<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, its 20549
FORM 10-K
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the fiscal year ended DECEMBER 31, 1998 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from __________ to __________.
Commission file number: 0-18006
THE IMMUNE RESPONSE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0255679
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5935 DARWIN COURT, CARLSBAD, CA 92008
Address of principal executive offices
(760) 431-7080
Registrant's telephone number including area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.0025
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant, based upon the last sale price of the Common Stock reported on
the National Association of Securities Dealers Automated Quotation National
Market System on March 23, 1999, was $190,818,199.
The number of shares of Common Stock outstanding as of March 23, 1999, was
24,269,473.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
(To the Extent Indicated Herein)
Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the
Registrant's 1999 Annual Meeting of Stockholders to be held on May 25, 1999
is incorporated by reference in Part III, Items 10 (as to directors), 11, 12
and 13 of this Form 10-K.
2
<PAGE>
ITEM 1. BUSINESS
GENERAL
The Immune Response Corporation ("Immune Response" or the "Company") is a
biopharmaceutical company developing immune-based therapies to induce
specific T cell responses for the treatment of HIV, autoimmune diseases and
cancer. The Company is conducting clinical trials for its immune-based
therapies for HIV, rheumatoid arthritis, psoriasis, multiple sclerosis, colon
cancer and brain cancer and preclinical studies for prostate cancer. In
addition, the Company is developing a targeted delivery technology for gene
therapy which is designed to enable the delivery of genes directly to the
liver after intravenous injection. The Company's gene therapy program is
focused on diseases of the liver and is in preclinical studies for the
treatment of hemophilia and hepatitis.
PRODUCTS UNDER DEVELOPMENT(1)
PRODUCTS UNDER DEVELOPMENT(1)
<TABLE>
<CAPTION>
PRECLINICAL PHASE I PHASE II PHASE III
----------- ------- -------- ---------
<S> <C> <C> <C> <C>
IMMUNE-BASED THERAPIES
HIV ---------------------------------------------------
Rheumatoid Arthritis --------------------------------------
Psoriasis ----------------------------------
Multiple Sclerosis -----------------------
Colon Cancer -----------------------
Brain Cancer ---------------
Melanoma Cancer ----------
Prostate Cancer -------
GENE THERAPY
------------
Hemophilia A ----------
Hepatitis ----------
</TABLE>
(1) The table describes the status of the current product candidates and is
not intended to depict the relative lengths of time of any of the stages
of drug discovery and preclinical and clinical development. The amount of
time spent in any phase of development will vary substantially from
product to product and there can be no assurance that any of the products
will proceed beyond the phase depicted or will receive regulatory
approval. See "Government Regulation."
IMMUNE-BASED THERAPIES
REMUNE HIV THERAPY
BACKGROUND. AIDS is a condition that slowly destroys the body's immune defense
system making the body vulnerable to opportunistic infections. AIDS is caused by
a virus known as HIV. Shortly after an individual is infected with HIV, the
virus multiplies rapidly and can be detected in the blood. The immune system
responds by producing antibody and cellular immune responses capable of
attacking HIV. While these and other responses are usually sufficient to
temporarily arrest progress of the infection and reduce levels of virus in the
blood, the virus continues to replicate and slowly destroy the immune system by
infecting and killing critical T cells, known as CD4 cells, which are needed to
maintain the immune system. As the infection progresses, the immune system's
control of HIV levels weakens, the level of virus in the blood rises and the
level of CD4 cells declines to a fraction of normal levels. These events are
followed by progression of the disease and the collapse of the immune system,
leaving the body susceptible to fatal infections and cancers. AIDS represents
the "end stage" of the HIV infection, and is characterized by pneumonia and
other infectious diseases of the pulmonary system, central nervous system,
gastrointestinal tract and skin, as well as cancers such as Kaposi's sarcoma and
lymphoma.
The World Health Organization ("WHO") estimates there are approximately 30
million individuals around the world infected with HIV. WHO also stated that
during 1998, 5.8 million individuals (including 590,000 children) became
infected with HIV. This represents approximately 16,000 new infections per day.
In the United States, the number of HIV-infected individuals is estimated at
890,000. The HIV epidemic represents a significant societal threat to both
developed and developing nations since most of the HIV-infected individuals are
expected to ultimately develop AIDS, creating a significant burden on healthcare
systems and economies around the world.
3
<PAGE>
EXISTING THERAPIES FOR HIV. The spread of HIV is a result of the virus
transferring its genetic material (RNA) into the host cell where it uses the
host cell's protein synthesis capability to replicate. The first antiviral
drugs approved in the United States to treat HIV were designed to inhibit the
synthesis of DNA from viral RNA in infected cells by targeting reverse
transcriptase enzymes. These reverse transcriptase inhibitors include:
zidovudine (AZT), dideoxyinosine (ddI), stavudine (d4T), zalcitabine
(Hivid/ddC), lamivudine (3TC), nevirapine (Viramune), delavirdine
(Rescriptor), efivirenz (Sustiva), and a combination of lamivudine and
zidovudine (Combivir) . Worldwide sales of reverse transcriptase inhibitors
were approximately $1.11 billion in 1997.
A second class of HIV antiviral drugs inhibits HIV protease, a viral enzyme
required to cleave newly synthesized viral proteins into the correct size so
the virus can assemble itself into new infectious virus particles. Approved
HIV protease inhibitors include: saquinavir (Invirase), ritonavir (Norvir),
indinavir (Crixivan), and nelfinavir mesylate (Viracept). Worldwide sales of
protease inhibitors were approximately $1.4 billion in 1997 and are projected
to grow significantly over the next several years.
Currently available antiviral products have been shown to be effective at
reducing the levels of virus in the blood, however, certain limitations in
the therapy have prevented the antiviral products from being as effective as
originally predicted. The antiviral products are often associated with
significant toxicity and eventual induction of viral resistance. In addition,
non-compliance with the strict dosage regimen may also reduce the
effectiveness and can accelerate emergence of resistance.
- RESISTANCE. HIV is prone to mutations that produce resistance to reverse
transcriptase and protease inhibitors. In an effort to overcome such
resistance, physicians have begun to use reverse transcriptase and
protease inhibitors in various combinations. Reverse transcriptase and
protease inhibitors, in various combinations commonly referred to as
"cocktail therapy" represent an advance in the treatment of HIV infection,
though no cocktail therapy has yet proven to be a cure. Moreover, although
these cocktail therapies have slowed the emergence of resistance, new
mutant strains have been identified which are resistant to several of
these drugs.
- TOXICITY. Accumulating data indicate that certain patients are unable to
take reverse transcriptase and protease inhibitors, either alone or in
combination, due to toxic side effects, including gastrointestinal
disorders, peripheral neuropathy and kidney stones. Recent information has
suggested that protease inhibitors may cause diabetes-like symptoms in
some patients.
- COMPLIANCE. In order to maintain a high level of the drugs in the blood,
many current drugs require complex dosing, with some medications to be
taken with meals and some on an empty stomach. A typical cocktail therapy
regimen includes 14 to 16 pills taken at six to eight times during the
day. If a patient misses a dose or delays taking the drugs even for a
short period of time, the drug level in the body may decline, allowing the
virus to replicate and increasing the potential to develop resistant
strains.
It is currently estimated that only 20% to 30% of HIV-infected individuals in
the United States use cocktail therapies, and up to 50% of these individuals
discontinue treatment due to resistance, toxicity, lack of compliance or
because the cocktail therapy was not effective in reducing the viral load.
The Company believes HIV opinion leaders have begun to recognize that in
order to effectively stop or slow the progression of HIV to AIDS, therapies
must stimulate the infected individual's own immune system (HIV-specific T
cell proliferation) in addition to reducing viral load through the use of
antiviral drugs. In the November 21, 1997 issue of SCIENCE, Dr. Bruce Walker
and his colleagues at Harvard University reported on the importance of
maintaining an HIV-specific immune response. Specifically, Dr. Walker showed
there was a direct correlation between HIV-specific T cell proliferation and
the successful control of virus replication in the absence of antiviral drug
therapy in certain HIV-infected individuals. Dr. Walker and other researchers
suggest that these results provide some hope that an immune response could be
boosted even in people who show little evidence of having an HIV-specific
immune response, possibly by combining powerful antiviral therapies with
anti-HIV immune-based therapies. The Company believes its published studies
have shown that the administration of REMUNE to HIV-infected individuals
elicits not only HIV-specific T cell proliferation, but also appears to
impact other markers of disease progression, such as chemokines and gamma
interferon, as well as a reduction in tumor necrosis factor, all of which are
believed by scientists to have a favorable impact on disease progression.
REMUNE - PRODUCT DESCRIPTION. REMUNE is an immune-based therapy intended to
treat HIV-infected individuals by preventing or delaying the progression of
HIV to AIDS. REMUNE is designed to stimulate an HIV-infected individual's
immune system to attack HIV. The Company believes results from its previous
clinical trials
4
<PAGE>
demonstrated that REMUNE has a statistically significant impact on boosting
HIV-specific immune responses in HIV-infected individuals. The Company
believes REMUNE stimulates the immune system against the virus and also
stimulates specific antiviral substances, such as chemokines, which are
produced by the immune system and naturally protect T cells from HIV
infection. By utilizing an immune-based therapy such as REMUNE, the Company
believes it may be possible to augment the natural immune system against the
virus and further optimize the effects of antiviral drug therapy. The Company
is currently conducting a Phase 3 clinical endpoint trial involving
approximately 2,500 HIV-infected individuals to determine whether REMUNE is
effective in halting or delaying the progression of HIV to AIDS. The Company
anticipates the trial will conclude in 1999.
REMUNE consists of the whole HIV virus, inactivated and depleted of its outer
coat ("envelope" or "gp120"). REMUNE is based on the core proteins of the
virus which are consistent across multiple strains of HIV. Earlier approaches
to HIV immune-based therapies were based on the viral envelope, proteins
located on the outside of the virus, and may not have been effective due to
mutations in the viral envelope. The Company believes REMUNE has been shown
to be safe and well tolerated after repeated use in thousands of individuals.
The Company believes REMUNE may be an appropriate treatment for HIV-infected
individuals to take alone or in combination with other treatments. REMUNE is
administered by intramuscular injection, by a healthcare professional, once
every three months.
HUMAN CLINICAL TRIALS. To support the Phase 3 clinical endpoint trial, the
Company established relationships with leading academic and clinical
institutions in order to place control of the design, statistical results,
data and laboratory results in the hands of independent third parties. There
are over 70 clinical sites participating in the trial. Physicians from the
University of California-San Francisco, Brown University and Cornell
University assisted in the design of this trial and are participating in
managing the trial as Principal Investigators. The statistical plans for the
trial were developed and data analyses are being conducted by
biostatisticians at Harvard University. Data management and analysis of
patient samples for this trial are being conducted by Quintiles, Inc., while
an independent data safety monitoring board comprised of clinicians and
statisticians not involved with the design or conduct of the trial will
review the data during the interim and final analyses of the Phase 3 trial.
This trial design was reviewed by a FDA Advisory Committee, and the trial was
designated by the FDA as a pivotal Phase 3 clinical endpoint trial.
The first statistical interim analysis of data from this Phase 3 trial
occurred in June 1998. The interim data suggested that the trial continue as
planned. The Company considered this result to be an indication that the
trial was progressing as expected. Another interim analysis of the data is
expected to occur in late Spring 1999.
The FDA has also granted expanded access to REMUNE. Expanded access is a
procedure whereby patients who were ineligible to enroll in the existing
clinical trials are provided treatment under a separate clinical trial
protocol. Under this protocol, all patients are treated with REMUNE and are
monitored primarily for safety.
Prior to commencing its U.S. Phase 3 clinical endpoint trial, the Company
completed several Phase 1 and Phase 2 clinical trials of REMUNE involving
over 280 HIV-infected individuals. The Phase 1 clinical trials conducted at
the University of Southern California involved 107 individuals at various
stages of HIV infection. In these trials, REMUNE was well tolerated without
serious side effects and indicated its ability to enhance an immune system
response against HIV.
In one of these open-label Phase 1 clinical trials, which began in 1987, 25
HIV-positive individuals were treated with REMUNE. Of those individuals, 12
developed an HIV-specific immune response (as measured by a skin test), of
whom 11 have not experienced significant progression of the disease. The
long-term follow-up results from this clinical trial were published in the
JOURNAL OF ACQUIRED IMMUNE DEFICIENCY SYNDROMES AND HUMAN RETROVIROLOGY in
April 1996. Many of the participants in these Phase 1 trials have elected to
continue treatment with REMUNE.
Two Phase 2 clinical trials of REMUNE were conducted to assess the ability of
this therapy to stimulate immune system responses against HIV, to evaluate
the effect of REMUNE on early markers of progression in asymptomatic
HIV-infected individuals and to monitor safety. A double-blind,
placebo-controlled Phase 2 dose-ranging clinical trial involving 60
asymptomatic HIV-infected individuals was conducted to determine the ability
of REMUNE administered at various doses to enhance responses to HIV proteins.
The Company believes the results of the trial demonstrated, in a
statistically significant manner, that REMUNE can stimulate enhanced immune
responses in HIV-infected individuals. The trial was not designed to evaluate
the effectiveness of REMUNE as a treatment for HIV infection. The results of
this Phase 2 trial were published in the British scientific journal AIDS in
October 1994.
5
<PAGE>
A second double-blind, placebo-controlled Phase 2 clinical trial of REMUNE
was conducted to evaluate the effect of the therapy on the level of virus in
the blood and other potential surrogate markers for disease progression. The
Company believes the results of this trial, involving 103 HIV-infected
individuals, indicated that treatment with REMUNE is safe, well tolerated and
may slow the rate of increase in the levels of HIV in blood cells. In
addition, the Company believes the results of the trial indicated that REMUNE
has a favorable impact on multiple markers of HIV disease progression,
including viral burden, CD4 cell count, HIV-specific cell-mediated immunity,
antibody production and weight gain. The Company believes the trial results
also indicated that REMUNE may slow the rate of decline in key immune cells
known to be attacked by HIV, as well as enhance the immune system's attack
against HIV proteins. The results of this clinical trial were published in
THE JOURNAL OF INFECTIOUS DISEASES in June 1994 and in a supplement to THE
JOURNAL OF ACQUIRED IMMUNE DEFICIENCY SYNDROME in October 1994.
REMUNE IN COMBINATION WITH ANTIVIRAL THERAPIES
REMUNE is designed to work alone or in conjunction with antiviral drugs. By
combining these therapies, the Company believes an HIV-infected individual
may be able to attack the virus from two fronts: boosting the immune system
with REMUNE to eliminate HIV-infected cells and reducing the level of the
virus in the blood with antiviral drugs. The Company has initiated several
combination drug trials which are designed to determine whether the
combination of REMUNE and antiviral drug therapies will act synergistically
(e.g. the antiviral drug therapies lowering viral load and REMUNE boosting
the immune system). One goal of the combination approach is to prolong the
impact of antiviral drug therapies on viral load by increasing the immune
response to HIV-infected cells. If successful, a delay in drug resistance and
a prolonged duration of low levels of virus in the blood coupled with an
increase in the immune response to HIV could translate into clinical benefit.
[GRAPHIC]
(1) HIV infects T cells and takes over the cell machinery such that the cell
becomes a manufacturing facility that makes and releases infectious HIV
(RNA) particles into the bloodstream where the virus infects other cells.
(2) Antiviral drugs interfere with the infected cells ability to manufacture
infectious virus particles, but does not impact or eliminate the infected T
cell.
(3) Treatment with REMUNE is intended to increase an HIV-specific immune
response believed to be associated with the destruction of the HIV-infected
T cell.
(4) The combination of REMUNE and antiviral drugs may act synergistically --
REMUNE potentially boosts the immune response while the drugs lower the
viral load.
The Company has combination drug trials underway in which REMUNE is used in
combination with major antiviral drugs. In addition, the Company is currently
conducting a number of other clinical trials to obtain additional data with
respect to the use of REMUNE. The following table summarizes the clinical
trials the Company has conducted or is conducting with REMUNE.
6
<PAGE>
CLINICAL TRIALS USING REMUNE
<TABLE>
<CAPTION>
CURRENT UNITED STATES TRIALS
INTENDED
DATE PATIENT
STAGE INITIATED ENROLLMENT OBJECTIVES
- ----- --------- ---------- ----------
<S> <C> <C> <C>
Phase 3 (pivotal efficacy) 1996 2,500 Intended to measure the ability of REMUNE to
(fully enrolled) impact progression to AIDS and death
Phase 1 (pediatric) 1996 32 Intended to measure safety and ability to
stimulate an immune response in children
(National Institutes of Health)
Expanded Access 1996 1,000 Intended to measure long-term safety
<CAPTION>
CURRENT INTERNATIONAL TRIALS
INTENDED
DATE PATIENT
STAGE INITIATED ENROLLMENT OBJECTIVES
- ----- --------- ---------- ----------
<S> <C> <C> <C>
Phase 2 (safety and activity) 1996 300 Intended to measure safety, HIV-specific
Thailand immune response and effects on indicators of
disease progression
Phase 2 (combination) 1996 300 Intended to measure HIV-specific immune
Spain response during antiviral drug usage
Phase 2 (combination) 1998 30 Intended to measure HIV-specific immune
Switzerland response during antiviral drug usage
(Hoffman La Roche/Glaxo Wellcome)
Phase 2 (combination) 1998 40 Intended to measure HIV-specific immune
United Kingdom response during antiviral drug usage
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
COMPLETED UNITED STATES TRIALS
# OF
STAGE DATE PATIENTS RESULTS
- ----- --------- ---------- ----------
<S> <C> <C> <C>
Phase 1 (safety) 1987 - 1995 25 Safety indicated and long-term survival observed
in patients with strong, HIV-specific, immune
response
Phase 1 (safety) 1988 - 1995 82 Safety indicated and HIV-specific immune
response observed
Phase 2 (dose ranging) 1990 - 1992 60 Safety indicated and HIV-specific immune
response observed
Phase 2 (activity) 1990 - 1993 103 Safety indicated, HIV-specific immune response
and positive effect on indicators of disease
progression observed
Phase 2 (drug interaction) 1992 - 1993 27 REMUNE treatment indicated safe when
combined with antiviral drug therapy
Phase 2 (long-term safety) 1995 -1996 175 Safety indicated
Phase 2 (combination) 1997 43 HAART plus REMUNE indicated improved
immunologic markers and positive trends in
virologic markers for disease progression
response. (Merck/Glaxo Wellcome)
</TABLE>
7
<PAGE>
In October 1998, the Company announced results from a 32-week, multi-center,
double-blind, placebo-controlled Phase II clinical trial of 43 HIV-infected
individuals treated with HAART plus REMUNE. The results of the trial
indicated that the individuals treated with HAART plus REMUNE experienced
significantly improved immunologic markers and positive trends in virologic
markers for disease progression compared to the HAART plus placebo group.
In September 1995, the Company signed an agreement with Trinity Medical Group
Co., Ltd. ("Trinity"), of Bangkok, Thailand to license the rights to develop,
market and distribute REMUNE in Thailand and certain other Southeast Asian
countries. Trinity is currently conducting an ongoing Phase 2,
placebo-controlled clinical trial with approximately 300 HIV-infected
individuals. This clinical trial is being conducted by investigators from
Mahidol University in Bangkok, Thailand, and will be monitored by an
independent data safety monitoring board and conducted under the guidelines
of the Thailand Ministry of Public Health.
TECHNOLOGY. REMUNE is composed of inactivated HIV, depleted of its envelope,
and emulsified in Incomplete Freund's Adjuvant ("IFA"), an agent which
elicits a more potent immune response by more effectively presenting the
inactivated virus to the immune system. REMUNE is manufactured by first
culturing HIV-infected human T cells. The virus is then purified from this
cell culture and inactivated using two separate procedures. The virus is
first inactivated with betapropiolactone, a chemical agent commonly used for
viral inactivation, and then physically inactivated with irradiation. Each of
these procedures alone is capable of inactivating HIV. During processing and
purification, the outer envelope protein of the virus, known as gp120, is
depleted from the inactivated HIV. The final envelope-depleted HIV is
emulsified in IFA and is filled in syringes. When introduced into
HIV-infected individuals, REMUNE appears to stimulate an HIV-specific immune
system response, which the Company believes may provide a safe, effective and
long-lasting benefit to these individuals.
MANUFACTURING. The Company subleases a 51,000 square foot facility in King of
Prussia, Pennsylvania to manufacture REMUNE for clinical trials and, if the
product is approved by the FDA, initial commercial production. In February
1996, the Company received clearance from the FDA to release the product for
use in clinical trials. The Company believes the facility, which is a
full-scale, GMP commercial process facility, is capable of supplying clinical
trial quantities and, providing initial commercial quantities. The Company
relies on a third party for the final inactivation step of the manufacturing
process. If the existing manufacturing operations prove inadequate, there can
be no assurance that any arrangement with a third party can be established on
a timely basis, or that the Company can establish other manufacturing
capacity on a timely basis. The Company believes that the raw materials
necessary to produce REMUNE are readily available from various sources.
8
<PAGE>
REMUNE INACTIVATION PROCESS
[GRAPHIC]
1. Fully intact, infectious HIV
2. Inactivation of the virus
3. The outer envelope protein of the virus, gp120, has been depleted from
the inactivated virus
4. Final envelope-depleted, inactivated "whole-killed" HIV emulsified in
IFA
COMMERCIALIZATION STRATEGY. During June 1998, the Company and Agouron
Pharmaceuticals, Inc. ("Agouron") entered into an agreement under which the
Company exclusively licensed to Agouron the marketing rights to REMUNE in
North America, Europe, Japan and certain other countries, if regulatory
approvals are received. The Company and Agouron have conducted physician and
patient focus group sessions to begin preparations for a commercial marketing
launch of REMUNE, subject to the successful conclusion of the clinical trials
and final approval of the product by the FDA. If REMUNE is successfully
developed and approved for marketing, third party reimbursement will need to
be sought for the costs of related treatments from government health
administration authorities, private health coverage insurers, managed care
organizations and other organizations. The two companies will share all
profits from the commercialization of REMUNE on a 50/50 basis, if REMUNE is
successfully developed and receives the necessary regulatory approvals.
IMMUNE-BASED THERAPIES FOR AUTOIMMUNE DISEASES
BACKGROUND. The normal immune system is closely regulated. The body is able
to distinguish its own proteins from those that are present due to infection
or abnormalities. Aberrations in immune response are not uncommon and at
times may cause an individual's immune system to react inappropriately to a
component of one's own body as if the component were foreign. In these
instances, it is often T cells that exhibit aberrant behavior resulting in
the development of autoimmune diseases. These "autoreactive" T cells are
believed responsible for the incorrect identification and destruction of the
individual's own tissue. While autoimmune diseases may involve any organ
system, common targets include the lining of the joints in rheumatoid
arthritis, the skin in psoriasis and the white matter of the brain and spinal
cord in multiple sclerosis. Current treatments for these diseases address
only the symptoms and are ineffective in halting the progressive tissue
destruction caused by the autoreactive T cells. This progression often
results in severe debilitation or death.
TECHNOLOGY. The Company's proprietary autoimmune immune-based therapies under
development are designed to inhibit or downregulate the autoreactive T cells
that the Company believes cause the tissue damage in certain autoimmune
diseases. These therapies are designed to induce specific immune responses by
targeting markers on the T cell receptor ("TCR") present on autoreactive T
cells and inhibiting the disease-causing autoreactive T cells. The Company's
proprietary technology platform from which it is seeking to develop
immune-based therapies involves identifying receptors on autoreactive T cells
and synthesizing a therapeutic vaccine based on peptides (amino acid
9
<PAGE>
sequences) located within these receptors. The Company is pursuing this
approach for the treatment of rheumatoid arthritis, psoriasis and multiple
sclerosis.
[GRAPHIC]
1. T cells believed to be involved in autoimmune diseases are identified
by the T cell receptor, a unique "fingerprint like" structure that
distinguishes one type of T cell from another T cell.
2. A small section (peptide) of the T cell receptor is identified. This
peptide represents the principal component of the potential
immune-based therapy.
3. The immune-based therapy under development is intended to stimulate
the immune system to downregulate (turn off) those T cells believed
to cause inflammation and tissue destruction.
The Company believes that its approach to the treatment of autoimmune
diseases may provide several advantages over existing therapies and competing
approaches based on immune system regulation. In Phase 1 and Phase 2 studies,
the Company's immune-based therapies using T cell receptor peptides have
indicated a lack of toxicity and a specific impact on the disease-causing
cells. These results, combined with the ease of administration through
infrequent intramuscular injections and the potential for a long-lasting
response of an active immune-based therapy, may provide an important
treatment compared to existing therapies.
The Company is in discussions with major pharmaceutical companies regarding a
corporate collaboration using this immune-based technology. There can be no
assurance that the Company will be able to negotiate collaborative
arrangement on favorable terms, or at all, or that any collaborative
arrangements would be successful.
RHEUMATOID ARTHRITIS.
Rheumatoid arthritis is a chronic inflammatory disease characterized by
persistent inflammation of the lining of the joints accompanied by stiffness
and pain or tenderness on motion. It is estimated that approximately 2.1
million individuals in the United States, and 1% of the worldwide population,
suffer from rheumatoid arthritis, and up to $5.6 billion is spent annually
worldwide on medications which are designed to treat only the symptoms of
this debilitating disease.
EXISTING THERAPIES. There is currently no cure for rheumatoid arthritis.
Currently, management of rheumatoid arthritis requires early diagnosis and
aggressive treatment before functional impairment and irreversible joint
damage has occurred. Available therapies generally have adverse side effects
and address only the symptoms of the disease. Objectives of disease
management include relief of pain, reduction of inflammation, minimization of
undesirable side effects, preservation of muscle strength and joint function,
and the return to a normal lifestyle. Drugs are
10
<PAGE>
necessary for treatment, but are often unsatisfactory. Nonsteroidal
anti-inflammatory drugs are a widely used therapy. They require large doses
and close monitoring. Steroidal and other drugs may be used, but usually are
accompanied by more severe side effects and toxicity. By contrast, the
Company's rheumatoid arthritis therapy is intended to target and inhibit the
specific T cells thought to be involved in the disease process. The Company
believes this inhibition may reduce the inflammatory events that occur as the
disease progresses.
PRODUCT DESCRIPTION. IR501 and IR703 are the Company's proprietary rheumatoid
arthritis immune-based therapies under development and is based on a
combination of three peptides from the V(beta)3, V(beta)14 and V(beta)17 T
cell receptors emulsified in IFA. The Company published, in the PROCEEDINGS
OF THE NATIONAL ACADEMY OF SCIENCES in December 1991, the discovery of
specific T cell populations containing these T cell receptors that the
Company believes may cause rheumatoid arthritis. The treatment being
developed is designed to stimulate the immune system of a rheumatoid
arthritis patient to control these T cells. The Company believes that
eliminating or inhibiting these T cells may prevent further damage to the
tissue of joints. Several scientific publications since 1991 by research
groups independent of the Company have confirmed the involvement of one or
more of these T cell populations in rheumatoid arthritis.
HUMAN CLINICAL TRIALS. In December 1996, the Company completed a Phase 2
clinical trial evaluating the safety and ability of its rheumatoid arthritis
treatment to elicit an immune response. This double-blind, placebo-controlled
trial involved 99 rheumatoid arthritis patients and was designed to generate
additional safety data, determine the ability of the rheumatoid arthritis
therapy to stimulate responses against the T cell receptor peptides used in
the vaccine and to determine an optimal dose of the therapy. While this trial
was designed to show trends, results from this trial indicated safety and a
statistically significant clinical improvement in disease condition using the
American College of Rheumatology guidelines (ACR 20). The ACR 20 criteria
require an improvement in tender and swollen joint counts of at least 20%
from baseline, along with improvement in three of five other disease-related
criteria. Patients who showed improvement after treatment also had evidence
of a favorable reduction in the circulating level of the inflammatory
cytokine tumor necrosis factor alpha (TNF-a). In December 1997, the Company
initiated a Phase 2b clinical trial intended to confirm and expand clinical
results from the completed Phase 2 clinical trial. This Phase 2b trial in 340
individuals with rheumatoid arthritis was a 24 week, five-arm, double-blind,
placebo-controlled, multi-center trial conducted at 22 clinical sites. This
trial was completed in December 1998. The Company believes that the results
from this trial suggest a favorable treatment effect according to the
American College of Rheumatology criteria for improvement (ACR 20 criteria)
with statistical significance at one time point after the third injection,
and was consistent with and expanded upon the results shown in the previous
Phase 2 trial. The results also suggest that the treatments were safe and
well tolerated.
PSORIASIS.
Psoriasis is a chronic and recurrent proliferative disease of the skin
characterized by irritating and sometimes painful, defined red patches
covered with silvery-white scales. According to the National Psoriasis
Foundation, psoriasis affects over 6 million Americans. Annual outpatient
costs for treatment are currently estimated at up to $3 billion per year. A
distinguishing feature of the disease is the rapid sloughing of skin layers.
While normal skin cells mature in 28 to 30 days, skin cells of psoriasis
patients move to the surface of the skin in approximately four days.
EXISTING THERAPIES. Current treatments, which range from topical ointments to
phototherapy, address the symptoms of psoriasis rather than the cause of the
disease. Not all treatments work for every individual. These treatments often
require individuals to experiment and/or combine therapies in order to
discover the regimen that is most effective. Treatment success requires
faithful compliance to the regimen and provides varying degrees of relief
from the disease. By contrast, the Company's psoriasis therapy is intended to
target and inhibit the immune system cells that may be involved in the
initiation of the disease process.
PRODUCT DESCRIPTION. The Company's proprietary immune-based therapy under
development for psoriasis, IR502, is based on a combination of two peptides
from the V(beta)3 and V(beta)13.1 T cell receptors emulsified in IFA. The
Company published, in the PROCEEDINGS OF THE NATIONAL ACADEMY OF SCIENCES in
1994, the discovery of T cells containing two T cell receptors in psoriasis
lesions. The treatment being developed by the Company is designed to
stimulate the immune system of a psoriasis patient to control these T cells.
The Company believes that eliminating or inhibiting these T cells may
alleviate the effects of this disease.
HUMAN CLINICAL TRIALS. In December 1996, the Company completed a Phase 2
clinical trial evaluating the safety and the ability of its psoriasis
treatment to elicit an immune response. This double-blind, placebo-controlled
clinical trial involved 93 psoriasis patients and was designed to test the
safety of the therapy, determine the ability of the psoriasis therapy to
stimulate responses against the T cell receptor peptides used in the vaccine
and to determine an optimal
11
<PAGE>
dose of the therapy. Results of the trial indicated the product was well
tolerated. Although patients in the trial improved after treatment, there was
no statistically significant difference between the treated and control
groups.
Based on strong immunological results seen in the Phase 2 trial, the Company
performed a second Phase 2 clinical trial which was completed in May 1998.
This Phase 2 trial involved 84 individuals with moderate to severe psoriasis.
The 16 week, nine-arm, double-blind, placebo-controlled, multi-center trial
was conducted at six clinical sites. The Company believes the results from
this trial suggest that the groups that received intramuscular injections of
T cell receptor ("TCR") peptides along with Incomplete Freund's Adjuvant
("IFA") showed improvement when compared to all other treatment groups. These
other treatment groups included patients receiving injections of IFA alone,
injections of the TCR peptides in DETOX-PC adjuvant, intradermal injections
of TCR peptides in saline or intradermal injections of saline alone. This
data was presented at the 5th European Congress on Psoriasis/7th
International Psoriasis Symposium on September 5, 1998 in Milan, Italy.
MULTIPLE SCLEROSIS.
Multiple sclerosis afflicts approximately 350,000 individuals in the United
States and more than 1.1 million individuals worldwide. Multiple sclerosis is
a chronic disease of the central nervous system and one of the most common
causes of chronic neurologic disability in young adults.
PRODUCT DESCRIPTION. The Company's proprietary immune-based therapy under
development for multiple sclerosis, IR208, also uses peptides from the Vb6.2
T cell receptors, emulsified in IFA. T cells containing this T cell receptor
were found in the cerebrospinal fluid of individuals afflicted with multiple
sclerosis.
HUMAN CLINICAL TRIALS. In January 1995, in collaboration with the Sidney
Kimmel Cancer Center ("SKCC"), the Company completed a Phase 1 clinical trial
in multiple sclerosis patients, which provided evidence that this therapy is
safe and well tolerated and that it may stimulate immunological responses
against the specific T cells. In February 1997, the Company began a
compassionate use program in California for certain individuals. The results
from this trial were published in the JOURNAL OF NEUROIMMUNOLOGY.
IMMUNE-BASED THERAPIES FOR CANCER
BACKGROUND. Cancer is characterized by the uncontrolled growth of abnormal
cells that spread from the anatomic site of origin. This growth, if
uncontrolled, invades vital organs and may result in death. However, many
cancers can be cured if they are detected early and treated promptly; others
can be controlled for many years with a variety of treatment approaches.
Cancer is most often treated by surgery, radiation, chemotherapy, hormones
and more recently, immunotherapy.
EXISTING THERAPIES. There are currently several ways to treat cancer, all of
which have significant and often severe side effects. The most common
combination of treatment is surgery or radiotherapy followed by chemotherapy.
Unfortunately, certain tumors are drug resistant from the beginning while
others develop resistance with repeated treatments. The problem of drug
resistance is particularly serious in chemotherapy when tumors develop a
resistance to multiple drugs after only one drug has been administered.
TECHNOLOGY. The Company is utilizing proprietary immune-based cancer vaccine
technologies for the development of more effective cancer therapies. The
Company initially intends to focus on treatments for colon, brain and
prostate cancers. Each of the technologies being developed uses advanced
molecular gene therapy techniques combined with vaccine technology to enable
the immune system to recognize and control tumor growth.
12
<PAGE>
[GRAPHIC]
1. Inactivated tumor cells are combined with cells that stimulate the
immune system (interleukin-2 or other cytokines)
2. Through immunization, the immune system is presented with the
structure of the tumor cell in the presence of the stimulating agent
3. Activated T cells migrate to the site of residual tumor cells and
destroy them
COLON CANCER.
It is estimated that nearly 100,000 individuals in the United States annually
develop colon cancer, with an estimated 48,000 deaths attributable to the
disease per year.
HUMAN CLINICAL TRIALS. In June 1995, the Company, in conjunction with the
Sidney Kimmel Cancer Center ("SKCC"), initiated a Phase 1 clinical trial of
this potential therapy in colon cancer patients that had failed conventional
therapy. The Phase 1 clinical trial in patients involved the preparation of a
custom therapy for each patient. Results from this trial indicated the
treatment was well tolerated. The Company is developing therapies that would
alleviate the need for isolating fibroblasts and tumor cells from each
patient with the objective of creating a universal, non-patient specific,
treatment. Success in this development program may lead to the application of
this technology to other solid tumors. In late 1998, the Company initiated a
universal cell line vaccine trial to treat colon cancer.
BRAIN CANCER.
Brain tumors are responsible for significant morbidity and mortality in both
pediatric and adult populations. The most common type of brain cancer is
glioma, a tumor that arises in the supportive tissue of the brain. Glioma
tumor cells are known to overproduce the cytokine TGF-(beta), which can
suppress the activity of the immune system cells that are needed to destroy
tumors, and it is believed to be one of the mechanisms by which tumor cells
evade immune system recognition. It is estimated that approximately 16,000
malignant brain tumors are diagnosed each year in the United States and that
approximately 13,000 will die from this disease.
HUMAN CLINICAL TRIALS. The Company submitted an IND to the FDA for a
universal cell line vaccine to treat brain cancer with universal cell lines
selected to express low levels of TGF-b. The universal cell line for glioma
is administered with a cell line that stimulates the immune system using the
cytokine GM-CSF.
PROSTATE CANCER.
Prostate cancer is the second leading cause of cancer death among men.
According to the American Cancer Society, approximately 180,000 American men
will be diagnosed with prostate cancer in 1999 and an estimated 37,000 deaths
will result from this disease. According to recent articles, recurrent
disease will occur in up to 40% of patients who undergo radical prostatectomy
or radiation therapy. Preclinical work is being conducted on a potential
prostate cancer vaccine.
13
<PAGE>
MELANOMA CANCER.
According to the American Cancer Society, approximately 44,000 individuals in
the United States will be diagnosed with melanoma cancer in 1999 and an
estimated 7,300 deaths will result from this disease. The major cause of
melanoma cancer is excessive exposure to the sun's ultraviolet rays.
Preclinical work is being conducted on a potential melanoma cancer vaccine.
GENE THERAPY
TECHNOLOGY. The Company's proprietary GeneDrug-TM- products under development
are based on a patented delivery technology which can be used to treat a
variety of diseases. This technology was exclusively licensed from The
University of Connecticut Research Foundation ("University of Connecticut"),
for intravenous injection and targeting of genes or drugs directly to liver
cells. The Company believes this technology may have several advantages over
current therapies including; targeted delivery to the liver, versatility to
treat different diseases with the same technology, and safety since viruses
are not used to deliver genes. Other competitive gene therapy systems under
development use disabled viruses to carry the gene to the cell nucleus.
COMMERCIAL POTENTIAL: Each gene therapy product under development by the
Company is intended to be prepared and distributed like a traditional
injectable pharmaceutical. These therapies would not require patient-specific
processing of cells outside the body compared to other gene therapy systems
under development.
[GRAPHIC]
HEMOPHILIA
Hemophilia A, a hereditary blood clotting disorder, results from the
dysfunction or absence of the Factor VIII protein. Approximately one of every
5,000 live male births in the United States results in a child afflicted with
hemophilia A. Current treatments for hemophilia A are expensive. In the
United States, it is estimated that most patients on prophylaxis which is
begun in the first few years of life will easily exceed the common life-time
insurance cap of $1 million by the second decade of life. The Company's
GeneDrug technology system is designed to produce therapeutic concentrations
of Factor VIII by delivering the gene that produces this protein. Once
delivered to the liver cells, the Factor VIII gene may express the desired
protein and secrete this protein into the bloodstream on a continuous basis
for several weeks. If successful, this product would eliminate the regular
bleeding episodes associated with hemophilia by allowing the patient to
receive periodic injections in order to maintain therapeutic levels of Factor
VIII. In July 1996, Immune Response entered into an agreement with Bayer
Corporation, the United States affiliate of Bayer AG of Leverkusen, Germany,
to develop gene therapy products for the treatment of hemophilia A.
14
<PAGE>
HEPATITIS.
Hepatitis B is a viral infection of the liver. As many as 1.25 million
Americans are chronically infected with hepatitis B virus ("HBV") and there
are up to 320,000 new cases of HBV infection each year. Hepatitis C virus
("HCV") was recently identified as the major cause of non-A/non-B hepatitis.
As many as 3.9 million Americans are chronically infected with this virus and
there are up to 180,000 new cases of HCV infection each year. Recombinant
interferon-alpha (IFN-a) is currently approved for treatment of both HBV and
HCV. Many patients treated with recombinant IFN-a do not respond and whether
there is a long-term benefit among those who have responses is uncertain. A
preclinical study evaluating delivery of the IFN-a gene to the liver has
demonstrated successful expression of IFN-a protein IN VITRO and IN VIVO for
up to six weeks. The Company's GeneDrug system is designed to enhance
interferon therapy by achieving continuous, low-level expression and
secretion of the protein specifically in liver cells. The Company entered
into a research collaboration in July 1998 with Schering-Plough Corporation
to deliver their genes for IFN-a using the Company's gene delivery technology
for the treatment of hepatitis.
MANUFACTURING
The Company has established a pilot manufacturing facility at its
headquarters in Carlsbad, California for the production of the immune-based
and gene therapies. This facility is expected to be adequate to supply
limited clinical trial quantities for these therapies. Additional
manufacturing capacity will be needed for commercial scale production, if
these therapies are approved for commercial sale. For the manufacture of the
autoimmune disease therapies under development, the Company obtains synthetic
peptides from third party manufacturers. The Company believes that the
synthetic peptides and other materials necessary to produce the autoimmune
disease therapies are readily available from various sources and several
suppliers may be capable of supplying the autoimmune disease therapies in
both clinical and commercial quantities.
PATENTS
REMUNE - HIV THERAPY. In 1993, the Company received a United States patent
relating to REMUNE. In 1998 and 1999, additional patents were issued relating
to certain products and methods. The Company has also received similar
patents in Australia, certain European countries, Japan and Russia. The
Company has additional patent applications relating to REMUNE on file in the
United States, as well as in other countries. The patent applications cover,
in part, certain products and methods of their use for the immunotherapeutic
treatment of HIV-infected patients and/or preventive treatment of uninfected
individuals. There can be no assurance that any additional HIV-related
patents will be issued to the Company. Further, there can be no assurance
that the issued patents, or any patent that may be issued in the future, will
survive opposition or provide meaningful proprietary protection.
AUTOIMMUNE DISEASES. During January 1994, the European Patent Office granted
the Company a patent covering processes for vaccinating against diseases
resulting from pathogenic responses by specific T cell populations. In March
1997, the Company was issued a patent covering this technology in the United
States. In May 1994, the Australian Industrial Property Organisation accepted
a similar application of the Company. In November 1998 and January 1999, the
Company was issued two additional United States patents directed to this
technology. These patents include composition and method claims for the
prevention or treatment of certain autoimmune diseases, such as rheumatoid
arthritis and proliferative T cell diseases. The Company also has patent
applications relating to its autoimmune technology on file in the United
States and other countries, including members of the European Patent
Convention and Japan. These patent applications cover certain compositions
and methods relating to the use of T cell receptor peptide sequences to
vaccinate against autoreactive T cells involved in autoimmune disease. There
can be no assurance that any further autoimmune disease patents will be
issued to the Company or that any issued patents, or any patent that may be
issued in the future, will survive opposition or provide meaningful
proprietary protection. The Company is aware that Connetics Corporation
("Connetics") has been granted United States and European patents related to
autoimmune disease which covers technology similar to that used by the
Company. The Company is in discussions with Connetics to resolve any conflict
between the Company's and Connetics' patents. However, there can be no
assurance that a cross license or other resolutions satisfactory to the
Company will result. A failure to resolve this dispute in a manner favorable
to the Company, could have a material adverse effect on the Company. In March
1998, the Company successfully defended its European patent with respect to
its immune-based therapies for autoimmune disease technology that was under
opposition; although this decision can be appealed, the patent is presently
enforceable.
CANCER. Technology to genetically modify fibroblasts with cytokine genes or
genes to inhibit TGF-b production has been exclusively licensed to the
Company from SKCC. The technology to use cytokine modified fibroblasts to
increase sensitivity to chemotherapy was jointly developed by SKCC and the
Company, and the Company retains
15
<PAGE>
exclusive rights to develop this technology. SKCC has applied for patent
protection in the United States and Europe related to the technologies
licensed exclusively to the Company. There can be no assurance that the
issued patents, or any patent that may be issued in the future, will survive
opposition or provide meaningful proprietary protection.
GENE THERAPY. In November 1992, the Company obtained an exclusive license to
a United States patent, received by the University of Connecticut, covering
the Company's core gene delivery system technology, including methods and
compositions for delivering DNA to the liver via receptors on the surface of
liver cells. In addition, during 1997 and 1999, two related United States
patents issued, extending the Company's gene delivery protection to include
the delivery of any polynucleotide to any mammalian cell via any
internalizing cell surface receptor. Thus, the Company's patent protection in
the United States is no longer limited to the delivery of genes to the liver.
In 1998, a corresponding Japanese patent application also issued, covering
the delivery of any polynucleotide to mammalian cells via non-protein (e.g.,
synthetic) liver-specific ligands.
The Company also licenses and owns a number of issued United States and
foreign patents covering the delivery of specific genes and polynucleotides
to cells using their proprietary technology, as well as formulations tailored
for such delivery. For example, the Company owns a United States patent
covering the targeted delivery of antisense polynucleotides to cells to treat
Hepatitis B infection. The Company also licenses an allowed European patent
application covering the targeted delivery to cells of genes encoding
secretory proteins, including blood coagulation factors, to treat hemophilia.
The Company continues to file patent applications covering novel genes and
other aspects of its proprietary gene delivery technology which the Company
develops.
The Company is presently seeking to obtain licenses for certain genes from
several different third parties. There can be no assurance that the Company
will be able to obtain such licenses on commercially favorable terms, if at
all, and if these licenses are not obtained, the Company might be prevented
from using certain of its technologies. The Company's failure to obtain a
license required to continue practicing its own technologies would have a
material adverse effect on the Company.
There can be no assurance that any additional gene therapy patents will be
issued to the Company. Further, there can no assurance that the issued
patents, or any patent that may be issued in the future, will survive
opposition or provide meaningful proprietary protection.
COMPETITION
HIV. The Company is engaged in segments of the biopharmaceutical industry,
including the treatment of HIV, that are intensely competitive and rapidly
changing. If successfully developed and approved, the product candidates and
compounds that the Company is currently developing will compete with numerous
existing therapies. For example, 11 drugs are currently approved for the
treatment of HIV. In addition, a number of companies are pursuing the
development of novel pharmaceutical products that target the same diseases
that the Company is targeting, and some companies, including several
multinational pharmaceutical companies, are simultaneously marketing several
different drugs and may therefore be able to market their own combination
drug therapies. The Company believes that a significant number of drugs are
currently under development and will become available in the future for the
treatment of HIV.
Although the Company believes that there is a significant future market for
therapeutics to treat HIV and other viral diseases, the Company anticipates
that even if it successfully develops REMUNE and REMUNE is approved for
marketing, it will face intense and increasing competition in the future as
new products enter the market and advanced technologies become available.
laThere can be no assurance that existing products or new products for the
treatment of HIV developed by the Company's competitors, including Glaxo
Wellcome, plc, Merck & Co. and Abbott Laboratories, will not be more
effective, or more effectively marketed and sold, than REMUNE, should it be
successfully developed and receive regulatory approval, or any other
therapeutic for HIV that may be developed by the Company. Competitive
products or the development by others of a cure or new treatment methods may
render the Company's technologies and products and compounds obsolete,
noncompetitive or uneconomical prior to the Company's recovery of development
or commercialization expenses incurred with respect to any such technologies
or products or compounds. Many of the Company's competitors have
significantly greater financial, technical and human resources than the
Company and may be better equipped to develop, manufacture, sell, market and
distribute products. In addition, many of these companies have extensive
experience in preclinical testing and clinical trials, obtaining FDA and
other regulatory approvals and manufacturing and marketing pharmaceutical
products. For use individually or in combination therapy, many of these
competitors also have products that have been approved or are in late-stage
development and operate large, well-funded research and development programs.
Smaller companies may also prove to be significant competitors, particularly
through collaborative arrangements with large
16
<PAGE>
pharmaceutical and biotechnology companies. Furthermore, academic
institutions, governmental agencies and other public and private research
organizations are becoming increasingly aware of the commercial value of
their inventions and are more actively seeking to commercialize the
technology they have developed.
New developments in areas in which the Company is conducting its research and
development are expected to continue at a rapid pace in both industry and
academia. If the Company's product candidates and compounds are successfully
developed and approved, the Company will face competition based on the safety
and effectiveness of its products and compounds, the timing and scope of
regulatory approvals, availability of manufacturing, sales, marketing and
distribution capabilities, reimbursement coverage, price and patent position.
There can be no assurance that the Company's competitors will not develop
more effective or more affordable technology or products, or achieve earlier
patent protection, product development or product commercialization than the
Company. Accordingly, the Company's competitors may succeed in
commercializing products more rapidly or effectively than the Company, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
TREATMENTS FOR AUTOIMMUNE DISEASE. Several emerging technologies related to
immune system regulation, if successfully developed, could compete with the
Company's autoimmune disease treatments under development. The Company
believes that its principal competition in the autoimmune disease area will
come from companies conducting research in the areas of T cell receptors,
interaction between T cells and the target antigen and tissue, specific
targeting of activated T cell populations, and mechanisms of tolerance
including oral tolerance approaches. Scientific reports on T cell receptor
research have also discussed approaches similar to that of the Company.
TREATMENTS FOR CANCER. New cancer therapies are being developed by a number
of individual investigators and companies. Some of these approaches involve
modification of tumor cells with a variety of cytokines, which approaches may
prove competitive with the technologies being developed by the Company. Many
of the Company's competitors have substantially greater experience, financial
and technical resources and production, marketing and development
capabilities than the Company. There can be no assurance that competitors
have not or will not succeed in developing technologies and products more
quickly or that are more effective than any which have been or are being
developed by the Company or which would render the Company's technology and
products obsolete and noncompetitive.
GENE THERAPY. The Company believes that competition in the treatment of the
diseases targeted by its gene therapy program will be of two types: chronic
treatment with pharmaceutical products; and other gene therapy systems under
development for insertion of the correct gene. There currently exist a number
of approved therapies for treatment of hemophilia, and hepatitis B and C.
Both purified and recombinant forms of Factor VIII have been approved by the
FDA for treatment of hemophilia and are effective in stopping bleeding
episodes. Interferon alpha-2b is currently approved for treatment of chronic
hepatitis B and C. Other interferons are being tested for the treatment of
viral hepatitis. In addition to interferons, a variety of nucleoside analogs
have been tested for treatment of chronic hepatitis B, including 3TC.
Several major pharmaceutical companies are investigating gene therapy
treatments for the delivery of proteins to treat these diseases. If these
prove effective, they may compete with the Company's gene delivery therapies.
Many of the Company's competitors have substantially greater experience,
financial and technical resources and production, marketing and development
capabilities than the Company. There can be no assurance that competitors
have not or will not succeed in developing technologies and products more
quickly or that are more effective than any which have been or are being
developed by the Company or which would render the Company's technology and
products obsolete and noncompetitive.
GOVERNMENT REGULATION
Clinical testing, manufacture, promotion and sale of the Company's drug
products are subject to extensive regulation by numerous governmental
authorities in the United States, principally the FDA, and corresponding
state and foreign regulatory agencies. The Company believes that REMUNE and
most of its other potential immune-based therapies will be regulated by the
FDA as biological drug products under current regulations of the FDA.
Biological products must be shown to be safe, pure and potent (i.e.,
effective) and are subject to the same regulatory requirements as
nonbiological products under the Food and Drug Administration Act ("FDA
Act"), as amended by the Food and Drug Administration Modernization Act of
1997 ("FDA Modernization Act"), except that a biological product licensed
under the PHS Act ("PHS Act") is not required to have an approved New Drug
Application ("NDA") under the Federal Food, Drug and Cosmetic Act ("FDC
Act"). The FDA Modernization Act directed the FDA to take measures to
minimize the differences in the review and approval of marketing applications
for biological and
17
<PAGE>
nonbiological products. The FDA Modernization Act also made significant
revisions to the statutory requirements with regard to the approval of new
biologics and nonbiological products. Among other things, the FDA
Modernization Act established a new statutory program for the approval of
fast track drugs, streamlined clinical research, and revised the content of
product approval applications and the FDA review process. The FDA is required
to issue regulations and guidelines in order to implement certain of these
new requirements. Until the FDA implements these regulations and guidelines,
it is impossible to predict the impact of the FDA Modernization Act on the
review and approval of any marketing applications that the Company may submit
to the FDA in the future. The FDC Act, the PHS Act and other federal and
state statutes and regulations govern or influence the testing, manufacture,
safety, effectiveness, labeling, storage, recordkeeping, approval,
advertising, distribution and promotion of biological prescription drug
products. Noncompliance with applicable requirements can result in, among
other things, fines, injunctions, seizure of products, total or partial
suspension of product marketing, failure of the government to grant premarket
approval, withdrawal of marketing approvals and criminal prosecution.
The steps required before a biological drug product may be marketed in the
United States generally include preclinical studies and the filing of an IND
application with the FDA, which must become effective pursuant to FDA
regulations before human clinical trials may commence. Reports of results of
preclinical studies and clinical trials for biological drug products are
submitted to the FDA in the form of a Biologics License Application (the
"BLA") for approval for marketing and commercial shipment. Submission of a
BLA does not assure FDA approval for marketing. The BLA review process may
take a number of years to complete, although reviews of applications for
treatments of AIDS, cancer and other life-threatening diseases may be
accelerated or expedited. Failure of the Company to receive FDA marketing
approval for REMUNE or any of its other products under development on a
timely basis could have a material adverse effect on the Company's business,
financial condition and results of operations.
In the past, in addition to obtaining approval for each biological drug
product, an Establishment License Application (the "ELA") usually was
required to be filed and approved by the FDA. However, the FDA Modernization
Act repealed the statutory requirement for an ELA for a biological product.
Now only a single BLA covering both the biological product and the facility
in which the product is manufactured is required. The FDA also has been
directed by the FDA Modernization Act to take measures to minimize the
differences in the review and approval of biological drugs required to have
approved BLAs under the PHS Act and nonbiological drugs required to have
approved NDAs under the FDC Act.
Among the other requirements for BLA approval is the requirement that
prospective manufacturers conform to the Good Manufacturing Practices (the
"GMP") regulations specifically for biological drugs, as well as for other
drugs. In complying with the GMP regulations, manufacturers must continue to
expend time, money and effort in production, recordkeeping and quality
control to assure that the product meets applicable specifications and other
requirements. The FDA periodically inspects biological drug product
manufacturing facilities in order to assure compliance with applicable GMP
requirements. Failure to comply with the GMP regulations subjects the
manufacturer to possible FDA regulatory action, such as the suspension of
manufacturing, product recall or seizure, injunction and criminal
prosecution. There can be no assurance that the Company or its contract
manufacturers, if any, will be able to maintain compliance with the GMP
regulations on a continuing basis. Failure to maintain such compliance could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company believes its proprietary GeneDrug and cancer treatment therapies
also will likely be regulated as biological products. This is because the
Company's gene products are subject to the FDA's industry guidance for Human
Somatic Cell Therapy and Gene Therapy, which was issued by the FDA in March
1998 (the "1998 Guidance"), as well as earlier FDA notices on this subject.
The 1998 Guidance confirms that gene therapy products will be regulated by
the FDA as biological products subject to biological product licensure
requirements. In addition, the 1998 Guidance describes FDA concerns regarding
production, quality control testing, and the administration of recombinant
vectors for gene therapy. No assurance exists that the Company or its
suppliers can successfully address all of the concerns of the 1998 Guidance
with respect to gene therapy products. As with the Company's other potential
products, the gene therapy products will be subject to extensive FDA
regulation throughout the product development process, and there can be no
assurance that any of these products will be successful at securing the
requisite FDA marketing approval on a timely basis, if at all.
The preclinical and clinical testing process to obtain FDA approval of a
biological drug is expensive and time consuming. Preclinical studies are
conducted in animals usually to evaluate the potential safety of a product.
The results of preclinical studies are submitted to the FDA as part of the
IND application, which must become effective
18
<PAGE>
pursuant to FDA regulations before human clinical trials may begin. Human
clinical trials typically are conducted in three phases and are subject to
detailed protocols. Each protocol indicating how the clinical trial will be
conducted must usually be submitted for review to the FDA as part of the IND
application. The FDA's review of a trial protocol does not necessarily mean
that, if the trial is completed, it will constitute proof of safety or
efficacy (including potency). Further, each clinical trial must be conducted
under the auspices of an independent Institutional Review Board ("IRB")
established pursuant to FDA regulations. The IRB considers, among other
things, ethical concerns, informed consent requirements and the possible
liability of the institution conducting the trials. The FDA or IRB may
require changes in a protocol both prior to and after the commencement of a
clinical trial. There is no assurance that the IRB or FDA will permit a trial
to go forward or, once started, to be completed.
The three phases of clinical trials are generally conducted sequentially, but
they may overlap. In Phase 1, the initial introduction of the drug into
humans, the drug is tested for safety, side effects, dosage tolerance,
metabolism and clinical pharmacology. Phase 1 testing for an indication
typically takes at least one year to complete. Phase 2 involves controlled
tests in a large but still limited patient population to determine the
preliminary effectiveness of the drug for specific indications, to determine
optimal dosage and to identify possible side effects and safety risks. Phase
2 trials typically take at least from one and one-half to two and one-half
years to complete. If preliminary evidence suggesting effectiveness has been
obtained during Phase 2 evaluations, expanded Phase 3 trials are undertaken
to gather the additional information about safety and effectiveness that is
needed to evaluate the overall benefit-risk relationship of the product and
to provide an adequate basis for physician labeling. Phase 3 trials for an
indication generally take from two and one-half to five years to complete.
There can be no assurance that Phase 1, Phase 2 or Phase 3 testing will be
completed successfully within any specified time period, if at all, with
respect to any of the Company's products that have not completed any such
testing. Nor can there be any assurance that completion of clinical testing
will result in FDA approval. Furthermore, the FDA may suspend clinical trials
at any time if the patients are believed to be exposed to a significant
health risk.
The FDA Modernization Act amended the FDC Act to streamline clinical research
on biological and nonbiological drugs. Under the new law, a clinical
investigation may begin 30 days after the FDA receives an IND application
containing information about the drug and clinical investigation that
includes:
1. Information about the design of the investigation and adequate reports of
basic information, certified by the applicant, necessary to assess the
drug's safety in a clinical trial
2. Adequate information on the chemistry and manufacturing of the drug,
controls available for the drug and primary data tabulations from animal
or human studies.
The FDA is authorized by the new law to halt a clinical study at any time by
issuing a clinical hold, confirmed in writing, prohibiting the sponsor from
conducting the investigation. The clinical hold may be issued based on the
FDA's determination that the drug presents an unreasonable risk to the safety
of the research subjects, taking into account the qualifications of the
investigators, information about the drug, the design of the clinical
investigation, the conditions for which the drug is to be investigated, and
the health status of the subjects. Clinical holds also may be imposed by the
FDA for other reasons, as established by regulations. The new law, however,
largely codifies current regulations albeit with several significant changes.
First, the new law potentially reduces the amount of data required to be
submitted as part of an IND (most importantly by sanctioning the use of
"primary data tabulations from animal and human studies" rather than full
reports from such studies). Second, it codifies the procedural safeguards for
issuance of clinical holds and strengthens certain rights of the
manufacturer, including the right to obtain a written decision from the FDA
regarding the removal of a clinical hold within 30 days of a written request
from the IND sponsor.
Under the FDA's current IND regulations, a number of procedures are available
to expedite approval or to allow expanded access to investigational drugs.
Certain investigational drugs, including products for the treatment of AIDS,
can be distributed outside of traditional IND requirements on a "treatment"
basis. Generally, the FDA may permit an investigational drug, including an
investigational biological drug, to be used for "treatment" of patients
outside of controlled clinical trials, if: (1) the drug is intended to treat
a serious or immediately life-threatening disease; (2) there is no comparable
or satisfactory alternative drug or other therapy available to treat that
stage of the disease in the intended patient population; (3) the drug is
under investigation in a controlled clinical trial, or all clinical trials
have been completed; and (4) the sponsor of the controlled clinical trial is
actively pursuing marketing approval of the investigational drug with due
diligence. Although the FDA has granted expanded access to REMUNE for those
patients who are ineligible to enroll in the Phase 3 clinical endpoint trial,
the FDA has to date not designated expanded access protocols for REMUNE as
"treatment" protocols. Either expanded access or a treatment
19
<PAGE>
protocol designation might permit third party reimbursement of some of the
costs associated with making REMUNE available to patients in such an expanded
access context. There can be no assurance that the FDA will determine that
REMUNE meets all of the FDA's criteria for use of an investigational drug for
treatment use or that, even if the product is allowed for treatment use, that
third party payers will provide reimbursement for any of the costs of REMUNE
treatment. The FDA Modernization Act also amended the FDC Act to permit
expanded access to individuals and larger groups to unapproved new
therapeutic and diagnostic products. Although the new law largely codifies
existing FDA regulations in this area, it expands access to all
investigational therapies. First, the new law allows the FDA to authorize the
emergency shipment of investigational new drugs for the diagnosis,
monitoring, or treatment of a serious disease or condition. Second, the new
law permits any person, through a licensed physician, to request and obtain
from a manufacturer or distributor an investigational drug for the diagnosis,
monitoring, or treatment of a serious disease or condition if the following
conditions are met:
1. A comparable or satisfactory alternative therapy is not available.
2. There is sufficient evidence of the drug's safety and effectiveness to
permit such use.
3. The use will not interfere with the conduct of clinical investigations to
support marketing approval.
4. A clinical protocol is submitted to the FDA describing the use of the
investigational drug in a single patient or small group of patients.
The new law also authorizes expanded patient access to investigational drugs
under a treatment IND application.
The FDA also has issued regulations to accelerate the approval of or to
expedite the review of new biological drug products for serious or
life-threatening illnesses that provide meaningful therapeutic benefit to
patients over existing treatments (e.g., the ability to treat patients
unresponsive to, or intolerant of, available therapy, or improved patient
response over available therapy). Under the accelerated approval program, the
FDA may grant marketing approval for a biological or nonbiological drug
product earlier than would normally be the case, based on an effect on a
surrogate endpoint or a clinical endpoint other than survival. Under the
program, the sponsor must agree to conduct postmarketing studies to verify
and describe the clinical benefits of the product. In addition to the
accelerated approval process, the FDA has established procedures designed to
expedite the development, evaluation and marketing of new therapies intended
to treat persons with life-threatening and severely-debilitating illnesses,
especially when no satisfactory alternative therapy exists. The term
"life-threatening" is defined by the FDA to mean: (1) disease or conditions
where the likelihood of death is high unless the course of the disease is
interrupted and (2) diseases or conditions with potentially fatal outcomes,
where the endpoint of clinical trial analysis is survival. "Severely
debilitating" is defined by the FDA to mean diseases or conditions that cause
major irreversible morbidity. As a condition of approval, the FDA may require
the sponsor to conduct certain postmarketing studies to delineate additional
information about the drug's risks, benefits and optimal use. The FDA
Modernization Act establishes a new statutory program for the approval of
fast track drugs, including biological products. Fast track drugs are defined
as new drugs or biological products intended for the treatment of serious or
life-threatening conditions and that demonstrate the potential to address
unmet medical needs for such conditions. Under the new fast track program, a
request for designation may be submitted concurrently with, or any time
after, submission of an IND application. If a product meets the statutory
criteria, the FDA is required to designate the product as a fast track drug
within 60 days of the request for designation. A BLA or NDA for a fast track
drug may be approved by the FDA upon a determination that the drug has an
effect on a clinical endpoint or a surrogate endpoint that is reasonably
likely to predict clinical benefits. The FDA can condition approval of a fast
track drug upon a requirement to conduct post-approval studies and submit
copies of promotional materials to the FDA prior to dissemination. The new
law also provides procedures for the expedited withdrawal of marketing
approval of a fast track. There can be no assurance that the FDA will
consider REMUNE, or any other of the Company's products under development, to
be an appropriate candidate for accelerated approval, expedited review or
fast track designation.
Since 1992, non-biological and biological drugs have been subject to the
Prescription Drug User Fee Act of 1992 ("PDUFA"). PDUFA requires that
companies submitting marketing applications for such products pay fees in
connection with review of the applications. In return, the FDA has committed
to reviewing a certain percentage of the applications within certain
timeframes. For example, in its Fiscal Year 1997 Report to Congress on PDUFA,
the FDA reported that 96% of all original premarketing applications for
biological and nonbiological drugs received in Fiscal Year 1996 were reviewed
within 12 months of the application submission date. The FDA's PDUFA
performance goal in Fiscal Year 1996 was to complete 80% of such applications
within 12 months of the submission date. Although PDUFA was scheduled to
expire on September 30, 1997, the Food and Drug Administration Modernization
Act of 1997 reauthorized PDUFA for five years (i.e., until September 30,
2002). The FDA has committed to reaching approval, disapproval or
additional-data-required decisions on 90% of standard original NDAs and to
act on 30% of those submissions within 10 months. The FDA has also agreed to
act on BLAs filed
20
<PAGE>
during fiscal year 1999 within 12 months of receipt of the marketing
application and to review and act on 90% of priority original NDAs and BLAs
(i.e., applications offering significant advances over existing treatments)
within six months of receipt. There can be no assurance, however, that any
BLA the Company submits to the FDA for any of its biological products will be
reviewed and acted upon within the timeframes set out above. The Company also
is subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other present and potential future federal,
state or local regulations. Regulations concerning biotechnology may affect
the Company's research and development programs. Furthermore, existing or
additional government regulations may be applied that could prevent or delay
regulatory approval of the Company's products, or affect the pricing or
distribution of such products.
The Company also is subject to foreign regulatory requirements governing
human clinical trials and pharmaceutical sales that vary widely from country
to country. Whether or not FDA approval has been obtained, approval of a
product by comparable regulatory authorities of foreign countries must be
obtained prior to marketing the product in those countries. The approval
process may be more or less rigorous from country to country and the time
required may be longer or shorter than that required in the United States.
The Company may seek to use foreign marketing partners to assist in obtaining
foreign regulatory approval for REMUNE and other products.
EMPLOYEES
As of December 31, 1998, the Company and its subsidiary had a combined 156
full-time employees, of whom 38 hold Ph.D. or other advanced degrees. Of
these employees, 112 are engaged in, or directly support, research and
development. A significant number of the Company's management and
professional employees have had prior experience with pharmaceutical and
biotechnology companies. None of the Company's employees is covered by a
collective bargaining agreement.
RISK FACTORS
UNCERTAINTY OF PRODUCT DEVELOPMENT AND CLINICAL TESTING. The Company has not
completed the development of any products and there can be no assurance any
products will be successfully developed. The Company has been in existence
since 1986, and to date only six of its product candidates have entered
clinical trials. The Company's potential immune-based therapies for HIV,
autoimmune disease, cancer and gene therapy products currently under
development will require significant additional research and development
efforts and regulatory approvals prior to potential commercialization. To
achieve profitable operations, the Company must successfully develop,
manufacture, introduce and market products. There can be no assurance that
any of the Company's potential products will prove to be safe and effective
in clinical trials, that FDA or other regulatory approvals will be obtained
or that such products will achieve market acceptance.
The Company's potential HIV immune-based therapy, REMUNE, is in a Phase 3
clinical endpoint trial designed to provide evidence of efficacy based on
clinical endpoints. There can be no assurance that the results of such
clinical trial will demonstrate that REMUNE is safe and efficacious or, that
even if the results of the clinical trial are considered successful by the
Company, that the Food and Drug Administration ("FDA") will not require the
Company to conduct additional large scale clinical trials with REMUNE before
the FDA will consider approving REMUNE for commercial sale. Failure to
successfully complete the Phase 3 clinical endpoint trial in a timely fashion
and a failure to obtain FDA approval of REMUNE will materially and adversely
affect the Company. There can be no assurance that the results of the Phase 3
trial will be consistent with Phase 2 results. In addition, REMUNE is being
tested in a Phase 2 clinical trial in Thailand, in a pediatric Phase 1
clinical trial in the United States and in combination trials with approved
HIV therapies in the United States and Spain. Failure of these trials to
demonstrate the safety and effectiveness of REMUNE could have a material
adverse effect on the regulatory approval process for this potential product.
The Company's other potential immune-based therapies and gene therapy
technologies are at a much earlier stage of development than REMUNE. The
Company's gene therapy technology and certain of its technologies for the
treatment of cancer have not yet been tested in humans and there can be no
assurance that human testing of potential products based on such technologies
will be permitted by regulatory authorities or, that even if human testing is
permitted, that products based on such technologies will be developed and
shown to be safe or efficacious. Potential immune-based therapies based on
certain of the Company's autoimmune technologies and certain of its cancer
technologies are at an early stage of clinical testing and there can be no
assurance that such products will be shown to be safe, efficacious or receive
regulatory approval.
21
<PAGE>
There can be no assurance that the results of the Company's preclinical
studies and clinical trials will be indicative of future clinical trial
results. A commitment of substantial resources to conduct time-consuming
research, preclinical studies and clinical trials, including the REMUNE Phase
3 clinical endpoint trial will be required if the Company is to develop any
products. Delays in planned patient enrollment in the Company's current
clinical trials or future clinical trials may result in increased costs,
program delays or both. There can be no assurance that any of the Company's
potential products will prove to be safe and effective in clinical trials,
that FDA or other regulatory approvals will be obtained or that such products
will achieve market acceptance. Any products resulting from these programs
are not expected to be successfully developed or commercially available for a
number of years, if at all.
There can be no assurance that unacceptable toxicities or side effects will
not occur at any time in the course of human clinical trials or, if any
products are successfully developed and approved for marketing, during
commercial use of the Company's products. The appearance of any such
unacceptable toxicities or side effects could interrupt, limit, delay or
abort the development of any of the Company's products or, if previously
approved, necessitate their withdrawal from the market. Furthermore, there
can be no assurance that disease resistance will not limit the efficacy of
potential products.
ADDITIONAL FINANCING REQUIREMENTS AND ACCESS TO CAPITAL. The Company will
need to raise additional funds to conduct research and development,
preclinical studies and clinical trials necessary to bring its potential
products to market and establish manufacturing and marketing capabilities.
The Company anticipates that in 1999, the REMUNE clinical trials and
manufacturing costs will continue to represent a significant portion of the
Company's overall expenditures. The Company also anticipates that costs
related to the development of REMUNE will continue to increase as the Company
approaches possible commercialization. In particular, the Company anticipates
additional capital improvements of approximately $4 million to be made during
1999 related to increasing the capacity of its manufacturing facility, some
of which the Company anticipates it will lease. Other anticipated costs with
respect to REMUNE will depend on many factors, including the results of
interim analyses of the data from the Phase 3 clinical endpoint trial, the
continuation of the Company's collaboration with Agouron and other factors
which will influence the Company's determination of the appropriate continued
investment of the Company's financial resources in this program.
The Company's future capital requirements will depend on many factors,
including continued scientific progress in its research and development
programs, the scope and results of preclinical studies and clinical trials,
the time and costs involved in obtaining regulatory approvals, the costs
involved in filing, prosecuting and enforcing patent claims, competing
technological and market developments, the cost of manufacturing scale-up,
effective commercialization activities and arrangements and other factors not
within the Company's control. The Company intends to seek additional funding
through public or private financings, arrangements with corporate
collaborators or other sources. If funds are acquired through additional
collaborations, the Company will likely be required to relinquish some or all
rights to products that the Company may have otherwise developed itself.
Adequate funds may not be available when needed or on terms acceptable to the
Company. Insufficient funds may require the Company to scale back or
eliminate some or all of its research and development programs or license to
third parties products or technologies that the Company would otherwise seek
to develop itself. The Company believes that its existing resources will
enable the Company to maintain its current and planned operations through
1999.
PATENTS AND PROPRIETARY TECHNOLOGY. The Company has filed, or participated as
licensee, in the filing of a number of patent applications in the United
States and many international countries. The Company files applications as
appropriate for patents covering its products and processes. The Company has
been issued patents, or has licensed patents, covering certain aspects of its
proposed immune-based therapies for HIV, autoimmune disease, cancer and gene
therapy technologies. The Company's success may depend in part on its ability
to obtain patent protection for its products and processes. The Company is
aware that a group working with Connetics Corporation has received a United
States patent related to autoimmune disease research that covers technology
similar to that used by the Company.
There can be no assurance that the Company will be successful in these
opposition proceedings. An unfavorable outcome could have an adverse impact
on the Company's ability to consummate future corporate partnerships or
market autoimmune disease products. There can be no assurance that the
Company will be able to negotiate any necessary cross licenses, and if not
successful, failure to do so could have a negative impact on the Company.
There can be no assurance that the Company's patent applications will be
issued as patents or that any of its issued patents, or any patent that may
be issued in the future, will provide the Company with adequate protection
for the covered products, processes or technology.
22
<PAGE>
The patent positions of biotechnology and pharmaceutical companies can be
highly uncertain, and involve complex legal and factual questions. Therefore,
the breadth of claims allowed in biotechnology and pharmaceutical patents
cannot be predicted. The Company also relies upon unpatented trade secrets
and know how, and no assurance can be given that others will not
independently develop substantially equivalent trade secrets or know how. In
addition, whether or not the Company's patents are issued, or issued with
limited coverage, others may receive patents which contain claims applicable
to the Company's product. There can be no assurance that any of the Company's
patents, or any patents issued to the Company in the future, will afford
meaningful protection against competitors. Defending any such patent could be
costly to the Company, and there can be no assurance that the patent would be
held valid by a court of competent jurisdiction.
The Company also relies on protecting its proprietary technology in part
through confidentiality agreements with its corporate collaborators,
employees, consultants and certain contractors. There can be no assurance
that these agreements will not be breached, that the Company will have
adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known or independently discovered by its competitors.
It is possible that the Company's products or processes will infringe, or
will be found to infringe, patents not owned or controlled by the Company,
such as the patent owned by Connetics Corporation. If any relevant claims of
third-party patents are upheld as valid and enforceable, the Company could be
prevented from practicing the subject matter claimed in such patents, or
would be required to obtain licenses or redesign its products or processes to
avoid infringement. There can be no assurance that such licenses would be
available at all or on terms commercially reasonable to the Company or that
the Company could redesign its products or processes to avoid infringement.
Litigation may be necessary to defend against claims of infringement, to
enforce patents issued to the Company or to protect trade secrets. Such
litigation could result in substantial costs and diversion of management
efforts regardless of the results of such litigation and an adverse result
could subject the Company to significant liabilities to third parties,
require disputed rights to be licensed or require the Company to cease using
such technology.
HISTORY OF OPERATING LOSSES. As of December 31, 1998, the Company had a
consolidated accumulated deficit of $171.6 million. The Company has not
generated revenues from the commercialization of any products and expects to
incur substantial net operating losses over the next several years. There can
be no assurance that the Company will be able to generate sufficient product
revenue to become profitable at all or on a sustained basis. The Company
expects to have quarter-to-quarter fluctuations in expenses, some of which
could be significant, due to expanded research, development and clinical
trial activities.
LENGTHY APPROVAL PROCESS AND UNCERTAINTY OF GOVERNMENT REGULATORY
REQUIREMENTS. Clinical testing, manufacture, promotion and sale of the
Company's drug products are subject to extensive regulation by numerous
governmental authorities in the United States, principally the FDA, and
corresponding state and foreign regulatory agencies. The Company believes
that REMUNE and most of its other potential immune-based therapies will be
regulated by the FDA as biological drug products under current regulations of
the FDA. Biological products must be shown to be safe, pure and potent (i.e.,
effective) and are subject to the same regulatory requirements as
nonbiological products under the FDC Act, as amended by the FDA Modernization
Act, except that a biological product licensed under the PHS Act is not
required to have an approved NDA under the FDC Act. The FDA Modernization Act
directed the FDA to take measures to minimize the differences in the review
and approval of marketing applications for biological and nonbiological
products. The FDA Modernization Act also made significant revisions to the
statutory requirements with regard to the approval of new biological and
nonbiological products. Among other things, the FDA Modernization Act
established a new statutory program for the approval of fast track drugs,
streamlined clinical research, and revised the content of product approval
applications and the FDA review process. The FDA is required to issue
regulations and guidelines in order to implement certain of these new
requirements. Until the FDA issues and implements these regulations and
guidelines, it is impossible to predict the impact of the FDA Modernization
Act on the review and approval of any marketing applications that the Company
may submit to the FDA. The FDC Act, the PHS Act and other federal and state
statutes and regulations govern or influence the testing, manufacture,
safety, effectiveness, labeling, storage, recordkeeping, approval,
advertising, distribution and promotion of biological prescription drug
products. Noncompliance with applicable requirements can result in, among
other things, fines, injunctions, seizure of products, total or partial
suspension of product marketing, failure of the government to grant premarket
approval, withdrawal of marketing approvals and criminal prosecution.
The regulatory process for new therapeutic drug products, including the
required preclinical studies and clinical testing, is lengthy and expensive
and there can be no assurance that necessary FDA clearances will be obtained
in a timely manner, if at all. There can be no assurance as to the length of
the clinical trial period or the number of
23
<PAGE>
patients the FDA will require to be enrolled in the clinical trials in order
to establish the safety and efficacy of the Company's products. The Company
may encounter significant delays or excessive costs in its efforts to secure
necessary approvals, and regulatory requirements are evolving and uncertain.
Future United States or foreign legislative or administrative acts could also
prevent or delay regulatory approval of the Company's products. There can be
no assurance that the Company will be able to obtain the necessary approvals
for clinical trials, manufacturing or marketing of any of its products under
development. Even if commercial regulatory approvals are obtained, they may
include significant limitations on the indicated uses for which a product may
be marketed. In addition, a marketed product is subject to continual FDA
review. Later discovery of previously unknown problems or failure to comply
with the applicable regulatory requirements may result in restrictions on the
marketing of a product or withdrawal of the product from the market, as well
as possible civil or criminal sanctions.
The steps required before a biological drug product may be marketed in the
United States generally include preclinical studies and the filing of an IND
application with the FDA. Reports of results of preclinical studies and
clinical trials for biological drug products are submitted to the FDA in the
form of a Biologics Licensing Application ("BLA") for approval for marketing
and commercial shipment. Submission of a BLA does not assure FDA approval for
marketing. The BLA review process may take a number of years to complete,
although reviews of applications for treatments of AIDS, cancer and other
life-threatening diseases may be accelerated or expedited. Failure of the
Company to receive FDA marketing approval for REMUNE or any of its other
products under development on a timely basis could have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition to obtaining approval for each biological drug
product, an ELA usually must be filed and approved by the FDA.
Among the other requirements for BLA approval is the requirement that
prospective manufacturers conform to the FDA's GMP requirements specifically
for biological drugs, as well as for other drugs. In complying with the FDA's
GMP requirements, manufacturers must continue to expend time, money and
effort in production, recordkeeping and quality control to assure that the
product meets applicable specifications and other requirements. Failure to
comply with the FDA's drug GMP requirements subjects the manufacturer to
possible FDA regulatory action. There can be no assurance that the Company or
its contract manufacturers, if any, will be able to maintain compliance with
the FDA's drug GMP requirements on a continuing basis. Failure to maintain
such compliance could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company believes its proprietary GeneDrug and cancer treatment therapies
will likely be regulated as biological products. As with the Company's other
potential products, the gene therapy and cancer products will be subject to
extensive FDA regulation throughout the product development process, and
there can be no assurance that any of these products will be successful at
securing the requisite FDA marketing approval on a timely basis, if at all.
The FDA Modernization Act also amended the FDC Act to permit expanded access
to individuals and larger groups to unapproved new therapeutic and diagnostic
products. Although the new law largely codifies existing FDA regulations in
this area, it expands access to all investigational therapies under certain
conditions. See "Business -- Government Regulation." Although the FDA has
granted expanded access to REMUNE for those patients who are ineligible to
enroll in the Phase 3 clinical endpoint trial, the FDA has to date not
designated expanded access protocols for REMUNE as "treatment" protocols.
Either expanded access or a treatment protocol designation might permit third
party reimbursement of some of the costs associated with making REMUNE
available to patients in such an expanded access context. There can be no
assurance that the FDA will determine that REMUNE meets all of the FDA's
criteria for use of an investigational drug for treatment use or that, even
if the product is allowed for treatment use, that third party payers will
provide reimbursement for any of the costs of treatment with REMUNE .
The FDA also has issued regulations to accelerate the approval of or to
expedite the review of new biological drug products for serious or
life-threatening illnesses that provide meaningful therapeutic benefit to
patients over existing treatments. Under the accelerated approval program,
the FDA may grant marketing approval for a biological or nonbiological drug
product earlier than would normally be the case. In addition to the
accelerated approval process, the FDA has established procedures designed to
expedite the development, evaluation and marketing of new therapies intended
to treat persons with life-threatening and severely-debilitating illnesses,
especially when no satisfactory alternative therapy exists. In addition, the
FDA Modernization Act established a new statutory program for the approval of
fast track drugs, including biological products. See "Business -- Government
Regulation." There can be no assurance that the FDA will consider REMUNE or
any other of the Company's products under development to be an appropriate
candidate for accelerated approval, expedited review or fast track
designation.
24
<PAGE>
To market any drug products outside of the United States, the Company is also
subject to numerous and varying foreign regulatory requirements, implemented
by foreign health authorities, governing the design and conduct of human
clinical trials and marketing approval. The approval procedure varies among
countries and can involve additional testing, and the time required to obtain
approval may differ from that required to obtain FDA approval. The foreign
regulatory approval process includes all of the risks associated with
obtaining FDA approval set forth above, and approval by the FDA does not
ensure approval by the health authorities of any other country. See
"Business -- Government Regulation."
TECHNOLOGICAL CHANGE AND COMPETITION. The biotechnology industry continues to
undergo rapid change and competition is intense in the fields of HIV,
autoimmune disease, cancer and gene therapy, and such competition is expected
to increase. The Company will compete with fully integrated pharmaceutical
companies, small biotechnology companies, universities and research
organizations. There can be no assurance that competitors have not or will
not succeed in developing technologies and products that are more effective
than any which have been or are being developed by the Company or which would
render the Company's technology and products obsolete and noncompetitive.
Many of the Company's competitors have substantially greater experience,
financial and technical resources and production, marketing and development
capabilities than the Company. Accordingly, certain of the Company's
competitors may succeed in obtaining regulatory approval for products more
rapidly or effectively than the Company. If the Company commences commercial
sales of its products, it will also be competing with respect to
manufacturing efficiency and sales and marketing capabilities, areas in which
it currently has no experience. There can be no assurance that competitors
will not develop and commercialize more effective or affordable products.
DEPENDENCE ON THIRD PARTIES. The Company's strategy for the research,
development and commercialization of its products requires entering into
various arrangements with corporate collaborators, licensors, licensees and
others, and the Company's commercial success is dependent upon these outside
parties performing their respective contractual responsibilities, including
the analysis of the data generated in the Company's clinical trials. The
amount and timing of resources such third parties will devote to these
activities may not be within the control of the Company. There can be no
assurance that such parties will perform their obligations as expected and
the failure of third parties to perform their obligations would have a
material adverse effect on the Company. Although the Company has
collaborative agreements with several universities and research institutions,
the Company's agreements with Agouron, Schering-Plough and Bayer are the only
collaborative agreements that provides the Company with contract revenue.
Agouron is in the process of obtaining shareholder approval on the sale of
the company to Warner-Lambert Company ("Warner-Lambert"). Though Agouron is
to remain a separate entity as a wholly-owned subsidiary of Warner-Lambert,
there can be no assurance as to which Agouron research projects
Warner-Lambert will continue to fund in the future.
There can be no assurance that any of the Company's collaborations will not
be terminated or will result in the development of any commercial products.
Immune Response intends to seek additional collaborative arrangements to
develop and commercialize certain of its products. There can be no assurance
that the Company will be able to negotiate collaborative arrangements on
favorable terms, or at all, in the future, or that its current or future
collaborative arrangements will be successful.
DEPENDENCE ON KEY PERSONNEL. Since its inception, Immune Response has relied
on the technical and management skills of its experienced staff. The Company
does not maintain key man life insurance on any of its personnel. The
Company's success also depends in large part upon its ability to attract and
retain highly qualified scientific and management personnel. The Company
faces competition for such personnel from other companies, academic
institutions, government entities and other organizations. There can be no
assurance that the Company will be successful in hiring or retaining
requisite personnel.
LACK OF COMMERCIAL MANUFACTURING AND MARKETING EXPERIENCE. The Company has a
manufacturing facility for REMUNE located in King of Prussia, Pennsylvania,
and a pilot manufacturing facility in Carlsbad, California for its other
products. The Company has not yet manufactured its product candidates in
commercial quantities. No assurance can be given that the Company, on a
timely basis, will be able to make the transition from manufacturing clinical
trial quantities to commercial production quantities successfully or be able
to arrange for contract manufacturing. The Company believes it will be able
to manufacture REMUNE for initial commercialization, if the product obtains
FDA approval, but it has not yet demonstrated the capability to manufacture
REMUNE in commercial quantities, or its autoimmune disease, cancer and gene
therapy treatments in large-scale clinical or commercial quantities. The
Company has no experience in the sales, marketing and distribution of
pharmaceutical products. There can be no assurance that the Company will be
able to establish sales, marketing and distribution capabilities or make
arrangements with its collaborators, licensees or others to perform such
activities or that such efforts will be
25
<PAGE>
successful. There can be no assurance of market acceptance of the Company's
products, if they are developed and approved for commercialization.
The manufacture of the Company's products involves a number of steps and
requires compliance with stringent quality control specifications imposed by
the Company itself and by the FDA. Moreover, the Company's products can only
be manufactured in a facility that has undergone a satisfactory inspection by
the FDA. For these reasons, the Company would not be able quickly to replace
its manufacturing capacity if it were unable to use its manufacturing
facilities as a result of a fire, natural disaster (including an earthquake),
equipment failure or other difficulty, or if such facilities are deemed not
in compliance with the FDA's drug GMP requirements and the non-compliance
could not be rapidly rectified. The Company's inability or reduced capacity
to manufacture its products would have a material adverse effect on the
Company's business and results of operations.
The Company may enter into arrangements with contract manufacturing companies
to expand its own production capacity in order to meet requirements for its
products, or to attempt to improve manufacturing efficiency. If the Company
chooses to contract for manufacturing services and encounters delays or
difficulties in establishing relationships with manufacturers to produce,
package and distribute its finished products, clinical trials, market
introduction and subsequent sales of such products would be adversely
affected. Further, contract manufacturers must also operate in compliance
with the FDA's drug GMP requirements; failure to do so could result in, among
other things, the disruption of product supplies. Until recently, biologic
product licenses could not be held by any company unless it performed
significant manufacturing operations. The FDA has amended its regulations in
this regard, and the Company believes that under the revised regulations it
can now hold licenses for its biological products without performing
significant manufacturing steps. Nonetheless, the Company's potential
dependence upon third parties for the manufacture of its products may
adversely affect the Company's profit margins and its ability to develop and
deliver such products on a timely and competitive basis.
UNCERTAINTY OF PRODUCT PRICING, REIMBURSEMENT AND RELATED MATTERS. The
Company's ability to earn sufficient returns on its products will depend in
part on the extent to which reimbursement for the costs of such products and
related treatments will be available from government health administration
authorities, private health coverage insurers, managed care organizations and
other organizations. Third party payors are increasingly challenging the
price of medical products and services. If purchasers or users of the
Company's products are not able to obtain adequate reimbursement for the cost
of using such products, they may forego or reduce such use. Significant
uncertainty exists as to the reimbursement status of newly approved health
care products, and there can be no assurance that adequate third party
coverage will be available. Failure to obtain appropriate reimbursement would
have a material adverse effect on the Company.
PRODUCT LIABILITY EXPOSURE. The Company faces an inherent business risk of
exposure to product liability and other claims in the event that the
development or use of its technology or prospective products is alleged to
have resulted in adverse effects. While the Company has taken, and will
continue to take, what it believes are appropriate precautions, there can be
no assurance that it will avoid significant liability exposure. Although the
Company currently carries product liability insurance for clinical trials,
there can be no assurance that the Company has sufficient coverage, or can
obtain sufficient coverage, at a reasonable cost. An inability to obtain
product liability insurance at acceptable cost or to otherwise protect
against potential product liability claims could prevent or inhibit the
commercialization of products developed by the Company. A product liability
claim could have a material adverse effect on the Company's business,
financial condition and results of operations.
HAZARDOUS MATERIALS/ENVIRONMENTAL MATTERS. Although the Company does not
currently manufacture commercial quantities of its product candidates, it
produces limited quantities of such products for its clinical trials. The
Company's research and development processes involve the controlled storage,
use and disposal of hazardous materials, biological hazardous materials and
radioactive compounds. The Company is subject to federal, state and local
laws and regulations governing the use, manufacture, storage, handling and
disposal of such materials and certain waste products. Although the Company
believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by such laws and regulations,
the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result, and any such liability could exceed
the resources of the Company. There can be no assurance that the Company will
not be required to incur significant costs to comply with current or future
environmental laws and regulations nor that the operations, business or
assets of the Company will not be materially or adversely affected by current
or future environmental laws or regulations.
26
<PAGE>
VOLATILITY OF STOCK PRICE AND ABSENCE OF DIVIDENDS. The market price of
Immune Response's common stock, like that of the common stock of many other
biopharmaceutical companies, has been and is likely to be highly volatile.
Factors such as the results of preclinical studies and clinical trials by the
Company, its collaborators or its competitors, other evidence of the safety
or efficacy of products of the Company or its competitors, announcements of
technological innovations or new products by the Company or its competitors,
governmental regulatory actions, changes or announcements in reimbursement
policies, developments with the Company's collaborators, developments
concerning patent or other proprietary rights of the Company or its
competitors (including litigation), concern as to the safety of the Company's
products, period-to-period fluctuations in the Company's operating results,
changes in estimates of the Company's performance by securities analysts,
market conditions for biopharmaceutical stocks in general and other factors
not within the control of the Company could have a significant adverse impact
on the market price of the common stock. The Company has never paid cash
dividends on its common stock and does not anticipate paying any cash
dividends in the foreseeable future.
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS. The Company's Certificate of
Incorporation and Bylaws include provisions that could discourage potential
takeover attempts and make attempts by stockholders to change management more
difficult. The approval of 66 2/3 percent of the Company's voting stock is
required to approve certain transactions and to take certain stockholder
actions, including the calling of special meetings of stockholders and the
amendment of any of the anti-takeover provisions contained in the Company's
Certificate of Incorporation. Further, pursuant to the terms of its
stockholder rights plan, the Company has distributed a dividend of one right
for each outstanding share of common stock. These rights will cause
substantial dilution to the ownership of a person or group that attempts to
acquire the Company on terms not approved by the Board of Directors and may
have the effect of deterring hostile takeover attempts.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
DENNIS J. CARLO, PH.D., age 55, a co-founder of the Company, has been
President and Chief Executive Officer since September 1994, and Chief
Scientific Officer since September 1998. Dr. Carlo was Chief Operating
Officer from April 1987 to September 1994 and Executive Vice President from
October 1987 to September 1994. Dr. Carlo has been Assistant Corporate
Secretary and a Director since 1987. From January 1982 to May 1987, Dr. Carlo
was Vice President of Research and Development and Vice President of
Therapeutic Manufacturing at Hybritech Incorporated, a biotechnology company
that was acquired by Eli Lilly & Company ("Eli Lilly"), a pharmaceutical
company, in 1986. From 1971 to 1981, Dr. Carlo held various positions at
Merck & Co., Inc., including Director of Development and Basic Cellular
Immunology and Director of Bacterial Vaccines and Immunology. Dr. Carlo is
also a director of AVANIR Pharmaceuticals and Vyrex Corporation. Dr. Carlo
has authored or co-authored over 100 articles and abstracts in the field of
immunology. Dr. Carlo received his Ph.D., M.S. and B.S. from Ohio State
University.
STEVEN P. RICHIERI, R.PH., age 44, has served as Chief Operating Officer
since January 1998 and Executive Vice President since September 1998. Mr.
Richieri was Senior Vice President, Operations from October 1995 to September
1998. Mr. Richieri served as Chief Financial Officer and Treasurer from
December 1998 to March 1999. Mr. Richieri was Vice President, Medical and
Regulatory Affairs from May 1992 to October 1995, and Executive Director,
Medical and Regulatory Affairs from October 1991 to May 1992. Mr. Richieri is
a director of Drug and Device Regulatory Services, Inc. From 1984 to 1991,
Mr. Richieri held various positions with Dura Pharmaceuticals, Inc. including
Vice President, Regulatory and Technical Affairs. From 1981 to 1984, Mr.
Richieri worked in Regulatory Affairs with Barnes Hind Inc., a subsidiary of
Revlon, Inc. Prior to joining Barnes Hind Inc., Mr. Richieri worked as a
Pharmacist in the medical community. Mr. Richieri received his M.B.A. from
the University of San Diego and his B.S. from Rutgers College of Pharmacy.
RAND P. MULFORD, age 55, has been Chief Financial Officer and Senior Vice
President, Corporate Development of the Company since March 1999. Mr. Mulford
was President and Chief Financial Officer of World Blood, Inc. from April
1997 to March 1999, and was Chairman of the Board of Medication Delivery
Devices, Inc. from June 1991 to December 1995. From September 1994 to May
1995, Mr. Mulford was President and Chief Operating Officer of Xytronyx, Inc.
From 1991 to 1994, Mr. Mulford was Chief Executive Officer of Chiron
Mimotopes Peptide Systems, L.L.C. Mr. Mulford received his M.B.A. from
Harvard University and his B.S.E. from Princeton University.
27
<PAGE>
STEVEN W. BROSTOFF, PH.D., age 56, has been Vice President, Research and
Development since March 1999. Dr. Brostoff was Vice President, Scientific
Affairs from September 1998 to March 1999. Dr. Brostoff was Chief Scientific
Officer from October 1995 to September 1998, and Vice President, Research and
Development for the Company from May 1992 to September 1998. Dr. Brostoff was
Executive Director of Autoimmune Disease Research from July 1988 to May 1992.
From 1973 to 1988, Dr. Brostoff held various positions within the Medical
University of South Carolina including: Director, University Research
Development; Director, Medical Scientist Training Program; Director, Program
in Molecular and Cellular Biology and Pathobiology; Professorships in
Microbiology and Immunology, and in Neurology; and served as Associate Dean
of the Graduate School. During his tenure at the University, Dr. Brostoff
also served as a Visiting Scientist at Oxford University in the United
Kingdom. Prior to this, Dr. Brostoff held positions with Albert Einstein
College of Medicine, Merck Institute for Therapeutic Research, the Salk
Institute, and the Eleanor Roosevelt Institute for Cancer Research. Dr.
Brostoff received his Ph.D. and B.S. from the Massachusetts Institute of
Technology.
PAULA B. ATKINS, age 45, has been Vice President, Administration of the
Company since September 1992 and Assistant Corporate Secretary since December
1998. Ms. Atkins was Executive Director, Administration from June 1991 to
September 1992, and Director, Administration from March 1988 to June 1991.
Ms. Atkins is President of the Biotech Employee Development Coalition and a
director of the San Diego Chapter of the Arthritis Foundation. From January
1985 to March 1988, Ms. Atkins was Director of Human Resources and
Administration for Access Research Corporation. Ms. Atkins held positions
previously with Foodmaker, Inc., a wholly owned subsidiary of Ralston Purina,
and Scripps Clinic and Research Foundation. Ms. Atkins received her M.S. and
B.A. from San Diego State University.
ITEM 2. PROPERTIES
The Company leases a 50,400 square foot laboratory and headquarters facility
located in Carlsbad, California. Under the terms of the lease, which expires
on December 31, 2000, and has two five-year options to extend, current
monthly rental on the facility is approximately $67,100.
The Company also leases a 31,200 square foot facility located adjacent to its
headquarters facility in Carlsbad, California. The Company expects this
facility to be used for additional laboratory and office space. Under the
terms of the lease, which is expected to expire in March 2008, initial
monthly rental on the facility is approximately $18,400. The Company has also
delivered to the lessor a Letter of Credit for $600,000 as an additional
security deposit.
The Company subleases a 52,500 square foot manufacturing facility located in
King of Prussia, Pennsylvania. Under the terms of the sublease which expires
on September 30, 2000, the monthly rental on the facility is approximately
$28,450. The Company has an option to extend the sublease for up to six
years, in three-year increments. The Company has also delivered to the
sublessor a Letter of Credit for $203,200 as an additional security deposit.
The Company owns 4.65 acres of undeveloped property adjacent to its
headquarters facility in Carlsbad, California. This property may be used in
the future as a manufacturing facility or for additional laboratory and
office space.
ITEM 3. LEGAL PROCEEDINGS
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
28
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market ("NNM")
under the symbol "IMNR." The following table sets forth the range of high and
low sales prices for the Common stock on the NNM for the periods indicated
since January 1, 1997.
<TABLE>
<CAPTION>
1997 HIGH LOW
- ---- ---- ---
<S> <C> <C>
January 1 - March 31, 1997 $ 9.13 $ 6.06
April 1 - June 30, 1997 9.13 6.50
July 1 - September 30, 1997 14.25 7.38
October 1 - December 31, 1997 13.75 9.00
1998 HIGH LOW
- ---- ---- ---
January 1 - March 31, 1998 $ 11.44 $ 8.81
April 1 - June 30, 1998 19.69 9.50
July 1 - September 30, 1998 15.00 7.38
October 1 - December 31, 1998 14.69 10.13
</TABLE>
As of March 23, 1999, the Company's Common Stock was held by 889 stockholders
of record. The Company has never paid cash dividends and does not anticipate
paying any cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Contract research revenue $ 5,488 $ 2,000 $ 1,000 $ 1,561 $ 6,035
Licensed research revenue 12,185 --- 6,000 --- 1,000
Research and development expenses 33,240 34,090 27,211 19,489 13,511
Net loss (18,062) (33,557) (21,026) (19,936) (17,399)
Net loss per share - Basic and diluted (.78) (1.53) (1.19) (1.19) (1.05)
Shares used in computing net loss
per share 23,148 21,883 17,658 16,750 16,614
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, marketable
securities and short-term investments $ 24,862 $ 30,439 $ 47,787 $ 44,610 $ 59,328
Working capital 22,626 28,939 45,684 43,586 59,226
Total assets 35,626 37,375 54,086 50,429 68,483
Stockholders' equity 22,060 35,102 51,304 48,441 67,086
</TABLE>
29
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Immune Response is a biopharmaceutical company developing immune-based
therapies to induce specific T cell responses for the treatment of HIV,
autoimmune diseases and cancer. The Company is conducting clinical trials for
its immune-based therapies for HIV, rheumatoid arthritis, psoriasis, multiple
sclerosis, colon cancer and brain cancer and preclinical studies for prostate
cancer and melanoma cancer. In addition, the Company is developing a targeted
delivery technology for gene therapy that is designed to enable the
intravenous injection of genes for delivery directly to the liver. The
Company's gene therapy program is currently focused on diseases of the liver
and is in preclinical studies for the treatment of hemophilia and hepatitis.
This discussion contains forward-looking statements concerning the Company's
operating results and timing of anticipated expenditures. Such statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected. Factors that could cause or contribute to
such differences include those discussed under "Risk Factors," as well as
those discussed elsewhere in this Form 10-K. The following should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere in this Form 10-K. These forward-looking statements speak
only as of the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
During April 1998, the Company sold 200 shares of its Series F Convertible
Preferred Stock ("Series F Stock") in return for gross proceeds of $10
million. The Series F Stock is convertible into common stock initially at a
conversion price of $14.07 per share of common stock. If the Company's common
stock does not trade at prices higher than $14.07 per share over a period of
time, the conversion price will be adjusted downward on April 24, 1999, (or
sooner if the Company issues common stock at less than $14.07 per share) and
quarterly thereafter. The Series F Stock bears a dividend of 7.5% per annum.
In general, the dividend is payable in shares of common stock. For the year
ended December 31, 1998, 22,234 shares of the Company's common stock were
issued as dividends to the Series F shareholders.
During June 1998, the Company and Agouron Pharmaceuticals, Inc. ("Agouron")
entered into a binding agreement under which the Company agreed to
exclusively license to Agouron, REMUNE, its immune-based therapy under
development for the treatment of HIV infection. Under the terms of the
agreement, the Company will manufacture commercial supplies of REMUNE and
Agouron will have exclusive rights to market REMUNE in North America, Europe,
Japan and certain other countries, if regulatory approvals are received. The
Company may receive as much as $77 million as a result of this agreement,
including license and milestone payments of $45 million, payments to support
research and development of $18 million and $14 million to purchase the
Company's common stock, priced at a premium to the market, subject to certain
rights of termination by Agouron. In addition, the two companies will share
all profits from the commercialization of REMUNE on a 50/50 basis, if REMUNE
is successfully developed and receives the necessary regulatory approvals.
In June 1998, the Company received a $10 million license fee and Agouron
purchased 118,256 shares of unregistered common stock of the Company, priced
at a premium to market, for $2 million. In October 1998, the Company received
a $5 million payment from Agouron consisting of a $3 million payment for
research and development and a $2 million payment for the purchase of 126,758
shares of unregistered common stock priced at a premium to the market. The
October 1998 payment is the first in a series of six quarterly payments that
the Company expects Agouron to make to fund research and development and to
purchase unregistered common stock. In January 1999, the Company received its
second quarterly $5 million payment from Agouron consisting of a $3 million
payment for research and development and a $2 million payment for the
purchase of 149,911 shares of unregistered common stock priced at a premium
to the market. In February 1999, the Company received its initial milestone
payment of $5 million.
In July 1998, the Company entered into a research collaboration and option
agreement with Schering-Plough Corporation ("Schering-Plough") to develop
gene therapy products for the treatment of hepatitis B and C and other
diseases. Under terms of the initial preclinical research agreement, the
Company could receive approximately $5 million in initial fees, reimbursement
of expenses, and technical milestone payments related to the delivery of the
interferon alpha-2b gene for the treatment of hepatitis B and C. In July
1998, the Company received approximately $2 million for a license fee and to
fund research. In March 1999, the Company received approximately $1 million
to fund additional research. As part of the agreement, Schering-Plough has
the option to license the Company's gene
30
<PAGE>
delivery system for additional proprietary Schering-Plough genes. The
agreement also provides for Schering-Plough to pay royalties on future
product sales.
The Company has not been profitable since inception and had a consolidated
accumulated deficit of $171.6 million as of December 31, 1998. To date, the
Company has not recorded any revenues from the sale of products. Revenues
recorded through December 31, 1998 were earned in connection with contract
research, licensing of technologies and investment income. The Company
expects its operating losses to continue, as well as to have
quarter-to-quarter fluctuations, some of which could be significant, due to
expanded research, development and clinical trial activities. The Company may
not be able to generate sufficient product revenue to become profitable at
all or on a sustained basis.
RESULTS OF OPERATIONS
License and contract research revenues of $14.2 million and $2.0 million were
received in 1998 from Agouron and Schering-Plough respectively, related to
the agreements discussed above. License and contract research revenues of
$1.5 million in 1998, $2.0 million in 1997 and $7.0 million in 1996, were
received from Bayer Corporation related to a research collaboration for a
potential therapy for hemophilia that began in July 1996. The Company has not
received any revenue from the commercial sale of products and may not derive
revenue from the sale of products for the foreseeable future.
Investment income was $1.7 million in 1998, $2.4 million in 1997 and $2.6
million in 1996. The decline in investment income over the past three years
was due to the reduction of the Company's cash position during that period,
as well as to the fluctuation in interest rates.
The Company's research and development expenses were $33.2 million in 1998,
$34.1 million in 1997 and $27.2 million in 1996. The decrease in research and
development costs in 1998 compared to 1997 was due primarily to the initial
costs of the Phase 3 clinical endpoint trial for HIV infection using REMUNE
being front-end loaded to allow the clinical sites to aggressively prepare
for and recruit patients for this trial. Initial enrollment of this trial was
completed in the first half of 1997. The Company expects the costs related to
this trial to decline in 1999, unless the trial is extended by the Data
Safety Monitoring Board, an independent group of clinicians and statisticians
monitoring the data during the trial, when it meets in late Spring 1999. If
the Phase 3 trial is extended, the Company anticipates 1999 trial costs to be
consistent with 1998 trial costs. Research and development expenses related
to advancing REMUNE are expected to increase due to the scaling up of the
manufacturing process for REMUNE as the Company approaches possible
commercialization of REMUNE.
The Company also expects research and development costs to increase as it
continues clinical trials related to a potential rheumatoid arthritis
therapy. The Company anticipates beginning additional rheumatoid arthritis
clinical trials during the second half of 1999. Research and development
expenses should also continue to rise in the foreseeable future due to
expanding preclinical and clinical testing of the Company's proposed gene
therapy and cancer treatments
The Company's costs incurred for the development of REMUNE during 1998, 1997
and 1996 were $21.5 million, $23.7 million and $17.8 million, respectively.
Costs incurred for the development of potential products in the autoimmune
disease program were $5.3 million, $3.9 million and $4.3 million for the
years 1998, 1997 and 1996, respectively. The gene therapy program incurred
costs in 1998, 1997 and 1996 of $4.6 million, $4.9 million and $4.3 million,
respectively. The cancer program, which began in 1996, incurred costs of $1.8
million in 1998, $1.6 million in 1997 and $756,000 during 1996.
General and administrative expenses were $4.2 million in 1998, $3.9 million
in 1997 and $3.4 million in 1996. General and administrative expenses
necessary to support the Company's research and development and other
corporate activities are expected to increase in 1999 compared to 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had working capital of $22.6 million,
including $24.9 million of cash, cash equivalents and marketable securities.
This compares with working capital as of December 31, 1997 of $28.9 million,
including $30.4 million of cash, cash equivalents and marketable securities.
Working capital decreased in 1998, despite the $10 million received from the
private placement of Series F Convertible Preferred Stock, the $17 million
received from Agouron and the $2.5 million received from Schering-Plough and
Bayer Corporation, as a
31
<PAGE>
result of costs of operations, in particular, due to the cost of the HIV
clinical trials with REMUNE and the capital improvements incurred to increase
the capacity of the manufacturing facility producing REMUNE.
The Company will need to raise additional funds to conduct research and
development, preclinical studies and clinical trials necessary to bring its
potential products to market and establish manufacturing and marketing
capabilities. The Company anticipates that in 1999, the REMUNE clinical
trials and manufacturing costs will continue to represent a significant
portion of the Company's overall expenditures. The Company also anticipates
that costs related to the development of REMUNE will continue to increase as
the Company approaches possible commercialization. In particular, the Company
anticipates additional capital improvements of approximately $4 million to be
made during 1999 related to increasing the capacity of its manufacturing
facility, some of which the Company anticipates it will lease. Other
anticipated costs with respect to REMUNE will depend on many factors,
including the results of interim analyses of the data from the Phase 3
clinical endpoint trial, the continuation of the Company's collaboration with
Agouron and other factors which will influence the Company's determination of
the appropriate continued investment of the Company's financial resources in
this program.
The Company's future capital requirements will depend on many factors,
including continued scientific progress in its research and development
programs, the scope and results of preclinical studies and clinical trials,
the time and costs involved in obtaining regulatory approvals, the costs
involved in filing, prosecuting and enforcing patent claims, competing
technological and market developments, the cost of manufacturing scale-up,
effective commercialization activities and arrangements and other factors not
within the Company's control. The Company intends to seek additional funding
through public or private financings, arrangements with corporate
collaborators or other sources. If funds are acquired through additional
collaborations, the Company will likely be required to relinquish some or all
rights to products that the Company may have otherwise developed itself.
Adequate funds may not be available when needed or on terms acceptable to the
Company. Insufficient funds may require the Company to scale back or
eliminate some or all of its research and development programs or license to
third parties products or technologies that the Company would otherwise seek
to develop itself. The Company believes that its existing resources will
enable the Company to maintain its current and planned operations through
1999.
YEAR 2000
The Company has performed a review of its computer applications and equipment
related to their continuing functionality for the year 2000 and beyond. The
Company does not believe that it has material exposure with respect to the
year 2000 issue concerning its computer applications and equipment. The
Company is communicating with third parties with whom it has a material
relationship to assess its risk with respect to year 2000 issues. This
assessment is not complete, in particular, because the Company has not
completed inquiries of such outside third parties. However, the Company is
not aware, at this time, of any material year 2000 issues with respect to its
dealings with such third parties. The Company anticipates that its assessment
will be completed by September 30, 1999. In the event that year 2000 issues
were to disrupt the Company, such disruption may have a material impact on
the Company and its results of operations. Since no significant issues have
arisen, the Company does not have a contingency plan to address any material
year 2000 issues. A contingency plan, if required, will be developed
immediately upon completion of the Company's assessment of our third party
exposure.
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company
required by this item are set forth at the pages indicated in Item 14(a)(1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item (with respect to Directors) is
incorporated by reference from the information under the captions "Election
of Directors" and "Other Matters" contained in the Company's Proxy Statement
to be filed with the Securities and Exchange
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information under the caption "Compensation of Executive Officers and
Directors" contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information under the caption "Stock Ownership of Management and Certain
Beneficial Owners" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information under the caption "Certain Transactions" contained in the Proxy
Statement.
33
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The consolidated financial statements required by this item are submitted in a
separate section beginning on page F-1 of this report.
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS OF THE IMMUNE RESPONSE CORPORATION
<S> <C>
Report of Independent Public Accountants F-1
Consolidated Balance Sheets at
December 31, 1998 and 1997 F-2
Consolidated Statements of Operations for the
three years ended December 31, 1998 F-3
Consolidated Statements of Stockholders' Equity
for the three years ended December 31, 1998 F-4
Consolidated Statements of Cash Flows for the
three years ended December 31, 1998 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
(2) Financial Statement Schedules
Schedules have been omitted because of the absence of conditions under which
they are required or because the required information is included in the
financial statements or the notes thereto.
(3) Exhibits with each management contract or compensatory plan or
arrangement required to be filed identified. See paragraph (c)
below.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during the fourth
quarter of the fiscal year ended December 31, 1998.
(c) Exhibits
<TABLE>
<S> <C>
3(i)(12) Restated Certificate of Incorporation of The Immune Response
Corporation, as amended by Certificate of Designations, Preferences
and Rights of Series F Convertible Preferred Stock.
3(ii)(6) Restated Bylaws of The Immune Response Corporation.
10.1(7) Amended and Restated 1989 Stock Plan of The Immune Response
Corporation.
10.13(1) Assignment, dated May 27, 1988, by Jonas Salk and Dennis J. Carlo,
assignors, to the Company.
10.14(1) Assignment, dated May 27, 1988 by Jonas Salk to the Company.
10.17(1) Lease, dated as of May 22, 1989, between the Company and BDN Carlsbad
#1 Limited Partnership.
10.28(5)* Form of Indemnification Agreement entered into between the Company and
its officers and directors.
10.36(2) First Amendment, dated February 19, 1990, to Lease between BDN
Carlsbad #1 Limited Partnership and the Company.
10.37* Amended and Restated 1990 Directors' Stock Option Plan of The Immune
Response Corporation.
10.42(3) Second and Third Amendments to the Lease, dated as of May 22, 1989,
between the Company and BDN Carlsbad #1 Limited Partnership.
</TABLE>
34
<PAGE>
<TABLE>
<S> <C>
10.47(4) Rights Agreement, dated February 26, 1992, between the Company and
First Interstate Bank, Ltd., as Rights Agent.
10.53* Form of The Immune Response Corporation Special Nonstatutory Stock
Option Agreement.
10.56(8) Sublease dated as of March 2, 1995, between Immunization Products
Limited and Rhone- Poulenc Rorer Pharmaceuticals Inc.
10.57(8) Amendment No. 1 to sublease dated as of June 5, 1995, between
Immunization Products Limited and Rhone-Poulenc Rorer Pharmaceuticals
Inc.
10.58(9) Collaboration Agreement by and between The Immune Response Corporation
and Bayer Corporation, dated as of July 8, 1996.
10.59(10) Unit Purchase Agreement, dated April 15, 1997, between The Immune
Response Corporation and Kevin B. Kimberlin, including Common Stock
Purchase Warrant, Promissory Note and Stock Pledge Agreement.
10.60(10) Unit Purchase Agreement, dated April 15, 1997, between The Immune
Response Corporation and Dennis J. Carlo, Ph.D., including Common
Stock Purchase Warrant, Promissory Note and Stock Pledge Agreement.
10.61(10) Amendment No. 1 to Rights Agreement (Exhibit 10.47), dated April 17,
1997, between The Immune Response Corporation and Harris Trust Company
of California
10.62(11) Common Stock Purchase Warrant, dated June 26, 1997, between The Immune
Response Corporation and Kevin B. Kimberlin.
10.63(11) Common Stock Purchase Warrant, dated June 26, 1997, between The Immune
Response Corporation and Dennis J. Carlo, Ph.D.
10.65(15) Letter of Intent dated June 11, 1998 between The Immune Response
Corporation and Agouron Pharmaceuticals, Inc.
10.66(15) Common Stock Purchase Agreement dated June 11, 1998 between The Immune
Response Corporation and Agouron Pharmaceuticals, Inc.
10.67(13) Securities Purchase Agreement dated as of April 24, 1998 by and among
the Company and the Investors.
10.68(14) Registration Rights Agreement dated as of April 24, 1998 by and among
the Company and the Investors.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Public Accountants.
24.1 Power of Attorney (see page 37).
27.1 Financial Data Schedule
</TABLE>
(1) Incorporated by reference to the exhibits of the same number to the
Company's Registration Statement on Form S-1, No. 33-31057.
(2) Incorporated by reference to the exhibits of the same number to the
Company's Registration Statement on Form S-1, No. 33-34096.
(3) Incorporated by reference to the exhibits of the same number to the
Company's Report on Form 10-K for the Fiscal Year ended December 31,
1990 (Commission File No. 0-18006).
(4) Incorporated by reference to Exhibit 5.1 to the Company's Report on
Form 8-K filed March 4, 1992 (Commission File No 0-18006).
(5) Incorporated by reference to the exhibits of the same number to the
Company's Registration Statement on Form S-1, No. 33-31057.
(6) Incorporated by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-8, No. 33-62940.
(7) Incorporated by reference to the exhibit of the same number to the
Company's Registration Statement on Form S-8, No. 33-80884.
(8) Incorporated by reference to the exhibit of the same number to
Company's Form 10-K dated December 31, 1995
(9) Incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K, as amended, dated July 8, 1996. Confidential
treatment has been granted for certain portions of the Exhibit.
35
<PAGE>
(10) Incorporated by reference to the Exhibits of the same number filed
with the Company's March 31, 1997 Form 10-Q.
(11) Incorporated by reference to the Exhibit of the same number filed with
the Company's June 30, 1997 Form 10-Q.
(12) Incorporated by reference to the Exhibit of the same number filed with
the Company's Form 8-K dated April 24, 1998.
(13) Incorporated by reference to Exhibit 10.1 filed with the Company's
Form 8-K dated April 24, 1998.
(14) Incorporated by reference to Exhibit 10.2 filed with the Company's
Form 8-K dated April 24, 1998.
(15) Incorporated by reference to the Exhibit of the same number filed with
the Company's Form 8-K dated June 11, 1998.
* Indicates management contract or compensatory plan or arrangement.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE IMMUNE RESPONSE CORPORATION
By: /s/ Dennis J. Carlo
---------------------------
Dennis J. Carlo,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Dennis J. Carlo and Rand P. Mulford his
attorneys-in-fact, each with full power of substitution, for him in any and
all capacities, to sign any amendments to this Report and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact, or their substitute or substitutes, may do or cause
to be done by virtue hereof.
/s/ James B. Glavin Chairman of the March 25, 1999
- ------------------------ Board of Directors
James B. Glavin
/s/ Dennis J. Carlo President, March 25, 1999
- ------------------------ Chief Executive Officer,
Dennis J. Carlo and Director
/s/ Rand P. Mulford Senior Vice President, March 25, 1999
- ------------------------ Corporate Development Chief
Rand P. Mulford Financial Officer Secretary
and Treasurer
/s/ Kevin B. Kimberlin Director March 25, 1999
- ------------------------
Kevin B. Kimberlin
/s/ Melvin Perelman Director March 25, 1999
- ------------------------
Melvin Perelman
/s/ John Simon Director March 25, 1999
- ------------------------
John Simon
37
<PAGE>
/s/ William M. Sullivan Director March 25, 1999
- ------------------------
William M. Sullivan
/s/ Philip M. Young Director March 25, 1999
- ------------------------
Philip M. Young
38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Immune Response Corporation:
We have audited the accompanying consolidated balance sheets of The Immune
Response Corporation (a Delaware corporation) and subsidiaries as of December
31, 1998, and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Immune Response
Corporation and subsidiaries at December 31, 1998, and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
San Diego, California
January 21, 1999,
F1
<PAGE>
THE IMMUNE RESPONSE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,519 $ 4,872
Marketable securities-available-for-sale 23,343 25,567
Other current assets 1,983 773
---------- ----------
Total current assets 26,845 31,212
Property and equipment, net 7,825 5,810
Deposits and other assets 956 353
---------- ----------
$ 35,626 $ 37,375
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,755 $ 1,356
Accrued expenses 1,198 562
Deferred rent obligation 266 355
---------- ----------
Total current liabilities 4,219 2,273
Commitments (Note 3)
Convertible preferred stock 9,347 --
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized; none issued -- --
Common stock, $.0025 par value, 40,000,000 shares authorized,
23,795,292 and 22,815,054 shares issued and
outstanding at December 31, 1998 and 1997, respectively 59 57
Warrants 2,144 2,144
Additional paid-in capital 191,317 186,374
Unrealized gain on marketable securities 102 27
Accumulated deficit (171,562) (153,500)
---------- ----------
Total stockholders' equity 22,060 35,102
---------- ----------
$ 35,626 $ 37,375
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F2
<PAGE>
THE IMMUNE RESPONSE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Contract research revenue $ 5,488 $ 2,000 $ 1,000
Licensed research revenue 12,185 -- 6,000
--------- --------- ---------
17,673 2,000 7,000
Expenses:
Research and development 33,240 34,090 27,211
General and administrative 4,163 3,904 3,420
--------- --------- ---------
37,403 37,994 30,631
Other revenue and expense:
Investment income 1,668 2,437 2,605
--------- --------- ---------
Net loss $ (18,062) $ (33,557) $ (21,026)
--------- --------- ---------
--------- --------- ---------
Net loss per share - basic and diluted $ (0.78) $ (1.53) $ (1.19)
--------- --------- ---------
--------- --------- ---------
Weighted average number of shares
outstanding 23,148 21,883 17,658
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F3
<PAGE>
THE IMMUNE RESPONSE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Unrealized
Gain
Common Stock Additional (Loss) on
----------------- Paid-in Marketable
Shares Amount Warrants Capital Securities
------ ------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 16,789 $ 42 $ -- $ 146,770 $ 545
Issuance of common stock in private stock transactions 568 1 -- 7,999 --
Issuance of common stock from public offering, net of
issuance costs of $1,189,000 2,530 7 -- 15,250 --
Issuance of common stock from exercise of options 343 1 -- 1,037 --
Change in unrealized gain (loss) on marketable
securities -- -- -- -- (405)
Net loss -- -- -- -- --
------ ---- ------- --------- ------
Balance at December 31, 1996 20,230 51 -- 171,056 140
Issuance of common stock and warrants in private
transaction, net of issuance costs of $360,000 2,051 5 2,144 13,491 --
Issuance of common stock from exercise of options 534 1 -- 1,827 --
Change in unrealized gain (loss) on marketable
securities -- -- -- -- (113)
Net loss -- -- -- -- --
------ ---- ------- --------- ------
Balance at December 31, 1997 22,815 57 2,144 186,374 27
Issuance of common stock in private transaction 245 1 -- 2,814 --
Issuance of common stock as dividend on convertible
preferred stock 22 -- -- -- --
Accrual for preferred stock dividend -- -- -- (263) --
Accretion of convertible preferred stock costs -- -- -- (187) --
Issuance of common stock from exercise of options 713 1 -- 2,579 --
Change in unrealized gain (loss) on marketable
securities -- -- -- -- 75
Net loss -- -- -- -- --
------ ---- ------- --------- ------
Balance at December 31, 1998 23,795 $ 59 $ 2,144 $ 191,317 $ 102
------ ---- ------- --------- ------
------ ---- ------- --------- ------
<CAPTION>
Total
Accumulated Stockholders' Comprehensive
Deficit Equity Income
----------- ------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1995 $ (98,917) $ 48,440
Issuance of common stock in private stock transactions -- 8,000
Issuance of common stock from public offering, net of
issuance costs of $1,189,000 -- 15,257
Issuance of common stock from exercise of options -- 1,038
Change in unrealized gain (loss) on marketable
securities -- (405) $ (405)
Net loss (21,026) (21,026) (21,026)
---------- --------- ---------
Balance at December 31, 1996 (119,943) 51,304 $ (21,431)
---------
---------
Issuance of common stock and warrants in private
transaction, net of issuance costs of $360,000 -- 15,640
Issuance of common stock from exercise of options -- 1,828
Change in unrealized gain (loss) on marketable
securities -- (113) $ (113)
Net loss (33,557) (33,557) (33,557)
---------- --------- ---------
Balance at December 31, 1997 (153,500) 35,102 $ (33,670)
---------
---------
Issuance of common stock in private transaction -- 2,815
Issuance of common stock as dividend on convertible
preferred stock -- --
Accrual for preferred stock dividend -- (263)
Accretion of convertible preferred stock costs -- (187)
Issuance of common stock from exercise of options -- 2,580
Change in unrealized gain (loss) on marketable
securities -- 75 $ 75
Net loss (18,062) (18,062) (18,062)
---------- --------- ---------
Balance at December 31, 1998 $ (171,562) $ 22,060 $ (17,987)
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes.
F4
<PAGE>
THE IMMUNE RESPONSE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net loss $ (18,062) $ (33,557) $ (21,026)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 1,486 1,266 848
Deferred rent expense (89) (59) (30)
Changes in operating assets and liabilities:
Other current assets (1,210) (93) 284
Accounts payable 1,399 (515) 713
Accrued expenses 374 64 111
--------- --------- ---------
Net cash used in operating activities (16,102) (32,894) (19,100)
Investing activities:
Sale (purchase) of marketable securities, net 2,299 18,322 6
Purchase of short-term investment -- -- (1,265)
Purchase of property and equipment (3,501) (2,526) (1,613)
Sale of land -- 1,020 --
Other assets (603) (304) --
--------- --------- ---------
Net cash provided by (used in) investing activities (1,805) 16,512 (2,872)
Financing activities:
Net proceeds from sale of common stock through public offering -- -- 15,256
Proceeds from other sales of common stock 2,815 -- 8,000
Net proceeds from sale of common stock and warrants through
private offering -- 15,640 --
Net proceeds from the sale of convertible preferred stock 9,160 -- --
Net proceeds from exercise of stock options 2,579 1,829 1,038
--------- --------- ---------
Net cash provided by financing activities 14,554 17,469 24,294
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (3,353) 1,087 2,322
Cash and cash equivalents at beginning of year 4,872 3,785 1,463
--------- --------- ---------
Cash and cash equivalents at end of year $ 1,519 $ 4,872 $ 3,785
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of noncash investing and financing activities:
Accretion of convertible preferred stock $ 187 $ -- $ --
--------- --------- ---------
--------- --------- ---------
Payment of dividend on convertible preferred stock $ 329 $ -- $ --
--------- --------- ---------
--------- --------- ---------
Declared dividend on convertible preferred stock $ 263 $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F5
<PAGE>
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Immune Response Corporation (the "Company"), a Delaware corporation, is a
biopharmaceutical company with proprietary technologies in four core areas:
Human Immunodeficiency Virus ("HIV"), autoimmune disease, gene therapy, and
cancer. The Company is conducting clinical trials for potential immune-based
therapies for HIV, rheumatoid arthritis, psoriasis, multiple sclerosis, and
brain and colon cancers. The Company has potential gene therapies in
preclinical studies for hemophilia and hepatitis. The Company intends to
retain ownership of its core technologies and to license selected
applications.
The Company's products are in various stages of development. Prior to
generating product revenues, the Company must complete the development of its
products, including several years of human clinical testing, and receive
regulatory approvals prior to selling these products in the human health care
market. The Company's products may not be successfully developed, regulatory
approvals may not be granted, or patient and physician acceptance of any of
these products may not be achieved.
The Company faces additional risks associated with biopharmaceutical
companies whose products are in various stages of development. These risks
include, among others, the Company's need for additional financing to
complete its research and development programs and commercialize its
technologies. Financing may not be available to the Company when required or
under favorable terms.
The Company believes that patents and other proprietary rights are important
to its business. The Company's policy is to file patent applications to
protect technology, inventions, and improvements to its inventions that are
considered important to the development of its business. The patent positions
of pharmaceutical and biotechnology firms, including the Company, are
uncertain and involve complex legal and factual questions for which important
legal principles are largely unresolved.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding during the period. Common equivalent shares are excluded
as the effect would be antidilutive.
CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in U.S. Government securities and money
market accounts. The Company has established guidelines relative to
diversification and maturities that maintain safety and liquidity. These
guidelines are periodically reviewed and modified to take advantage of trends
in yields and interest rates.
INCOME TAXES
All income tax amounts have been computed in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under
this statement, the liability method is used to account for deferred income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax base of assets
and liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences reverse.
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 disclosures 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.
F6
<PAGE>
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has adopted Statement of Financial Accounting Standards ("FAS")
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" and has determined that it operates in one business segment
dedicated to pharmaceutical research.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is depreciated or amortized over
the estimated useful lives of the assets (five to seven years) or the lease
term using the straight-line method. Property and equipment consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
(IN THOUSANDS) 1998 1997
----------- ------------
<S> <C> <C>
Furniture and fixtures $ 1,351 $ 1,246
Equipment 1,486 1,393
Leasehold improvements 10,337 7,034
Land 1,339 1,339
----------- -----------
14,513 11,012
Less accumulated depreciation and
amortization (6,688) (5,202)
------------ ------------
$ 7,825 $ 5,810
------------ ------------
------------ ------------
</TABLE>
COMPREHENSIVE INCOME
In January 1998, the Company adopted FAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The objective of the Statement is to report a measure
of all changes in equity of an enterprise that result from transactions and
other economic events of the period other than transactions with owners
("comprehensive income"). Comprehensive income is the total of net income and
all other non-owner changes in equity.
2. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES
Cash and cash equivalents consist of cash and time deposits with original
maturities of less than three months. Short-term investments are stated at
market.
Marketable securities consist of treasury securities with maturities of more
than three months. The Company has classified all of its marketable
securities as available-for-sale securities. The following table summarizes
available-for-sale securities:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
----------------------------------------------
GROSS GROSS
(IN THOUSANDS) UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
U.S. Government Securities $ 23,241 $ 110 $ 8 $ 23,343
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
DECEMBER 31, 1997
U.S. Government Securities $ 25,540 $ 99 $ 72 $ 25,567
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
</TABLE>
The net realized gains on sales of available-for-sale securities, which are
included in investment income in the accompanying Statement of Operations,
totaled $38,000 for the year ended December 31, 1998.
F7
<PAGE>
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
The amortized cost and estimated fair value of available-for-sale securities
at December 31, 1998, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
-------- ----------
<S> <C> <C>
Due in one year or less $ 15,198 $ 15,254
Due after one year through two years 8,043 8,089
-------- --------
Totals $ 23,241 $ 23,343
-------- --------
-------- --------
</TABLE>
3. COMMITMENTS
The Company leases its offices, research facilities, manufacturing facility,
and certain office and laboratory equipment under operating lease agreements.
The equipment lease agreements require monthly payments through May 2008. The
office and research facility lease agreement, which commenced in January
1991, is for a term of ten years, with two five-year options to extend. In
connection with this lease, the Company received certain deferred payment
terms and the minimum annual rent is subject to certain annual increases.
Rent is being expensed on a straight-line basis over the term of the lease.
Deferred rent reflected in the accompanying balance sheet represents the
difference between rent expense accrued and amounts actually paid under the
terms of the lease.
The Company subleases a manufacturing facility in King of Prussia,
Pennsylvania. The lease, which began in September 1997, is for a term of
three years, with two three-year options to extend.
At December 31, 1998, future minimum rental payments due under the Company's
noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -------------------------------
(in thousands)
<S> <C>
1999 $ 2,672
2000 1,918
2001 653
2002 249
2003 256
Thereafter 1,173
-------
$ 6,921
-------
-------
</TABLE>
Total rent expense for the years ended December 31, 1998, 1997, and 1996 was
$2.4 million, $2.4 million, and $3.2 million, respectively.
4. STOCKHOLDERS' EQUITY
STOCK TRANSACTIONS
During April 1998, the Company sold 200 shares of its Series F Convertible
Preferred Stock ("Series F Stock") in return for gross proceeds of $10
million. The Series F Stock is convertible into common stock initially at a
conversion price of $14.07 per share of common stock. If the Company's common
stock does not trade at prices higher than $14.07 per share over a period of
time, the conversion price will be adjusted downward on April 24, 1999, (or
sooner if the Company issues common stock at less than $14.07 per share) and
quarterly thereafter. The Series F Stock bears a dividend of 7.5% per annum.
In general, the dividend is payable in shares of common stock. For the year
ended December 31, 1998, 22,234 shares of the Company's common stock were
issued as dividends to the Series F shareholders. The Company has filed a
registration statement with the Securities and Exchange Commission covering
the resale of the common stock issuable upon conversion of the Series F
Stock. Further, the Company has the option until April 24, 1999, to sell an
additional $10 million of the Series F Stock, if certain conditions are met.
F8
<PAGE>
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
During 1997, the Company completed a $16.0 million private placement of units
consisting of common stock and warrants to purchase common stock of the
Company. These units were purchased at a price of $7.80 per unit by a
director of the Company and the Company's President and Chief Executive
Officer. The units sold in the private placement consisted of 2,051,281
shares of common stock plus warrants exercisable for 2,051,281 shares of
common stock. The warrants, with an exercise price of $14.00 per share, are
callable by the Company if the Company's common stock trades at $28.00 per
share or greater for 45 consecutive days. The warrants expire on April 17,
2001. The shares and warrants are unregistered.
STOCK OPTIONS
The Company has established various stock option plans to grant options to
purchase common stock to employees and non-employee directors of the Company
and certain other individuals. The plans authorize the Company to issue or
grant qualified and non-qualified options to purchase up to 6,150,000 shares
of its common stock.
Under the terms of the 1989 Stock Plan, options may be granted at not less
than 100% and 85% of fair market value as of the date of grant for qualified
and non-qualified options, respectively. To date, all options have been
issued at 100% of fair market value. These options primarily become
exercisable over a four-year period from the date of grant.
The 1990 Directors' Stock Option Plan provides for the Company to issue or
grant non-qualified options to purchase up to 650,000 common shares to its
non-employee directors. Under the terms of the plan, options will be granted
at the fair market value as of the date of grant. These options become
exercisable in four equal annual installments on each of the first four
anniversaries of the date of grant. Additionally, the 1990 Directors' Stock
Option Plan provides that upon each date of the Company's Annual Meeting of
the Stockholders, non-employee directors are eligible to receive a grant of
6,250 shares at the fair market value on date of grant with a one-year
vesting schedule.
Activity with respect to the various stock plans is summarized as follows:
<TABLE>
<CAPTION>
STOCK WEIGHTED
OPTIONS AVERAGE
(IN THOUSANDS) OUTSTANDING PRICE
------------ --------
<S> <C> <C>
Balance at December 31, 1995 3,602 $3.91
Granted 902 7.29
Exercised (342) 3.03
Cancelled (111) 4.69
-----
Balance at December 31, 1996 4,050 4.71
Granted 578 8.34
Exercised (534) 3.42
Cancelled (91) 6.75
-----
Balance at December 31, 1997 4,003 5.36
Granted 705 10.38
Exercised (713) 3.62
Cancelled (122) 8.94
-----
Balance at December 31, 1998 3,873 6.48
-----
-----
</TABLE>
The weighted average remaining useful life of the outstanding stock options
at December 31, 1998, is approximately six years.
F9
<PAGE>
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
At December 31, 1998, 8,774,818 shares of common stock were reserved for the
exercise of stock options and warrants, future dividends on the Series F
Stock, and future purchases of stock by Agouron Pharmaceuticals, Inc.
(see Note 5).
The Company has adopted the disclosure-only provisions of FAS 123.
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in 1998, 1997
and 1996 consistent with the provisions of FAS 123, the Company's net loss
and loss per share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
(in thousands, except per share data) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss - as reported $ 18,062 $ 33,557 $ 21,026
Net loss - pro forma $ 29,407 $ 45,290 $ 30,078
Net loss per share - as reported $ .78 $ 1.53 $ 1.19
Net loss per share - pro forma $ 1.27 $ 2.07 $ 1.70
</TABLE>
The fair value of each option grant was estimated on the date of grant using
the Black Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998: risk-free interest rate of 4.733%,
expected option life of 6 years, expected volatility of .84, and a dividend
rate of zero.
Because FAS 123 has not been applied to options granted prior to January 1,
1996, the resulting pro forma compensation cost may not be representative of
that to be expected in future years.
STOCKHOLDER RIGHTS PLAN
The Company has a Stockholder Rights Plan that provides for the distribution
of a preferred stock purchase right (a "Right") as a dividend for each share
of the Company's common stock of record held at the close of business on
March 12, 1992, as well as all future stock issuances. Under certain
conditions involving an acquisition by any person or group of 15% or more of
the common stock, the Rights permit the holders (other than the 15% holder)
to purchase the Company's common stock at a 50% discount upon payment of an
exercise price of $150 per Right. In addition, in the event of certain
business combinations, the Rights permit the purchase of the common stock of
an acquiror at a 50% discount. Under certain conditions, the Rights may be
redeemed by the Board of Directors in whole, but not in part, at a price of
$.01 per Right. The Rights have no voting privileges and are attached to and
automatically trade with the Company's common stock. The Rights expire
February 26, 2002.
5. REMUNE-TM- COLLABORATION WITH AGOURON PHARMACEUTICALS, Inc.
During June 1998, the Company and Agouron Pharmaceuticals, Inc. ("Agouron"),
entered into a binding agreement under which the Company agreed to
exclusively license to Agouron REMUNE-TM-, its immune-based therapy under
development for the treatment of HIV infection. Under the terms of the
agreement, the Company will manufacture commercial supplies of REMUNE and
Agouron will have exclusive rights to market REMUNE in North America, Europe,
Japan and certain other countries, if regulatory approvals are received. As a
result of this agreement, the Company may receive as much as $77 million,
including license and milestone payments of $45 million, payments to support
research and development of $18 million and $14 million for the purchase of
the Company's common stock, priced at a premium to the market, subject to
certain rights of termination by Agouron. In addition, the two companies will
share all profits from the commercialization of REMUNE on a 50/50 basis, if
REMUNE is successfully developed and receives the necessary regulatory
approvals.
In June 1998, the Company received a $10 million license fee and Agouron
purchased 118,256 shares of newly issued common stock of the Company, priced
at a premium to market, for $2 million. In October 1998, the Company received
a $5 million payment from Agouron consisting of a $3 million payment for
research and development and a
F10
<PAGE>
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
$2 million payment for the purchase of 126,758 shares of unregistered common
stock priced at a premium to the market. The October 1998 payment was the
first in a series of six quarterly payments that the Company expects Agouron
to make to fund research and development and to purchase unregistered common
stock. Subsequent to year-end, the Company received its second quarterly $5
million payment from Agouron consisting of a $3 million payment for research
and development and a $2 million payment for the purchase of 149,911 shares
of unregistered common stock priced at a premium to the market. Subsequent to
year-end, the Company also received its initial milestone payment of $5
million.
6. GENE THERAPY LICENSE AGREEMENTS
In July 1998, the Company entered into a research collaboration and option
agreement with Schering-Plough Corporation ("Schering-Plough") to develop
gene therapy products for the treatment of hepatitis B and C and other
diseases. Under terms of the initial preclinical research agreement, the
Company could receive approximately $5 million in initial fees, reimbursement
of expenses, and technical milestone payments related to the delivery of the
interferon alpha-2b gene for the treatment of hepatitis B and C. In July
1998, the Company received approximately $2 million for a license fee and to
fund research. As part of the agreement, Schering-Plough has the option to
license the Company's gene delivery system for additional proprietary
Schering-Plough genes. The agreement also provides for Schering-Plough to pay
royalties on future product sales.
In July 1996, the Company entered into an agreement with Bayer Corporation
("Bayer"), the United States affiliate of Bayer AG of Leverkusen, Germany, to
develop gene therapy products for the treatment of hemophilia A, a hereditary
blood clotting disorder. Bayer made an initial license payment of $6 million
upon signing this agreement. Bayer also purchased $4 million of Immune
Response Common Stock in the Company's public stock offering completed in
October 1996. In addition, during the term of the agreement, the Company will
receive research funding from Bayer for the Company's hemophilia A program
and may receive milestone payments and royalties on future sales, if a
product is developed and commercialized. Under the agreement, Bayer is
responsible for all medical and regulatory activities associated with
developing any potential hemophilia A products and will also be responsible
for commercial-scale manufacturing and commercialization of any such product
developed. The agreement provides Bayer with a worldwide license to the
Company's GeneDrug-TM- technology for the delivery of the Factor VIII gene and
the option to enter into negotiations with the Company to use this technology
to treat other blood coagulation disorders.
7. SECTION 401(k) PROFIT SHARING PLAN
The Company has a defined contribution plan, The Immune Response Corporation
401(k) Savings and Profit Sharing Plan, which covers substantially all
employees of the Company. This plan allows each eligible employee to
voluntarily make pre-tax deferred salary contributions. The Company may make
matching contributions in amounts as determined by the board of directors.
The Company made matching contributions of approximately $103,000, $101,000,
and $91,000, for the years ended December 31,1998, 1997, and 1996,
respectively.
8. INCOME TAXES
At December 31, 1998, the Company had federal and California tax net
operating loss carryforwards of approximately $144.7 million and $19.8
million, respectively. The difference between the federal and California tax
loss carryforwards is primarily attributable to capitalized research and
development expenses for California and the 50% limitation of California loss
carryforwards. The federal tax loss carryforwards will begin expiring in
2002, unless previously utilized, while the California tax loss carryforwards
began to expire in 1995. The Company also has federal and California research
and development tax credit carryforwards of $8.4 million and $3.5 million,
respectively, which begin expiring in 2002, unless previously utilized.
F11
<PAGE>
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the
Company's net operating loss and credit carryforwards will be limited because
of a cumulative change in ownership of more than 50% which occurred during
1992. However, the Company does not believe such change will have a material
impact upon the utilization of these carryforwards. Included in the federal
loss carryforwards are approximately $4.4 million of acquired net operating
loss carryforwards that can only be used to the extent of the separate
taxable income of the acquired company.
The components of the Company's deferred tax assets as of December 31, 1998,
and 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
(IN THOUSANDS) 1998 1997
-------- --------
<S> <C> <C>
Net operating loss carryforwards $ 50,388 $ 43,460
Unused research and development credits 11,900 8,100
Capitalized research and development 6,321 5,026
Other 1,591 1,054
-------- --------
70,200 57,640
Valuation allowance (70,200) (57,640)
-------- --------
$ -- $ --
-------- --------
-------- --------
</TABLE>
Approximately $6.4 million of the valuation allowance at December 31, 1998,
relates to benefits of stock options which, when recognized, will be
allocated directly to stockholders' equity.
9. QUARTERLY RESULTS (UNAUDITED)
The following unaudited quarterly financial information includes, in
management's opinion, all normal and recurring adjustments necessary to
fairly state the Company's consolidated results of operations and related
information for the periods presented. Net loss per share has been computed
using the weighted average shares outstanding during each quarter.
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1998
Contract research revenue $ 1,000 $ -- $ 1,488 $ 3,000
Licensed research revenue -- 10,667 1,000 518
Operating expenses (9,260) (9,534) (8,493) (10,116)
------- -------- ------- --------
Loss from operations (8,260) 1,133 (6,005) (6,598)
Other income 311 402 524 431
------- -------- ------- --------
Net income (loss) $(7,949) $ 1,535 $(5,481) $ (6,167)
------- -------- ------- --------
------- -------- ------- --------
Net income (loss) per share $ (0.35) $ 0.06 $ (0.24) $ (0.26)
------- -------- ------- --------
------- -------- ------- --------
1997
Contract research revenue $ 1,000 $ -- $ 1,000 $ --
Operating expenses (9,592) $(10,602) (8,458) (9,342)
------- -------- ------- --------
Loss from operations (8,592) (10,602) (7,458) (9,342)
Other income 609 669 591 568
------- -------- ------- --------
Net loss $(7,983) $ (9,933) $(6,867) $ (8,774)
------- -------- ------- --------
------- -------- ------- --------
Net loss per share $ (0.39) $ (0.45) $ (0.31) $ (0.38)
------- -------- ------- --------
------- -------- ------- --------
</TABLE>
F12
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
I.R.C. Inc., a Delaware corporation
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report in this Form 10-K into The Immune Response Corporation's
previously filed Registration Statements on Form S-8 pertaining to the 1989
Stock Plan, the Amended and Restated 1990 Directors' Stock Plan and the
Special Nonstatutory Stock Option Agreement of The Immune Response
Corporation.
Arthur Andersen LLP
San Diego, California
January 21, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES F2 AND F3 OF THE COMPANY'S FORM 10-K FOR THE YEAR-TO-DATE, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,519
<SECURITIES> 23,343
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,845
<PP&E> 14,513
<DEPRECIATION> 6,688
<TOTAL-ASSETS> 35,626
<CURRENT-LIABILITIES> 4,219
<BONDS> 0
9,347
0
<COMMON> 59
<OTHER-SE> 22,001
<TOTAL-LIABILITY-AND-EQUITY> 35,626
<SALES> 0
<TOTAL-REVENUES> 17,673
<CGS> 0
<TOTAL-COSTS> 37,403
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (18,062)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,062)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,062)
<EPS-PRIMARY> (0.78)
<EPS-DILUTED> (0.78)
</TABLE>
