<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-21088
VICAL INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 93-0948554
- - -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9373 Towne Centre Dr., Suite 100, San Diego, California 92121
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(Address of principal executive offices) (Zip code)
(619) 453-9900
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at June 30, 1996
----- ----------------------------
<S> <C>
Common Stock, $.01 par value 15,384,924
</TABLE>
<PAGE> 2
VICAL INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
COVER PAGE..................................................................................... 1
TABLE OF CONTENTS.............................................................................. 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of June 30, 1996 and December 31, 1995.............................. 3
Statements of Operations for the three months ended June 30, 1996 and
June 30, 1995 and for the six months ended June 30, 1996 and June 30, 1995............ 4
Statements of Cash Flows for the six months ended June 30, 1996 and
June 30, 1995......................................................................... 5
Notes to Financial Statements......................................................... 6
ITEM 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................. 8
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................................ *
ITEM 2. Changes in Securities........................................................ *
ITEM 3. Defaults upon Senior Securities.............................................. *
ITEM 4. Submission of Matters to a Vote of Security Holders.......................... 11
ITEM 5. Other Information............................................................ *
ITEM 6. Exhibits and Reports on Form 8-K............................................. 12
SIGNATURE...................................................................................... 13
EXHIBIT LIST................................................................................... 14
</TABLE>
* No information provided due to inapplicability of item.
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VICAL INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
ASSETS (Unaudited)
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,993,781 $ 7,174,128
Marketable securities 44,020,191 45,353,638
Receivables and other 1,020,103 528,089
------------ ------------
Total current assets 51,034,075 53,055,855
------------ ------------
Property and Equipment:
Equipment 3,408,056 3,218,315
Leasehold improvements 1,132,566 517,846
------------ ------------
4,540,622 3,736,161
Less-Accumulated depreciation and amortization (3,259,001) (3,044,110)
------------ ------------
1,281,621 692,051
------------ ------------
Patent Costs 979,441 835,410
Deposits and Other Assets 1,052,082 534,188
------------ ------------
$ 54,347,219 $ 55,117,504
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 650,409 $ 528,297
Current portion of capital lease obligations 281,228 307,485
Deferred revenue 739,493 679,167
------------ ------------
Total current liabilities 1,671,130 1,514,949
------------ ------------
Long-Term Obligations:
Notes Payable 641,320 --
Long-Term Obligations Under Capital Leases 327,795 338,514
------------ ------------
Total long-term obligations 969,115 338,514
------------ ------------
Stockholders' Equity:
Common stock, $.01 par value--40,000,000 shares authorized--
15,384,924 and 15,364,265 shares issued and outstanding
at June 30, 1996 and December 31, 1995, respectively 153,849 153,643
Additional paid-in capital 72,859,955 72,728,484
Deferred compensation (53,712) (158,427)
Unrealized gain (loss) on marketable securities (134,460) 104,176
Accumulated deficit (21,118,658) (19,563,835)
------------ ------------
Total stockholders' equity 51,706,974 53,264,041
------------ ------------
Total Liabilities and Stockholders' Equity $ 54,347,219 $ 55,117,504
============ ============
</TABLE>
See accompanying notes.
<PAGE> 4
VICAL INCORPORATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------------- ---------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Contract revenue $ 226,228 $ 225,000 $ 509,428 $ 452,979
License/royalty revenue 3,329,300 3,262,804 3,566,587 4,011,391
------------ ------------ ------------ ------------
3,555,528 3,487,804 4,076,015 4,464,370
Expenses:
Research and development 3,133,421 2,818,575 5,513,839 4,906,530
General and administrative 738,719 1,030,254 1,469,021 1,712,995
------------ ------------ ------------ ------------
3,872,140 3,848,829 6,982,860 6,619,525
------------ ------------ ------------ ------------
Loss from operations (316,612) (361,025) (2,906,845) (2,155,155)
Interest income 680,036 334,589 1,379,052 631,318
Interest expense 13,011 19,533 27,030 39,379
------------ ------------ ------------ ------------
Net income (loss) $ 350,413 $ (45,969) (1,554,823) (1,563,216)
============ ============ ============ ============
Net earnings (loss) per share (Note 2) $ .02 $ (.00) $ (.10) $ (.12)
============ ============ ============ ============
Shares used in per share calculation (Note 2) 15,791,282 12,845,612 15,377,166 12,845,613
============ ============ ============ ============
</TABLE>
See accompanying notes.
<PAGE> 5
VICAL INCORPORATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows provided from (used in) operating activities:
Net loss $(1,554,823) $(1,563,216)
Adjustments to reconcile net loss to net cash provided from
(used in) operating activities:
Depreciation and amortization 241,830 290,849
Compensation expense related to stock purchases 103,800 131,339
Write-off of patent application costs 3,247 219,242
Change in operating assets and liabilities:
Receivables and other (492,014) 140,327
Accounts payable and accrued expenses 122,112 (67,229)
Deferred revenue 60,326 (762,500)
----------- -----------
Net cash provided from (used in) operating activities (1,515,522) (1,611,188)
----------- -----------
Cash flows provided from (used in) investing activities:
Marketable securities 1,094,811 7,085,492
Capital expenditures (682,071) (23,645)
Deposits and other assets (517,894) 346,358
Patent expenditures (151,935) (206,041)
----------- ----------
Net cash provided from (used in) investment activities (257,089) 7,202,164
----------- -----------
Cash flow provided provided from (used in) financing activities:
Principal payments under capital lease obligations (181,649) (196,725)
Proceeds from note payable 641,320 --
Issuance of common stock, net 132,593 (16)
----------- -----------
Net cash provided from (used in) financing activities 592,264 (196,741)
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,180,347) 5,394,235
Cash and cash equivalents at beginning of period 7,174,128 2,264,130
----------- -----------
Cash and cash equivalents at end of period $ 5,993,781 $ 7,658,365
=========== ===========
Supplemental Disclosure of Non-cash Investing and Financing Activities:
Equipment acquired under capital leases $ 144,673 $ 109,364
=========== ===========
</TABLE>
See accompanying notes.
<PAGE> 6
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
(unaudited)
1. Organization and Basis of Presentation
Organization
Vical was incorporated in April 1987 and has devoted substantially all
of its resources since that time to its research and development
programs. The Company is currently focusing its resources on the
development of its direct gene transfer and related technologies.
Basis of Presentation
The information contained herein has been prepared in accordance with
instructions for Form 10-Q. The information at June 30, 1996, and for
the three month and six month periods ended June 30, 1996 and 1995, is
unaudited. In the opinion of management, the information reflects all
adjustments necessary to make the results of operations for the interim
periods a fair statement of such operations. All such adjustments are
of a normal recurring nature. Interim results are not necessarily
indicative of results for a full year. 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. For
a presentation including all disclosures required by generally accepted
accounting principles, these financial statements should be read in
conjunction with the audited financial statements for the year ended
December 31, 1995, included in the Vical Incorporated Form 10-K filed
with the Securities and Exchange Commission.
In January 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation."
SFAS 123 requires that the Company either recognize compensation
expense for grants of stock, stock options, and other equity
instruments to employees based on new fair value accounting rules or at
a minimum disclose pro forma net income and earnings per share under
the new method without actually adopting the new fair value accounting
rules. Additionally, detailed disclosures about plan terms, exercise
prices, and the assumptions used in measuring the fair value of
stock-based grants must be disclosed. The Company has elected to adopt
the alternative disclosure requirement of SFAS 123 and therefore will
not be recording stock based compensation using fair value accounting
as defined under SFAS 123.
Patent Costs
The Company capitalizes certain costs related to patent applications.
Accumulated costs are amortized over the estimated economic lives of
the patents using the straight-line method, commencing at the time the
patents are issued. Costs related to patent applications are written
off to expense at the time such costs are deemed to have no continuing
value.
<PAGE> 7
2. Net Earnings (Loss) Per Share
Net earnings (loss) per share for the three and six month periods ended
June 30, 1996 and 1995 is computed using the weighted average number of
common shares and common equivalent shares, as applicable, outstanding
during the period. Common share equivalents represent shares issuable
upon assumed exercise of stock options, using the treasury stock
method, which would have a dilutive effect in periods where there are
earnings. Common share equivalents are not considered in the
calculation of net loss per share, as their effect would be
anti-dilutive. Earnings (loss) per share on a fully diluted basis are
the same as primary earnings per share for all periods presented.
3. Notes Payable
In June 1996, the Company obtained a loan and security agreement with a
bank for the borrowing of up to $2,500,000. Borrowings currently bear
interest at the bank's prime rate (8.25% at June 30, 1996) plus .5%,
and the Company may alternatively choose to have its borrowings bear
interest at the LIBOR rate plus 3.25%. Borrowings under the line of
credit are secured by substantially all assets of the Company. In April
1997, any outstanding borrowings convert to a term loan amortized over
three years. The term loan bears interest at the same rate options. In
addition, the Company is required to comply with certain restrictive
covenants. At June 30, 1996, borrowings under the line of credit
totaled $641,000.
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
OVERVIEW
Vical was incorporated in April 1987 and has devoted substantially all of its
resources since that time to its research and development programs. The Company
is focusing its resources on the development of its direct gene transfer and
related technologies. To date, the Company has not received revenues from the
sale of products. The Company expects to incur substantial operating losses for
at least the next several years, due primarily to expansion of its research and
development programs and the cost of preclinical studies and clinical trials. As
of June 30, 1996, the Company's accumulated deficit was approximately $21.1
million.
In September 1995, the Company commenced Phase II clinical trials of
Allovectin-7 at ten teaching oncology centers in five tumor types: melanoma,
colorectal carcinoma, renal cell carcinoma, breast carcinoma and non-Hodgkin's
lymphoma. If appropriate rates and durations of clinical response are observed
in these Phase II clinical trials, the data could potentially lead to the design
and initiation of pivotal Phase II/III clinical trials to support product
license approval submissions for certain indications. In addition, Allovectin-7
is being evaluated, either alone or in combination with an approved cancer
therapeutic agent, in several other Phase I/II clinical trials. The trials are
ongoing.
In April 1995, the Company initiated Phase I/II clinical testing of its second
gene therapy product candidate, Leuvectin, at two clinical centers. Leuvectin is
a gene-based product candidate intended for direct injection into tumor lesions
of cancer patients. Twenty-four patients with advanced solid malignancies or
lymphoma were enrolled in a Phase I/II clinical trial which evaluated the safety
and biological activity of the experimental gene therapy. This trial concluded
in the second quarter of 1996, and results were presented in May 1996. Since no
toxicity or other adverse events were observed, a follow-on trial is planned to
evaluate safety and biological activity at higher dose levels. This follow-on
trial is scheduled to begin in late 1996.
There can be no assurance that the Company's product candidates will prove to be
safe and effective in clinical trials or that any commercially successful
products will ultimately be developed by the Company.
This Form 10-Q contains in addition to historical information, forward-looking
statements. Such statements are subject to certain risks and uncertainties,
including whether the Company's product candidates will be shown to be safe or
efficacious in clinical trials, whether the Company's corporate collaborations
are successful, and whether the Company's product candidates will ultimately be
successfully developed or receive necessary regulatory approvals, which could
cause actual results to differ materially from those projected. These
forward-looking statements speak only as of the date hereof. The Company
undertakes no obligation to update these forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
For the quarter ended June 30, 1996, the Company had revenues of $3,555,000.
Revenue in the second quarter of 1996 included a milestone payment of $1,000,000
as the result of Merck & Co., Inc.'s ("Merck") initiation of a Phase I clinical
trial of an experimental DNA vaccine against influenza virus, one of the seven
infectious disease targets covered under Merck's research, collaboration and
license agreement with Vical covering potential DNA vaccines. Also included in
the second quarter was revenue from the exercise of three of five original
license options, the extension of the option to a fifth vaccine target, and the
addition of an option to a sixth vaccine target by Pasteur Merieux Serums &
Vaccins ("Pasteur Merieux") under the research, option and license agreement
with the Company. Vical received $2.6 million in return for these transactions.
Revenue from Pasteur Merieux transactions totaling
<PAGE> 9
$2,227,000 was recognized in the quarter. Other license, contract, and royalty
revenue in the quarter amounted to $328,000. The Company had revenues of
$3,488,000 for the quarter ended June 30, 1995. Of this amount, $3,104,000
resulted from license and contract revenue from Merck. In April 1995 pursuant to
an existing research and collaboration agreement between the Company and Merck,
Merck exercised its remaining options to license the Vical technology for use
with three vaccine targets: hepatitis B, herpes simplex virus, and tuberculosis.
On April 27, 1995, the Company received approximately $3 million in return for
these license rights, all of which was recognized as license revenue in the
second quarter of 1995. Other license, contract, and royalty revenue in the
quarter amounted to $384,000. Revenues in the first six months of 1996 totaled
$4,076,000 and consisted of $1,000,000 from Merck, $2,390,000 from Pasteur
Merieux, and other license, royalty, and contract revenue totaling $686,000. For
the six months ended June 30, 1995, the Company had revenues of $4,464,000.
Revenues in the first six months of 1995 consisted of license revenue from Merck
in the amount of $3,312,000, other license and royalty revenue totaling
$699,000, as well as $453,000 in contract revenue. Future payments from Merck,
if any, will be milestone and royalty payments, due upon Merck's development and
commercialization of products under the agreement. There can be no assurance
that such development and commercialization will occur.
The Company's total operating expenses for the quarter ended June 30, 1996, were
$3,872,000 compared to $3,849,000 for the second quarter of 1995. Operating
expenses for the six months ended June 30, 1996, were $6,983,000 as compared to
$6,620,000 for the same period in 1995.
Research and development expenses increased to $3,133,000 for the three months
ended June 30, 1996, as compared to $2,819,000 for the same period in 1995. For
the six months ended June 30, 1996, research and development expenses increased
to $5,514,000 from $4,907,000 for the same period in 1995. These increases in
research and development expenses resulted primarily from ongoing clinical
trials and related internal staffing increases. During the second quarter, Vical
paid an option fee to Corixa Corporation to enter into an option agreement that
allows the Company to combine its gene transfer technology with a gene encoding
Corixa's proprietary immunomodulatory protein, called LeIF. Further potential
expenses under the agreement may include internal research and development
costs, a license fee, milestone payments, and royalties on product sales.
Additionally, costs of staffing and funding of research being conducted at
universities working in collaboration with Vical contributed to the increase in
research and development expenses.
General and administrative expenses decreased to $739,000 for the three months
ended June 30, 1996, from $1,030,000 for the same period in 1995 and to
$1,469,000 for the six months ended June 30, 1996, from $1,713,000 in 1995. The
change was primarily due to approximately $350,000 of previously capitalized
building costs being written off to expense in the quarter ended June 30, 1995
Interest income increased from approximately $335,000 for the quarter ended June
30, 1995, to approximately $680,000 for the second quarter of 1996 and from
$631,000 for the six months ended June 30, 1995 to $1,379,000 for the six months
ended June 30, 1996. These changes are primarily the result of higher cash and
investment balances and average rates of return.
Net earnings per share for the three months ended June 30, 1996, were $.02 per
share as compared to a net loss per share of $.00 for the second quarter of
1995. Net loss for the six months ended June 30, 1996, was $.10 per share as
compared to a net loss per share of $.12 for the same period in 1995.
Vical expects to incur substantial operating losses over the next several years
due to anticipated significant increases in research and development expenses.
The increases are expected to result from expanding preclinical and clinical
trials for the Company's proposed products, increased patent and regulatory
costs and associated increases in personnel. Losses may fluctuate from quarter
to quarter as a result of differences in the timing of expenses incurred and the
revenues received from collaborative agreements. Such fluctuations may be
significant.
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Vical has financed its operations primarily through private
placements of preferred stock, three public offerings of common stock, and
revenues from collaborative agreements. As of June 30, 1996, the Company had
working capital of approximately $49.4 million compared to $51.5 million at
December 31, 1995. Cash and marketable securities totaled approximately $50.0
million at June 30, 1996, compared to $52.5 million at December 31, 1995.
In June 1996, the Company obtained a loan and security agreement with a bank for
the borrowing of up to $2,500,000. Borrowings currently bear interest at the
bank's prime rate (8.25% at June 30, 1996) plus .5%, and the Company may
alternatively choose to have its borrowings bear interest at the LIBOR rate plus
3.25%. Borrowings under the line of credit are secured by substantially all
assets of the Company. In April 1997, any outstanding borrowings convert to a
term loan amortized over three years. The term loan bears interest at the same
rate options. In addition, the Company is required to comply with certain
restrictive covenants. At June 30, 1996, borrowings under the line of credit
totaled $641,000.
The Company expects to incur substantial additional research and development
expense including continued increases in personnel costs and costs related to
preclinical testing and clinical trials. 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 testing 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 and scale-up, and commercialization activities and
arrangements. The Company intends to seek additional funding through research
and development relationships with suitable potential corporate collaborators or
through public or private financing. There can be no assurance that additional
funding will be available on favorable terms, if at all.
If additional funding is not available, Vical anticipates that its available
cash and existing sources of funding will be adequate to satisfy its operating
needs through 1998.
<PAGE> 11
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 13, 1996, the Company held its Annual Meeting of Stockholders. The
following actions were taken at the annual meeting.
1. The following two Class I directors were elected:
a. Alain B. Schreiber, M.D. 13,659,126 shares voted in favor of the
nominee, 90,620 withheld their vote;
b. Philip M. Young. 13,661,926 shares voted in favor of the nominee,
87,820 withheld their vote;
The Company's Class II directors, Robert C. Bellas and Fred A.
Middleton, will continue in office until 1997, and the Company's Class
III directors, Patrick F. Latterell and Dale A. Smith, will continue in
office until 1998.
2. The selection of the Company's independent auditors was ratified. 13,716,384
shares were voted in favor of the proposal, 14,594 were voted against the
proposal, and 18,768 shares abstained.
<PAGE> 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
Exhibit 10.9 Research Collaboration and License Agreement dated
May 31, 1991, between the Company and Merck & Co.,
Inc. *
Exhibit 27 Financial Data Schedule
2. Reports on Form 8-K
None
* This agreement, which was filed as Exhibit 10.9 to the Company's Form 10-Q for
the Quarterly Period Ended September 30, 1994, is being filed herewith to make
publicly available certain portions of the agreement which were previously
confidential, but which have subsequently been publicly disclosed.
<PAGE> 13
VICAL INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
Vical Incorporated
Date: August 13, 1996 By: /s/ Martha J. Demski
--------------------
Martha J. Demski
Vice President and
Chief Financial Officer
(on behalf of the registrant and
as the registrant's Principal
Financial and Accounting
Officer)
<PAGE> 14
EXHIBIT LIST
Exhibit 10.9 Research Collaboration and License Agreement dated
May 31, 1991, between the Company and Merck & Co.,
Inc. *
Exhibit 27 Financial Data Schedule
*This agreement, which was filed as Exhibit 10.9 to the Company's Form 10-Q for
the Quarterly Period Ended September 30, 1994, is being filed herewith to make
publicly available certain portions of the agreement which were previously
confidential, but which have subsequently been publicly disclosed.
<PAGE> 1
(COPY MARKED TO SHOW CONFIDENTIAL
TREATMENT CURRENTLY REQUESTED
FOR EXTENSION OF ORDER)
CONFIDENTIAL
TREATMENT
REQUESTED
EXHIBIT 10.9
RESEARCH COLLABORATION
AND
LICENSE AGREEMENT
THIS AGREEMENT is effective as of the 31st day of May, 1991 by and
between Vical Incorporated, a corporation organized and existing under the laws
of the State of Delaware, and having its principal offices at 9373 Towne Centre
Drive, San Diego, California 92121 ("VICAL"), and Merck & Co., Inc., a
corporation organized and existing under the laws of the State of New Jersey,
and having its principal office at 126 East Lincoln Avenue, Rahway, New Jersey
07065 ("MERCK").
WHEREAS, VICAL possesses technology pertaining to the intramuscular
delivery of vaccines for the prevention of human infectious disease that consist
of DNA and/or RNA gene sequences derived from the genome of the infectious agent
which would prevent clinical disease from an infection (the "Technology"); and
WHEREAS, MERCK wishes to collaborate with VICAL to develop an INFLUENZA
VACCINE as defined herein and an AIDS VACCINE as defined herein utilizing the
Technology and to obtain licenses under VICAL PATENT RIGHTS and VICAL KNOW-HOW.
NOW, THEREFORE, VICAL and MERCK agree as follows:
<PAGE> 2
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ARTICLE 1 - DEFINITIONS
1.1 AIDS VACCINE means a vaccine which would prevent an infection by Human
Immunodeficiency Virus (HIV-1) and/or clinical diseases caused by
infection with HIV-1 in humans.
1.2 INFLUENZA VACCINE means a vaccine which would prevent an infection
and/or significant clinical diseases caused by any influenza virus in
humans.
1.3 LICENSED PRODUCT means a bulk or finished AIDS VACCINE or INFLUENZA
VACCINE, or other vaccine for the prevention of human infectious
disease if licensed hereunder, which utilizes the Technology or
technology which is developed by VICAL during and as a result of the
RESEARCH COLLABORATION PROGRAM; provided, however, that if any such
vaccine is also capable of being used for treatment of the same human
infectious disease, then such therapeutic use of such vaccine shall
also be considered a LICENSED PRODUCT for purposes of the license being
granted by VICAL to MERCK under this Agreement.
1.4 COMBINATION PRODUCT means LICENSED PRODUCT in combination with one or
more antigenically active components other than an AIDS VACCINE or an
INFLUENZA VACCINE or other vaccine for the prevention of human
infectious disease if licensed hereunder.
1.5 VICAL PATENT RIGHTS means (i) all patents and patent applications which
relate to the Technology which are owned by VICAL as sole or joint
owner or under which VICAL has licensable
<PAGE> 3
- 3 -
rights and which exist as of the effective date of this Agreement and
any other similar future United States or foreign patent or patent
applications which VICAL owns as sole or joint owner during and as a
result of the RESEARCH COLLABORATION PROGRAM or under which VICAL
acquires licensable rights during the RESEARCH COLLABORATION PROGRAM;
and (ii) any divisions, continuations, or continuations-in-part of the
patents and patent applications set forth above, including any reissue,
reexamination or extension of the patent, any extended or restored
term, and any confirmation patent, registration patent, or patent of
addition.
1.6 VICAL KNOW-HOW means any information and data relevant to LICENSED
PRODUCT not generally known including, but not limited to, procedures
for experiments and tests and other protocols, results of
experimentation and testing, fermentation and purification techniques
and assay protocols, which are necessary or useful for MERCK in order
to manufacture, use, develop, sell or seek approval to market LICENSED
PRODUCT, in which VICAL has an ownership or licensable interest and
which is presently in the possession of VICAL and/or which comes into
the possession of VICAL during and as a result of the RESEARCH
COLLABORATION PROGRAM.
1.7 MERCK KNOW-HOW means information and data not in MERCK's possession as
of the effective date of this Agreement and developed solely under the
RESEARCH COLLABORATION PROGRAM which in MERCK's reasonable discretion
it determines are necessary and useful for VICAL in order to develop
LICENSED PRODUCT.
<PAGE> 4
- 4 -
1.8 (a) NET SALES means the gross amount of sales of LICENSED PRODUCT
invoiced to third parties less:
1. the actual cost to MERCK of the devices for dispensing or
administering the LICENSED PRODUCT as well as diluents
or similar material which accompany the LICENSED PRODUCT
as it is sold;
2. trade and quantity discounts actually allowed;
3. returns, rebates and allowances;
4. retroactive price reductions;
5. with regard to sales in the United States, [ * ]
of the amount invoiced to cover cash discounts, bad debt,
sales or excise taxes, transportation and insurance charges;
and with regard to sales outside the United States [ * ]
to include the above and additional special packaging,
duties, and other governmental charges.
(b) With respect to sales of COMBINATION PRODUCT, NET SALES shall be
calculated on the basis of the sales price of the same dose of
LICENSED PRODUCT being sold without other active ingredients if
such exists, and if LICENSED PRODUCT is not sold without other
active ingredients, NET SALES shall be calculated on the basis of
the invoice price of the COMBINATION PRODUCT multiplied by a
fraction, the numerator of which shall be the inventory cost of
LICENSED PRODUCT in the COMBINATION PRODUCT and the denominator of
which shall be the inventory cost (using the same method of
accounting) of all of the active ingredients in the COMBINATION
PRODUCT. Inventory cost shall be determined in
[ * ] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 5
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accordance with MERCK's regular accounting methods. In no event shall
the fraction be less than one over the number of active ingredients in
the COMBINATION PRODUCT.
1.9 TERRITORY means all countries of the world.
1.10 AFFILIATE of VICAL or MERCK means any corporation or business entity
which owns or controls VICAL or MERCK, or is under common control with
VICAL or MERCK. The term "control" means possession, direct or
indirect, of the power to direct or cause the direction of the
management and policies, whether through the ownership of voting
securities, by contract or otherwise.
1.11 RESEARCH COLLABORATION PROGRAM means the research related to the
Technology to be conducted in accordance with this Agreement by VICAL
and MERCK as set forth in Schedule B to develop LICENSED PRODUCT.
1.12 CONTRACT YEAR shall mean the one (1) year period beginning with the
effective date of this Agreement and any subsequent one (1) year
periods that this Agreement is in effect.
1.13 VALID PATENT RIGHTS shall mean issued and unexpired VICAL PATENT RIGHTS
which have not been declared invalid by a court of competent
jurisdiction from which no appeal can be or is taken.
ARTICLE 2 - RESEARCH COLLABORATION AND DEVELOPMENT
2.1 Subject to MERCK's rights set forth in Article 8.2(b), the
<PAGE> 6
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parties shall engage in a RESEARCH COLLABORATION PROGRAM for a three
(3) year period beginning on the effective date of this Agreement in
order to pursue the development of LICENSED PRODUCTS. The parties
current understanding of the RESEARCH COLLABORATION PROGRAM is set
forth in Schedule B attached hereto and made a part of this Agreement.
2.2 All activities of the parties involving the RESEARCH COLLABORATION
PROGRAM shall be determined and approved by a majority of the members
of a Review Committee, which shall consist of four (4) scientific
representatives designated by MERCK and three (3) by VICAL. Each party
shall make its initial designation of its representatives by notice to
the other party within thirty (30) days after execution of this
Agreement and shall cause its representatives to attend meetings of the
Review Committee. The Review Committee shall meet no less frequently
than once each calendar quarter.
2.3 No later than ninety (90) days prior to the expiration of each CONTRACT
YEAR during the RESEARCH COLLABORATION PROGRAM, the parties shall meet
to discuss in detail the progress of the RESEARCH COLLABORATION PROGRAM
and agree upon its details, its short and long-term goals and
prospective budget. In the event a significant development transpires
during the twelve (12) month period which may affect the short- or
long-term goals or budget of the RESEARCH COLLABORATION PROGRAM or
methods of achieving said goals, the parties shall reconvene, reassess
and, if mutually agreed, change such methods and goals and the RESEARCH
COLLABORATION PROGRAM.
<PAGE> 7
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2.4 Throughout the term of the RESEARCH COLLABORATION PROGRAM both parties
shall share with each other know-how resulting from the RESEARCH
COLLABORATION PROGRAM. MERCK and VICAL agree that such know-how shall
be granted confidentiality by the receiving party and shall not be
disclosed without the written prior consent of the supplying party,
except as otherwise provided in this Agreement and to the extent that
such information meets the exclusions set forth in Article 6.
2.5 Each party shall continue to own and retain proprietary rights to such
know-how and patents licensed or transferred under this Agreement
except as specifically provided herein. Inventions developed under the
RESEARCH COLLABORATION PROGRAM shall be owned by the inventing party,
which shall have the right to have patents filed to protect its rights.
Joint inventions developed under the RESEARCH COLLABORATION PROGRAM
shall be jointly owned, and the parties shall cooperate in the filing
of patents relating to such joint inventions which MERCK shall
prosecute and maintain and bear all expenses; provided, however, that
VICAL shall be consulted by MERCK with respect to patent applications
filed by MERCK with respect to joint inventions under this Article 2.5,
and VICAL shall be given the opportunity to review all such patent
applications prior to filing. [ * ] of all payments by MERCK under
this Article 2.5 as to such joint inventions shall be creditable
against royalties due VICAL under Article 8 of this Agreement;
however, no royalty payment when due, regardless of the number of
credits available to MERCK in accordance with the terms of this
Agreement, shall be reduced by more than [ * ].
[ * ] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 8
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2.6 Unless otherwise mutually agreed by MERCK and VICAL, responsibility for
development of LICENSED PRODUCTS shall belong to MERCK. In this
connection, MERCK shall use diligent efforts, consistent with those
applied to other products of similar commercial value, to conduct a
development program for each LICENSED PRODUCT to obtain regulatory
approvals for such LICENSED PRODUCT as outlined in Article 13 below.
Unless otherwise agreed, VICAL shall participate in such activities to
the extent that MERCK deems such participation necessary in its sole
discretion. Summary reports with respect to such development activities
shall be made as outlined in Article 13 below.
ARTICLE 3 - LICENSE GRANT
3.1 VICAL grants to MERCK an exclusive license under VICAL KNOW-HOW and
VICAL PATENT RIGHTS to develop, make, have made, use and sell LICENSED
PRODUCTS in the TERRITORY with the right to grant sublicenses to
AFFILIATES of MERCK and those persons or entities through whom MERCK,
in the normal course of its business collaborates in the manufacture
and sale of its products; provided, however, that nothing in this
Agreement shall prohibit VICAL from utilizing the VICAL KNOW-HOW and/or
VICAL PATENT RIGHTS, exclusive of MERCK KNOW-HOW, to develop, make,
have made, use and sell, either by itself or with one or more third
parties, products for the treatment of human infectious diseases.
3.2 In accordance with the letter from MERCK to the Wisconsin Alumni
Research Foundation ("WARF") dated May 29, 1991, a copy of which is
attached hereto as Schedule D, the exclusive licenses
<PAGE> 9
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granted under Article 3.1 hereof with respect to certain of the VICAL
PATENT RIGHTS shall extend beyond and survive the termination of the
License Agreement ("WARF License Agreement") dated and effective as of
January 1, 1991 between VICAL and WARF in the event such termination
occurs prior to the termination of this Agreement.
3.3 During the term of the RESEARCH COLLABORATION PROGRAM, all VICAL
activities relating to the Technology and the development of a LICENSED
PRODUCT for prevention of human infectious disease shall be conducted
by VICAL exclusively for MERCK under the terms of this Agreement.
3.4 VICAL agrees that so long as the RESEARCH COLLABORATION PROGRAM
continues in effect, at least thirty (30) days prior to entering into
substantive business discussions with a third party with respect to a
collaboration agreement in the field of vaccines for the prevention of
auto-immune disease VICAL will provide MERCK representatives of the
Review Committee, with a copy to the Executive Director, Corporate
Licensing, with a one-time notice in writing of these proposed
activities.
ARTICLE 4 - PATENT PROTECTION AND VALIDITY
4.1 VICAL represents and warrants to MERCK that as of the effective date of
this Agreement it (i) has the right to grant the licenses granted under
Article 3.1 hereof and to provide the VICAL KNOW-HOW to MERCK pursuant
to this Agreement, (ii) to the extent lawfully allowed by the Wisconsin
Alumni Research Foundation will maintain in
<PAGE> 10
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full force and effect the WARF License Agreement for so long as this
Agreement remains in force, and (iii) will take no action with respect
to the WARF LICENSE AGREEMENT which would conflict with MERCK's rights
under this Agreement. MERCK may elect to terminate this Agreement in
the event VICAL is determined by WARF to be in breach of the WARF
LICENSE AGREEMENT. MERCK acknowledges that (i) VICAL has entered into
the WARF License Agreement, (ii) MERCK has reviewed such Agreement, in
the form which is attached as Schedule C, (iii) that any sublicense
from VICAL to MERCK with respect thereto shall be subject, to the
extent set forth in Schedule D, to the terms of the WARF License
Agreement, including, without limitation, Section 2C of such Agreement
with respect to sublicenses which extend beyond its termination.
4.2 MERCK represents and warrants that it has the full right to enter into
this Agreement and that it neither has made nor will make any
commitments to others in conflict with or in derogation of this
Agreement.
4.3 Nothing in this Agreement shall be construed as a warranty or
representation by VICAL as to the validity or scope of any VICAL PATENT
RIGHTS. Nothing in this Agreement shall be construed as a warranty or
representation that any LICENSED PRODUCT made, used or sold, or
otherwise disposed of under any license granted by this Agreement, or
any use of the VICAL KNOW-HOW, is or will be free from infringement of
patents of third
<PAGE> 11
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parties. VICAL makes no warranty or representation as to the
viability, safety or efficacy of any LICENSED PRODUCT. THE WARRANTIES
EXPRESSLY SET FORTH HEREIN ARE EXCLUSIVE AND NO OTHER WARRANTY,
WRITTEN OR ORAL, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE, IS EXPRESSED OR IMPLIED.
4.4 To the extent it may lawfully do so, and except to the extent MERCK has
agreed to do so with respect to joint inventions as set forth in
Article 2.5 above VICAL agrees to file, prosecute and maintain in such
jurisdictions as it reasonably deems commercially appropriate after
consultation with MERCK the VICAL PATENT RIGHTS owned in whole or in
part by VICAL and licensed to MERCK under this Agreement, including
prosecution of an interference. VICAL shall give notice to MERCK of any
decision to cease prosecution and maintenance of such VICAL PATENT
RIGHTS and, in such case, shall permit MERCK at its sole discretion to
continue prosecution or maintenance at its own expense. If MERCK elects
to continue prosecution or maintenance, VICAL shall execute such
documents and perform such acts at VICAL's expense as may be reasonably
necessary for MERCK to continue prosecution or maintenance. [ * ] of
all expenses and costs incurred by MERCK to continue prosecution and
subsequent maintenance of VICAL PATENT RIGHTS shall be fully
creditable against royalties due under Article 8 of this Agreement;
however, no royalty payment when due, regardless of the number of such
credits available to MERCK in accordance with the
[ * ] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 12
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terms of this Agreement, shall be reduced by more than [ * ].
4.5 VICAL shall protect, where it reasonably determines that it is
commercially advisable to do so after consultation with MERCK the VICAL
PATENT RIGHTS licensed to MERCK under this Agreement against any third
party who infringes the VICAL PATENT RIGHTS by development,
manufacture, use or sale of LICENSED PRODUCT for which MERCK retains a
license under this Agreement.
4.6 In the event VICAL institutes an action at its expense against third
party infringers with respect to LICENSED PRODUCT or takes appropriate
action to defend the VICAL PATENT RIGHTS, MERCK hereby agrees to
cooperate fully with VICAL and any recovery obtained by VICAL as a
result of such proceeding or other actions, whether obtained by
settlement or otherwise, shall be retained by VICAL, except that VICAL
shall pay to MERCK any reasonable expenses incurred in assisting in
such action (excluding counsel fees) and any amount of the recovery
attributable to lost profit on lost sales by MERCK after deduction of
the royalty due VICAL on such sales under Article 8.
4.7 If within sixty (60) days of becoming aware of the infringement of the
VICAL PATENT RIGHTS for which MERCK retains a license under this
Agreement or unauthorized use of the VICAL KNOW-HOW with respect to
such a LICENSED PRODUCT, VICAL decides not to institute an
[ * ] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 13
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infringement suit or take other reasonable action to protect the VICAL
PATENT RIGHTS and VICAL KNOW-HOW, MERCK shall have the right to
institute such suit or take other appropriate action at its own expense
in the name of VICAL or MERCK or both. In such event, VICAL shall
cooperate fully with MERCK in its efforts to protect the VICAL PATENT
RIGHTS and the VICAL KNOW-HOW. Any recovery obtained by MERCK as a
result of such proceeding, by settlement or otherwise, shall be the
property of MERCK, provided, however, that MERCK shall pay to VICAL any
reasonable expenses incurred by VICAL in assisting with such action
(other than counsel fees) and the applicable royalty VICAL would have
received on sales lost by MERCK to the extent that the recovery
includes sales lost by MERCK.
4.8 VICAL and MERCK each shall immediately give notice to the other of any
certification of which they become aware filed under the U.S. "Drug
Price Competition and Patent Term Restoration Act of 1984" claiming
that a patent covering LICENSED PRODUCT is invalid or that infringement
will not arise from the manufacture, use or sale of LICENSED PRODUCT by
a third party. If VICAL or MERCK (depending on which party is defending
the patent) decides not to bring infringement proceedings against the
entity making such a certification, such party shall give notice to the
other party of its decision not to bring suit within twenty-one (21)
days after receipt of notice of such certification. The party receiving
such notice may then, but is not required to, bring suit
<PAGE> 14
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against the party that filed the certification. Any suit by MERCK or
VICAL shall either be in the name of MERCK or in the name of VICAL, or
jointly by MERCK and VICAL, as may be required by law. For this
purpose, the party not bringing suit shall execute such legal papers
necessary for the prosecution of such suit as may be reasonably
requested by the party bringing suit.
4.9 VICAL shall promptly give notice to MERCK of the grant, lapse,
revocation, surrender, invalidation or abandonment of any VICAL PATENT
RIGHTS licensed to MERCK for which VICAL is responsible for the
application, prosecution and maintenance.
4.10 The parties hereto shall cooperate with each other in gaining patent
term extension where applicable to VICAL PATENT RIGHTS.
4.11 In any country where a compulsory license must be granted involving
VICAL PATENT RIGHTS, the exclusive rights and license granted to MERCK
shall not prohibit or prevent the granting of a compulsory license
under the VICAL PATENT RIGHTS and any royalty payable by MERCK shall
not be greater than the royalty payable by the compulsory licensee.
VICAL shall consult with MERCK with respect to any circumstances in
which it may be required to grant a compulsory license.
<PAGE> 15
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ARTICLE 5 - TRANSFER OF INFORMATION
5.1 Each party shall disclose upon request by the other party all VICAL or
MERCK KNOW-HOW, as applicable, not already disclosed. During the term
of the RESEARCH COLLABORATION PROGRAM, VICAL shall also disclose to
MERCK on an ongoing basis all VICAL KNOW-HOW developed in connection
with the RESEARCH COLLABORATION PROGRAM.
5.2 VICAL shall have the option to acquire a nonexclusive, worldwide
license to any technology developed solely by MERCK under the RESEARCH
COLLABORATION PROGRAM and MERCK's interest in any technology developed
jointly with VICAL under the RESEARCH COLLABORATION PROGRAM
(hereinafter referred to as "MERCK Licensed Technology") which would be
necessary for VICAL to develop vaccines which MERCK has not elected to
develop or for which it has not pursued development as required under
the terms of this Agreement.
5.3 Under the option granted in Article 5.2, VICAL shall have the right to
grant sublicenses to subsidiaries without consent and to third parties
approved in advance by MERCK (which approval shall not be unreasonably
withheld) only in the event that VICAL elects not to develop and/or
market the MERCK Licensed Technology. The right to grant sublicenses to
subsidiaries without consent and approved third parties shall not
include the right of such subsidiaries or approved third parties to
<PAGE> 16
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grant further sublicenses except as MERCK may otherwise agree in its
sole discretion.
5.4 In the event VICAL elects to exercise the option granted in Article
5.2, the parties shall negotiate in good faith a License Agreement
which shall provide for the payment of royalties reasonable under the
circumstances by VICAL to MERCK on net sales by VICAL, its Affiliates
or sublicensee of such vaccine products utilizing the MERCK Licensed
Technology and which shall provide for such other provisions
customarily included in such an Agreement.
ARTICLE 6 - CONFIDENTIALITY
6.1 Except as otherwise provided in this Agreement, all VICAL or MERCK
KNOW-HOW or other confidential information which is received by a party
during the term of this Agreement shall be maintained in confidence by
the recipient and shall not be disclosed to any other person, firm, or
agency, governmental or private, without the prior written consent of
the other party, except to the extent that such materials or
information:
6.1.1 is known by recipient at the time of its receipt as documented in
written records, or
6.1.2 is properly in the public domain, or
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6.1.3 is subsequently disclosed to a party by a third party not under an
obligation of confidentiality to the disclosing party, or
6.1.4 is developed independently of VICAL or MERCK KNOW-HOW, as the case may
be, or information received by recipient as documented in written
records, or
6.1.5 is required to be disclosed to governmental agencies in order to gain
approval to sell LICENSED PRODUCT (but only to the extent that such
disclosure is required), or
6.1.6 is necessary to be disclosed to sublicensees, agents, consultants,
AFFILIATES and/or other third parties for the research and development
and/or sale and marketing of LICENSED PRODUCT under this Agreement,
which entities first agree to be bound by the confidentiality
obligations contained in this Agreement. It is understood that each
party may disclose confidential information with the prior consent and
approval of the other party.
ARTICLE 7 - ADVERSE EXPERIENCE REPORTING
7.1 The parties agree throughout the duration of this Agreement to notify
each other immediately of any information concerning any serious or
unexpected side effect, injury, toxicity or sensitivity reaction, or
any unexpected incidence, and the severity thereof, associated with the
clinical uses, studies, investigations, tests and marketing of the
LICENSED
<PAGE> 18
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PRODUCT. "Serious", as used in this paragraph, refers to an experience
which results in death, permanent or substantial disability, in-patient
hospitalization, prolongation of hospitalization; or is a congenital
anomaly, cancer, the result of an overdose, or life threatening.
"Unexpected", as used in this paragraph for a non-marketed LICENSED
PRODUCT, is one that is not identified in nature, severity, or
frequency in the current clinical investigator's confidential
information brochure. "Unexpected", as used in this paragraph for a
marketed product, is one that is not listed in the current labeling for
the LICENSED PRODUCT and includes an event that may be symptomatically
and pathophysiologically related to an event listed in the labeling but
differs from the event because of increased frequency or greater
severity or specificity.
ARTICLE 8 - PAYMENTS AND OTHER CONSIDERATIONS
8.1 MERCK shall make a nonrefundable payment in consideration of VICAL's
research of [ * ] upon execution of this Agreement.
8.2 (a) In support of mutually agreed upon research to be conducted by
VICAL for the first CONTRACT YEAR of the RESEARCH COLLABORATION
PROGRAM, (which is described in Schedule B attached hereto) MERCK shall
pay VICAL [ * ] payable upon the execution date
[ * ] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 19
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of this Agreement. It is understood that this amount will support five
and one-half (5.5) research scientists.
(b) In the event MERCK has not terminated the Agreement at the end of the
first CONTRACT YEAR as provided in Article 12.3 MERCK shall fund the
PROGRAM for the second and, if the Agreement continues to remain in
effect, the third CONTRACT YEAR, at no less than four hundred
ninety-five thousand dollars ($495,000) for each such year or such
other greater dollar amount as the Review Committee unanimously and
reasonably determines shall be necessary to fund VICAL's activities
contemplated for such additional CONTRACT YEAR based upon the RESEARCH
COLLABORATION PROGRAM set forth in the attached Schedule B. It is
understood that this amount will support a minimum of two and three
quarter (2.75) research scientists.
(c) MERCK's rights and obligations under Article 3.1 of this Agreement
shall terminate in the event MERCK elects not to fund the PROGRAM for
the second and third CONTRACT YEAR as set forth herein unless MERCK
pays VICAL, to reflect VICAL's continuing research the nonrefundable
sum of five hundred thousand dollars ($500,000) for AIDS VACCINE and/or
five hundred thousand dollars ($500,000) for INFLUENZA VACCINE (an
aggregate of one million dollars ($1,000,000.) for both) within thirty
(30) days prior to the end of the second CONTRACT
<PAGE> 20
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YEAR. Prior to such time, and afterwards in the event such payments are
made, MERCK's obligations with respect to AIDS VACCINE and INFLUENZA
VACCINE shall continue as set forth under the terms and conditions of
this Agreement.
8.3 (a) As further consideration and in recognition of the research to be
performed by VICAL under this Agreement and subject to the
provisions of Article 12, MERCK shall make the nonrefundable
research milestone payments provided for in Schedule A for each
of the first five (5) vaccines for the prevention of human
infectious disease selected by MERCK in accordance with the terms
of this Agreement including AIDS VACCINE and INFLUENZA VACCINE.
Such payments shall be made within thirty (30) days of the
achievement of the milestone.
(b) As an additional research milestone payment, in the event that a
United States Patent covering LICENSED PRODUCT issues to VICAL
while this Agreement is in effect and prior to LICENSED PRODUCT
entering Phase III clinical studies, then MERCK shall pay to
VICAL, on a one time basis, the nonrefundable sum of [ * ]
at the end of the first CONTRACT YEAR or upon completion of
VICAL's duties under Proof of Principle experimental studies as
described in Schedule B attached hereto whichever occurs later
or as soon thereafter as said patent issues and the
nonrefundable sum of [ * ]
[ * ] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 21
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[ * ] on initiation of Phase III clinical studies. If such
patent issues after initiation of Phase III clinical studies and
while this Agreement remains in effect, then MERCK shall pay to
VICAL, on a one time basis, the nonrefundable sum of [ * ] at
the time such patent issues.
(c) MERCK shall have the right to an option to extend the rights
granted in Article 3.1 hereof through the second CONTRACT YEAR to
vaccines used for prevention of all other human infectious
diseases, to a RAS oncogene vaccine derived from the Kirsten -,
Harvey -, or N-RAS oncogene for the prevention of ras oncogene
associated tumors, and to a human papilloma virus vaccine derived
from the genome of the human papilloma virus for the prevention
of papilloma associated tumors and lesions other than LICENSED
PRODUCT and shall have such right to do so (i) in the first
CONTRACT YEAR at no additional cost and (ii) in the second
CONTRACT YEAR by paying VICAL the sum of one million dollars
($1,000,000) at the end of the first CONTRACT YEAR or at the
successful completion of VICAL's Proof of Principle experimental
studies (as described in Schedule B attached), whichever is
later. Thereafter, following only the second and third CONTRACT
YEARS, respectively, MERCK shall again have the right to an
option to extend the rights granted in Article 3.1 hereof on a
year-by-year and vaccine-by-vaccine basis by paying to VICAL the
amount of S250,000 per
[ * ] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 22
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[ * ]; provided, however, that MERCK shall use its good faith
efforts to begin or continue, as the case may be, conduct of a
development program as outlined in this Agreement with respect to
any vaccines for which it has made the above described payments,
if so required. If MERCK determines to so extend the rights as
described above, payments for such extension shall be made no
later than thirty (30) days preceding the end of the second or
third CONTRACT YEAR, as the case may be. MERCK shall lose all
right to any vaccine for which it does not make the above
described payments, if so required, or to any vaccines for which
MERCK already has the rights but the development of which it has
not been pursued as required by the terms of this Agreement;
provided, however, during the term of this Agreement that at
least thirty (30) days prior to entering into substantive
business discussions with a third party with respect to a
collaborative agreement regarding a vaccine for which MERCK has
not made the above described payments, if so required, or pursued
development as required, VICAL will provide MERCK representatives
of the Review Committee with a one-time notice in writing of
these proposed activities. A copy of such notice shall also be
provided to the Executive Director, Corporate Licensing.
[ * ] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 23
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(d) If MERCK determines to exercise the options for which it has paid
VICAL the sums as required in Article 8.3(c) above it shall do so
on or before the end of the second, third or fourth CONTRACT
YEARS, as the case may be. In such event MERCK shall pay VICAL, a
license fee of [ * ] of the payment made under Article 8.3(c)
(ii) shall be creditable against the license fee paid hereunder.
(e) The terms and conditions of this Agreement will be applicable to
licenses of additional infectious disease vaccines provided that
the only consideration under such agreements shall be the
royalties and milestones provided herein.
8.4 In consideration of the license granted in Article 3, royalties shall
be payable to VICAL in each calendar year in the amount of [ * ] of
NET SALES by MERCK, its AFFILIATES or permitted sublicensees of each
LICENSED PRODUCT which is covered by VALID PATENT RIGHTS.
8.5 In the event a LICENSED PRODUCT sold in a country is not covered by
VALID PATENT RIGHTS (including countries where patents have been
applied for but have not yet issued), then MERCK shall pay know-how
royalties of [ * ] on NET SALES of such LICENSED PRODUCT in such
country for
[ * ] CONFIDENTIAL TREATMENT REQUESTED
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a period of [ * ] from the date of first commercial sale of LICENSED
PRODUCT in such country. The royalties payable under this section
shall be in lieu of patent royalties and not additive where patents
later issue in a country.
8.6 Sales between MERCK and its sublicensees or AFFILIATES, or among such
AFFILIATES and sublicensees, shall not be subject to royalty, but in
such cases royalty shall be calculated upon MERCK's or its
sublicensee's or AFFILIATES's NET SALES to an independent third party.
8.7 The obligation to pay royalties is imposed only once with respect to
the same unit of LICENSED PRODUCT.
8.8 If MERCK is required to pay cumulative royalties in excess of [ * ]
of Net Sales for additional licenses required to commercialize a
particular LICENSED PRODUCT, the royalties payable to VICAL herewith
with respect to such LICENSED PRODUCT shall be reduced by [ * ] of the
additional royalties beyond such [ * ] figure; provided however that
in no event shall the royalties due VICAL hereunder, after taking
into account the above reduction be reduced below [ * ].
8.9 In the event that VICAL seeks to obtain additional licenses from third
parties which may enhance or improve one or more LICENSED PRODUCTS,
VICAL shall
[ * ] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 25
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discuss with MERCK its interest in such additional licenses and on what
terms such licenses may be obtained by VICAL or MERCK.
ARTICLE 9 - ACCOUNTING AND REPORTS
9.1 MERCK shall deliver to VICAL within sixty (60) days after the end of
each calendar quarter a written account, including quantities and
monetary amounts of MERCK's and MERCK's AFFILIATE's and sublicensee's
sales subject to royalty payments and the amount of the royalty payment
due to VICAL for such quarter. In the case of sales outside the United
States, "calendar quarter" shall mean the respective periods of three
(3) consecutive calendar months ending on February 28, May 31, August
31, and November 30. With respect to these "calendar quarters",
royalties shall be calculated for such periods but accounted for and
paid within sixty (60) days after the end of each regular calendar
quarter as set forth above. Any such payments by MERCK that are not
paid on or before the date such payments are due under this Agreement
shall bear interest to the extent permitted by applicable law at the
reference rate of interest as reported by Bank of America NT & SA in
San Francisco, California from time to time, calculated on the number
of days such payment is delinquent.
9.2 When MERCK delivers the accounting to VICAL, MERCK shall also deliver
all royalty payments due to VICAL for the calendar quarter.
<PAGE> 26
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9.3 MERCK shall keep accurate records in sufficient detail to enable the
amounts due to VICAL to be determined. Upon VICAL's request, MERCK
shall permit an independent, certified public accountant selected by
VICAL, except one to whom MERCK has reasonable objection, to have
access during ordinary business hours to MERCK's records necessary to
determine the correctness of any report or payment made in respect to
any calendar quarter and obtain information as to the amount payable to
VICAL for any such period in case of MERCK's failure to report or make
payment. Such examination shall be at VICAL's expense and shall not
take place more than once each year. These rights with respect to any
year shall terminate two (2) years after the end of any such year;
provided, however, that if such examination discloses that the
royalties payable for the examination period are more than one hundred
five percent (105%) of the royalties actually paid for such period,
MERCK shall pay the expenses of the accountant. Information supplied to
VICAL by such independent, certified public accountants shall not
include any proprietary information not required to be disclosed under
other sections of this Agreement.
9.4 All payments to be made by MERCK to VICAL under this Agreement shall be
made in United States dollars by bank wire transfer in immediately
available funds. In the case of sales outside the United States, the
rate of exchange to be used in computing the amount of currency
equivalent in United States dollars due VICAL
<PAGE> 27
- 27 -
shall be made at the rate of exchange, utilized by MERCK in its
worldwide accounting system, prevailing on the fourth-to-the last
business day of the calendar quarter.
ARTICLE 10 - MANUFACTURE
10.1 In the event that MERCK decides to develop any LICENSED PRODUCT under
the terms of this Agreement and subject to the terms and conditions of
a customary manufacturing and supply agreement, MERCK shall discuss
with and, in its sole discretion, may grant to VICAL the right to
manufacture a part of MERCK's requirements of LICENSED PRODUCT.
ARTICLE 11 - DURATION
11.1 This Agreement becomes effective as of the day and year first above
written and may be terminated as set forth in Article 12 hereof and
otherwise remains in effect until MERCK is no longer obligated to make
payments to VICAL pursuant to this Agreement. At such time, the rights
and licenses granted to MERCK under this Agreement shall be fully paid
up and shall continue in full force and effect.
ARTICLE 12 - TERMINATION
12.1 Upon any material breach by either party under this Agreement, in
addition to any other remedy it may
<PAGE> 28
- 28 -
have, the other party may terminate this Agreement by ninety (90) days
written notice to the breaching party, specifying the material breach,
default or other defect. The termination becomes effective at the end
of the ninety (90) day period unless the breaching party cures the
breach during the ninety (90) day period.
12.2 Either party may terminate this Agreement without notice if the other
party becomes insolvent, makes an assignment for the benefit of
creditors, is the subject of proceedings in voluntary or involuntary
bankruptcy instituted on behalf of or against such party, or has a
receiver or trustee appointed for substantially all of its property;
provided that in the case of an involuntary bankruptcy proceeding such
right to terminate shall only become effective if the party consents
thereto or such proceeding is not dismissed within ninety (90) days
after the filing thereof.
12.3 Notwithstanding any other provisions of this Agreement to the contrary,
this Agreement may be terminated by MERCK at the end of the first
CONTRACT YEAR or thereafter upon ninety (90) days prior written notice
given to VICAL. In the event of such termination, no further sums shall
be payable by MERCK under this Agreement and the licenses and rights
granted to MERCK shall be terminated except as set forth in Article
8.2(c) respecting rights and obligations MERCK has
<PAGE> 29
- 29 -
elected to continue for AIDS VACCINE and human INFLUENZA VACCINE. Upon
such termination, MERCK shall (i) return to VICAL any and all VICAL
KNOW-HOW or other VICAL technology related to VICAL PATENT RIGHTS
provided that MERCK may retain, in its Legal files, a copy of such
written KNOW-HOW or technology for record purposes and (ii) disclose to
VICAL and license to VICAL in accordance with Article 5.2 any
previously undisclosed MERCK KNOW-HOW or other technology developed by
MERCK under the RESEARCH COLLABORATION PROGRAM.
12.4 Any expiration or early termination of this Agreement shall be without
prejudice to the rights of either party against the other accrued or
accruing under this Agreement prior to termination, including the
obligation to pay royalties for LICENSED PRODUCT sold prior to such
termination.
12.5 Upon termination of this Agreement, all provisions regarding
confidentiality shall continue in full force and effect until seven (7)
years after termination. Additionally, upon such termination, each
party shall continue to be a joint owner of any joint inventions
developed under the RESEARCH COLLABORATION PROGRAM.
ARTICLE 13 - EFFORTS
13.1 MERCK shall use diligent efforts, consistent with those applied to
other products of similar commercial value, to design and complete all
(except as otherwise provided) toxicological, pharmacological and
clinical
<PAGE> 30
- 30 -
investigations, to the extent reasonably deemed necessary by MERCK, to
obtain and maintain government approvals to import, register and market
any LICENSED PRODUCT in each country in the Territory, in which MERCK
determines that it is commercially reasonable to enter and to market
such LICENSED PRODUCTS in such countries. All such regulatory
applications for approval to market any LICENSED PRODUCTS in the
Territory shall be filed in the name of and owned by MERCK. MERCK shall
notify VICAL each time it submits an application for government
registration and marketing approval for any LICENSED PRODUCT, shall
notify VICAL of any action taken on any application, and shall promptly
advise VICAL when any government approval to market any LICENSED
PRODUCT has been obtained in the Territory.
13.2 MERCK shall furnish VICAL with semiannual, summary progress reports
with respect to MERCK's efforts under Articles 2.6 and 13.1 above as to
each LICENSED PRODUCT until the date of first commercial sale of such
PRODUCT. Prior to such first commercial sale and so long as this
Agreement remains in effect, if VICAL, in order for VICAL to develop
vaccines which MERCK has elected not to develop under this Agreement,
requests access to information, data or technology in
MERCK's possession, relating exclusively to the LICENSED PRODUCTS,
MERCK may consider such request, and in its sole discretion,
determine if and on what terms access to such information, data or
technology may be
<PAGE> 31
- 31 -
obtained by VICAL
ARTICLE 14 - GOVERNING LAW
14.1 This Agreement shall be construed and the respective rights of the
parties hereto determined according to the substantive laws of the
State of New Jersey notwithstanding the provisions governing conflict
of laws under such law to the contrary.
ARTICLE 15 - ASSIGNMENT
15.1 Neither party may assign this Agreement in whole or in part without the
consent of the other, except that no such consent shall be required (i)
in the case of MERCK if such assignment occurs in connection with the
sale of all or substantially all of the business and assets of MERCK
related to vaccines, or if MERCK assigns this Agreement to an AFFILIATE
and (ii) in the case of VICAL, if such assignment occurs in connection
with the acquisition, merger, or sale of all or substantially all of
the assets of VICAL related to the Technology or a change in control of
VICAL. Assignment of this Agreement shall not release the assigning
party of its performance obligations under this agreement without the
consent of the other party which consent shall not be unreasonably
withheld.
ARTICLE 16 - SEVERANCE
16.1 If any provision of this Agreement is held to be invalid or
unenforceable under the laws of either
<PAGE> 32
- 32 -
jurisdiction of the parties, all other provisions shall nevertheless
continue in full force and effect, unless there is a material change in
the benefits and/or rights received under this Agreement.
ARTICLE 17 - AMENDMENT
17.1 This Agreement constitutes the entire agreement between the parties and
supersedes all previous arrangements whether written or oral. Any
amendment or modification to this Agreement shall be made in writing
signed by both parties.
ARTICLE 18 - NOTICE
18.1 Notices to VICAL shall be addressed to:
Vical Incorporated
9373 Towne Centre Drive
San Diego, California 92121
Attention: President
Copy to:
Thomas E. Sparks, Jr.
Pillsbury, Madison & Sutro
235 Montgomery St.
San Francisco, CA 94104
Notices to MERCK shall be addressed to:
Merck & Co., Inc.
P.O. Box 2000
Rahway, New Jersey 07065
Attention: Office of the Secretary
Either party may change its address by giving notice to the other party
in the manner herein provided. Any notice required or provided for by
the terms of this Agreement shall be in writing and sent by registered
or certified
<PAGE> 33
- 33 -
mail, return receipt requested, postage prepaid or by express courier
services providing evidence of delivery and properly addressed in
accordance with the paragraph above. The effective date of notice shall
be the actual date of receipt by VICAL or MERCK.
ARTICLE 19 - FORCE MAJEURE
19.1 No failure or omission by the parties hereto in the performance of any
obligation of this Agreement shall be deemed a breach of this Agreement
or create any liability if the same shall arise from any cause or
causes beyond the control of the parties, including, but not limited
to, the following: act of God; acts or omissions of any government; any
rules, regulations or orders issued by any governmental authority or by
any officer department, agency or instrumentality thereof; fire; storm;
flood; earthquake; accident; war; rebellion; insurrection; riot;
invasion; strikes; and lockouts and provided that such failure or
omission resulting from one of the above causes is cured as soon as is
practicable after the occurrence of one or more of the above-mentioned
causes.
ARTICLE 20 - PUBLIC ANNOUNCEMENTS/MISCELLANEOUS
20.1 Any public announcements or similar publicity with respect to this
Agreement or the transactions contemplated herein shall be at such time
and in such manner as VICAL and MERCK shall agree, provided that
nothing herein shall prevent either party upon notice to the other from
making such
<PAGE> 34
- 34 -
public announcements as such party's legal obligations require. VICAL
may disclose this Agreement or the transactions contemplated thereby to
investors or potential investors in VICAL or to financial institutions
for the purpose of obtaining financing in the event that such
disclosure is reasonably required to obtain an investment or financing
and MERCK will have the opportunity to review such disclosure in
advance.
20.2 During the term of this Agreement, each party shall be free to submit
scientific manuscripts for publication regarding the work of the
RESEARCH COLLABORATION PROGRAM, provided that the party wishing to
publish shall submit to the other party all underlying data and the
final draft of all such publications, whether they are to be presented
orally or in written form, at least thirty (30) days prior to
presentation or submission for publication. As may be applicable, the
reviewing party shall advise the publishing party as to the
patentability of any inventions to be disclosed and both parties shall
work together to protect any and all proprietary rights.
ARTICLE 21 - INDEMNIFICATION
21.1 Each party shall indemnify and hold the other party harmless, and
hereby forever releases and discharges the other party, from and
against all claims, demands, liabilities, damages and expenses
(including attorneys' fees) arising out of negligence of the
indemnifying party, its AFFILIATES or permitted sublicensees in
connection with
<PAGE> 35
- 35 -
the work performed during the RESEARCH COLLABORATION PROGRAM.
21.2 MERCK agrees to indemnify and hold VICAL, its employees and agents
harmless from and against any claims, demands, liabilities, damages and
expenses (including attorneys' fees) arising out of MERCK's
development, testing, use, manufacture, marketing or other activities
contemplated under this Agreement with respect to LICENSED PRODUCTS.
21.3 A party (the "Indemnitee") that intends to claim indemnification under
this Article 21 shall promptly notify the other party (the
"Indemnitor") in writing of any loss, claim, damage, liability or
action in respect of which the Indemnitee or any of its AFFILIATES
intend to claim such indemnification, and the Indemnitor shall have the
right to participate in, and, to the extent the Indemnitor so desires,
jointly with any other Indemnitor similarly noticed, to assume the
defense thereof with counsel mutually satisfactory to the parties;
provided, however, that an Indemnitee shall have the right to retain
its own counsel, with the fees and expenses to be paid by the
Indemnitee, if representation of such Indemnitee by the counsel
retained by the Indemnitor would be inappropriate due to actual or
potential differing interests between such Indemnitee and any other
party represented by such counsel in such proceedings. The indemnity
agreement in this Article 21 shall not apply to amounts paid in
settlement of any loss, claim, damage, liability or action if such
settlement is effected without the consent of the
<PAGE> 36
- 36 -
Indemnitor, which consent shall not be withheld unreasonably. The
failure to deliver written notice to the Indemnitor within a reasonable
time after the commencement of any such action, if prejudicial to its
ability to defend such action, shall relieve such Indemnitor of any
liability to the Indemnitees under this Article 21, but the omission so
to deliver written notice to the Indemnitor will not relieve it of any
liability that it may have to any Indemnitee otherwise than under this
Article 21. The Indemnitee under this Article 21, its employees and
agents, shall cooperate fully with the Indemnitor and its legal
representatives in the investigation of any action, claim or liability
covered by this indemnification.
21.4 MERCK shall maintain product liability insurance with respect to
manufacture and sales of LICENSED PRODUCTS by MERCK, its AFFILIATES or
permitted sublicensees in such form and in such amount as MERCK
customarily maintains with respect to sales of its other vaccine
products, and VICAL shall be named as an additional insured on any such
product liability insurance policy. MERCK shall maintain such insurance
for so long as it continues to manufacture or sell any LICENSED
PRODUCTS, and thereafter for so long as MERCK maintains insurance for
itself covering such manufacture or sales.
ARTICLE 22 - MISCELLANEOUS
22.1 This Agreement, including all Schedules attached hereto,
<PAGE> 37
- 37 -
contains the entire understanding of the parties with respect to the
subject matter hereof. All express or implied agreements and
understandings, either oral or written, heretofore made are expressly
merged in and made a part of this Agreement. This Agreement may be
amended, or any term hereof modified, only by a written instrument duly
executed by both parties hereto.
22.2 It is expressly agreed that MERCK and VICAL shall be independent
contractors and that the relationship between the two parties shall not
constitute a partnership, joint venture or agency. Neither MERCK nor
VICAL shall have the authority to make any statements, representations
or commitments of any kind, or to take any action, which shall be
binding on the other party without the prior written consent of such
other party.
22.3 This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
MERCK & CO., INC. VICAL INCORPORATED
By /s/ Edward M. Scolnick By /s/ Dannie H. King
-------------------------------- ----------------------------
Edward M. Scolnick, M.D.
Title: President, MSDRL Title: President and CEO
Date: 6/6/91 Date: 5/31/91
<PAGE> 38
- 38 -
SCHEDULE A
MILESTONES
FIRST ENTRY INTO PHASE I (or its
equivalent) IN A MAJOR MARKET COUNTRY $1.0M
FIRST ENTRY INTO PHASE III (or its
equivalent) IN A MAJOR MARKET COUNTRY [ * ]
FIRST FILING OF PRODUCT LICENSE
APPLICATION IN A MAJOR MARKET COUNTRY [ * ]
FIRST APPROVAL OF PRODUCT LICENSE
APPLICATION IN A MAJOR MARKET COUNTRY [ * ]
"Major Market Country" shall mean the United States, EEC
countries, Canada, or Japan.
[ * ] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 39
SCHEDULE B
RESEARCH COLLABORATION PROGRAM
YEAR 1
[ * ]
[ * ] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 40
SCHEDULE B (continued)
[ * ]
[ * ] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 41
SCHEDULE C
SEE EXHIBIT 10.12
<PAGE> 42
[MERCK & CO., INC. - LETTERHEAD]
SCHEDULE D
May 29, 1991
Mr. Kenneth U. Johnson
Marketing-Licensing
Wisconsin Alumni Research Foundation
P.O. Box 7365
Madison, Wisconsin 53707-7365
Re: Research Collaboration and License Agreement
Between Vical Incorporated and Merck & Co., Inc.
Dear Mr. Johnson:
Vical Incorporated and Merck & Co., Inc., anticipate entering into a Research
Collaboration and License Agreement ("Vical License Agreement") involving
intramuscular delivery of vaccines for the prevention of human infectious
disease ("the Technology"). Under the proposed Agreement Merck would be granted
an exclusive license from Vical.
Merck is aware that certain inventions involving the Technology are jointly
owned by Vical and WARF and that pursuant to a License Agreement between the
parties, dated January 1, 1991, ("WARF License Agreement") WARF has granted
Vical an exclusive License to its interest in certain of the Technology. The
grant is subject only to the rights, if any, of the United States Government to
practice the invention for government purposes.
Pursuant to Section 2C of the WARF License Agreement, Merck hereby requests
WARF's consent permitting Vical to extend the exclusive license granted by Vical
to Merck with respect to WARF's ownership interest in certain of the Technology
beyond any termination of the WARF License Agreement. In the event of such
termination MERCK agrees to be bound by the terms of the WARF License Agreement
to the extent of its license from Vical and for so long as the Vical License
Agreement remains in affect.
<PAGE> 43
- 2 -
If WARF is willing to permit such extension please have WARF indicate its
consent by having an authorized representative sign and date this letter in the
space provided below and return one original to me.
We have asked Vical to acknowledge its agreement to this arrangement by also
signing and dating this letter.
Your cooperation in this matter is appreciated.
Sincerely,
/s/ George W. Brodhead
- - ---------------------------------
George W. Brodhead
5733n
/ac
AGREED TO AND ACCEPTED:
WISCONSIN ALUMNI RESEARCH
FOUNDATION
By: /s/ John R. Pike
-----------------------------
Date: 5/31/91
---------------------------
ACKNOWLEDGED:
VICAL INCORPORATED
By: /s/ Dannie H. King
-----------------------------
Date: 6/6/91
---------------------------
approved for execution:
/s/ P. Jeffrey Archibald
- - ---------------------------------
P. Jeffrey Archibald
May 31, 1991
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