establish its own
manufacturing facilities to produce any vaccine products that it may develop. In
order for AVANT to establish a manufacturing facility, AVANT will require
substantial additional funds and will be required to hire and retain significant
additional personnel and comply with the extensive cGMP regulations of the FDA
applicable to such facility. The product manufacturing facility would also need
to be licensed for the production of vaccines by the FDA.
Marketing
Under the terms of existing and future collaborative agreements, AVANT
relies and expects to continue to rely on the efforts of its collaborators for
the sale and marketing of its products. There can be no assurance that AVANT's
collaborators will market vaccine products incorporating AVANT's technologies,
or, if marketed, that such efforts will be successful. The failure of AVANT's
collaborators to successfully market products would have an adverse effect on
AVANT's business.
AVANT has retained, and in the future intends to retain, marketing rights
to certain of its vaccine and immunotherapeutic delivery systems and vaccine
candidates in selected geographic areas and for specified indications. AVANT
intends to seek marketing and distribution agreements and/or co-promotion
agreements for the distribution of its products in such territories and for such
indications. AVANT believes that these arrangements could enable AVANT to
generate a higher level of financial return than might be obtained from early
stage licensing and collaboration agreements. AVANT has no marketing and sales
staff and limited experience relating to vaccine marketing. If AVANT determines
in the future to engage in direct marketing of vaccine products, it will be
required to recruit an experienced marketing group and incur significant
additional expenditures. There can be no assurance that AVANT will be able to
establish a successful marketing force.
Patents, Licenses and Proprietary Rights
Patents, Licenses and Proprietary Rights. AVANT's policy is to protect its
technology by filing patent applications and obtaining patent rights covering
its own technology, both in the United States and in foreign countries. In
addition, AVANT has acquired and will seek to acquire as needed or desired,
exclusive rights of others through assignment or license to complement its
portfolio of patent rights. AVANT also relies on trade secrets, unpatented
know-how and technological expertise and innovation to develop and maintain its
competitive position.
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Patents. The successful development and marketing of products by AVANT will
depend in part on its ability to create and maintain intellectual property,
including patent rights. AVANT has established a proprietary patent position in
the areas of complement inhibitor technology, vaccine technologies and
diagnostic technologies, and it is the owner or exclusive licensee of numerous
patents and pending applications around the world. Although AVANT continues to
pursue patent protection for its products, no assurance can be given that any
pending application will issue as a patent, that any issued patent will have a
scope that will be of commercial benefit, or that AVANT will be able to
successfully enforce its patent position against competitors.
In the area of complement molecules, AVANT is co-owner with The Johns
Hopkins University and Brigham & Women's Hospital, whose rights AVANT has
exclusively licensed, of patents and application covering inventions relating to
complement receptor type 1 (CR1). These rights are based in part on the work of
Dr. Douglas Fearon and include U.S. and foreign patents which claim nucleic acid
sequences encoding CR1, sCR1 and active fragments; purification methods; and
therapeutic uses of sCR1. AVANT also owns or has rights to a number of other
patent applications relating to sCR1, sCR1sLe(x) and other complement inhibitor
molecules and their uses. In November 1997, AVANT received a notice of allowance
from the U.S. Patent and Trademark Office for its patent application covering
sCR1sLe(x) and other complement inhibitory proteins.
In April 1996, AVANT announced that it had licensed portions of its patent
and technology rights regarding CR1 to CytoTherapeutics, Inc.
("CytoTherapeutics") for use in protecting CytoTherapeutics' proprietary
cell-encapsulation products for the delivery of therapeutic substances to the
central nervous system.
In December 1996, AVANT amended its agreement with Astra to transfer
certain of its patent rights and licenses to the TCAR technology to Astra. This
transfer includes patent applications which have resulted to date in U.S.
patents covering the DNA, protein, protein fragments and antibodies relating to
the Alpha TCAR and the DNA, full-length proteins and antibodies relating to Beta
TCAR, and two European patents covering Beta TCAR inventions. In addition, AVANT
has transferred recent filings on T cell antigen receptor inventions resulting
from the partnership with Astra.
In the area of diagnostics, AVANT is the owner of several patents relating
to TRAx(R) CD4 and CD8 and other applications of the TRAx(R) product
technologies. The first U.S. patent covering the TRAx(R) CD4 and CD8 products
issued on June 11, 1996. In February 1998, AVANT received a notice of allowance
of claims for the U.S. patent and Trademark Office for a patent application
covering the TRAx(R) Test Kit.
In the area of vaccine technology, AVANT owns issued U.S. patents and
corresponding foreign applications directed to the use of vaccines incorporating
AVANT's Adjumer(TM) vaccine delivery technology, and directed to the use of
vaccines incorporating AVANT's Micromer(TM) vaccine delivery technology.
Further, AVANT owns and has licensed other U.S. patents and patent applications,
and corresponding foreign applications, directed to technology that may be
useful for AVANT's Micromer(TM) and Adjumer(TM) vaccine delivery systems. AVANT
has an exclusive license to a United States patent application, and
corresponding foreign applications, directed to a vector construct that is used
in AVANT's VibrioVec(TM) vaccine delivery system; AVANT has an exclusive license
to an issued U.S. patent directed to a rotavirus strain antigen which forms the
basis of AVANT's rotavirus vaccine; and AVANT has an exclusive license to a U.S.
patent application, and corresponding foreign applications, directed to a
defective HSV2 virus for use in AVANT's vaccine directed against genital herpes.
AVANT also has an exclusive license to U.S. patent applications directed to
technology that may be useful for AVANT's Therapore system. AVANT has also filed
patent applications in the U.S. and selected foreign countries relating to
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control of CETP activity through vaccination.
There can be no assurance that patent applications owned by or licensed to
AVANT will result in granted patents or that, if granted, the resultant patents
will afford protection against competitors with similar technology. It is also
possible that third parties may obtain patent or other proprietary rights that
may be necessary or useful to AVANT. In cases where third parties are first to
invent a particular product or technology, it is possible that those parties
will obtain patents that will be sufficiently broad to prevent AVANT from using
certain technology or from further developing or commercializing certain vaccine
and immunotherapeutic systems and vaccine candidates. If licenses from third
parties are necessary but cannot be obtained, commercialization of the covered
products might be delayed or prevented.
Although a patent has a statutory presumption of validity in the United
States, the issuance of a patent is not conclusive as to validity or as to the
enforceable scope of the patent claims. Thus, there can be no assurance that
AVANT's issued patents or any patents subsequently issued to or licensed by
AVANT will not be successfully challenged in the future. The validity or
enforceability of a patent after its issuance by the Patent and Trademark Office
can be challenged in litigation. If the outcome of the litigation is adverse to
the owner of the patent, third parties may then be able to use the invention
covered by the patent without payment. There can be no assurance that AVANT's
patents will not be infringed or that the coverage of its patents will not be
successfully avoided by competitors through design innovation.
AVANT is aware that others, including universities and companies, have
filed patent applications and have been granted patents in the United States and
other countries which claim subject matter potentially useful or necessary to
the commercialization of AVANT's products. The ultimate scope and validity of
existing or future patents which have been or may be granted to third parties,
and the availability and cost of acquiring rights in those patents necessary to
the manufacture, use or sale of AVANT's products presently cannot be determined
by AVANT.
AVANT uses a mutated Vibrio cholerae in its VibrioVec(TM) vaccine delivery
system. AVANT is aware of an issued U.S. patent which claims a culture of
mutated Vibrio cholerae. AVANT believes that only one claim (the "Claim") of the
patent may be pertinent to the company's VibrioVec(TM) system. The remaining
claims of the patent cover other cultures which AVANT believes are not pertinent
to VibrioVec(TM). AVANT has received an opinion of counsel from Fish &
Richardson, P.C. that, based on the analysis set forth in their opinion and the
facts known to them, the Claim is invalid. It should be noted that a party
challenging validity of a patent has the burden of proving invalidity and that
the outcome of any litigation cannot be predicted with certainty. Accordingly,
there can be no assurance that, if litigated, a court would conclude that the
Claim is invalid.
In addition, AVANT is aware of a foreign patent with claims that could
conflict with AVANT's vaccine candidates and vaccine delivery systems. AVANT
believes that the relevant claims under this patent do not extend to or restrict
AVANT's activities, however there can be no assurance that a foreign court would
reach the same conclusion. AVANT is also aware of an issued U.S. patent relating
to the same technology covered by a patent application to which it has been
granted an exclusive license and therefore anticipates that it will be involved
in an interference proceeding prior to marketing its herpes vaccine.
In addition to the patents referred to in the previous two paragraphs,
there may be other patent applications and issued patents belonging to
competitors that may require AVANT to alter its vaccine candidates and vaccine
and immunotherapeutic delivery systems, pay licensing fees or cease certain
activities. If the Company's product candidates conflict with patents that have
been or may be granted to competitors, universities or others, the patent owners
could bring legal actions against AVANT claiming
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damages and seeking to enjoin manufacturing and marketing of the patented
products. If any such actions are successful, in addition to any potential
liability for damages, AVANT could be required to obtain a license in order to
continue to manufacture or market the affected products. There can be no
assurance that AVANT would prevail in any such action or that any license
required under any such third party patent would be made available on acceptable
terms or at all. AVANT believes that there may be significant litigation in the
biotechnology and vaccine industries regarding patent and other intellectual
property rights. If AVANT becomes involved in such litigation, it could consume
substantial resources.
Licenses. AVANT has entered into several significant license agreements
relating to technology that is being developed by AVANT and/or its
collaborators, including licenses from: Massachusetts Institute of Technology
covering certain proprietary technologies for vaccine delivery related to PCPP
microparticles; Penn State Research Foundation covering the production of
polyphosphazene polymer; Harvard College relating to proprietary technology
involving genetically altered Vibrio and Salmonella typhi strains; Cincinnati
Children's Hospital involving proprietary rights and technologies relating to an
attenuated rotavirus strain for a rotavirus vaccine; Harvard College and the
Dana Farber Cancer Institute relating to a genetically-altered HSV2 virus for
use in a genital herpes virus vaccine; and Harvard College for the proprietary
technology related to Therapore, a novel immunotherapy delivery system to be
developed for delivery of products for the treatment of persistent viral
infections and certain cancers. In general, these institutions have granted
AVANT an exclusive worldwide license (with right to sublicense) to make, use and
sell products embodying the licensed technology, subject to the reservation by
the licensor of a non-exclusive right to use the technologies for non-commercial
purposes. Generally, the term of each license is through the expiration of the
last of the patents issued with respect to the technologies covered by the
license. AVANT has generally agreed to use reasonable efforts to develop and
commercialize licensed products and to achieve certain milestones and pay
license fees, milestone payments and royalties based on the net sales of the
licensed products or to pay a percentage of sublicense income. If AVANT breaches
its obligations, the licensor has the right to terminate the license, and, in
some cases, convert the license to a non-exclusive license.
Proprietary Rights. AVANT also relies on unpatented technology, trade
secrets and confidential information, and no assurance can be given that others
will not independently develop substantially equivalent information and
techniques or otherwise gain access to AVANT's know-how and information, or that
AVANT can meaningfully protect its rights in such unpatented technology, trade
secrets and information. AVANT requires each of its employees, consultants and
advisors to execute a confidentiality agreement at the commencement of an
employment or consulting relationship with AVANT. The agreements generally
provide that all inventions conceived by the individual in the course of
employment or in providing services to AVANT and all confidential information
developed by, or made known to, the individual during the term of the
relationship shall be the exclusive property of AVANT and shall be kept
confidential and not disclosed to third parties except in limited specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for AVANT's information in the event of
unauthorized use or disclosure of such confidential information.
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Government Regulation
AVANT's activities and products are significantly regulated by a number of
governmental entities, including the FDA in the United States and by comparable
authorities in other countries. These entities regulate, among other things, the
manufacture, testing, safety, effectiveness, labeling, documentation,
advertising and sale of AVANT's products. Product development within this
regulatory framework takes a number of years and involves the expenditure of
substantial resources. Many products that initially appear promising ultimately
do not reach the market because they are found to be unsafe or ineffective when
tested.
In the United States, vaccines and immunotherapeutics for human use are
subject to FDA approval as "biologics" under the Public Health Service Act and
"drugs" under the Federal Food, Drug and Cosmetic Act. The steps required before
a new product can be commercialized include: preclinical studies in animals,
clinical trials in humans to determine safety and efficacy and FDA approval of
the product for commercial sale.
The FDA provides that human clinical trials may begin thirty (30) days
after receipt and review of an Investigational New Drug ("IND") application,
unless the FDA requests additional information or changes to the study protocol
within that period. Authorization to conduct a clinical trial in no way assures
that the FDA will ultimately approve the product. Clinical trials are usually
conducted in three sequential phases; in a Phase I trial, the product is given
to a small number of healthy volunteers to test for safety (adverse effects).
Phase II trials are conducted on a limited group of the target patient
population; safety, optimal dosage and efficacy are studied. A Phase III trial
is performed in a large patient population over a wide geographic area to prove
that significant efficacy exists. The FDA has ongoing oversight over all these
trials and can order a temporary or permanent discontinuation if that action is
warranted. Such an action could materially and adversely affect AVANT.
The results of the clinical trials and all supporting data are submitted to
the FDA for approval. A Biologics License Application ("BLA") is submitted for a
biologic product; a New Drug Application (an "NDA") for a drug product. The
interval between IND filing and BLA/NDA filing is usually at least several years
due to the length of the clinical trials; and the BLA/NDA review process can
take over a year. During this time the FDA may request further testing,
additional trials or may turn down the application. Even with approval, the FDA
frequently requires post-marketing safety studies (known as Phase IV trials) to
be performed.
The FDA requires that the manufacturing facility that produces a licensed
product meet certain standards, undergo an inspection and obtain an
establishment license prior to commercial marketing.
The Advisory Committee on Immunization Practices ("ACIP") of the CDC has a
role in setting the public market in the United States for the vaccine products
AVANT intends to develop. The ACIP makes recommendations on the appropriate use
of vaccines and related products and the CDC develops epidemiologic data
relevant to vaccine requirements and usage.
To market its products abroad, AVANT is subject to varying foreign
regulatory requirements. Although international efforts are being made to
harmonize these requirements, applications must currently be made in each
country. The data necessary and the review time varies significantly from one
country to another. Approval by the FDA does not ensure approval by the
regulatory bodies of other countries.
AVANT's collaborators are subject to all of the above-described regulations
in connection with the commercialization of products utilizing AVANT's
technology.
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Product Liability
The testing and marketing of vaccines and immunotherapeutics entail an
inherent risk of product liability attributable to unwanted and potentially
serious health effects. If and when AVANT manufactures vaccines which are
recommended for routine administration to children, AVANT will be required to
participate in the National Vaccine Injury Compensation Program. This program
compensates children having adverse reactions to certain routine childhood
immunizations with funds collected through an excise tax from the manufacturers
of these vaccines.
AVANT has clinical trial liability insurance coverage in the amount of $2
million. However, there can be no assurance that such insurance coverage is or
will continue to be adequate or available. AVANT intends to seek product
liability insurance coverage prior to commercialization of its product
candidates but there can be no assurance that insurance will be available at all
or in sufficient amounts to protect AVANT at a reasonable cost.
Legal Proceedings
AVANT is not a party to any legal proceedings.
Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits
(a) Financial Statements of Business Acquired
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INDEX TO VIRUS RESEARCH INSTITUTE, INC.'S FINANCIAL STATEMENTS
<TABLE>
<S> <C>
VIRUS RESEARCH INSTITUTE, INC.
Balance Sheets as of June 30, 1998 and December 31, 1997............................... 22
Statements of Operations for the Three Months Ended June 30, 1998 and 1997,
for the Six Months Ended June 30, 1998 and 1997, and for the Period from Inception
through June 30, 1998................................................................. 23
Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997, and for
the period from Inception through June 30, 1998....................................... 24
Notes to Financial Statements ......................................................... 25
Report of Independent Accountants ..................................................... 26
Balance Sheets as of December 31, 1996 and 1997 ....................................... 27
Statements of Operations for the Years Ended December 31, 1995, 1996, 1997 and for the
Period from February 11, 1991 (Inception) through December 31, 1997 .................. 28
Statements of Changes in Stockholders' Equity for the Period February 11, 1991
(Inception) through December 31, 1997 ................................................ 29
Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 and for
the Period from February 11, 1991 (Inception) through December 31, 1997 .............. 30
Notes to Financial Statements ......................................................... 31
</TABLE>
21
<PAGE>
VIRUS RESEARCH INSTITUTE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,039,879 $ 2,488,963
Marketable securities 10,369,111 15,968,923
Contract receivable 0 1,000,000
Interest receivable 144,316 352,186
Prepaid expenses 542,051 273,224
Other current assets 36,694 42,616
------------ ------------
Total current assets 16,132,051 20,125,912
Noncurrent assets:
Leasehold improvements and equipment (net
of accumulated depreciation and amortization
of $2,596,446 at June 30, 1998 and
$2,416,568 at December 31, 1997) 784,847 715,234
Other assets 34,473 37,193
------------ ------------
Total noncurrent assets 819,320 752,427
------------ ------------
Total assets $ 16,951,371 $ 20,878,339
============ ============
Current liabilities:
Accounts payable $ 140,047 $ 24,769
Accrued consulting and research fees 1,213,145 709,295
Accrued employee benefits 121,636 91,636
Accrued legal 204,707 192,453
Other accrued expenses 298,500 377,987
Current portion of lease obligation payable 21,852 72,352
------------ ------------
Total current liabilities 1,999,887 1,468,492
Stockholders' equity:
Preferred stock -- $.001 par value; 5,000,000 shares
authorized, none issued -- --
Common stock -- $.001 par value; 30,000,000 shares authorized; 9,044,992
shares issued at June 30, 1998
and 8,928,314 shares issued at December 31, 1997 9,045 8,928
Additional paid-in capital 52,025,302 51,930,441
Deficit accumulated during the development stage (37,082,863) (32,529,522)
------------ ------------
Total stockholders' equity 14,951,484 19,409,847
------------ ------------
Total liabilities and stockholders' equity $ 16,951,371 $ 20,878,339
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
22
<PAGE>
VIRUS RESEARCH INSTITUTE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED CUMULATIVE
JUNE 30, JUNE 30, SINCE INCEPTION
1998 1997 1998 1997 (1991)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE:
Licensing and option revenue $ 0 $ 250,000 $ 51,111 $ 250,000 $ 6,946,667
Research and development revenue 0 387,491 0 774,982 4,165,180
Interest income 238,089 339,816 502,064 672,596 3,025,453
-----------------------------------------------------------------------------------------
TOTAL REVENUE 238,089 977,307 553,175 1,697,578 14,137,300
EXPENSES:
Research and development 1,788,199 1,672,085 3,642,038 3,372,561 35,208,573
General and administrative 596,604 634,833 1,260,253 1,346,851 12,569,250
Depreciation 87,915 98,140 179,878 228,747 2,698,794
Interest expense 11,112 17,010 24,347 34,995 743,546
-----------------------------------------------------------------------------------------
TOTAL EXPENSES 2,483,830 2,422,068 5,106,516 4,983,154 51,220,163
-----------------------------------------------------------------------------------------
NET LOSS ($2,245,741) ($1,444,761) ($4,553,341) ($3,285,576) ($37,082,863)
========================================================================================
Basic and diluted net loss per share ($ 0.25) ($ 0.16) ($ 0.51) ($ 0.37)
=====================================================================
Shares used in computing basic and
diluted net loss per common share 9,024,296 8,892,995 8,983,987 8,877,493
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
23
<PAGE>
VIRUS RESEARCH INSTITUTE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED CUMULATIVE
JUNE 30, SINCE INCEPTION
1998 1997 (1991)
---------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Loss ($4,553,341) ($ 3,285,576) ($37,082,863)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 179,878 232,743 2,749,320
Conversion of accrued interest to preferred stock 0 0 58,373
Changes in operating assets and liabilities:
Contract receivable 1,000,000 0 0
Increase in prepaid expenses
and other assets (52,315) (486,493) (634,408)
Increase (decrease) in accounts payable and
accrued expenses 581,894 (18,305) 1,978,034
Increase in deferred revenue 0 150,000 0
---------------------------------------------------
Net cash used in operating activities (2,843,884) (3,407,631) (32,931,544)
Cash flows from investing activities:
Purchases (redemptions) of marketable
securities, net 5,599,812 (7,537,770) (10,369,111)
Capital expenditures (249,491) (177,968) (3,398,738)
Other 0 0 (46,182)
---------------------------------------------------
Net cash provided by (used in) investing activities 5,350,321 (7,715,738) (13,814,031)
Cash flows from financing activities:
Proceeds from notes payable 0 0 7,973,668
Sale and leaseback related to capital acquisitions 0 0 751,311
Principal payments on lease obligations (50,499) (75,525) (889,764)
Sale of common stock 94,978 20,602 27,808,181
Sale of preferred stock 0 0 19,258,613
Offering costs 0 0 (3,112,941)
Founders' shares reacquired 0 0 (846)
Purchase of treasury stock 0 0 (2,768)
---------------------------------------------------
Net cash provided by (used in) financing activities 44,479 (54,923) 51,785,454
Net increase (decrease) in cash and cash equivalents 2,550,916 (11,178,292) 5,039,879
Cash and cash equivalents, beginning of period 2,488,963 15,209,180 0
---------------------------------------------------
Cash and cash equivalents, end of period $ 5,039,879 $ 4,030,888 $ 5,039,879
===================================================
Supplemental disclosure of cash flow information:
Interest paid during the period $ 7,793 $ 15,775 $ 265,986
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
24
<PAGE>
VIRUS RESEARCH INSTITUTE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(1) FINANCIAL STATEMENT PRESENTATION
The unaudited financial statements of Virus Research Institute, Inc. (the
"Company") herein have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC) and, in the opinion of management,
reflect all adjustments (consisting of normal recurring accruals) necessary to
present fairly the results of operations for the interim periods presented.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting principals
have been condensed or omitted pursuant to such rules and regulations; however,
management believes that the disclosures are adequate to make the information
presented not misleading. These financial statements and the notes thereto
should be read in conjunction with the financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997. The results for the interim period presented are not
necessarily indicative of the results for the full fiscal year.
(2) NET LOSS PER COMMON SHARE
During 1997, the Company adopted Statement of Financial Accounting Standard
No. 128, "Earnings per Share" requiring certain changes in the calculation of
per share results. As the Company has reported net losses from operations in the
years presented, the computation for basic and diluted earnings per share is
identical.
(3) RECENT DEVELOPMENTS
On May 12, 1998, the Company announced that it has signed a definitive
merger agreement with T Cell Sciences, Inc. (T Cell) whereby the Company will be
acquired by T Cell. Under the terms of the merger agreement, which is subject to
shareholder and regulatory approval, T Cell will issue 1.55 shares of its common
stock and 0.2 warrants for each share of the Company's common stock. Each
warrant represents the right to purchase one share of T Cell's common stock for
$6.00 per share and will expire five years from the closing date. It is
anticipated that a significant portion of the purchase price will be written off
as in-process technology.
T Cell is a biopharmaceutical company engaged in the discovery and
development of innovative drugs using novel applications of immunology to
prevent and treat cardiovascular, pulmonary and immune disorders.
Consummation of the merger is subject to the fulfillment of certain
conditions, including approval of the merger by the Company's stockholders,
approval of the issuance of T Cell's common stock and warrants by its
stockholders and listing of the shares of T Cell's common stock issuable in
connection with the merger or upon exercise of T Cell's warrant's on the Nasdaq
National Market. It is expected that the consummation of the merger will occur
as soon as practicable after the satisfaction of all such conditions. T Cell has
filed a Registration Statement on Form S-4 covering the shares of T Cell's
common stock to be issued in connection with the merger.
25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Virus Research Institute, Inc.
Cambridge, Massachusetts
We have audited the accompanying balance sheets of Virus Research
Institute, Inc. (a development stage company) as at December 31, 1997 and
December 31, 1996, and the related statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997, and for the period from February 11, 1991
(inception) through December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance abut 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 enumerated above present fairly,
in all material respects, the financial position of Virus Research Institute,
Inc. at December 31, 1997 and December 31, 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1997, and the period from February 11, 1991 (inception)
through December 31, 1997 in conformity with generally accepted accounting
principles.
RICHARD A. EISNER & COMPANY, LLP
Cambridge, Massachusetts
January 30, 1998
26
<PAGE>
VIRUS RESEARCH INSTITUTE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------- ------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note E) ................... $ 2,488,963 $ 15,209,180
Marketable securities (Note E) ....................... 15,968,923 10,339,985
Contract receivable (Note C) ......................... 1,000,000 --
Interest receivable .................................. 352,186 218,285
Prepaid expenses ..................................... 273,224 220,534
Other current assets ................................. 42,616 659
------------- -------------
Total current assets ............................... 20,125,912 25,988,643
NONCURRENT ASSETS:
Marketable securities (Note E) ....................... 0 499,891
Leasehold improvements and equipment (net of
accumulated depreciation and amortization of
$2,416,568 at December 31, 1997 and $2,015,483
at December 31, 1996) (Note D) ...................... 715,234 881,363
Other assets ......................................... 37,193 67,634
------------- -------------
Total noncurrent assets ............................ 752,427 1,448,888
------------- -------------
Total assets ....................................... $ 20,878,339 $ 27,437,531
============= =============
CURRENT LIABILITIES:
Accounts payable ..................................... $ 24,769 $ 43,809
Accrued consulting and research fees ................. 709,295 810,677
Accrued employee benefits ............................ 91,636 71,636
Accrued legal ........................................ 192,453 112,000
Other accrued expenses ............................... 377,987 229,123
Current portion of lease obligation payable
(Note F(2)) ......................................... 72,352 155,079
------------- -------------
Total current liabilities .......................... 1,468,492 1,422,324
Lease obligation payable, less current portion
(Note F(2)) ......................................... -- 64,351
Commitments (Notes C and F)
Stockholders' equity (Notes A and G):
Preferred stock--$.001 par value; 5,000,000
shares authorized, none issued ...................... -- --
Common stock--$.001 par value; 30,000,000
shares authorized; 8,928,314 shares issued at
December 31, 1997 and 8,845,027 shares
issued at December 31, 1996 ......................... 8,928 8,845
Additional paid-in capital ........................... 51,930,441 51,907,179
Deficit accumulated during the development stage...... (32,529,522) (25,965,168)
------------- -------------
Total stockholders' equity .......................... 19,409,847 25,950,856
------------- -------------
Total liabilities and stockholders' equity ......... $ 20,878,339 $ 27,437,531
============= =============
</TABLE>
See Notes to Financial Statements
27
<PAGE>
VIRUS RESEARCH INSTITUTE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
February 11, 1991
Year Ended December 31, (Inception) Through
1997 1996 1995 December 31, 1997
---------------- ---------------- ---------------- --------------------
<S> <C> <C> <C> <C>
REVENUE (NOTE B(1)):
Licensing and option revenue .................... $ 905,556 $ 4,520,000 $ 770,000 $ 6,895,556
Research and development revenue ................ 1,599,982 1,476,449 1,067,480 4,165,180
Interest income ................................. 1,298,857 851,082 126,249 2,523,389
------------ ------------ ------------ -------------
Total revenue ................................ 3,804,395 6,847,531 1,963,729 13,584,125
EXPENSES:
Research and development (Note C) ............... 7,557,055 5,262,507 5,734,427 31,566,535
General and administrative ...................... 2,344,638 2,328,204 1,854,732 11,308,997
Depreciation .................................... 401,085 673,436 583,654 2,518,916
Interest and other expense ...................... 65,971 165,320 87,944 719,199
------------ ------------ ------------ -------------
Total expenses ............................... 10,368,749 8,429,467 8,260,757 46,113,647
------------ ------------ ------------ -------------
Net loss ..................................... $ (6,564,354) $ (1,581,936) $ (6,297,028) $ (32,529,522)
============ ============ ============ =============
Basic and diluted net loss per common share ..... $ (0.74)
============
Shares used in computing basic and diluted
net loss per common share ...................... 8,897,784
Pro forma basic and diluted net loss per
common share ................................... $ (0.21) $ (1.03)
============ ============
Shares used in computing pro forma basic and
diluted net loss per common share .............. 7,639,726 6,104,671
</TABLE>
See Notes to Financial Statements
28
<PAGE>
VIRUS RESEARCH INSTITUTE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During
--------------------------- Paid-In Development
Shares Par Value Capital Stage Total
--------------- ----------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Sale of common stock ...................... 1,667 $ 2 $ 498 $ -- $ 500
Net loss--February 11, 1991 (inception)
through December 31, 1991 ................ (862,597) (862,597)
---------- -------- ------------ ------------- -------------
Balance December 31, 1991 ................. 1,667 2 498 (862,597) (862,097)
Sale of common stock .................... 607 1 1,819 1,820
Recapitalization: 1,000 for 1 stock
split .................................. 2,271,060 2,271 (2,271) --
Surrender of common stock by
HCV II ................................. (1,291,667) (1,292) 905 (387)
Sale of common stock .................... 48,275 48 7,193 7,241
Net loss for the year ................... (3,967,604) (3,967,604)
---------- -------- ------------ ------------- -------------
Balance December 31, 1992 ................. 1,029,942 1,030 8,144 (4,830,201) (4,821,027)
Cancellation of shares pursuant to
founders' plan amendment ............... (282,000) (282) (564) (846)
Purchase and cancellation of treasury
shares ................................. (105,917) (106) (2,662) (2,768)
Stock options exercised ................. 83 -- 12 12
Net loss for the year ................... (5,927,221) (5,927,221)
---------- -------- ------------ ------------- -------------
Balance December 31, 1993 ................. 642,108 642 4,930 (10,757,422) (10,751,850)
Stock options exercised ................. 1,475 2 321 323
Founder option exercised ................ 43,333 43 37,007 37,050
Stock warrants exercised ................ 185 -- 178 178
Net loss for the year ................... (7,328,782) (7,328,782)
---------- -------- ------------ ------------- -------------
Balance December 31, 1994 ................. 687,101 687 42,436 (18,086,204) (18,043,081)
Stock options exercised ................. 2,903 3 1,766 1,769
Common stock warrants issued in
conjunction with notes payable ......... 90,000 90,000
Net loss for the year ................... (6,297,028) (6,297,028)
---------- -------- ------------ ------------- -------------
Balance December 31, 1995 ................. 690,004 690 134,202 (24,383,232) (24,248,340)
Conversion of notes payable to
investors .............................. 217,927 218 987,874 988,092
Cashless exercise of stock warrants ..... 17,363 17 (17) --
Conversion of redeemable convertible
preferred stock ........................ 5,553,579 5,554 26,003,825 26,009,379
Stock options exercised ................. 66,154 66 40,900 40,966
Shares issued at Initial Public
Offering ............................... 2,300,000 2,300 27,597,700 27,600,000
Costs of offering ....................... (2,857,305) (2,857,305)
Net loss for the year ................... (1,581,936) (1,581,936)
---------- -------- ------------ ------------- -------------
Balance December 31, 1996 ................. 8,845,027 8,845 51,907,179 (25,965,168) 25,950,856
Cashless exercise of stock warrants ..... 20,924 21 (21) --
Stock options exercised ................. 62,363 62 23,283 23,345
Net loss for the year ................... (6,564,354) (6,564,354)
---------- -------- ------------ ------------- -------------
Balance December 31, 1997 ................. 8,928,314 $ 8,928 $ 51,930,441 $ (32,529,522) $ 19,409,847
========== ======== ============ ============= =============
</TABLE>
See Notes to Financial Statements
29
<PAGE>
VIRUS RESEARCH INSTITUTE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
February 11, 1991
Year Ended December 31, (Inception) Through
1997 1996 1995 December 31, 1997
---------------- ---------------- ---------------- --------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ...................................... $ (6,564,354) $ (1,581,936) $ (6,297,028) $ (32,529,522)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ................ 409,077 700,188 599,435 2,569,442
Conversion of accrued interest to
preferred stock ............................. -- 46,026 -- 58,373
Changes in operating assets and
liabilities:
Contract receivable ........................ (1,000,000) -- -- (1,000,000)
(Increase) decrease in prepaid expenses
and other assets ........................... (198,108) (164,869) 112,784 (582,093)
Increase in accounts payable and
accrued expenses ........................... 128,896 127,320 157,611 1,396,140
------------- ------------- ------------ -------------
Net cash used in operating activities ....... (7,224,489) (873,271) (5,427,198) (30,087,660)
Cash flows from investing activities:
Purchases of marketable securities, net of
redemptions ................................. (5,129,047) (10,839,876) -- (15,968,923)
Capital expenditures .......................... (234,955) (349,312) (129,561) (3,149,247)
Other ......................................... -- -- -- (46,182)
------------- ------------- ------------ -------------
Net cash used in investing activities ...... (5,364,002) (11,189,188) (129,561) (19,164,352)
Cash flows from financing activities:
Proceeds from notes payable ................. -- -- 1,000,000 7,973,668
Sale and leaseback related to capital
acquisitions ............................... -- -- 250,000 751,311
Principal payments on lease obligations ..... (155,070) (174,503) (183,344) (839,265)
Sale of common stock ........................ 23,344 27,640,966 1,769 27,713,203
Sale of preferred stock ..................... -- 1,500,140 -- 19,258,613
Offering costs .............................. -- (2,875,140) (980) (3,112,941)
Founders' shares reacquired ................. -- -- -- (846)
Purchase of treasury stock .................. -- -- -- (2,768)
------------- ------------- ------------ -------------
Net cash provided by (used in)
financing activities ..................... (131,726) 26,091,463 1,067,445 51,740,975
Net increase (decrease) in cash and cash
equivalents ................................... (12,720,217) 14,029,004 (4,489,314) 2,488,963
Cash and cash equivalents, beginning of
period ........................................ 15,209,180 1,180,176 5,669,490 --
------------- ------------- ------------ -------------
Cash and cash equivalents, end of period ....... $ 2,488,963 $ 15,209,180 $ 1,180,176 $ 2,488,963
============= ============= ============ =============
Supplemental disclosure of cash flow
information:
Interest paid during the period ............. $ 27,530 $ 63,473 $ 61,915 $ 258,193
</TABLE>
See Notes E, F and G with respect to noncash financing and leasing
transactions.
See Notes to Financial Statements
30
<PAGE>
VIRUS RESEARCH INSTITUTE, INC.
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(NOTE A)--THE COMPANY:
Virus Research Institute, Inc. (the "Company") is a development stage
company engaged in the discovery and development of systems for the delivery of
vaccines and immunotherapeutics, and improved and novel vaccines for adults and
children.
The Company has incurred substantial losses since inception while it has
been in the development stage and such losses are expected to continue. In June
1996, the Company completed an initial public offering of 2,300,000 shares of
common stock for $12.00 per share, resulting in net proceeds of approximately
$24,743,000. The Company anticipates that the proceeds from the initial public
offering in conjunction with payments received from collaborative partners will
allow the Company to meet its obligations through December 31, 1999.
(NOTE B)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(1) Revenue recognition:
Nonrefundable, noncreditable licensing and option fees and milestone
payments are recognized when they are earned in accordance with the performance
requirements and contractual terms. Research and development revenues and
grants are recognized over the period of performance under the terms of the
related agreements.
Licensing revenue represents amounts paid by companies for the use of or
access to the Company's proprietary technology. Option revenue represents
payments for the right to evaluate the Company's proprietary technology which
may or may not result in a licensing or collaborative development agreement.
Research and development revenue represents amounts earned by the Company from
several collaborative partners for sponsored research activities. Certain of
the Company's collaborators are also stockholders of the Company.
(2) Depreciation and amortization:
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized using the
straight-line method over the life of the lease.
(3) Patent and licensing costs:
As a result of research and development efforts conducted by the Company,
it has received and applied for, and is in the process of applying for, a
number of patents to protect proprietary inventions and licenses to use certain
intellectual property. Costs incurred in connection with patent applications
and licenses have been expensed as incurred and are reflected as general and
administrative expenses.
(4) Cash and cash equivalents:
The Company considers all highly liquid investments with maturities of
three months or less, when acquired, to be cash equivalents. Cash equivalents
are recorded at cost, which approximates fair value.
(5) Investments in marketable securities:
In addition to cash equivalents, the Company has investments in corporate
and municipal debt securities that are classified in the balance sheet as
held-to-maturity in accordance with the provisions of Statement of Financial
Accounting Standard No. 115 (SFAS No. 115), "Accounting for Certain Instruments
in Debt and Equity Securities." Held-to-maturity investments are securities the
Company has the positive intent and ability to hold to maturity. These
securities are accounted for at amortized cost, which approximates fair value.
31
<PAGE>
VIRUS RESEARCH INSTITUTE, INC.
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(6) Income taxes:
Deferred income taxes are recognized for the tax consequences in future
years for differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. aluation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
(7) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
are used when accounting for depreciation and amortization, taxes and
contingencies.
(8) Stock-based compensation:
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation." The Company adopted this standard in 1996 by making the required
note disclosures only. Therefore, the adoption of this standard has not had an
effect on the Company's financial position or results of operations.
(9) Net loss per share:
During 1997, the Company adopted Statement of Financial Accounting
Standard No. 128, "Earnings per Share" requiring certain changes in the
calculation of per share results. As the Company has reported net losses from
operations in the years presented, the computation for basic and diluted
earnings per share is identical.
Pro forma net loss per common share is based on the pro forma weighted
average number of common shares outstanding during the periods presented as
adjusted to reflect the conversion of all preferred stock on a retroactive
basis as of January 1, 1995 or date of issuance, if later.
(NOTE C)--RESEARCH, LICENSE AND CONSULTING AGREEMENTS:
The Company has entered into various research, license and consulting
agreements to support its research and development activities. These agreements
generally expire over several future years although some are automatically
renewable on an annual basis unless canceled by either party. Amounts charged
to operations in connection with these agreements for the years ended December
31, 1997, 1996 and 1995 amounted to approximately $705,000, $650,000 and
$1,255,000, respectively. The Company expects to incur similar expenses in
future years. Some of the above agreements contain provisions for future
royalties to be paid on sales of products developed under the agreements.
During 1997, the Company entered into an agreement pursuant to which the
Company licensed certain patents and technology to a collaborator. Under the
terms of the agreement, the collaborator is required to pay the Company
$400,000 for licensing rights and $600,000 for research which was completed as
of December 31, 1997. The total $1,000,000 is recorded as a contract receivable
at December 31, 1997. The agreement also provides for future payments
contingent upon the achievement of certain milestones.
32
<PAGE>
VIRUS RESEARCH INSTITUTE, INC.
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(NOTE D)--LEASEHOLD IMPROVEMENTS AND EQUIPMENT:
Leasehold improvements and equipment, including approximately $413,000
acquired under capital leases, are stated at cost and are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Laboratory furniture, fixtures and equipment ........... $1,537,121 $1,366,074
Office furniture, fixtures and equipment ............... 291,963 246,800
Leasehold improvements ................................. 1,302,718 1,283,972
---------- ----------
Total ................................................ 3,131,802 2,896,846
Less accumulated depreciation and amortization ......... 2,416,568 2,015,483
---------- ----------
Balance .............................................. $ 715,234 $ 881,363
========== ==========
</TABLE>
(NOTE E)--INVESTMENTS IN DEBT SECURITIES:
As of December 31, 1997 and 1996, the aggregate fair value of the
held-to-maturity securities was $15,966,179 and $16,866,045, respectively.
These amounts include an unrealized loss of $2,744 at December 31, 1997 and an
unrealized gain of $26,056 at December 31, 1996.
These securities are reflected in the balance sheet as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
Cash equivalents ........................................ $ -- $ 6,000,113
Marketable securities, maturing within one year ......... $15,968,923 $10,339,985
Marketable securities, long term ........................ $ -- $ 499,891
</TABLE>
(NOTE F)--COMMITMENTS:
(1) Operating lease:
The Company has an operating lease for office and research facilities
which expires in December 2001. The Company has the option to renew the lease
for an additional five years. The lease also provides that the Company pay all
real estate taxes levied against the premises. The lease requires minimum
annual rentals in 1998 through 2001 of $294,000.
Rent expense for 1997, 1996 and 1995 amounted to approximately $332,000,
$267,000 and $269,000, respectively.
(2) Capital lease:
The Company has entered into several capital leases for equipment,
including sale and leaseback transactions. Future minimum payments under these
leases at December 31, 1997 amount to $72,352.
(NOTE G)--CAPITALIZATION:
(1) Warrants:
The Company has issued warrants to purchase common and preferred stock in
connection with the issuance of notes payable and the establishment of capital
leases.
33
<PAGE>
VIRUS RESEARCH INSTITUTE, INC.
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Warrants outstanding at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Exercise Price
Security Number of Shares Per Share Expiration Date
- ------------------------- ------------------ --------------- ------------------
<S> <C> <C> <C>
Common stock ......... 23,006 $ .96 February 9, 2004
Common stock ......... 49,578 1.95 December 14, 2005
Common stock ......... 11,000 9.60 April 12, 2001
</TABLE>
The warrant agreements contain antidilution provisions related to future
issuances of stock.
(2) Common stock options:
The Company has adopted an equity incentive plan providing for the
issuance of restricted stock and the granting of options to purchase up to a
combined total of 1,751,176 shares of common stock. The plan provides for the
granting of both incentive stock options and nonstatutory stock options. The
exercise price for any incentive stock options cannot be less than the fair
market value on the date of grant, while the exercise price for nonstatutory
options will be determined by the Board of Directors. The vesting periods for
all options are determined by the Board of Directors. The Company had the
following option activity during 1995, 1996 and 1997:
<TABLE>
<CAPTION>
Weighted Average Option
Number of Shares Price Per Share
------------------ ------------------------
<S> <C> <C>
Balance--December 31, 1994 ......... 750,220 $ .80
Granted .......................... 12,142 $ 1.85
Exercised ........................ (2,903) $ .61
Cancelled ........................ (11,584) $ .96
-------
Balance--December 31, 1995 ......... 747,875 $ .82
Granted .......................... 325,172 $ 6.36
Exercised ........................ (66,154) $ .62
Cancelled ........................ (14,515) $ 1.45
-------
Balance--December 31, 1996 ......... 992,378 $ 2.64
Granted .......................... 104,412 $ 6.97
Exercised ........................ (62,363) $ .37
Cancelled ........................ (1,765) $ 5.09
-------
Balance--December 31, 1997 ......... 1,032,662 $ 3.23
---------
</TABLE>
Options for 539,569 shares are exercisable at December 31, 1997 at a
weighted average option price of $1.90 per share, with a weighted average
remaining contractual life of approximately 7 years. At December 31, 1997,
there were 585,545 shares available for future grant.
(3) Stock-based compensation:
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" but applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its plan.
These was no compensation expense recognized in 1997, 1996 or 1995. If the
Company had elected to recognize compensation cost for the plan based on the
fair value at the grant date for awards under the plan, consistent with the
method prescribed by SFAS No. 123, net loss per share would have been changed
to the pro forma amounts indicated below:
34
<PAGE>
VIRUS RESEARCH INSTITUTE, INC.
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1996 1995
---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net loss ................... As reported $ (6,564,354) (1,581,936) $ (6,297,028)
Pro forma (6,776,699) (1,729,019) (6,297,309)
Net loss per share ......... As reported $ (.74) $ (.21) $ (1.03)
Pro forma (.76) (.23) (1.03)
</TABLE>
The fair value of the Company's stock options used to compute pro forma
net loss and net loss per share disclosures is the estimated present value at
grant date using the Black-Scholes option-pricing model with the following
weighted average assumptions for 1997, 1996 and 1995: dividend yield of 2.5%;
expected volatility of 45%; a risk free interest rate of 7.3%; and an expected
holding period of nine years.
The weighted average grant date fair value of options granted was $2.37
per share, $3.21 per share, and $3.07 per share for the years ended December
31, 1997, 1996 and 1995, respectively.
(NOTE H)--INCOME TAXES:
Through December 31, 1993, pursuant to provisions of the Internal Revenue
Code, the Company was deferring all start-up costs because operations, as
defined by the Internal Revenue Code, had not commenced. In addition, the
Company elected to defer all research and development costs until revenues were
generated. Effective January 1994, the Company began generating revenues and
commenced operations for tax purposes and is amortizing all costs deferred
through December 31, 1993 over 60 months. From January 1994 forward, the
Company continues to defer internal research and development costs and
amortizes such costs over 60 months for tax purposes.
At December 31, 1997 and 1996, the Company had no current or deferred tax
liability.
The components of the Company's net deferred tax asset and the tax effects
of the primary differences giving rise to the Company's deferred tax asset are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995
---------------- --------------- ---------------
<S> <C> <C> <C>
Net operating loss carryforwards ................ $ 4,900,000 $ 3,100,000 $ 3,000,000
Deferred start-up costs ......................... 200,000 380,000 550,000
Deferred research and development costs ......... 6,800,000 5,944,000 5,415,000
Depreciation .................................... 315,000 250,000 164,000
Research and development credit ................. 561,000 227,000 110,000
Other ........................................... 47,000 36,000 171,000
------------- ------------ ------------
Deferred tax asset .............................. 12,823,000 9,937,000 9,410,000
Valuation allowance ............................. (12,823,000) (9,937,000) (9,410,000)
------------- ------------ ------------
Net deferred tax asset .......................... $ -- $ -- $ --
============= ============ ============
</TABLE>
At December 31, 1997, the Company's net operating loss carryovers for
federal income tax purposes amount to approximately $12,480,000 and expire
through 2012. The Company's ability to use these carryforwards is subject to
limitations resulting from an ownership change as defined in Internal Revenue
Code Sections 382 and 383.
35
<PAGE>
(b) Pro Forma Financial Information
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
The following unaudited pro forma condensed combined balance sheet as
of June 30, 1998, the unaudited pro forma condensed combined statements of
operations for the year ended December 31, 1997 and the six months ended June
30, 1998 (collectively, the "Unaudited Pro Forma Statements") were prepared to
give effect to the Merger accounted for under the purchase method of accounting.
The unaudited pro forma balance sheet assumes that the Merger occurred on June
30, 1998. The unaudited pro forma condensed combined statement of operations for
the year ended December 31, 1997 and for the six months ended June 30, 1998
assume that the Merger occurred on January 1, 1997 and January 1, 1998,
respectively. The Unaudited Pro Forma Statements are based on the historical
consolidated financial statements of AVANT (formerly T Cell Sciences, Inc.) and
VRI under the assumptions and adjustments set forth in the accompanying notes to
the Unaudited Pro Forma Statements. The condensed combined financial information
for the fiscal year ended December 31, 1997 has been obtained from the
consolidated financial statements of AVANT and VRI. The condensed combined
financial information for the six months ended June 30,1998 has been obtained
from the unaudited financial statements of AVANT and VRI and includes, in the
opinion of AVANT's and VRI's management, all adjustments necessary to present
fairly the data for such period. The Unaudited Pro Forma Statements may not be
indicative of the results that actually would have occurred if the Merger had
been in effect on the dates indicated or which may be obtained in the future.
The pro forma adjustments are based upon available information and upon
certain assumptions as described in the notes to the Unaudited Pro Forma
Statements that AVANT's management believes are reasonable in the circumstances.
The purchase price has been allocated to the acquired assets and liabilities
based on a determination from an independent appraisal of their respective
values. In accordance with generally accepted accounting principles, the amount
allocated to in-process technology will be charged to expense in the quarter in
which the Merger is consummated. This adjustment has been excluded from the
unaudited pro forma condensed combined statements of operations as it is a
nonrecurring item. Although AVANT believes, based on available information, that
the fair values and allocation of the purchase price included in the Unaudited
Pro Forma Statements are reasonable estimates, final purchase accounting
adjustments will be made on the basis of evaluations and estimates made after
the Merger is consummated. As a result, final allocation of costs related to the
Merger may differ from that presented herein. The Unaudited Pro Forma Statements
and accompanying notes should be read in conjunction with the separate
consolidated financial statements and notes thereto of AVANT and VRI which have
been included or incorporated by reference herein.
36
<PAGE>
AVANT IMMUNOTHERAPEUTICS, INC. AND VIRUS RESEARCH INSTITUTE, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30,1998
<TABLE>
<CAPTION>
Pro Forma
Combined
Pro Forma Reflecting the
AVANT VRI Adjustments Merger
===============================================================================================================================
<S> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $5,217,400 $ 5,039,900 $ 10,257,300
Marketable securities -- 10,369,100 10,369,100
Current portion restricted cash 750,000 -- 750,000
Prepaid and other current assets 696,600 723,100 (739,300)(a) 680,400
- -------------------------------------------------------------------------------------------------------------------------------
Total current assets 6,664,000 16,132,100 (739,300) 22,056,800
- -------------------------------------------------------------------------------------------------------------------------------
Property and equipment, net 341,900 784,800 1,126,700
Restricted cash 1,195,000 -- 1,195,000
Other noncurrent assets 1,635,400 34,500 1,560,000(b) 3,229,900
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $9,836,300 $ 16,951,400 $820,700 $ 27,608,400
===============================================================================================================================
Liabilities And Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $ 940,800 $ 1,978,000 $ 1,528,300(a) $ 4,447,100
Current portion of lease obligation payable -- 21,900 21,900
Deferred revenue 250,000 -- 250,000
Note payable 750,000 -- 750,000
- -------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,940,800 1,999,900 1,528,300 5,469,000
- -------------------------------------------------------------------------------------------------------------------------------
Long-term note payable 750,000 -- 750,000
- -------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Common stock 28,500 9,000 5,000(a)(d) 42,500
Additional paid-in capital 80,069,600 52,025,300 8,671,900(a)(d) 140,766,800
Accumulated deficit (72,952,600) (37,082,800) (9,384,500)(b)(d)(e) (119,419,900)
- -------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 7,145,500 14,951,500 (707,600) 21,389,400
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $9,836,300 $ 16,951,400 $820,700 $ 27,608,400
===============================================================================================================================
</TABLE>
See notes to Consolidated Pro Forma Financial Statements
37
<PAGE>
AVANT IMMUNOTHERAPEUTICS, INC. AND VIRUS RESEARCH INSTITUTE, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Pro Forma
Combined
Pro Forma Reflecting the
AVANT VRI Adjustments Merger
========================================================================================================================
<S> <C> <C> <C>
Operating Revenue:
Product development, research,
licensing and option revenue $ 1,147,600 $ 2,505,500 $ 3,653,100
Product sales 44,500 -- 44,500
- -----------------------------------------------------------------------------------------------------------------------
Total operating revenue 1,192,100 2,505,500 3,697,600
- -----------------------------------------------------------------------------------------------------------------------
Operating Expense:
Research and development 5,256,900 7,906,900 1,192,000(c) 14,355,800
General and administrative 3,375,500 2,395,900 5,771,400
Other operating expense 118,400 -- 118,400
- -----------------------------------------------------------------------------------------------------------------------
Total operating expense 8,750,800 10,302,800 1,192,000 20,245,600
- -----------------------------------------------------------------------------------------------------------------------
Operating loss (7,558,700) (7,797,300) (1,192,000) (16,548,000)
- -----------------------------------------------------------------------------------------------------------------------
Other non-operating income (expense), net (5,549,300) 1,232,900 (4,316,400)
- -----------------------------------------------------------------------------------------------------------------------
Net loss $(13,108,000) $ (6,564,400) $(1,192,000) $(20,864,400)
=======================================================================================================================
Basic and diluted net loss per common share $ (0.52) $ (0.74) $ (0.53)
=======================================================================================================================
Shares used in computing basic and
diluted net loss per common share 25,139,900 8,897,800 39,176,400(f)
=======================================================================================================================
</TABLE>
See notes to Consolidated Pro Forma Financial Statements
38
<PAGE>
AVANT IMMUNOTHERAPEUTICS, INC. AND VIRUS RESEARCH INSTITUTE, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30,1998
<TABLE>
<CAPTION>
Pro Forma
Combined
Pro Forma Reflecting the
AVANT VRI Adjustments Merger
========================================================================================================================
<S> <C> <C> <C>
Operating Revenue:
Product development, research,
licensing and option revenue $ 635,900 $ 51,100 $ 687,000
Product sales 35,000 -- 35,000
- -----------------------------------------------------------------------------------------------------------------------
Total operating revenue 670,900 51,100 722,000
- -----------------------------------------------------------------------------------------------------------------------
Operating Expense:
Research and development 2,259,800 3,792,400 596,000(c) 6,648,200
General and administrative 1,482,800 1,289,700 2,772,500
Other operating expense 39,900 -- 39,900
- -----------------------------------------------------------------------------------------------------------------------
Total operating expense 3,782,500 5,082,100 596,000 9,460,600
- -----------------------------------------------------------------------------------------------------------------------
Operating loss (3,111,600) (5,031,000) (596,000) (8,738,600)
- -----------------------------------------------------------------------------------------------------------------------
Other non-operating income, net 395,600 477,700 873,300
- -----------------------------------------------------------------------------------------------------------------------
Net loss $ (2,716,000) $ (4,553,300) ($596,000) $ (7,865,300)
=======================================================================================================================
Basic and diluted net loss per common share $ (0.10) $ (0.51) $ (0.19)
=======================================================================================================================
Shares used in computing basic and
diluted net loss per common share 27,638,900 8,984,000 41,675,400(f)
=======================================================================================================================
</TABLE>
See notes to Consolidated Pro Forma Financial Statements
39
<PAGE>
AVANT IMMUNOTHERAPEUTICS, INC. AND VIRUS RESEARCH INSTITUTE, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation
The pro forma information presented is theoretical in nature and not
necessarily indicative of the future consolidated results of operations of
the combined companies or the consolidated results of operations which
would have resulted had the Merger taken place during the periods
presented. The Unaudited Pro Forma Statements reflect the effects of the
Merger. The unaudited pro forma condensed combined balance sheet assumes
that the Merger and related events occurred as of June 30, 1998. The
unaudited pro forma condensed combined statements of operation for the year
ended December 31, 1997 and for the six months ended June 30, 1998 assume
that the Merger and related events occurred as of January 1, 1997 and
January 1, 1998, respectively.
2. Pro Forma Condensed Combined Financial Statement Adjustments
(a) The purchase price for the Merger was determined as follows:
<TABLE>
<S> <C>
AVANT common stock........................................................................ $ 51,686,900
AVANT warrants............................................................................ 4,980,700
Conversion of VRI Stock Options and VRI Warrants.......................................... 4,043,600
Direct acquisition costs.................................................................. 2,267,600
------------
Total estimated purchase price............................................................ $ 62,978,800
============
</TABLE>
(b) The actual allocation of the purchase price will be based on the
estimated fair values of the net assets of VRI at the consummation of
the Merger. For the purposes of the pro forma financial statements,
such allocation has been estimated as follows:
<TABLE>
<S> <C>
Net assets of VRI at June 30,1998......................................................... $ 14,951,500
In-process technology..................................................................... 46,467,300
Assembled workforce....................................................................... 460,000
Product base and collaborative relationships.............................................. 1,100,000
------------
Total estimated purchase price............................................................ $ 62,978,800
============
</TABLE>
(c) Amortization of the product base and collaborative relationships and
the assembled workforce will be over the estimated useful life of one
year and five years, respectively.
(d) Elimination of VRI stockholders' equity amounts.
(e) Management estimates that approximately $46.5 million of the purchase
price represents purchased in-process technology that has not yet
reached technological feasibility and has no alternative future use.
This amount will be expensed as a non-recurring charge upon
consummation of the Merger. This amount has been reflected as a
reduction to stockholders' equity and has not been included in the pro
forma condensed combined statements of operations due to its
non-recurring nature. A valuation of the intangible assets acquired was
conducted by an independent third party.
The value assigned to purchased in-process technology was determined by
identifying research projects in areas for which technological
feasibility has not been established. Due to the early stage nature of
VRI's operations and research and development, such research projects
represent substantially all of VRI's activities. The value was
determined by estimating the costs to develop the purchased in-process
technology into commercially viable products; estimating the resulting
net cash flows from such projects; and discounting the net cash flows
back the their present value.
40
<PAGE>
The efforts to develop the purchased in-process technology into
commercially viable products generally include the identification of
appropriate collaborative partners and financing, the completion of
both pre-clinical and clinical trials as well as the obtaining of
regulatory approval. Additional discussion of the nature of commercial
product development is included under "Risk Factors."
(f) The shares used in computing the unaudited pro forma combined net loss
per share for the year ended December 31, 1997 and six months ended
June 30,1998 are based upon the historical weighted average common
shares outstanding adjusted to reflect the issuance, as of January 1,
1997 and January 1, 1998, respectively, of approximately 14.0 million
shares of AVANT common stock as described in (a) above.
41
<PAGE>
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1 The Agreement and Plan of Merger, dated as of May 12, 1998,
by and among the Registrant, TC Merger Corp. and AVANT is
incorporated by reference to the Registration Statement on
Form S-4 filed with the Securities and Exchange Commission
on July 16, 1998 (Reg. No. 333-59215).*
3.1 Form of Second Certificate of Amendment of Third Restated
Certificate of Incorporation of T Cell Sciences, Inc.**
</TABLE>
- -----------
* Previously filed.
** Incorporated by reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-4 (File No. 333-59215) filed with the Commission on
July 16, 1998.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: September 29, 1998 AVANT Immunotherapeutics, Inc.
By: /s/ Norman W. Gorin
---------------------
Norman W. Gorin
Chief Financial Officer and Secretary
43
