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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 1997, or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from to .
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Commission file number: 0-21088
VICAL INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 93-0948554
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
9373 TOWNE CENTRE DRIVE, SUITE 100, SAN DIEGO, CA 92121
Address of principal executive offices
(619) 453-9900
Registrant's telephone number including area code
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<CAPTION>
<S> <C>
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 $0.01
Preferred Stock Purchase Rights, Par Value $0.01
(Title of Class)
</TABLE>
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. [X]
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 2, 1998, was $218,308,645.
The number of shares of Common Stock outstanding as of March 2, 1998, was
15,749,307.
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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 1998 Annual Meeting of Stockholders to be held on May 28, 1998,
is incorporated by reference in Part III, Items 10 (as to directors), 11, 12
and 13 of this Form 10-K.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Vical Incorporated ("Vical" or "the Company") discovers and develops
gene-based pharmaceutical product candidates for human therapy. Gene
transfer is an approach to the treatment and prevention of genetic and
acquired diseases in which genes are introduced into cells in an effort to
produce specific proteins needed to selectively correct or modulate disease
conditions. The Company and its collaborators have developed core
technologies that allow direct transfer of specific genes into cells IN VIVO
(inside the body). The Company believes that its gene-based drug therapy
approach may offer safer and more cost-effective treatment opportunities for
many diseases as well as novel treatment alternatives for certain diseases
that are currently poorly addressed.
Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-K are forward-looking statements
that involve risks and uncertainties, including the timely and successful
development of candidate products, receipt of necessary regulatory approvals
and commercial acceptance of products, the obtaining of proprietary
protection for any such products, the impact of competitive products and
pricing and reimbursement policies, changing market conditions and the other
risks detailed throughout this Form 10-K. Actual results may differ
materially from those projected. These forward-looking statements represent
the Company's judgment as of the date of the filing of this Form 10-K. The
Company disclaims, however, any intent or obligation to update these
forward-looking statements.
The key discoveries leading to Vical's proprietary direct gene transfer
technology were that, under certain conditions, some muscle tissues are able
to absorb genetic material directly and subsequently express a desired
protein for periods ranging from weeks to several months. From these basic
findings the Company has developed yield increases and productivity
improvements that have led to what the Company refers to as "naked DNA"
reagents for gene transfer. In addition, the Company is developing other
technologies that may allow the delivery of DNA directly into certain
non-muscle tissues, including the use of lipid molecules (cytofectins) that
facilitate direct absorption of DNA into cells. The active ingredients of
products under development at Vical consist of highly purified, well-defined
gene sequences produced by conventional fermentation processes. The Company
believes that the broad applicability, ease of manufacturing and potential
cost effectiveness of its gene-based drug therapy approach may provide it
with competitive advantages for commercialization.
Vical is concentrating its research and development activities in
oncology, infectious diseases and therapeutic proteins for metabolic
disorders. Currently, the Company is developing its cancer product candidates
internally, while developing vaccines for infectious diseases and metabolic
disorder candidates primarily in collaboration with corporate partners.
PRODUCT DEVELOPMENT PROGRAMS
Vical is applying its direct gene transfer technology to the following
therapeutic areas:
ONCOLOGY
The Company is developing novel gene-based cancer immunotherapies to
address the shortcomings of existing therapies. Vical has formulated
ALLOVECTIN-7, a complex containing the gene encoding a particular human
histocompatibility antigen, HLA-B7, and a lipid material to facilitate gene
uptake. After direct injection of ALLOVECTIN-7 into a tumor, the Company
believes that the HLA-B7 gene will cause the tumor cells to produce the
HLA-B7 antigen. This gene expression may then trigger a potent cellular
immune response against the tumor cells.
Vical has conducted several Phase I/II clinical trials and a
multi-center Phase II clinical trial in patients with advanced metastatic
melanoma and other cancers. The Company concluded, based on the Phase I/II
trial results, that ALLOVECTIN-7 was well-tolerated, and that gene transfer
and expression were detectable in the majority of patients, with measurable
tumor shrinkage observed in 13 of 36 patients with advanced metastatic
melanoma. The Company believes Phase II results confirmed the potential
efficacy of ALLOVECTIN-7 in treating melanoma patients, in particular, in
patients whose tumors had not yet metastasized to internal organs.
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In 1996, Vical commenced additional multi-center Phase II clinical
testing of ALLOVECTIN-7 in approximately 50 advanced melanoma patients. The
Company expects to initiate further clinical trials in 1998 to support
product license approval submissions.
Results from another Phase I/II trial of ALLOVECTIN-7 suggested
potential efficacy in certain patients with unresectable head and neck
cancer. A multi-center Phase II trial with ALLOVECTIN-7 in approximately 25
patients with unresectable head and neck cancer began in September 1997.
Vical is developing its second gene-based product candidate, LEUVECTIN,
also intended for direct injection into tumor lesions of cancer patients.
LEUVECTIN contains a gene that encodes the potent immunostimulator IL-2 and a
lipid material to facilitate gene uptake. Recombinant IL-2 protein is an
FDA-approved anti-cancer agent for the treatment of advanced renal cell
carcinoma and melanoma. It has been investigated widely as a cancer
immunotherapeutic agent, but is frequently associated with serious side
effects. The Company expects that LEUVECTIN, when injected into tumors, will
cause the malignant cells to produce and secrete IL-2 in the vicinity of the
tumor, stimulating the patient's immune system to attack and destroy tumor
cells. Because LEUVECTIN is designed to deliver IL-2 only at the site of
tumor lesions, the Company believes that it may provide similar efficacy with
fewer side effects than systemic IL-2 therapy.
Upon completion of Phase I/II clinical trials of LEUVECTIN the Company
concluded that LEUVECTIN was well-tolerated, induced detectable gene transfer
and expression, and resulted in measurable tumor shrinkage in 5 of 23
patients with various types of advanced malignancies. In 1996, the Company
initiated additional multi-center Phase I/II clinical testing of higher doses
of LEUVECTIN in approximately 45 patients with advanced melanoma, renal cell
carcinoma, and soft-tissue sarcoma. Of the 11 renal cell carcinoma patients
initially evaluable in the LEUVECTIN trials, 2 patients achieved objective
clinical partial responses persisting for more than six and nine months,
respectively, and 2 achieved stable disease. Responses appear to be
dose-related, and no serious treatment-related adverse events were reported,
even at the highest doses tested. In June 1997, the Company initiated a
Phase I/II clinical trial with LEUVECTIN in approximately 18 prostate cancer
patients.
In collaboration with Dr. Ronald Levy of Stanford University Medical
Center, the Company is developing a naked DNA anti-idiotype vaccine, VAXID,
against low-grade non-Hodgkin's B-cell lymphoma. VAXID is a DNA plasmid that
encodes the patient-specific idiotype of the B-cell tumor immunoglobulin.
The Company believes that immunization of post-chemotherapy patients with
VAXID could result in the elimination of residual disease and the prevention
of the relapse of disease. In October 1997, a Phase I/II clinical trial of
VAXID began at the Stanford University Medical Center under the direction of
Dr. Levy.
In February 1998, Vical entered into a license agreement allowing
Centocor, Inc. to use Vical's naked DNA technology to develop gene-based
vaccines for the treatment of certain types of cancer. See "--Collaboration
and Licensing Agreements--Corporate Partners--Centocor, Inc."
INFECTIOUS DISEASE VACCINES
Vical and its collaborators have generated preclinical data
demonstrating that direct intramuscular injection of specific genes can
induce a potent, specific and prolonged immune response to infectious
disease-causing agents. In preclinical models, a direct injection of genes
for antigens of influenza resulted in both antibody-mediated and
cell-mediated immunity that was protective across widely divergent strains of
influenza. Thus, Vical's naked DNA vaccine technology may enable the
development of a new generation of preventive vaccine products effective
against a variety of microorganism strains. Additional studies by Vical, its
collaborators and several independent laboratories have extended these
findings to preclinical models for more than a dozen infectious diseases,
suggesting a wide array of potential targets for Vical's naked DNA vaccine
technology.
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In May 1991, Vical entered into a commercial collaborative agreement
with Merck & Co., Inc. ("Merck") to undertake research and development in the
area of infectious disease preventive vaccines. As of April 1995, Merck had
exercised its options to exclusive licenses to use Vical's naked DNA
technology for development of vaccines directed against seven human
infectious disease targets: influenza, human immunodeficiency virus (HIV),
herpes, hepatitis B virus (HBV), hepatitis C, human papilloma virus (HPV) and
tuberculosis. The 1991 Agreement was amended in December 1995 and again in
November 1997 to grant Merck rights to develop and market therapeutic
vaccines against HPV, HIV and HBV. Merck has conducted Phase I clinical
trials with a preventive DNA vaccine candidate for influenza since April 1996.
In September 1994, the Company entered into a collaborative agreement
with Pasteur Merieux Serums & Vaccins, subsequently renamed Pasteur Merieux
Connaught ("PMC"), covering the use of Vical's proprietary naked DNA
technology for developing vaccine products directed against cytomegalovirus,
respiratory syncytial virus, Lyme disease, helicobacter pylori and malaria.
In July 1997, the Company and PMC began a Phase I trial of an experimental
vaccine against the parasite that causes malaria. As of December 31, 1997,
PMC had added a new target, herpes zoster, exercised four of the options, and
extended one option. See "--Collaboration and Licensing Agreements--Corporate
Partners--Merck & Co., Inc." and "--Pasteur Merieux Connaught."
THERAPEUTIC PROTEINS FOR METABOLIC DISORDERS
Vical's direct gene transfer technology may also permit the development
of sustained-release alternatives to chronically administered therapeutic
proteins. Delivering therapeutic proteins by way of direct gene injection
may represent a more cost-effective, more convenient and safer mode of
administration than using the protein itself. The Company has a
collaborative agreement with Genzyme Corporation ("Genzyme") for the
treatment of cystic fibrosis. See "--Collaboration and Licensing
Agreements--Corporate Partners--Genzyme Corporation." In September 1997, the
Company and Merck entered into an option and license agreement granting
Merck certain rights to use Vical's technology to deliver certain growth
factors that may be useful in treating particular cardiovascular diseases.
See "--Collaboration and Licensing Agreements--Corporate Partners--Merck &
Co., Inc."
In October 1997, the Company and Rhone-Poulenc Rorer, the pharmaceutical
subsidiary of Rhone-Poulenc S.A. signed an agreement for an exclusive
worldwide license to use Vical's technology to deliver certain neurologically
active proteins for potential treatment of neurodegenerative diseases. See
"--Collaboration and Licensing Agreements--Corporate Partners--Rhone-Poulenc
Rorer."
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Vical's product development programs are summarized in the following
table:
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Project Target Indication(s) Development Status(1) Development Rights(2)
- -------------------------------------------------------------------------------------------------------------------------------
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ONCOLOGY
ALLOVECTIN-7 Melanoma Phase II Clinical Trials Vical
Head and Neck Tumors
LEUVECTIN Melanoma Phase I/II Clinical Trials Vical
Renal Cell Carcinoma
Sarcoma
Prostate Carcinoma
VAXID Non-Hodgkin's B-Cell Phase I/II Clinical Trial Vical
Lymphoma
Cancer Vaccines Various Research/Preclinical Development Centocor
INFECTIOUS DISEASES
Preventive DNA Vaccines Influenza Phase I Clinical Trials Merck
Hepatitis B Virus (HBV) Research/Preclinical
Hepatitis C Development
Herpes Simplex
HIV
Human Papilloma Virus (HPV)
Tuberculosis
Malaria Phase I Clinical Trial PMC
Cytomegalovirus Research/Preclinical
Helicobacter Pylori Development
Herpes Zoster
Lyme Disease
Respiratory Syncytial Virus
Therapeutic DNA Vaccines HBV Research/Preclinical Merck
HIV
Animal Health Vaccines Various Research Merial
METABOLIC DISORDERS
Cystic Fibrosis Cystic Fibrosis Phase I/II Genzyme
Transmembrane Regulator
(CFTR)
Therapeutic protein DNA Ischemic Diseases Research/Preclinical Merck
Therapeutic protein DNA Neurodegenerative Diseases Research/Preclinical Rhone-Poulenc Rorer
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) As denoted in the table, "Research" indicates research related to
identification and synthesis of lead compounds. "Preclinical
Development" indicates that a specific compound is undergoing toxicology
testing and manufacturing scale-up, among other things, in preparation
for filing an IND. In Phase I, trials are conducted with a small number
of healthy volunteers to determine the safety profile, the pattern of
drug distribution and metabolism. In Phase II, trials are conducted with
a larger group of patients afflicted with a target disease in order to
determine preliminary efficacy, optimal dosages and expanded evidence of
safety. In the case of products for life-threatening diseases, the
initial human testing is generally done in patients rather than in
healthy volunteers. Since these patients are already afflicted with the
target disease, it is possible that such studies may provide results
traditionally obtained in Phase II trials. Such trials are frequently
referred to as "Phase I/II" trials. See "--Government Regulation."
(2) See "--Collaboration and Licensing Agreements--Corporate Partners."
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TECHNOLOGY
GENE TRANSFER OVERVIEW
Gene transfer is an approach to the treatment and prevention of genetic
and acquired diseases in which genes are introduced into cells to direct the
production of specific proteins needed to selectively correct or modulate
disease conditions. A typical human cell contains thousands of different
proteins essential to cellular structure, growth and function. Proteins are
produced by the cell according to a set of genetic instructions encoded by
the DNA, which contains all the information necessary to control the cell's
biological processes. DNA is organized into segments called genes, with each
gene containing the information required to produce a specific protein.
Production of the protein encoded by a particular gene is known as gene
expression. The aberrant expression of even a single gene can severely alter
a cell's normal function, frequently resulting in a disease condition.
Gene transfer approaches include the use of (i) cells genetically
altered EX VIVO (outside the body) using viral vectors or other gene transfer
methods, (ii) viral vectors (such as retroviruses, adenoviruses and
adeno-associated viruses) that have been genetically "crippled" so that they
cannot reproduce and infect other cells and that are delivered IN VIVO to the
patient, and (iii) non-viral vectors or synthetic formulations of DNA that
are delivered IN VIVO to the patient. EX VIVO cell-based therapies are
cumbersome and expensive relative to IN VIVO therapies since individual
products must be designed and manufactured for each patient. Thus, gene
transfer product candidates currently in development rely primarily either on
viral or non-viral vectors that are delivered IN VIVO to patients. IN VIVO
approaches using viral vectors suffer several drawbacks that may limit their
widespread usefulness, including adverse immune responses and inflammation
caused by the vector that may inhibit the activity of the virus-based therapy
and prevent repeated administration. In addition, certain viral vectors
induce permanent changes in the patient's genetic makeup, which may cause
malignant transformation of cells leading to cancer. IN VIVO methods using
non-viral vectors or synthetic DNA formulations may offer the best
combination of effective gene transfer to the patient while minimizing safety
concerns.
VICAL'S NAKED DNA GENE TRANSFER TECHNOLOGY
Vical has developed a non-viral gene transfer technology which it
believes has the potential to allow a safe and cost-effective method of gene
therapy in a number of therapeutic applications. Vical and its collaborators
are developing core technologies to allow the delivery of synthetic DNA
formulations, or "naked DNA" as these formulations are referred to by the
Company, directly into cells IN VIVO. The initial observation that led to
Vical's naked DNA gene transfer approach was that, under certain conditions,
some tissues, specifically myocardial (heart) and peripheral striated
skeletal muscle tissues, are able to directly absorb genetic material into
cells and subsequently express the desired protein for periods ranging from
weeks to several months. In addition, the Company has developed proprietary
methods to allow the delivery of genes directly into certain non-muscle
tissues, including the use of lipid molecules (cytofectins) that facilitate
absorption of genes into cells.
Vical's naked DNA gene transfer approach involves the design and
construction of plasmids, DNA segments whose ends are attached together to
form a highly stable closed loop. These plasmids contain the gene encoding
the protein of interest as well as short segments of DNA, or flanking
sequences, that control the rate and location of protein expression. These
plasmids can be manufactured through conventional fermentation and
purification techniques.
Vical's gene-based products are intended to be administered to patients
by different techniques depending on the therapeutic application and the
target tissue. For many applications, intramuscular injection of a pure
plasmid DNA in an aqueous solution may suffice. For delivery to non-muscle
tissues, the Company anticipates that the plasmids will generally be
formulated with a cytofectin.
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Cytofectins are proprietary lipid substances that Vical is developing
specifically as drug delivery vehicles for its gene transfer technology.
These lipid molecules are positively charged, allowing them to bind to
negatively charged molecules of DNA. The resulting cytofectin-DNA complex
can be delivered in an aqueous solution to tissues IN VIVO using a syringe or
a catheter. Cytofectins are capable of delivering DNA to the interior of the
target cell while allowing the DNA to evade metabolic processes that normally
degrade internalized material. In preliminary studies, cytofectins appear to
be superior for the IN VIVO delivery of DNA, as compared with other
lipid-based vehicles (e.g., liposomes), in which there is rapid degradation
of the genetic material following ingestion by cells.
The Company believes that the potential benefits of Vical's gene
transfer technology may include:
- CONVENIENCE. Vical's gene-based drug therapy is intended to be
directly administered to patients similar to conventional
pharmaceuticals.
- SAFETY. Vical's anticipated products will contain no viral
structural components that may induce an unwanted immune response or
infection.
- EASE OF MANUFACTURING. Vical's products are expected to be
manufactured using conventional fermentation techniques and standardized
purification procedures.
- COST-EFFECTIVENESS. The Company believes that its gene transfer
technology will prove more cost-effective than gene transfer systems
requiring EX VIVO manipulation of cells on a patient-by-patient basis.
In certain clinical situations, administering a gene-based drug
consisting of DNA encoding a particular protein may prove to be more
cost-effective than administering a therapeutically effective dose of
the protein itself. This is because the DNA, once introduced into the
body, is intended to stimulate the production of a therapeutic protein
over a prolonged period of time.
PRODUCT DEVELOPMENT PROGRAMS
ONCOLOGY
Cancer is a disease in which certain cells grow uncontrolled by the
body's normal self-regulatory mechanisms. Traditional chemotherapy seeks to
control cancer by killing rapidly dividing cells. However, a number of
non-malignant cells in the body, such as intestinal epithelium and bone
marrow cells, are also rapidly dividing and hence are highly susceptible to
chemotherapy. Thus, doses sufficient to eradicate the cancer often cannot be
administered without life-threatening side effects.
A therapeutic approach that selectively kills tumor cells would be far
superior to currently available therapies. One such approach would be the
generation of a specific immune response targeting cancer cells. It is
generally believed that the immune system is capable of selectively
recognizing cancer cells as abnormal and destroying them. However, the vast
majority of cancers arise spontaneously in patients with an otherwise normal
immune system. This observation suggests that cancer cells somehow escape the
normal immune defense mechanisms or that the cytotoxic T lymphocytes ("CTLs")
response produced by cancer patients is not powerful enough to kill all of
the abnormal cells. A variety of methods have been used to augment the
immune response against tumor cells, including the administration of natural
immune-enhancing proteins such as IL-2, either alone or in combination with
other agents. These methods have shown encouraging results in some patients
with certain tumor types but also cause serious side effects.
Vical scientists are developing novel gene-based cancer immunotherapies
to address the shortcomings of existing therapies. Vical has formulated a
complex it calls ALLOVECTIN-7 that contains the gene encoding a particular
human histocompatibility antigen, HLA-B7 and a lipid material to facilitate
gene uptake. ALLOVECTIN-7 is designed to be directly injected into a tumor,
with the therapeutic goal of causing the tumor cells to produce the HLA-B7
antigen which triggers a potent CTL response against the tumor cells.
Vical has conducted several Phase I/II clinical trials and a
multi-center Phase II clinical trial in patients with advanced metastatic
melanoma and other cancers. The Company concluded based on the Phase I/II
trial results that ALLOVECTIN-7 was well-tolerated, and that gene transfer
and expression were detectable in the majority of patients, with measurable
tumor shrinkage observed in 13 of 36 patients with advanced metastatic
melanoma.
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Melanoma is a skin cancer found predominantly in Caucasians, most often
in fair-skinned people susceptible to sunburn. Exposure to sunlight,
particularly UVB rays, is considered the primary cause. According to the
American Cancer Society, the incidence of melanoma is doubling every 6 to 10
years among affected populations, with more than 40,000 new cases diagnosed
annually in the U.S. and an estimated 7,000 deaths for 1997.
If detected in Stages I and II, defined as localized disease of varying
diameter and thickness, melanoma often can be successfully treated by
surgical removal. The five-year survival rate for localized malignant
melanoma, if treated, is about 95 percent.
If untreated, melanoma spreads to tissue beneath the skin and to
internal organs, most often the lymph glands, lungs, brain, or liver. If the
disease progresses to Stage III, defined as limited regional metastases,
treatment may involve surgical removal of the tumors and any affected lymph
glands, followed by systemic or local chemotherapy with single or multiple
agents. The five-year survival rate for treated Stage III patients is about
60 percent, and quality of life is compromised by both the disease and the
treatment.
If the disease progresses to Stage IV, defined as advanced regional or
any distant metastases, treatment may include surgical removal of tumors and
affected lymph glands, systemic or local chemotherapy, radiation therapy, and
immunotherapy. The prognosis is poor, with a five-year survival rate for
treated Stage IV patients of about 15 percent and a severely impaired quality
of life.
Vical's multi-center Phase II clinical testing of ALLOVECTIN-7 in
patients with advanced melanoma and other cancers (breast, colorectal,
non-Hodgkin's lymphoma and renal cell) concluded in early 1997. The Company
believes Phase II results confirmed the potential efficacy of ALLOVECTIN-7 in
treating melanoma patients. Among 11 melanoma patients with metastatic
disease involving only subcutaneous tissue or lymph nodes, 5 patients
exhibited tumor shrinkage, with 2 of those characterized as partial clinical
responses. In 14 patients with widespread advanced disease affecting
internal organs, 2 exhibited tumor shrinkage and none achieved clinical
responses. At this time, the Company has no plans to pursue further
development in the other cancer indications tested.
In 1996, Vical commenced additional multi-center Phase II clinical
testing of ALLOVECTIN-7 in approximately 50 advanced melanoma patients. The
Company expects to present results from this trial and initiate further
clinical trials in 1998 to support product license approval submissions.
Results from a pilot Phase I/II trial of ALLOVECTIN-7 indicated
potential efficacy in certain patients with unresectable head and neck
cancer. Of the 11 patients evaluated, 4 achieved partial clinical responses.
A multi-center Phase II trial with ALLOVECTIN-7 in approximately 25 patients
with unresectable head and neck cancer began in September 1997.
Head and neck cancer describes any of several localized tumors affecting
the oral cavity, the pharynx or larynx, or the esophagus. Head and neck
cancers are found more frequently in men than in women, and most often in men
over age 40. Risk factors vary with the particular location, but can include
use of tobacco and excessive consumption of alcohol. According to the
American Cancer Society, new diagnoses in the United States for the various
head and neck cancers total more than 50,000 new cases annually, and such
cancers were estimated to have caused more than 20,000 deaths in 1997.
Most head and neck cancers are treated by surgical removal and/ or
localized radiation therapy, with widely ranging degrees of success depending
on the number of tumors, their size, and their specific location. In
advanced disease, standard treatment may be preceded by systemic chemotherapy
to improve treatability, or followed by systemic chemotherapy to address
remaining cancer cells, most often with a combination of agents. The
five-year survival rate for head and neck cancer patients, if treated, varied
from more than 90 percent for localized, accessible disease to less than 5
percent for widespread, inoperable malignancies.
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Vical is developing its second gene-based product candidate, LEUVECTIN,
which, like ALLOVECTIN-7, also is intended for direct injection into tumor
lesions of cancer patients. LEUVECTIN contains a gene that encodes the
potent immunostimulator, IL-2 and a lipid material to facilitate gene uptake.
Recombinant IL-2 protein is an FDA-approved anti-cancer agent for the
treatment of advanced renal cell carcinoma and melanoma. It has been
investigated widely as a cancer immunotherapeutic agent, but is frequently
associated with serious side effects. The Company expects that LEUVECTIN,
when injected into tumors, will cause the malignant cells to produce and
secrete IL-2 in the vicinity of the tumor, stimulating the patient's immune
system to attack and destroy tumor cells. Because LEUVECTIN is designed to
deliver IL-2 only at the site of tumor lesions, the Company believes that it
may provide similar efficacy with fewer side effects than systemic IL-2
therapy.
Upon completion of Phase I/II clinical trials designed primarily to test
the safety of LEUVECTIN at varying dosage levels and to assess IL-2 gene
transfer and expression, the Company initiated additional multi-center Phase
I/II clinical testing of higher doses of LEUVECTIN in approximately 45
patients with advanced melanoma, renal cell carcinoma, and soft-tissue
sarcoma. Of the 11 renal cell carcinoma patients initially evaluable in the
LEUVECTIN trials, 2 achieved objective clinical partial responses persisting
for more than six and nine months, respectively, and 2 achieved stable
disease. Responses appear to be dose-related, and no serious
treatment-related adverse events were reported.
In June 1997, the Company initiated a Phase I/II clinical trial with
LEUVECTIN in approximately 18 prostate cancer patients. Prostate cancer is
the most frequently diagnosed type of cancer, and the second leading cause of
cancer fatalities among men in the United States. African Americans are at
significantly greater risk than Caucasians, and men over age 65 account for
over 80 percent of all diagnoses. In the United States more than 334,000 new
cases are diagnosed annually. The disease caused an estimated 41,000 deaths
in 1997.
Early detection, either by digital rectal exam or by prostate-specific
antigen (PSA) blood test, has been increasing the number of annual diagnoses
and improving overall survival rates. Most patients are diagnosed while the
disease is confined to the prostate gland, with a five-year survival rate of
99 percent. If the disease is discovered after it spreads to connective
tissue, lymph nodes, or other internal organs, survival rates decline.
Treatment options include "watchful waiting" for older patients with no
symptoms or with other more serious illnesses, radiation therapy, and
surgical removal of the prostate gland and/or affected lymph nodes. Symptoms
may also be relieved by hormone therapy or surgery.
In collaboration with Dr. Ronald Levy of Stanford University Medical
Center, the Company is developing a naked DNA anti-idiotype vaccine, VAXID,
against low-grade non-Hodgkin's B-cell lymphoma. This type of lymphoma is
characterized by a slow growth rate and excellent initial response to
chemotherapy or radiotherapy; however, a regular pattern of relapse to a
diffuse aggressive lymphoma occurs for which no curative therapy has been
identified. Clinical studies involving administration of either monoclonal
anti-idiotype antibodies or patient-specific B-cell lymphoma idiotype protein
have resulted in prolonged remissions; however, these therapies are limited
by the time and effort required to produce the drug product.
VAXID is a DNA plasmid that encodes the patient-specific idiotype of the
B-cell tumor immunoglobulin. In preclinical studies, Dr. Levy showed that
the injection into mice of a murine B-cell lymphoma idiotype plasmid resulted
in strong anti-idiotype immune responses and significant protection against
tumor challenge. Based on these preclinical studies and additional studies
conducted at Vical, the Company believes that immunization of
post-chemotherapy patients with VAXID could result in the elimination of
residual disease and the prevention of the relapse of disease. In October
1997, a Phase I/II clinical trial of VAXID began at the Stanford University
Medical Center under the direction of Dr. Levy.
In February 1998, Vical entered into a license agreement allowing
Centocor, Inc. to use Vical's naked DNA technology to develop and market
certain gene-based vaccines for the potential treatment of certain types of
cancer.
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INFECTIOUS DISEASE VACCINES
Vical's naked DNA technology may address two deficiencies of traditional
preventive vaccine approaches: (i) the inability to predict the random
changes in the strains of various infectious agents and (ii) the need for
safe formulations (adjuvants) that accentuate a humoral response or that
elicit sufficient cell-mediated responses. The Company's scientists have
shown in animal experiments that the intramuscular injection of a plasmid
encoding a protein common to all strains of the influenza virus stimulates
both humoral and cell-mediated responses against the virus itself and the
virus-infected cells. The immune response is potent, specific and requires
no adjuvant formulation. For over a year following vaccination, treated
animals demonstrated higher survival rates than untreated control animals
when challenged with various strains of inhaled influenza virus. This
observed cross-strain protection, if reproducible in humans, will offer a key
advantage compared with conventional influenza vaccines, which must be
specifically designed and manufactured to combat a particular strain of a
prevalent influenza virus. Thus, Vical's direct gene transfer technology may
be universal, not requiring frequent re-design or product modification for
each new viral strain.
Additional studies by Vical and its collaborators have extended these
findings to other models of infectious diseases for which there are no
currently approved vaccines, such as human papilloma virus, herpes and
malaria. Malaria is a severe infectious disease characterized by fever,
headache and joint pain, which if untreated can lead to death. Infection
normally occurs when the parasite enters a victim's bloodstream during a
mosquito bite. An estimated 300 million people are affected by malaria
worldwide, with more than 1 million deaths each year. Some 80 percent of
malaria cases occur in Africa, with the remainder generally confined to
regions of Asia and Latin America.
The Company believes Vical's potential vaccine products should be
simpler to manufacture, using conventional bacterial fermentation, than
vaccines that are made using cumbersome and labor-intensive techniques
involving difficult tissue culture procedures and live viruses. Merck holds
exclusive licenses to use Vical's naked DNA technology for development of
vaccines directed against seven human infectious disease targets: influenza,
human immunodeficiency virus (HIV), herpes, hepatitis B virus (HBV),
hepatitis C, human papilloma virus (HPV) and tuberculosis and to develop
therapeutic vaccines against HPV, HIV and HBV. Merck initiated a Phase I
clinical trial with a preventive DNA vaccine candidate for influenza in April
1996. In September 1994, the Company entered into a commercial collaborative
agreement with PMC covering the use of Vical's proprietary naked DNA
technology for developing vaccine products directed against cytomegalovirus,
respiratory syncytial virus, Lyme disease, helicobacter pylori and malaria.
In 1996, PMC added herpes zoster as a sixth target indication. In July 1997,
the Company and PMC began a Phase I trial of an experimental vaccine against
the parasite that causes malaria. As of December 31, 1997, PMC held licenses
for four of the indications and options for the remaining two. See
"--Collaboration and Licensing Agreements--Corporate Partners--Merck & Co.,
Inc." and "--Pasteur Merieux Connaught."
THERAPEUTIC PROTEINS FOR METABOLIC DISORDERS
Vical's direct gene transfer technology may permit the development of
alternatives to therapeutic protein administration for certain metabolic
diseases. The major shortcomings of some therapeutic proteins are their
short duration of action and the potential side effects associated with high
levels of circulating protein after intravenous administration. The Company
believes that direct injection of genes that code for the protein of interest
into muscles may enable the muscle to act as a protein factory causing a
sustained-release of low levels of the therapeutic proteins and reducing side
effects and the need for repeated dosing. Vical's technology may be the most
suitable for the delivery of proteins that are required in small amounts over
prolonged periods of time to produce therapeutic effects. Examples of such
proteins include: (i) CFTR, the protein that is defective in cystic fibrosis
patients, (ii) growth factors that stimulate the production of new blood
vessels in poorly vascularized tissues, and (iii) neuro-active proteins that
maintain nerve cell function and may be useful in treating certain
neurodegenerative diseases, such as Alzheimer's, Parkinson's, Huntington's,
Creutzfeldt-Jakob and Lou Gehrig's diseases. These neurodegenerative
diseases are all characterized by the gradual loss of various nerve cell
functions. Any gene-based treatments of these new degenerative diseases
would be expected to involve administration of specific genes into tissue
where nerve cells had begun to deteriorate. Administration of the genes may
increase local production of neurologically active proteins which may slow
the loss of nerve cell function.
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The Company also believes that its gene transfer technology can be used
in the treatment of ischemic diseases such as coronary artery disease and
peripheral vascular disease. Over 50 million people in the U.S. have one or
more forms of cardiovascular disease (coronary artery or rheumatic heart
disease, or high blood pressure). Coronary artery disease is caused by
narrowing of the coronary arteries due to deposits of plaque on the walls of
the arteries. Over time, the narrowed coronary arteries deliver less blood
to the muscles of the heart, thus severely impacting the ability of the heart
to function. Coronary artery disease is likely to produce angina pectoris
(chest pain), heart attack or both. Coronary artery disease is the single
largest cause of death in the U.S. Annually, in the U.S. an estimated 1.1
million people will have a new or recurrent coronary attack, which is fatal
about one-third of the time. Approximately 14 million people in the U.S.
have a history of heart attack, angina pectoris or both.
Peripheral vascular disease affects the blood vessels outside of the
heart or the lymph vessels. It is often a narrowing of the blood vessels of
the lower extremities and is frequently associated with diabetes. Any
potential treatment using the Company's technology would involve
administration of specific genes into tissues where disease had restricted
blood flow. Administration of the genes may increase local production of
certain growth factors which may stimulate the growth of new blood vessels.
The newly formed blood vessels may restore blood flow to the affected areas.
This treatment may be applicable in diseases such as coronary artery and
peripheral vascular ischemias.
In 1993, Vical entered into a collaborative research and option
agreement with Genzyme to evaluate the use of, and which granted an option to
license, Vical's cytofectins as non-viral vectors in gene therapy for the
treatment of cystic fibrosis. In 1996, Genzyme exercised the option. In
April 1997, the Company entered into a sublicense agreement with Cardiogene
Therapeutics, Inc. with respect to certain cardiovascular application of
Vical's technology. In September 1997, the Company and Merck entered into an
option and license agreement granting Merck certain rights to use Vical's
technology to deliver certain growth factors that may be useful in treating
particular cardiovascular diseases. In October 1997, the Company and
Rhone-Poulenc Rorer, the pharmaceutical subsidiary of Rhone-Poulenc, signed
an agreement for an exclusive worldwide license to use Vical's technology to
deliver certain neurologically active proteins for potential treatment of
neurodegenerative diseases. See "--Collaboration and Licensing
Agreements--Corporate Partners--Genzyme Corporation", "--Merck & Co., Inc."
and "--Rhone-Poulenc Rorer."
COLLABORATION AND LICENSING AGREEMENTS
The Company's strategy for the research, development and
commercialization of its potential products requires entering into various
arrangements with corporate, academic and government collaborators,
licensors, licensees and others, and is dependent upon the subsequent success
of these outside parties in performing their responsibilities. Although the
Company believes parties to any such arrangements would have an economic
motivation to succeed in performing their contractual responsibilities, the
amount and timing of resources to be devoted to these activities may not be
within the control of the Company. The parties may not perform their
obligations as expected and the Company may not derive any revenue from such
arrangements. In addition, the collaborators may pursue alternative
technologies as a means for developing treatments for the diseases targeted
by these collaborative programs.
The Company has entered into, and expects to enter into, additional
research collaborations, licensing agreements and corporate collaborations.
In addition to the agreements summarized below, Vical has entered into or is
currently conducting on going negotiations with potential corporate partners.
However, the Company may not be able to negotiate acceptable collaborative
agreements, and its existing collaborative agreements may not be successful.
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CORPORATE PARTNERS
MERCK & CO., INC. In May 1991, the Company entered into a research
collaboration and license agreement with Merck (the "1991 Agreement") to
develop vaccines to prevent infection and/or disease in humans utilizing
Vical's intramuscular delivery technology. In connection with the 1991
Agreement, Vical granted Merck a worldwide exclusive license to preventive
vaccines using Vical's technology against seven human infectious diseases:
influenza, HIV, herpes simplex, HBV, hepatitis C, human papilloma virus (HPV)
and tuberculosis. In April 1996, Merck initiated a Phase I clinical trial
with a preventive DNA vaccine candidate for influenza.
In addition, Merck has certain rights to therapeutic uses of preventive
vaccines developed under the 1991 Agreement. In December 1995 and November
1997, the Company and Merck amended the 1991 Agreement and Merck acquired
certain rights to develop and market therapeutic vaccines against HPV, HIV
and HBV.
Pursuant to the November 1997 amendment, Merck made an investment of
$5.0 million for approximately 262,000 shares of the Company's common stock.
The price per share reflected a 25 percent premium over the trading price of
the common stock. In connection with this 1991 Agreement, Merck has paid the
Company $17.1 million as of December 31, 1997.
In September 1997, the Company also entered into an option and license
agreement granting Merck the rights to use the Company's naked DNA technology
to deliver certain growth factors as potential treatments for a range of
applications including revascularization. The agreement resulted in an
initial payment to the Company of $2.0 million.
Merck is obligated to pay additional fees upon successful completion of
certain research milestones with respect to the products developed under the
various Merck agreements and royalties on net sales by Merck of such
products, if any such products are developed and marketed.
PASTEUR MERIEUX CONNAUGHT. In September 1994, the Company entered into
a collaborative agreement with the vaccine manufacturer PMC (the "PMC
Agreement") covering the use of Vical's proprietary naked DNA and cytofectin
technologies for developing vaccine products. The following vaccine targets
are included: cytomegalovirus (CMV), respiratory syncytial virus (RSV), Lyme
disease, helicobacter pylori and malaria. In April 1996, a sixth option
target, herpes zoster, was added. The PMC Agreement includes a research
collaboration and options for PMC to take exclusive licenses to Vical's naked
DNA vaccine and cytofectin technologies for each of the six vaccine targets.
To maintain the options, PMC was required to pay Vical annual research
payments through 1997. For licensed options, PMC will have to make milestone
and royalty payments to Vical. PMC has exercised four such options at
December 31, 1997, and extended an option. In July 1997, PMC paid the
Company $1.0 million as a milestone payment under the agreement when the
Company and PMC began a Phase I trial of an experimental vaccine against the
parasite that causes malaria. Through December 31, 1997, Vical had received
$7.4 million under this agreement.
GENZYME CORPORATION. In October 1993, Vical entered into a
collaborative research and option agreement with Genzyme to evaluate the use
of Vical's proprietary cytofectins as non-viral vectors in gene therapy for
the treatment of cystic fibrosis. The agreement includes a multi-year
research collaboration and an option for Genzyme to take an exclusive
worldwide license for the use of Vical's cytofectins in the field of cystic
fibrosis treatment. Vical also granted Genzyme a four-year right of first
offer to use Vical's cytofectin technology in other lung disorders. In 1996,
Genzyme exercised the option. Through December 31, 1997, Vical had received
$2.3 million from Genzyme under this agreement. The license agreement
includes provisions for research, milestone and royalty payments to Vical.
MERIAL. The Company entered into a corporate alliance in March 1995
relating to DNA vaccines in the animal health area with Merial (previously
known as Rhone Merieux), a leading manufacturer and marketer of animal health
products worldwide. The agreement includes options for Merial to take
exclusive licenses to Vical's direct injection technology and the cytofectin
technology to develop and commercialize certain gene-based products for use
in the prevention of infectious diseases in domesticated animals. If Merial
exercises its license options, cash payments and royalties on net sales would
be due to the Company.
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RHONE-POULENC RORER PHARMACEUTICALS, INC. In October 1997, the Company
and Rhone-Poulenc Rorer Pharmaceuticals, Inc. ("RPR") entered into an
agreement granting RPR an exclusive worldwide license to use the Company's
naked DNA gene delivery technology to deliver certain neurologically active
proteins for potential treatment of neurodegenerative diseases. Under the
terms of the agreement, the Company received $1.0 million in 1997. This
agreement provides for the Company to receive additional payments based upon
achievement of certain defined milestones and royalty payments based on net
product sales.
CENTOCOR, INC. In February 1998, Vical entered into a license agreement
allowing Centocor, Inc. to use Vical's naked DNA technology to develop and
market certain gene-based vaccines for the potential treatment of certain
types of cancer. Under the terms of the agreement, the Company received an
initial payment of $2.0 million and may receive additional payments based
upon achievement of certain defined milestones and royalty payments based on
net product sales.
Under the Merck, PMC, Merial, RPR and Centocor agreements, if Vical were
to receive milestone or royalty payments, Vical would be required to pay 10
percent of certain payments to Wisconsin Alumni Research Foundation. See
"--Research Institutions--Wisconsin Alumni Research Foundation."
RESEARCH INSTITUTIONS
THE UNIVERSITY OF MICHIGAN. In October 1992, Vical entered into a
license agreement with the University of Michigan pursuant to which the
Company obtained the exclusive license (subject to Michigan's retaining the
right to grant non-exclusive, non-royalty bearing licenses to the United
States government and the Howard Hughes Medical Institute) to products for
the prevention and treatment of disease utilizing certain technology relating
to the introduction of recombinant nucleic acid products into cancer cells
and cells of the vasculature by catheterization in return for certain license
fees and royalty payments. In April 1997, the Company entered into a
sublicense agreement with Cardiogene Therapeutics, Inc. with respect to
certain cardiovascular applications of this technology.
WISCONSIN ALUMNI RESEARCH FOUNDATION (WARF). Under a research agreement
entered into in 1989, scientists at the University of Wisconsin, Madison, and
at Vical co-invented a core technology related to intramuscular naked DNA
administration. Effective January 1, 1991, Vical entered into a license
agreement with WARF whereby WARF granted to the Company the exclusive license
to its interest in that technology (except as to the U.S. government which
may hold non-exclusive licenses to certain technology developed with
government funds). As consideration for the license grant, Vical paid WARF,
(the designated patent and licensing organization for the University of
Wisconsin), an initial license fee upon execution of the agreement and has
committed to pay WARF a royalty on sales of the products incorporating the
licensed technology and a percentage of up-front license payments from third
parties.
ACCESS TO PROPRIETARY GENES AND PROTEINS
A number of the genetic sequences or proteins encoded by certain of
those sequences that the Company expects to use or is currently investigating
in its clinical trials or may use in its other gene-based products are, or
may become, patented by others. As a result, the Company may be required to
obtain licenses under such patents in order to conduct certain research, to
manufacture or to market products that contain proprietary genetic sequences.
Licenses may not be available on commercially reasonable terms, or at all.
PATENTS AND PROPRIETARY RIGHTS
Patents and other proprietary rights are important to the Company's
business. The Company's policy is to file patent applications to protect
technology, inventions and improvements to its inventions that are considered
important to the development of its business.
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<PAGE>
The Company also relies upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position. To date, the Company has filed or participated as
licensee in the filing of more than 275 patent applications in the United
States and in foreign countries relating to the Company's technology. The
Company has filed a series of patent applications seeking to cover naked DNA
gene transfer for immunization and for delivering therapeutic proteins to
patients, specific gene sequences and formulations comprising the Company's
gene-based product candidates, methods for producing pharmaceutical grade DNA
and the composition of matter of several families of cytofectin molecules and
their uses in gene delivery. Certain of these patents have been issued by
the U.S. Patent and Trademark Office ("PTO"). Several other such
applications are still pending in the United States, and corresponding
foreign applications have been filed. No assurance can be given that the
claims will issue in their present form, if at all, nor that such patents, if
issued, will not be challenged, invalidated or circumvented and the rights
granted thereunder may not provide proprietary protection or commercial
advantage to the Company. See "Risk Factors--Patents and Proprietary Rights;
Access to Proprietary Genes and Proteins."
In 1997, the Company was issued three U.S. patents - No. 5,703,055, No.
5,693,622 and No. 5,641,665. As of December 31, 1997, the Company or its
exclusive licensors had received ten U.S. patents covering various aspects of
its proprietary technology. These patents are summarized below:
<TABLE>
<CAPTION>
U.S. Patent Technology Covered
----------- ------------------
<S> <C>
5,703,055 Direct administration of lipid-complexed DNA for immunization
5,693,622 Method to deliver a protein by injecting DNA into cardiac muscle
5,641,665 Plasmids expressing IL-2
5,589,466 Direct administration of naked DNA for immunization
5,580,859 Direct administration of naked DNA for protein expression
5,576,196 Process to reduce RNA during DNA production
5,561,064 Process to manufacture pharmaceutical-grade DNA
5,459,127 Use of cationic lipids to deliver genes IN VIVO
5,328,470 Catheter to facilitate intravascular gene transfer
5,264,618 Cationic lipid compositions to facilitate gene transfer IN VIVO
</TABLE>
In January 1998, the Company was granted U.S. Patent No. 5,707,812
covering improved purification of DNA using polyethylene glycol (PEG).
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. In
addition, the coverage claimed in a patent application can be significantly
reduced before a patent is issued. Consequently, the Company does not know
whether any patent applications will result in the issuance of patents or, if
any patents are issued, whether those patents will provide significant
proprietary protection or will be circumvented or invalidated. Since patent
applications in the United States are maintained in secrecy until patents
issue or foreign counterparts, if any, publish, and, since publication of
discoveries in the scientific or patent literature often lag behind actual
discoveries, the Company cannot be certain that it or any licensor was the
first creator of inventions covered by pending patent applications or that it
or such licensor was the first to file patent applications for such
inventions. Moreover, the Company might have to participate in interference
proceedings declared by the PTO to determine priority of invention, which
could result in substantial cost to the Company, even if the eventual outcome
were favorable to the Company. The Company's patents, if issued, may not be
held to be valid or enforceable by a court or a competitor's technology or
product may be found to not infringe such patents.
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<PAGE>
A number of pharmaceutical and biotechnology companies, and research and
academic institutions have developed technologies, filed patent applications
or received patents on various technologies that may be related to the
Company's business. Some of these technologies, applications or patents may
conflict with the Company's technologies or patent applications. Such
conflict could limit the scope of the patents, if any, that the Company may
be able to obtain or result in the denial of the Company's patent
applications. In addition, if patents that cover the Company's activities
are issued to other companies, there can be no assurance that the Company
would be able to obtain licenses to these patents at a reasonable cost or be
able to develop or obtain alternative technology.
In addition to patent protection, the Company also relies upon trade
secret protection for its confidential and proprietary information. There
can be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology or that the Company
can meaningfully protect its trade secrets.
It is the Company's policy to require its employees, consultants, and
parties to collaborative agreements to execute confidentiality agreements
upon the commencement of employment or consulting relationships or a
collaboration with the Company. These agreements provide that all
confidential information developed or made known during the course of the
relationship with the Company is to be kept confidential and not disclosed to
third parties except in specific circumstances. In the case of employees,
the agreements provide that all inventions resulting from work performed for
the Company, utilizing property of the Company or relating to the Company's
business and conceived or completed by the individual during employment,
shall be the exclusive property of the Company to the extent permitted by
applicable law. There can be no assurance, however, that these agreements
will provide meaningful protection of the Company's trade secrets or adequate
remedies in the event of unauthorized use or disclosure of such information.
See "Risk Factors--Patents and Proprietary Rights."
COMMERCIALIZATION AND MANUFACTURING
Because of the broad potential applications of its technology, Vical
intends to develop and commercialize products both on its own and through
corporate partners. The Company intends to develop and market products to
well-defined specialty markets, such as oncology, infectious diseases and
metabolic disorders. Where appropriate, the Company intends to rely on
strategic marketing and distribution partners for manufacturing and marketing
products addressing diseases treated by primary care physicians. There can
be no assurance that the Company will be able to reach satisfactory
arrangements with such distribution partners or that any such arrangements
will be successful.
The Company believes its DNA plasmids can be produced in commercial
quantities in bacterial cells through traditional fermentation and
purification techniques. The separation and purification of plasmid DNA is a
relatively straightforward procedure because of the inherent biochemical
differences between plasmid DNA and the majority of other bacterial
components. In addition, the Company's cytofectin formulations consist of
lipid components that are synthesized chemically using traditional, readily
scaleable, organic synthesis procedures.
Vical currently produces supplies of product for Phase I/II and Phase II
clinical trials and intends to produce sufficient supplies for additional
clinical investigations. The Company may also choose to rely in part on
outside organizations to manufacture its product candidates for expanded
clinical trials under close supervision and utilizing the Company's
proprietary processes. There can be no assurance that the Company will be
able to contract for manufacturing capabilities on acceptable terms.
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<PAGE>
COMPETITION
The field of gene-based drug development is new and rapidly evolving,
and it is expected to continue to undergo significant and rapid technological
change. Rapid technological development could result in the Company's
potential products or technologies becoming obsolete before the Company
recovers a significant portion of its related research, development and
capital expenditures. The Company may experience competition both from other
companies in the field and from companies which have other forms of treatment
for the diseases targeted by the Company. The Company is aware of several
development stage and established enterprises, including major pharmaceutical
and biotechnology firms, which are exploring gene-based drugs or are actively
engaged in research and development in areas including both viral gene
transfer and other methods of gene insertion. The Company may also
experience competition from companies that have acquired or may acquire
technology from companies, universities and other research institutions. As
these companies develop their technologies, they may develop proprietary
positions which may materially and adversely affect Vical. See "--Patents
and Proprietary Rights."
Certain competitors and potential competitors of the Company have
substantially greater product development capabilities and financial,
scientific, marketing and human resources than the Company. Other companies
may succeed in developing products earlier than the Company, obtaining FDA
approvals for such products more rapidly than the Company, or developing
products that are more effective than those proposed to be developed by the
Company. While the Company will seek to expand its technological
capabilities to remain competitive, there can be no assurance that research
and development by others will not render the Company's technology or
products obsolete or noncompetitive or result in treatments or cures superior
to any therapy developed by the Company, or that any therapy developed by the
Company will be preferred to any existing or newly developed technologies.
The Company's competitive position will be affected by the disease
indications addressed by the Company's and its competitors' potential
products, the timing of market introduction for such potential products and
the stage of development of other technologies under development to address
such disease indications. Accordingly, the Company's and its competitors'
proprietary positions, their ability to complete clinical trials of their
potential products on a timely basis and their ability to obtain timely
regulatory approvals to market such potential products are likely to be
significant competitive factors for the Company. Other important competitive
factors will include the efficacy, safety, reliability, availability and
price of the Company's and its competitors' potential products and the
ability of the Company and its competitors to secure sufficient capital
resources for the often substantial period between technological conception
and commercial sales. See "Risk Factors--Competition and Technological
Change."
GOVERNMENT REGULATION
Any products developed by the Company will require regulatory clearances
prior to clinical trials and additional regulatory clearances prior to
commercialization. New human gene therapy products are expected to be
subject to extensive regulation by the United States Food and Drug
Administration ("FDA") and comparable agencies in other countries. The
precise regulatory requirements with which the Company will have to comply
are uncertain at this time due to the novelty of the human gene products and
therapies currently under development. The Company believes that its
potential products will be regulated either as biological products or as new
drugs. New drugs are subject to regulation under the Federal Food, Drug and
Cosmetic Act, and biological products, in addition to being subject to
certain provisions of that Act, are regulated under the Public Health Service
Act. Both statutes and the regulations promulgated thereunder govern, among
other things, the testing, manufacturing, safety, efficacy, labeling,
storage, record keeping, advertising and other promotional practices
involving biologics or new drugs, as the case may be. FDA approval or other
clearances must be obtained before clinical testing, and before manufacturing
and marketing, of biologics or new drugs. At the FDA, the Center for
Biological Evaluation and Research ("CBER") is responsible for the regulation
of new biologics and the Center for Drug Evaluation and Research ("CDER") is
responsible for the regulation of new drugs.
Obtaining FDA approval has historically been a costly and time-consuming
process. Generally, in order to gain FDA premarket approval, preclinical
studies must be conducted in the laboratory and in animal model systems to
gain preliminary information on an agent's efficacy and to identify any major
safety concerns. The results of these studies are submitted as a part of an
application for an investigational new drug ("IND"), which the FDA must
review and allow before human clinical trials of an investigational drug can
start. The IND includes a detailed description of the clinical investigations
to be undertaken.
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In order to commercialize any products, the Company must sponsor and
file an IND for each proposed product and will be responsible for initiating
and overseeing the clinical studies to demonstrate the safety, efficacy and
potency that are necessary to obtain FDA approval of any such products.
Clinical trials are normally done in three phases. In Phase I, trials are
conducted with a small number of healthy volunteers to determine the safety
profile, the pattern of drug distribution and metabolism.
In Phase II, trials are conducted with a larger group of patients
afflicted with a target disease in order to determine preliminary efficacy,
optimal dosages and expanded evidence of safety. In Phase III, large-scale,
multi-center, comparative trials are conducted with patients afflicted with a
target disease in order to provide enough data for the statistical proof of
safety and efficacy required by the FDA and other regulatory authorities. In
the case of products for life-threatening diseases, the initial human testing
is generally done in patients rather than in healthy volunteers. Since these
patients are already afflicted with the target disease, it is possible that
such studies may provide results traditionally obtained in Phase II clinical
trials. Such trials are frequently referred to as "Phase I/II" clinical
trials.
The FDA receives reports on the progress of each phase of clinical
testing, and it may require the modification, suspension, or termination of
clinical trials if an unwarranted risk is presented to patients. Human gene
therapy products are a new category of therapeutics, and there can be no
assurance as to the length of the clinical trial period or the number of
patients the FDA will require to be enrolled in the clinical trials in order
to establish to its satisfaction the safety, efficacy and potency of human
gene therapy products.
After completion of clinical trials of a new product, FDA marketing
approval must be obtained. If the product is regulated as a biologic, CBER
will require the submission and approval of a Biologic License Application
("BLA") or a Product License Application ("PLA"), and an Establishment
License Application ("ELA") before commercial marketing of the biologic is
permitted. If the product is classified as a new drug, the Company must file
a New Drug Application ("NDA") with CDER and receive approval before
commercial marketing of the drug. The NDA, BLA, or PLA/ELA must include
results of product development activities, preclinical studies and clinical
trials in addition to detailed manufacturing information.
The review and approval processes require substantial time and effort
and there can be no assurance that any approval will be granted on a timely
basis, if at all. NDAs and BLA/ELAs submitted to the FDA can take, on
average, two to five years to receive approval after filing. If questions
arise during the FDA review process, approval can take more than five years.
Notwithstanding the submission of relevant data, the FDA may ultimately
decide that the NDA, BLA, or PLA/ELA does not satisfy its regulatory criteria
for approval and require additional preclinical or clinical studies. Even if
FDA regulatory clearances are obtained, a marketed product is subject to
continual review, and later discovery of previously unknown problems or
failure to comply with the applicable regulatory requirements may result in
restrictions on the marketing of a product or withdrawal of the product from
the market as well as possible civil or criminal sanctions. In addition,
after marketing clearance is secured, the manufacturing facility for the
Company's products will be subject to periodic inspections for Good
Manufacturing Practices compliance by FDA inspectors and, if the facility is
located in California, by inspectors from the Food and Drug Branch of the
California Department of Health Services.
In addition to the FDA requirements, the National Institutes of Health
("the NIH") have established guidelines for research involving recombinant
DNA molecules, which are utilized by the Company and certain of its
collaborators in their research. These guidelines apply to all recombinant
DNA research which is conducted at or supported by the NIH. Under current
guidelines, proposals to conduct clinical research involving gene therapy
which is conducted at institutions supported by the NIH must be reviewed and
allowed by the NIH. The NIH review is a public process and usually involves
review and approval by the Recombinant DNA Advisory Committee ("RAC") of the
NIH.
In both domestic and foreign markets, sales of the Company's products,
if any, will be dependent in part on the availability of reimbursements from
third party payors, such as government and private insurance plans. Third
party payors are increasingly challenging the prices charged for medical
products and services. If the Company succeeds in bringing one or more
products to market, there can be no assurance that these products will be
considered cost-effective, that reimbursement will be available, or if
available, that the payor's reimbursement policies will not adversely affect
the Company's ability to sell its products on a profitable basis.
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<PAGE>
The Company is also subject to various federal, state and local laws,
regulations and recommendations relating to safe working conditions,
laboratory and manufacturing practices, the experimental use of animals and
the use and disposal of hazardous or potentially hazardous substances,
including radioactive compounds and infectious disease agents, used in
connection with the Company's research work. The extent of government
regulation which might result from any future legislation or administrative
action cannot be accurately predicted.
HUMAN RESOURCES
As of March 2, 1998, Vical had 89 full-time employees, 19 of whom hold
degrees at the doctorate level. Of these employees, 64 are engaged in, or
directly support, research and development activities, and 25 are in
administrative and business development positions. A significant number of
the Company's management and professional employees have prior experience
with pharmaceutical and biotechnology companies. None of the Company's
employees is covered by collective bargaining agreements, and management
considers relations with its employees to be good.
PRODUCT LIABILITY EXPOSURE
The use of any products produced by the Company could expose the Company
to product liability claims. The Company currently carries insurance against
such claims for clinical trials only. There can be no assurance that the
Company has sufficient coverage, or that sufficient coverage can be acquired
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 or recall could have a material adverse effect on the
business or financial condition of the Company.
19
<PAGE>
RISK FACTORS
The following factors, among others, could cause actual results to
differ materially from those contained in forward-looking statements made in
this report and presented elsewhere by management from time to time.
UNCERTAINTY OF PRODUCT DEVELOPMENT AND TECHNOLOGICAL UNCERTAINTY
Existing preclinical and clinical data on the safety and efficacy of
gene therapy are limited. Further, the results of preclinical studies do not
necessarily predict safety or efficacy in humans. All of Vical's potential
products are in research, development or early stage clinical trials. The
potential products currently under development by the Company will require
significant additional research and development efforts prior to regulatory
approval and commercial use. There can be no assurance that the Company's
research and development efforts will be successful, that any of the
Company's potential products will prove to be safe and effective in clinical
trials or that any commercially successful products utilizing the Company's
technology will ultimately be developed by the Company or its collaborators.
Even if developed, these potential products may not receive regulatory
approval or be successfully commercialized.
LOSS HISTORY; FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
Through December 31, 1997, the Company had incurred cumulative losses of
approximately $30.3 million. The Company may never generate sufficient
product revenue to become profitable at all or on a sustained basis. The
Company expects to have quarter-to-quarter fluctuations in revenues, expenses
and losses, some of which could be significant.
The Company has generated no revenues from product sales, nor are any
product revenues expected for at least the next several years. The negative
cash flow and losses from operations are expected to continue and to increase
for the foreseeable future.
ADDITIONAL FINANCING REQUIREMENTS AND ACCESS TO CAPITAL
The Company will need to raise substantial additional funds to conduct
research and development, preclinical studies and clinical trials necessary
to bring its potential products to market and to establish manufacturing and
marketing capabilities. 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 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. 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 to license third parties to
commercialize products or technologies that the Company would otherwise seek
to develop itself. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
LENGTHY APPROVAL PROCESS; UNCERTAINTY OF GOVERNMENT REGULATORY
REQUIREMENTS
Given that gene therapy is a new technology and has not been extensively
tested in patients, the regulatory requirements governing gene therapy
products and related clinical procedures are uncertain and are subject to
substantial review by various governmental regulatory authorities. This
regulatory review may result in extensive delay in the regulatory approval
process. Regulatory requirements ultimately imposed could adversely affect
the Company's ability to clinically test, manufacture or market products. The
Company believes that the commercial uses of any of its products will be
regulated by the FDA and comparable foreign regulatory bodies as either
biologics or new drugs. Each product containing a particular gene will
likely be regulated as either a separate biologic or drug depending on its
intended use and evolving FDA policy.
20
<PAGE>
The regulatory process for new therapeutic and preventive products,
including the required preclinical and clinical testing, is lengthy and
expensive and there can be no assurance that 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 patients the FDA will require to
be enrolled in the clinical trials in order to establish the safety, efficacy
and potency of human gene therapy products. The Company may encounter
significant delays or excessive costs in its efforts to secure necessary
approvals or licenses particularly because gene therapy is novel and
regulatory requirements are evolving and uncertain. Future U.S. 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 or
for the manufacturing or marketing of any products. Even if regulatory
clearances are obtained, a marketed product is subject to continual 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. In addition, many academic
institutions and companies doing research in the gene therapy field are using
a variety of approaches and technologies. Any adverse results obtained by
such researchers in preclinical or clinical studies could adversely affect
the regulatory environment for gene therapy products in general, possibly
leading to delays in the approval process for the Company's potential
products.
In order to commercialize any products, the Company must sponsor and
file an IND for each proposed product and will be responsible for initiating
and overseeing the clinical studies to demonstrate the safety, efficacy and
potency that are necessary to obtain FDA approval of any such products. In
addition to the FDA requirements, NIH has established guidelines for
research involving recombinant DNA molecules, which are utilized by the
Company and certain of its collaborators in their research. These guidelines
apply to all recombinant DNA research which is conducted at or supported by
the NIH. Under current guidelines, proposals to conduct clinical research
involving gene therapy which is conducted at institutions supported by the
NIH must be approved by RAC and the NIH. See "Business--Government
Regulation."
PATENTS AND PROPRIETARY RIGHTS; ACCESS TO PROPRIETARY GENES AND PROTEINS
To date, the Company has filed or participated as licensee in the filing
of a number of patent applications in the United States relating to the
Company's technology, as well as foreign counterparts of certain of these
applications in many countries. The Company intends to file applications as
appropriate for patents covering both its products and processes. There can
be no assurance that patents will issue from any of these applications or, if
patents do issue, that claims allowed will be sufficient to protect the
Company's technology. The Company's success will depend in part on its
ability to obtain patent protection for its products and processes both in
the United States and other countries. The patent positions of biotechnology
and pharmaceutical companies can be highly uncertain and involve complex
legal and factual questions, and therefore, the breadth of claims allowed in
biotechnology and pharmaceutical patents cannot be predicted. In addition,
any patents issued to the Company or to licensors of the Company's technology
may be challenged, invalidated, or circumvented and the rights granted
thereunder may not provide proprietary protection or commercial advantage to
the Company.
The commercial success of the Company will also depend in part on the
Company not infringing patents issued to competitors and not breaching the
technology licenses that might cover technology used in the Company's
products. It is uncertain whether any third-party patents will require the
Company to alter its products or processes, obtain licenses, or cease certain
activities. A number of the genetic sequences or proteins encoded by certain
of those sequences that the Company is currently investigating in its
clinical trials or may use in other of its gene-based products are, or may
become, patented by others.
21
<PAGE>
As a result, the Company may be required to obtain licenses under such
patents in order to test, use or market products that contain proprietary
genetic sequences or encode proprietary proteins. There can be no assurance
that the Company will be able to obtain any such license on commercially
favorable terms, if at all. Failure by the Company to obtain a license to
any technology that it may require to commercialize its products may have a
material adverse impact on the Company. Litigation, which could result in
substantial cost to the Company, may also be necessary to enforce any patents
issued to the Company or to determine the scope and validity of third-party
proprietary rights. Should any of its competitors have prepared and filed
patent applications in the United States which claim technology also invented
by the Company, the Company may have to participate in interference
proceedings declared by the PTO in order to determine priority of invention
and, thus, the right to a patent for the technology in the United States, all
of which could result in substantial cost to the Company to determine its
rights. The Company also relies on protecting its proprietary technology in
part through confidentiality agreements with its corporate collaborators,
employees, consultants and certain contractors. These agreements may be
breached, the Company may not have adequate remedies for any breach, and
the Company's trade secrets may otherwise become known or be independently
discovered by its competitors. See "Business--Collaboration and Licensing
Agreements--Access to Proprietary Genes and Proteins" and "--Patents and
Proprietary Rights."
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 is
dependent upon the subsequent success of these outside parties in performing
their responsibilities. Although the Company believes parties to any such
arrangements would have an economic motivation to succeed in performing their
contractual responsibilities, the amount and timing of resources to be
devoted 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 or that the Company will derive any revenue from such
arrangements. In addition, certain of the Company's collaborators are
pursuing alternative competing technologies as a means for developing
treatments for the diseases targeted by these collaborative programs. The
Company has collaborative agreements with several pharmaceutical companies.
However, there can be no assurance that these companies will successfully
develop and market any products under their respective agreements. Vical
intends to seek additional collaborative arrangements to develop and
commercialize certain of its products. The Company may not be able to
negotiate acceptable collaborative arrangements in the future and its current
or future collaborative arrangements may not be successful.
COMPETITION AND TECHNOLOGICAL CHANGE
The gene therapy field is new and rapidly evolving, and it is expected
to continue to undergo significant and rapid technological change. Rapid
technological development could result in the Company's potential products or
technologies becoming obsolete before the Company recovers a significant
portion of its related research, development and capital expenditures. The
Company may experience competition both from other companies in the field of
gene therapy and from companies which have other forms of treatment or
prevention for the diseases targeted by the Company. The Company is aware of
several development stage and established entities, including major
pharmaceutical and biotechnology firms, which are exploring the field of
human gene therapy or are actively engaged in research and development in
areas related to gene therapy. The Company may also experience competition
from companies that have acquired or may acquire technology from universities
and other research institutions. As these companies develop their
technologies, they may develop proprietary positions in certain aspects of
gene therapy which may materially and adversely affect Vical.
Certain competitors and potential competitors of the Company have
substantially greater product development capabilities and financial,
scientific, marketing and human resources than the Company. Other companies
may succeed in developing products earlier than the Company, obtaining FDA
approvals for such products more rapidly than the Company, or developing
products that are more effective than those proposed to be developed by the
Company. While the Company will seek to expand its technological
capabilities in order to remain competitive, there can be no assurance that
research and development by others will not render the Company's technology
or products obsolete or noncompetitive or result in treatments or cures
superior to any therapy developed by the Company, or that any therapy
developed by the Company will be preferred to any existing or newly developed
technologies. See "Business--Competition."
22
<PAGE>
LACK OF COMMERCIAL SCALE MANUFACTURING OR MARKETING CAPABILITIES
The Company does not currently have the resources or capability to
manufacture or market any of its proposed products by itself on a commercial
scale, and large scale manufacturing of such products has not been
demonstrated. Initially, the Company may be dependent on corporate partners,
licensees or other entities for commercial scale manufacturing and marketing
of its products. Should the Company decide to establish a commercial scale
manufacturing facility, the Company will require substantial additional funds
and personnel and will be required to comply with extensive regulations
applicable to such a facility. The Company may not be able to enter into any
arrangements for the manufacturing or marketing of its products or to obtain
additional capital to conduct such activities independently.
UNCERTAINTY OF PRODUCT PRICING, REIMBURSEMENT AND RELATED MATTERS
The Company's ability to earn sufficient returns on its products may
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. If purchasers or users of the
Company's products are not entitled to 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.
HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS
Although the Company does not 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.
VOLATILITY OF STOCK PRICE AND ABSENCE OF DIVIDENDS
The market price of shares of common stock, like that of the common
stock of many other life sciences companies, has been and is likely to be
highly volatile. Factors such as the results of preclinical studies and
clinical trials by Vical and/or its collaborators or its competitors, other
evidence of the safety or efficacy of products of Vical or its competitors,
announcements of technological innovations or new products by the Company or
its competitors, governmental regulatory actions, 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, market conditions for life science 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. See "Price
Range of Common Stock and Dividend Policy."
YEAR 2000 ISSUES
The Company is currently developing a plan to insure that its systems
and software infrastructure are Year 2000 compliant. Key financial,
information and operational systems will be assessed and plans will be
developed to address required systems modifications.
23
<PAGE>
Given the relatively small size of the Company's systems and the
predominantly new hardware, software and operating systems, management does
not anticipate any significant delays in becoming Year 2000 compliant.
However, the Company is unable to control whether its current and future
strategic partners' systems are Year 2000 compliant. To the extent that
strategic partners would be unable to procure clinical materials or services
provided by the Company, or otherwise manage their clinical trials and
research and development activities, or to pay invoices owed to the Company,
or to the extent that suppliers are unable to manufacture and ship materials
or provide requested contract services, the Company's operations could be
affected. However, at this time management has no reason to believe that Year
2000 changes will have a material impact on the Company's business, financial
condition or results of operations.
24
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Alain B. Schreiber, M.D. 42 President, Chief Executive Officer and Director
Deirdre Y. Gillespie, M.D. 41 Executive Vice President and Chief Business Officer
Martha J. Demski 45 Vice President, Chief Financial Officer, Treasurer and
Secretary
George J. Gray 51 Vice President, Operations
Jon A. Norman, Ph.D. 49 Vice President, Research
Robert H. Zaugg, Ph.D. 48 Vice President, Business Development
</TABLE>
- ---------------------
ALAIN B. SCHREIBER, M.D., has been President, Chief Executive Officer and a
director of the Company since May 1992. Prior to joining the Company, Dr.
Schreiber held various executive level positions at Rhone-Poulenc Rorer Inc.,
a pharmaceutical company, from July 1985 to April 1992, lastly as Senior Vice
President of Discovery Research. From October 1982 to June 1985, Dr.
Schreiber served as Biochemistry Department Head at Syntex Corp., a
pharmaceutical company. He received his undergraduate degree and M.D. from
the Free University of Brussels, after which he was awarded a fellowship in
immunology at the Weizmann Institute.
DEIRDRE Y. GILLESPIE, M.D., joined the Company as Executive Vice President
and Chief Business Officer in March 1998. From 1986 to 1990, Dr. Gillespie
directed clinical research activities for Sandoz Pharma AG in Basel,
Switzerland, and London, England. From 1991 to 1996, she held various
management positions with the Dupont Merck Pharmaceutical Co. in London,
England, and Wilmington, Delaware, including Vice President of Global
Marketing and Vice President of Worldwide Product Planning. Most recently,
Dr. Gillespie served as Vice President of Business Development for
3-Dimensional Pharmaceuticals, Inc. in Exton, Pennsylvania. Dr. Gillespie
received a B.Sc. in Pharmacology and Therapeutics (equivalent to a masters
degree in the U.S.) in 1976 and an M.D. in 1980 from London University. She
received MRCP certification (equivalent to internal medicine boards in the
U.S.) in 1985. She served on the Executive Committee of the British
Association of Pharmaceutical Physicians from 1988-1990 and is a member of
the Faculty of Pharmaceutical Medicine (UK). Dr. Gillespie received her
M.B.A. in 1990 from the London Business School with a specialization in
marketing and international management.
MARTHA J. DEMSKI joined the Company as Chief Financial Officer in December
1988 and currently serves as Vice President, Chief Financial Officer,
Treasurer and Secretary. From August 1977 until joining Vical, Ms. Demski
held various positions with Bank of America, lastly as Vice President/Section
Head of the Technology Section. She also served as an adviser to Bank of
America on a statewide basis regarding the biotechnology industry in
California. Ms. Demski received a B.A. from Michigan State University and an
M.B.A. in Finance and Accounting from The University of Chicago Graduate
School of Business.
JON A. NORMAN, PH.D., joined the Company in January 1993 as Vice President,
Research. From 1986 until joining the Company, Dr. Norman was the Group
Leader/Section Head for the Departments of Pharmacology and Biochemistry at
Bristol-Myers Squibb Corporation, a pharmaceutical company. He was a Senior
Research Scientist at Ciba-Geigy Corporation, a pharmaceutical company, from
1981 to 1986. Dr. Norman received his B.A. and M.A. from the University of
California at Santa Barbara and his Ph.D. in Biochemistry from the University
of Calgary, after which he was awarded a fellowship at the Friederich
Miescher Institute in Basel, Switzerland.
GEORGE J. GRAY joined the Company in October 1992 as Vice President,
Operations. Prior to that time he was at Rhone-Poulenc Rorer Inc. where he
held various positions since 1975, lastly as Director, Discovery Research
Ventures, US/UK from January 1990 to October 1992, and prior to that as
Director, Project Management from January 1988 to December 1989. Mr. Gray
received a B.A. from George Washington University.
25
<PAGE>
ROBERT H. ZAUGG, PH.D., joined the Company in July 1991 as the Senior
Director, Business Development and has served as the Vice President of
Business Development since January 1994. Prior to joining the Company, Dr.
Zaugg served as Director of Business Development & Licensing for Triton
Biosciences from 1988 to 1991 and in various business development positions
with Sandoz Pharmaceuticals Corporation from 1982 to 1988. He holds a B.A.
from the University of California at Los Angeles, a Ph.D. in Biochemistry
from Northwestern University and an M.B.A. from New York University. He was
awarded a post-doctoral fellowship in immunology at the Massachusetts
Institute of Technology.
The executive officers are elected annually by the Board of Directors.
ITEM 2. PROPERTIES
The Company currently leases approximately 38,000 square feet of
laboratory and office space in San Diego, California at three sites and with
three leases. The leases terminate in 1999 and 2001 and contain varying
renewal options. Total current monthly rental on the facilities, including
common area maintenance costs, is approximately $93,000.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
26
<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
under the symbol "VICL." The following table presents quarterly information
on the price range of high and low sales prices for the Common Stock on the
Nasdaq National Market for the periods indicated since January 1, 1996.
<TABLE>
<CAPTION>
1996 HIGH LOW
- ---- ---- ----
<S> <C> <C>
First Quarter $20.00 $11.50
Second Quarter 22.00 13.00
Third Quarter 16.625 10.375
Fourth Quarter 21.25 12.75
1997
- ----
First Quarter 18.25 14.00
Second Quarter 15.75 9.25
Third Quarter 15.00 10.625
Fourth Quarter 17.25 11.00
</TABLE>
As of March 2, 1998, there were approximately 544 stockholders of record
of the Company's common stock with 15,749,307 shares outstanding. The
Company has never declared or paid any dividends and does not expect to pay
any dividends in the foreseeable future.
In November 1997, the Company and Merck amended their 1991 agreement and
granted Merck certain rights to develop and market certain vaccines. Under
the amended agreement, Merck made an investment of $5.0 million for
approximately 262,000 shares of the Company's common stock. For this sale of
stock, the Company relied on the exemption from registration under Section
4(2) of the Securities Act of 1933.
27
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- --------- ---------- -----------
(in thousands, except per share and share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract revenue $ 1,326 $ 1,061 $ 900 $ 1,005 $ 1,206
License/royalty
revenue 6,477 5,679 5,402 4,509 1,623
Sale of technology (1) -- -- -- -- 3,148
---------- ---------- --------- ---------- -----------
7,803 6,740 6,302 5,514 5,977
Expenses:
Research and
development 11,936 11,318 8,997 8,336 6,163
General and
administrative 3,733 3,168 2,902 2,615 1,989
---------- ---------- --------- ---------- -----------
Loss from operations (7,866) (7,746) (5,597) (5,437) (2,175)
Interest income 2,447 2,773 1,687 1,159 873
Interest expense 192 108 73 80 63
---------- ---------- --------- ---------- -----------
Net loss $ (5,611) $ (5,081) $ (3,983) $ (4,358) $ (1,365)
---------- ---------- --------- ---------- -----------
---------- ---------- --------- ---------- -----------
Net loss per share (basic
and diluted) (2) $ (.36) $ (.33) $ (.29) $ (.34) $ (.14)
---------- ---------- --------- ---------- -----------
---------- ---------- --------- ---------- -----------
Shares used in per share 15,484,952 15,382,848 13,504,790 12,831,585 9,876,062
calculation
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- --------- ---------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities $ 45,555 $ 46,846 $ 52,528 $ 27,339 $ 32,538
Working capital 44,856 46,315 51,541 25,956 30,920
Total assets 50,691 52,440 55,118 30,324 35,123
Long-term obligations 1,232 1,617 339 527 447
Stockholders' equity 47,194 48,365 53,264 27,852 32,446
</TABLE>
(1) This amount represents the proceeds from a one-time assignment of
certain lipid technology in January 1993.
(2) The 1993 net loss per share has been restated pursuant to Statement of
Financial Accounting Standards No. 128 "Earnings per Share" to include
the common shares issued upon conversion of the preferred stock into
common stock from the date of actual conversion.
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Vical was incorporated in April 1987 and since that time has devoted
substantially all of its resources 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. No assurance can be given that the
Company will be able to generate sufficient product revenue to become
profitable at all or on a sustained basis. As of December 31, 1997, the
Company's accumulated deficit was approximately $30.3 million.
Vical expects to incur substantial operating losses for at least the
next several years due to significant increases in research and development
expenses. The increases are expected to result from costs of preclinical
studies and clinical trials for the Company's product candidates, increased
patent and regulatory costs, and associated increases in personnel,
laboratory supplies and contract services. 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.
When used in this discussion, the words "expects," "anticipated" and
similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which could
cause actual results to differ materially from those projected. Readers are
cautioned not to place undue reliance on these forward-looking statements
which 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 which may be made to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The Company had revenues of $7.8 million for the year ended December 31,
1997, compared with $6.7 million in 1996 and $6.3 million in 1995. Revenues
in 1997 were composed of research and license revenue from a 1997 Merck
agreement covering certain growth factors ($2.0 million); the equity premium
on the investment Merck made in 1997 in Vical common stock under an amendment
to the 1991 collaborative agreement ($1.0 million); the PMC collaboration
($2.4 million); a 1997 collaborative agreement with Rhone-Poulenc Rorer for
neurodegenerative disease targets ($1.0 million); and other agreements which
totaled $1.4 million. In November 1997, the Company and Merck amended the
1991 agreement and granted Merck certain rights to develop and market
therapeutic vaccines against the human immunodeficiency virus (HIV) and
hepatitis B virus (HBV). Pursuant to the November 1997 amendment, Merck made
an investment of $5.0 million for approximately 262,000 shares of the
Company's common stock. The price per share reflected a twenty-five percent
premium over the trading price of the common stock. The premium on the
investment was reflected in revenue in 1997. The PMC revenue represented
contract revenue of $1.1 million as payment for certain clinical and
preclinical work and license revenue of $1.3 million, of which $1.0 million
was for a milestone payment for the start of the malaria clinical trial and
the remaining balance was the amortization of deferred license fees.
Revenues in 1996 resulted from research and license revenue from: the PMC
collaboration in the amount of $2.7 million, the 1991 Merck Agreement in the
amount of $1.5 million, the Genzyme collaboration in the amount of $1.3
million, and several other agreements in the amount of $1.2 million. Revenue
from the PMC agreement in 1996 was primarily the result of PMC's payment of
licensing and option fees, and the addition of a new option, as well as the
payment of fees for the Company's performance of certain clinical and
preclinical work. The Merck revenue resulted from milestone payments due
under the 1991 Merck Agreement. The Genzyme collaboration income was the
result of Genzyme exercising its option to license the Company's technology
for the treatment of cystic fibrosis as well as payments for the Company's
performance of certain research and preclinical work. Revenues in 1995
resulted from research and license income from the 1991 Merck Agreement in
the amount of $3.6 million, from the PMC collaboration in the amount of $1.3
million and under several other agreements in the amount of $1.4 million.
Revenue in 1995 from the 1991 Merck Agreement resulted primarily from the
exercise by Merck of remaining options to license Vical's technology to
develop preventive vaccines against certain human disease targets and the
recognition of revenue from previously received payments. PMC renewed its
options to acquire rights to use Vical's technology against certain disease
targets and exercised one such option in 1995.
29
<PAGE>
Research and development expense increased to $11.9 million in 1997 from
$11.3 million in 1996 and $9.0 million in 1995. This increase in research
and development expense was generally due to expansion of the Company's
research and development activities. The increased activities included
increased clinical and preclinical efforts which resulted in increases to
staffing, increased facilities related costs and increased expenditures on
laboratory supplies. Clinical trials expense increased to $1.6 million
during 1997 from $1.2 million in 1996 primarily due to the commencement of
the malaria clinical trial and increased clinical trials activity on
LEUVECTIN. During 1996, the Company incurred expenses of approximately $1.2
million with the commencement and progression of the multi-center Phase I/II
and Phase II clinical trials of LEUVECTIN and ALLOVECTIN-7 respectively.
Such costs are expected to continue to increase in 1998 and thereafter as the
Company's preclinical and clinical trial activities increase.
General and administrative expense increased to $3.7 million in 1997
from $3.2 million in 1996 and $2.9 million in 1995. These increases were due
primarily to additional staffing and related expenses. General and
administrative expenses are expected to continue to increase as research and
development activities expand.
Prior to its initial public offering in March 1993, the Company recorded
deferred compensation for the difference between the price of stock sold and
options granted and the deemed fair market value of the common stock at the
time of sale or grant. Deferred compensation and related amortization
expense as of and for the year ended December 31, 1996, amounted to
approximately $1.0 million and $.2 million, respectively. Deferred
compensation was fully amortized at December 31, 1996.
Interest income decreased from $2.8 million in 1996 to $2.4 million in
1997 due to lower investment balances as the Company redeemed investments to
fund current operating expenses. Interest income increased to $2.8 million
in 1996 compared with $1.7 million in 1995. This increase was primarily due
to changes in cash balances as a result of the completion of a follow-on
offering of common stock in September 1995, increases in payments received
under collaborative agreements and changes in the overall interest rates
earned on cash balances. Interest expense increased in 1997 and in 1996
compared to the previous year due to increased capital lease obligations to
finance equipment needs and the addition of a debt instrument in 1996.
YEAR 2000 ISSUES
The Company is currently developing a plan to insure that its systems
and software infrastructure are Year 2000 compliant. Key financial,
information and operational systems will be assessed and plans will be
developed to address required systems modifications. Given the relatively
small size of the Company's systems and the predominantly new hardware,
software and operating systems, management does not anticipate any
significant delays in becoming Year 2000 compliant. However, the Company is
unable to control whether its current and future strategic partners' systems
are Year 2000 compliant. To the extent that strategic partners would be
unable to procure clinical materials or services provided by the Company, or
otherwise manage their clinical trials and research and development
activities, or to pay invoices owed to the Company, or to the extent that
suppliers are unable to manufacture and ship materials or provide requested
contract services, the Company's operations could be affected. However, at
this time management has no reason to believe that Year 2000 changes will
have a material impact on the Company's business, financial condition or
results of operations.
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, revenues from collaborative agreements and the investment by Merck for
shares of Vical common stock. As of December 31, 1997, the Company had
working capital of approximately $44.9 million compared with $46.3 million at
December 31, 1996. Cash and marketable securities totaled approximately
$45.6 million at December 31, 1997, compared with $46.8 million at December
31, 1996.
30
<PAGE>
The Company expects to incur substantial additional research and
development expense including continued increases in personnel and costs
related to preclinical testing and clinical trials. The Company's future
capital requirements will depend on many factors, including the rate of
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 scale-up, commercialization
activities and arrangements and other factors not within the Company's
control. The Company intends to seek additional funding through research and
development relationships with suitable potential corporate collaborators
and/or through public or private financings. There can be no assurance that
additional financing will be available on favorable terms, if at all.
If additional financing is not available, Vical anticipates that its
available cash and existing sources of funding will be adequate to satisfy
its operating needs through 1999.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
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.
31
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
The directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AFFILIATION
- ---- -----------
<S> <C>
Alain B. Schreiber, M.D. Vical Incorporated
Robert C. Bellas, Jr. Morgenthaler Ventures
M. Blake Ingle Canji, Inc. (retired)
Patrick F. Latterell Venrock Associates
Fred A. Middleton Sanderling Venture Partners, Inc.
Dale A. Smith Baxter International Inc. (retired)
Philip M. Young U.S. Venture Partners
Gary A. Lyons Neurocrine Biosciences, Inc.
</TABLE>
The information required by this item (with respect to Directors) is
incorporated by reference from the information under the caption "Election of
Directors" contained in the Company's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the Company's 1998 Annual Meeting of Stockholders to be held on
May 28, 1998 ("Proxy Statement").
The required information concerning Executive Officers of the Company is
contained in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the information under the caption "Executive Compensation" 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 "Security Ownership of Certain Beneficial
Owners and Management" 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 contained under the caption "Certain Transactions" contained
in the Proxy Statement.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The financial statements required by this item are submitted in a separate
section beginning on page F-1 of this report.
<TABLE>
<CAPTION>
Financial Statements
--------------------
<S> <C>
Report of Independent Public Accountants F-1
Balance Sheets at December 31, 1997 and 1996 F-2
Statements of Operations for the three years F-3
ended December 31, 1997
Statements of Stockholders' Equity for the three years F-4
ended December 31, 1997
Statements of Cash Flows for the three years F-5
ended December 31, 1997
Notes to 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 are identified. See paragraph (c) below.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1997.
33
<PAGE>
(c) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
-------- -----------------------
<S> <C>
3.1(i)(11) Restated Certificate of Incorporation.
3.1(ii)(11) Amended and Restated Bylaws of the Company.
3.2(i)(2) Certificate of Designation, Rights and Preferences of Series A
Participating Preferred Stock of Vical Incorporated.
4.1(11) Specimen Common Stock Certificate.
4.2(2) Rights Agreement dated as of March 20, 1995, between the Company and
First Interstate Bank of California.
4.3 Stock Purchase Agreement dated November 3, 1997, between the Company
and Merck & Co., Inc.
10.1(4)# 1992 Stock Plan of Vical Incorporated.
10.2(5)# 1992 Directors' Stock Option Plan of Vical Incorporated.
10.3(3) Form of Indemnity Agreement between the Company and its directors and
officers.
10.5(3)# Employment Agreement dated August 20, 1992, between the Company and Mr.
George J. Gray.
10.6(3)# Employment Agreement dated November 2, 1992, between the Company and
Dr. Jon A. Norman.
10.7(3) Stock Purchase Agreement dated February 20, 1992.
10.8(3) Lease dated December 4, 1987, between the Company and Nexus/GADCo.-UTC,
a California Joint Venture, as amended.
10.9(6)* Research Collaboration and License Agreement dated May 31, 1991,
between the Company and Merck & Co., Inc.
10.12(1)* License Agreement dated January 1, 1991, between the Company and
Wisconsin Alumni Research Foundation.
10.14(1)* License Agreement dated October 23, 1992, between the Company and the
Regents of University of Michigan.
10.16(7) Research, Option and License Agreement dated September 29, 1994,
between the Company and Pasteur Merieux Serums & Vaccins.
10.17(8) Amendment dated April 27, 1994, to Research Collaboration and License
Agreement dated May 31, 1991, between the Company and Merck & Co., Inc.
10.18(9)* Agreement between Merck & Co., Inc. and the Company dated September 12,
1997.
10.19* Amendment dated November 3, 1997, to Research Collaboration and License
Agreement dated May 31, 1991, between the Company and Merck & Co., Inc.
23.1 Consent of Arthur Andersen LLP.
24 Power of Attorney (see page 36).
27 Financial Data Schedule
</TABLE>
- -------------
(1) Incorporated by reference to the Company's Registration Statement
on Form S-1 (No. 33-56830) filed on January 7, 1993.
(2) Incorporated by reference to the exhibit of the same number to
the Company's Report on Form 10-K for the Fiscal Year ended
December 31, 1994 (No. 0-21088).
(3) Incorporated by reference to the Exhibits of the same number
filed with the Company's Registration Statement on Form S-1 (No.
33-56830) filed on January 7, 1993.
(4) Incorporated by reference to Exhibit 10.1 filed with the
Company's Registration Statement on Form S-8 (No. 33-81602) filed
on July 15, 1994.
(5) Incorporated by reference to Exhibit 10.1 filed with the
Company's Registration Statement on Form S-8 (No. 33-87972) filed
on December 29, 1994.
(6) Incorporated by reference to Exhibit 10.9 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1994 (No. 0-21088).
(7) Incorporated by reference to Exhibit A of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994.
(8) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994 (No. 0-21088).
34
<PAGE>
(9) Incorporated by reference to the exhibit of the same number to
the Company's Quarterly Report on the Form 10-Q for the quarter
ended September 30, 1997, as amended by Form 10-Q/A filed January
30, 1998.
(10) Incorporated by reference to the exhibit of the same number
filed with the Company's Registration Statement on Form S-3
(No. 33-95812) filed on August 15, 1995.
* The Company has received confidential treatment of certain portions of
these agreements.
# Indicates management contract or compensatory plan or arrangement.
(d) FINANCIAL STATEMENT SCHEDULES
The financial statement schedules of Vical Incorporated required by this
item are set forth at the pages indicated in Item 14(a)(2).
35
<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 on March 30, 1998.
VICAL INCORPORATED
By: /s/ ALAIN B. SCHREIBER, M.D.
-------------------------------------
Alain B. Schreiber, M.D.
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 Alain B. Schreiber and Martha J. Demski, and
each of them, his or her attorneys-in-fact, each with full power of
substitution, for him or her 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 each said
attorneys-in-fact, or substitute or substitutes, may do or cause to be done
by virtue hereof.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ ALAIN B. SCHREIBER, M.D. President, Chief March 30, 1998
- ---------------------------------- Executive Officer
Alain B. Schreiber, M.D. and Director
/s/ MARTHA J. DEMSKI Vice President, Finance March 30, 1998
- ---------------------------------- Chief Financial Officer
Martha J. Demski Secretary and Treasurer
/s/ ROBERT C. BELLAS, JR. Director March 30, 1998
- ----------------------------------
Robert C. Bellas, Jr.
/s/ FRED A. MIDDLETON Director March 30, 1998
- ----------------------------------
Fred A. Middleton
/s/ PHILIP M. YOUNG Director March 30, 1998
- ----------------------------------
Philip M. Young
/s/ PATRICK F. LATTERELL Director March 30, 1998
- ----------------------------------
Patrick F. Latterell
/s/ DALE A. SMITH Director March 30, 1998
- ----------------------------------
Dale A. Smith
/s/ M. BLAKE INGLE Director March 30, 1998
- ----------------------------------
M. Blake Ingle
/s/ GARY A. LYONS Director March 30, 1998
- ----------------------------------
Gary A. Lyons
</TABLE>
36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Vical Incorporated:
We have audited the accompanying balance sheets of Vical Incorporated, a
Delaware corporation, as of December 31, 1997 and 1996, and the related
statements of operations, stockholders' equity, and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance 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 Vical Incorporated as of
December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Diego, California
February 10, 1998
F-1
<PAGE>
VICAL INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1997 1996
---------------- ---------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (Note 2) $ 12,157,149 $ 12,609,277
Marketable securities - available-for-sale (Note 2) 33,397,482 34,237,314
Receivables and other 1,566,532 1,925,995
---------------- ---------------
Total current assets 47,121,163 48,772,586
---------------- ---------------
Property and Equipment (Note 5):
Equipment 4,966,955 4,635,432
Leasehold improvements 1,587,554 1,235,199
---------------- ---------------
6,554,509 5,870,631
Less--accumulated depreciation and amortization (4,334,224) (3,607,724)
---------------- ---------------
2,220,285 2,262,907
---------------- ---------------
Patent costs, net of accumulated amortization of $74,063 and
$29,652 (Note 1) 1,247,059 1,091,687
Other assets 102,500 312,900
---------------- ---------------
$ 50,691,007 $ 52,440,080
---------------- ---------------
---------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses (Note 4) $ 1,424,603 $ 810,384
Current portion of capital lease obligations (Note 5) 448,261 455,681
Current portion of notes payable (Note 5) 213,773 -
Deferred revenue (Note 3) 178,261 1,191,304
---------------- ---------------
Total current liabilities 2,264,898 2,457,369
---------------- ---------------
Long-Term Obligations:
Long-term obligations under capital leases (Note 5) 911,794 976,164
Notes payable (Note 5) 320,660 641,320
---------------- ---------------
Total long-term obligations 1,232,454 1,617,484
---------------- ---------------
Commitments (Note 5)
Stockholders' Equity (Note 6):
Preferred stock, $.01 par value--5,000,000 shares authorized--
none outstanding -- --
Common stock, $.01 par value--40,000,000 shares authorized-- 157,313 153,966
15,731,316 and 15,396,582 shares issued and outstanding
in 1997 and 1996, respectively
Additional paid-in capital 77,267,971 72,904,472
Unrealized gain (loss) on marketable securities (Note 2) 24,028 (48,785)
Accumulated deficit (30,255,657) (24,644,426)
---------------- ---------------
Total stockholders' equity 47,193,655 48,365,227
---------------- ---------------
$ 50,691,007 $ 52,440,080
---------------- ---------------
---------------- ---------------
</TABLE>
See accompanying notes.
F-2
<PAGE>
VICAL INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues (Note 3):
Contract revenue $ 1,325,925 $ 1,060,557 $ 899,547
License/Royalty revenue 6,477,244 5,679,542 5,402,018
------------ ------------ ------------
7,803,169 6,740,099 6,301,565
------------ ------------ ------------
Expenses:
Research and development 11,936,068 11,317,908 8,997,001
General and administrative 3,733,290 3,168,331 2,902,176
------------ ------------ ------------
15,669,358 14,486,239 11,899,177
------------ ------------ ------------
Loss from operations (7,866,189) (7,746,140) (5,597,612)
Other income (expense):
Interest income 2,447,139 2,772,845 1,687,380
Interest expense (192,181) (107,296) (73,219)
------------ ------------ ------------
Net loss $(5,611,231) $(5,080,591) $ (3,983,451)
------------ ------------ ------------
------------ ------------ ------------
Net loss per share (basic and diluted--Note 1) $ (0.36) $ (0.33) $ (0.29)
------------ ------------ ------------
------------ ------------ ------------
Shares used in per share calculation 15,484,952 15,382,848 13,504,790
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
VICAL INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Deferred
Shares Amount Capital Compensation
------------ ---------- -------------- ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994 12,845,714 $128,457 $44,183,634 $(406,801)
Issuance of common stock at $12.25 per share 2,500,000 25,000 28,524,733 -
Repurchase of common stock at $.16 per share (449) (4) (123) 43
Stock option exercises 19,000 190 20,240 -
Deferred compensation - - - 248,331
Unrealized gain (loss) on marketable securities - - - -
Net loss - - - -
------------ ---------- -------------- ------------
BALANCE, December 31, 1995 15,364,265 153,643 72,728,484 (158,427)
Stock option exercises 32,317 323 175,988 -
Deferred compensation - - - 158,427
Unrealized gain (loss) on marketable securities - - - -
Net loss - - - -
------------ ---------- -------------- ------------
BALANCE, December 31, 1996 15,396,582 153,966 72,904,472 -
Issuance of common stock at $15.28 261,812 2,618 3,992,143 -
per share (Note 3)
Stock option exercises 72,922 729 371,356 -
Unrealized gain (loss) on marketable securities - - - -
Net loss - - - -
------------ ---------- -------------- ------------
BALANCE, December 31, 1997 15,731,316 $157,313 $77,267,971 $ -
------------ ---------- -------------- ------------
------------ ---------- -------------- ------------
<CAPTION>
Unrealized Gain Total
(Loss) on Marketable Accumulated Stockholders'
Securities Deficit Equity
-------------------- ------------- --------------
<S> <C> <C>
BALANCE, December 31, 1994 $(472,708) $(15,580,384) $27,852,198
Issuance of common stock at $12.25 per share - - 28,549,733
Repurchase of common stock at $.16 per share - - (84)
Stock option exercises - - 20,430
Deferred compensation - - 248,331
Unrealized gain (loss) on marketable securities 576,884 - 576,884
Net loss - (3,983,451) (3,983,451)
----------------- --------------- -------------
BALANCE, December 31, 1995 104,176 (19,563,835) 53,264,041
Stock option exercises - - 176,311
Deferred compensation - - 158,427
Unrealized gain (loss) on marketable securities (152,961) - (152,961)
Net loss - (5,080,591) (5,080,591)
----------------- --------------- -------------
BALANCE, December 31, 1996 (48,785) (24,644,426) 48,365,227
Issuance of common stock at $15.28 - - 3,994,761
per share (Note 3)
Stock option exercises - - 372,085
Unrealized gain (loss) on marketable securities 72,813 - 72,813
Net loss - (5,611,231) (5,611,231)
----------------- --------------- -------------
BALANCE, December 31, 1997 $ 24,028 $(30,255,657) $47,193,655
----------------- --------------- -------------
----------------- --------------- -------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
VICAL INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(5,611,231) $(5,080,591) $(3,983,451)
Adjustments to reconcile net loss to net cash provided
from (used in) operating activities:
Depreciation and amortization 939,956 620,033 509,375
Compensation expense related to stock purchases - 158,427 248,331
Write-off of abandoned patent application costs 80,994 3,247 220,440
Changes in operating assets and liabilities:
Receivables and other 359,463 (1,397,906) 33,902
Accounts payable and accrued expenses 614,219 282,087 (24,400)
Deferred revenue (1,013,043) 512,137 (350,000)
------------ ------------ ------------
Net cash used in operating activities (4,629,642) (4,902,566) (3,345,803)
------------ ------------ ------------
INVESTING ACTIVITIES:
Marketable securities 912,645 10,963,363 (19,701,751)
Capital expenditures (418,507) (980,709) (40,322)
Other assets 210,400 221,288 171,888
Patent expenditures (280,778) (269,682) (356,135)
------------ ------------ ------------
Net cash provided from (used in) investing activities 423,760 9,934,260 (19,926,320)
------------ ------------ ------------
FINANCING ACTIVITIES:
Principal payments under capital lease obligations (506,205) (414,176) (387,958)
Proceeds from (payments on) notes payable (106,887) 641,320 -
Issuance of common stock, net 4,366,846 176,311 28,570,079
------------ ------------ ------------
Net cash provided from financing activities 3,753,754 403,455 28,182,121
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (452,128) 5,435,149 4,909,998
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,609,277 7,174,128 2,264,130
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $12,157,149 $12,609,277 $ 7,174,128
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid $ 184,191 $ 107,296 $ 73,219
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital leases $ 434,416 $ 1,200,022 $ 144,355
</TABLE>
See accompanying notes.
F-5
<PAGE>
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Vical Incorporated (the "Company"), a Delaware corporation, was incorporated
in 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.
All of the Company's potential products are in research and development. No
revenues have been generated from the sale of any of such products, nor are
any such revenues expected for at least the next several years. The products
currently under development by the Company will require significant
additional research and development efforts, including extensive preclinical
and clinical testing and regulatory approval, prior to commercial use. There
can be no assurance that the Company's research and development efforts will
be successful and that any of the Company's potential products will prove to
be safe and effective in clinical trials. Even if developed, these products
may not receive regulatory approval or be successfully introduced and
marketed at prices that would permit the Company to operate profitably. The
Company expects to continue to incur substantial losses for at least the next
several years. No assurance can be given that the Company can generate
sufficient product revenue to become profitable at all or on a sustained
basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Equipment is stated at cost and depreciated over the estimated useful lives
of the assets (3-5 years) using the straight-line method. Leasehold
improvements are stated at cost and amortized over the shorter of the life of
the lease or the remaining useful life of the asset using the straight-line
method.
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.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are expensed as incurred.
REVENUE UNDER COLLABORATIVE AGREEMENTS
Revenue under collaborative agreements is generally recognized over the term
of the agreement or on the achievement of certain milestones. Advance
payments received in excess of amounts earned are classified as deferred
revenue.
NET LOSS PER SHARE
Basic and diluted net loss per share for each of the three years in the
period ended December 31, 1997, has been computed using the weighted average
number of shares of common stock outstanding during the periods pursuant to
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Diluted loss per share does not include any stock options as the effect would
be antidilutive. See Note 6 for information on the number of options
outstanding and the weighted average exercise price at December 31, 1997,
1996 and 1995.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes."
F-6
<PAGE>
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." This statement is effective for fiscal years beginning after
December 15, 1997. This statement requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. Accordingly, in addition to
reporting net income (loss) under the current rules the Company would be
required to display the impact of any unrealized gain or loss on marketable
securities as a component of comprehensive income and to display an amount
representing total comprehensive income for each period presented.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company will adopt SFAS 130 in the
first quarter of 1998. There will be no impact of this adoption on results
of operations or financial position.
2. CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company invests its excess cash in debt instruments of financial
institutions, corporations with strong credit ratings, and in U.S. government
obligations. 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. Cash equivalents are short-term, highly liquid
investments with original maturities of less than three months. Cash
equivalents at December 31, 1997 and 1996, consist primarily of $12,080,473
and $12,560,988, respectively, in commercial paper and money market funds.
The Company has adopted Statement of Financial Accounting Standards No. 115
("SFAS 115"), "Accounting for Certain Investments in Debt and Equity
Securities," which requires that the Company's marketable securities be
classified as available-for-sale and that unrealized holding gains or losses
are recorded as a separate component of stockholders' equity. Realized gains
or losses, calculated based on the specific identification method, were not
material for the years ended December 31, 1997, 1996 and 1995.
At December 31, 1997, marketable securities consisted of the following:
<TABLE>
<CAPTION>
Amortized Cost Market Value Unrealized Gain
-------------- ------------ ---------------
<S> <C> <C> <C>
U.S. Government Obligations $12,978,062 $12,982,090 $ 4,028
Commercial Paper 20,395,392 20,415,392 20,000
----------- ----------- -------
Total Marketable Securities $33,373,454 $33,397,482 $24,028
----------- ----------- -------
----------- ----------- -------
</TABLE>
Approximately 65% of these securities mature within one year of December 31,
1997, and the remaining 35% mature within two years of December 31, 1997.
At December 31, 1996, marketable securities consisted of the following:
<TABLE>
<CAPTION>
Amortized Cost Market Value Unrealized Loss
-------------- ------------ ---------------
<S> <C> <C> <C>
U.S. Government Obligations $25,421,815 $25,395,811 $(26,004)
Commercial Paper 8,864,284 8,841,503 (22,781)
----------- ----------- ---------
Total Marketable Securities $34,286,099 $34,237,314 $(48,785)
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
3. SIGNIFICANT CONTRACTS AND LICENSE AGREEMENTS
MERCK & CO., INC.
In May 1991, the Company entered into a collaborative research, development,
and commercialization agreement with Merck & Co., Inc. ("Merck"), which
provides Merck with certain exclusive rights to develop and commercialize
certain preventive human infectious disease vaccines incorporating the
Company's "naked" DNA vaccine technology. A second collaborative agreement
was signed in May 1992 granting Merck exclusive rights to develop and
commercialize the Company's naked DNA vaccine technology for an animal
disease application. In 1993, Merck exercised its right under the 1991
agreement to extend its option to vaccines developed against five specific
infectious disease targets in return for the payment to Vical of $1,250,000.
In 1994, Merck acquired the option to an exclusive license to use the
Company's naked DNA vaccine technology for the development of a tuberculosis
vaccine. In 1994, Merck also exercised its options to license the Company's
technology for use with two vaccine targets and extended its option to
vaccines developed against two other specific diseases. For these 1994
transactions, the Company received $2,300,000. In 1995, Merck exercised its
remaining options. The Company received approximately $2,950,000 for these
transactions in 1995. In 1996, the Company received a $1,000,000
F-7
<PAGE>
payment from Merck upon the initiation of a Phase I clinical trial of an
experimental DNA vaccine against influenza virus, one of the seven infectious
disease targets covered by the agreement. Also in 1996, Vical accrued a
$500,000 payment from Merck in conjunction with the issuance of the patent
technology covering the agreement. The payment was subsequently received in
1997. In November 1997, the Company and Merck amended the 1991 agreement and
granted Merck certain rights to develop and market therapeutic vaccines
against the human immunodeficiency virus (HIV) and hepatitis B virus (HBV).
Under the amended agreement, Merck made an investment of $5,000,000 for
approximately 262,000 shares of the Company's common stock. The price per
share reflected a twenty-five percent premium over the average per share
closing price for the twenty trading days prior to the date of the agreement.
The premium of $1,000,000 on the investment was reflected in revenue in 1997
and the balance of the investment, net of costs to issue the shares of stock,
was reflected in common stock and additional paid-in capital.
In September 1997, the Company also entered into an agreement granting Merck
the rights to use the Company's naked DNA technology to deliver certain
growth factors as potential treatments for a range of applications including
revascularization. The agreement resulted in an initial payment to the
Company of $2,000,000. Through December 31, 1997, the Company had received a
total of $19,130,000 (including the payment for the investment for common
stock) under these agreements of which $3,000,000, $1,500,000 and $3,562,500
was recognized as revenue in 1997, 1996, and 1995, respectively. All three
agreements provide for the Company to receive additional payments based upon
achievement of certain defined milestones and royalty payments based on net
product sales.
PASTEUR MERIEUX CONNAUGHT
In September 1994, the Company entered into an agreement with Pasteur MErieux
Connaught ("PMC") that includes a research collaboration and options for PMC
to take exclusive licenses to Vical's naked DNA vaccine technology for each
of five vaccine targets. In order to maintain the options, PMC will be
required to pay Vical option fees as specified in the agreement. In
addition, Vical shall be paid an annual research fee through September 1997
by PMC for expenses incurred in performing certain preclinical work as
defined in the agreement. PMC renewed options and exercised an option in
1995. In 1996, PMC exercised three options, extended one option, and added a
new option. In 1997, PMC paid the Company $1,000,000 as a milestone payment
under the agreement because the Company and PMC began a Phase I clinical
trial of an experimental vaccine against the parasite that causes malaria.
The Company and PMC are sponsoring the trial which is being conducted by the
U.S. Naval Medical Research Institute and the U.S. Army Medical Research
Institute of Infectious Diseases. Through December 31, 1997, Vical has
received $7,425,000 of which $2,399,000, $2,746,000, and $1,287,500 was
recognized as revenue in 1997, 1996, and 1995, respectively. The agreement
provides for the Company to receive additional payments based upon
achievement of certain defined milestones and royalty payments based on net
product sales.
RHONE-POULENC RORER PHARMACEUTICALS, INC.
In October 1997, the Company and RhOne-Poulenc Rorer Pharmaceuticals. Inc.
("RPR") entered into an agreement granting RPR an exclusive worldwide license
to use the Company's naked DNA gene delivery technology to develop certain
gene therapy products for potential treatment of neurodegenerative diseases.
Under the terms of the agreement, the Company received $1,000,000 which was
recognized as revenue in 1997. This agreement provides for the Company to
receive additional payments based upon achievement of certain defined
milestones and royalty payments based on net product sales.
GENZYME CORPORATION
In October 1993, the Company entered into an option agreement with Genzyme
Corporation ("Genzyme"). The Company granted Genzyme a three year option to
obtain exclusive worldwide license rights related to the use of the Company's
cytofectin technology in the treatment of cystic fibrosis. Vical also
granted Genzyme a right of first offer to use the Company's cytofectin
technology in other lung disorders. In 1996, Genzyme exercised the option,
resulting in a $1,000,000 payment to Vical. Through December 31, 1997, Vical
received $2,300,000 from Genzyme of which $1,300,000 and $400,000 has been
recognized as revenue in 1996 and 1995, respectively. No revenue was
recognized under this agreement in 1997. The agreement also provides for the
Company to receive additional payments based upon achievement of certain
defined milestones and royalty payments based on net product sales.
BAXTER INTERNATIONAL INC.
In December 1993, the Company entered into a collaborative research and
renewable option agreement with Baxter Healthcare Corporation (subsequently
renamed Baxter International Inc.--"Baxter"). The Company granted Baxter an
option to obtain an exclusive worldwide license to the Company's direct DNA
injection technology for use in the treatment of hemophilia. Baxter renewed
the option agreement in 1995. Through the termination of this agreement in
December 1996, the Company had received $1,100,000 from Baxter of which
$91,667 and $300,000 was recognized as revenue in 1996 and 1995, respectively.
F-8
<PAGE>
OTHER RESEARCH AND LICENSING AGREEMENTS
The Company also received revenue under research and licensing agreements
with other entities including the U.S. government of which approximately
$1,404,000, $1,102,000 and $752,000, was recognized as revenue during the
years ended December 31, 1997, 1996, and 1995, respectively. Included in
these amounts is revenue recognized for a corporate alliance entered into in
March 1995 relating to DNA vaccines in the animal health area with Merial
(previously known as RhOne MErieux), a leading manufacturer and marketer of
animal health products worldwide. The agreement includes options for Merial
to take exclusive licenses to Vical's naked DNA vaccine technology and the
cytofectin technology to develop and commercialize certain gene-based
products for use in the prevention of infectious diseases in domesticated
animals. In 1996, the agreement was extended to March 1998. In 1997, a
patent milestone payment was made to the Company pursuant to the agreement.
If Merial exercises its license options, cash payments and royalties on net
sales would be due to the Company.
Under a U.S. government agreement that commenced in the first quarter of 1996
and ended June 30, 1997, the Company and the Naval Medical Research Institute
were awarded a grant that provided $1,000,000 to support further
development of a malaria vaccine based on Vical's naked DNA vaccine
technology.
Under a separate agreement, the Company is obligated to pay a third party 10
percent of certain payments received by the Company under the Merck, PMC,
RPR, Merial and Centocor, Inc. (see "Note 10 - Subsequent Event") agreements.
4. OTHER FINANCIAL DATA
Accounts payable and accrued expenses consisted of the following at December
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Employee compensation $678,588 $556,224
Accounts payable 327,617 148,062
Accrued clinical trials costs 310,891 4,000
Other accrued liabilities 107,507 102,098
---------- --------
$1,424,603 $810,384
---------- --------
---------- --------
</TABLE>
5. COMMITMENTS
LEASES
The Company leases its office and research facilities and certain equipment
under operating and capital leases. The minimum annual rents on the office
and research facilities are subject to increases based on changes in the
Consumer Price Index subject to certain minimum and maximum annual increases.
The Company is also required to pay taxes, insurance and operating costs
under the facilities leases. The equipment capital leases are secured by
substantially all equipment of the Company. The carrying amounts of the
capital lease obligations approximate their fair value.
<TABLE>
<CAPTION>
Operating Leases Capital Leases
---------------- --------------
<S> <C> <C>
Years ended December 31,
1998 $ 981,997 $ 559,418
1999 962,681 473,830
2000 429,984 446,298
2001 108,540 94,597
2002 - -
---------- ----------
Total minimum lease payments $2,483,202 1,574,143
----------
----------
Less amount representing
interest (214,088)
----------
Present value of capital
lease payments 1,360,055
Less current portion (448,261)
----------
Long-term obligations under
capital leases $ 911,794
----------
----------
</TABLE>
F-9
<PAGE>
Rent expense for the years ended December 31, 1997, 1996, and 1995, was
$969,899, $807,713, and $517,446, respectively.
Cost and accumulated depreciation of equipment under capital leases were as
follows:
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation Net
---- ------------ ----
<S> <C> <C> <C>
December 31, 1997 $2,312,876 1,066,488 1,246,388
December 31, 1996 $2,186,648 807,897 1,378,751
</TABLE>
NOTES PAYABLE
In June 1996, the Company entered into a loan and security agreement with a
bank which provided for borrowings of up to $2,500,000 which was secured by
substantially all assets of the Company. In March 1997, the outstanding
borrowings converted to a term loan bearing interest at the bank's prime rate
(8.5% at December 31, 1997) plus .5%, or the Company may alternatively choose
to have its borrowings bear interest at the LIBOR rate plus 3.25%. The term
loan is secured by any Company deposits at the bank, however, the Company is
not required to, and does not, maintain any deposits at the bank. The term
loan has a three year amortization period. At December 31, 1997, the loan
balance was $534,000, including approximately $214,000 reflected in current
liabilities.
RESEARCH AND LICENSE AGREEMENTS
In 1997 and 1996, the Company continued research and exclusive license
agreements with various universities for continuing research and license
rights to technology related to gene therapy. The agreements generally grant
the Company the right to commercialize any product derived from specified
technology. Fees paid and future obligations on these agreements are not
significant.
6. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company's certificate of incorporation, as amended, authorizes the
issuance of up to 5,000,000 preferred shares. No shares of preferred stock
were outstanding at December 31, 1997 or 1996.
COMMON STOCK
The Company's certificate of incorporation, as amended, authorizes the
issuance of up to 40,000,000 common shares. Common stock shares totaling
15,731,316 and 15,396,582 were outstanding at December 31, 1997 and 1996,
respectively.
DEFERRED COMPENSATION
Prior to its initial public offering the Company recorded approximately
$1,018,000 of deferred compensation for the difference between the price of
stock sold and options granted and the deemed fair value of the Company's
common stock. Such deferred compensation was amortized to expense over the
various vesting periods and is fully amortized at December 31, 1996.
Amortization expense amounted to $158,427 and $248,331 for the years ended
December 31, 1996 and 1995, respectively.
STOCK PLAN AND DIRECTORS OPTION PLAN
The Company has a stock plan ("1992 Stock Plan") under which 1,700,000 shares
of common stock are reserved for issuance to employees, non-employee
directors and consultants of the Company. The plan provides for the grant of
incentive and nonstatutory stock options and the direct award or sale of
shares. The exercise price of incentive stock options must equal at least
the fair market value on the date of grant. The exercise price of
nonstatutory stock options and direct awards or sales of shares may be no
less than 85 percent of the fair market value on the date of grant. The
maximum term of options granted under the plan is ten years. The options
generally vest 25% on the first anniversary of the date of grant, with the
balance vesting quarterly over the remaining three years. The plan has also
limited the number of options that may be granted to any plan participant in
a single calendar year to 300,000 shares. In December 1997, the Company's
Board of Directors adopted an amendment to increase the number of shares of
common stock reserved for issuance under this plan by 750,000 shares. The
amendment is subject to the approval of the stockholders at the 1998 annual
meeting.
F-10
<PAGE>
The Company also has a directors stock option plan ("Directors Plan") that
provides for the issuance to non-employee directors of up to 210,000 shares
of the Company's common stock, of which options for 202,500 shares have been
granted. The initial grant to a director of options under this plan
generally vests 25% on the first anniversary of the date of grant, with the
balance vesting quarterly over the remaining three years. Subsequent annual
grants fully vest on the date of the regular annual meeting of stockholders
following the date of grant. In 1997, the stockholders approved an amendment
to the 1992 Stock Plan allowing non-employee directors to receive grants
under that plan and, accordingly, it is not anticipated that there will be
any future grants under the Directors Plan.
The following table summarizes stock option transactions for the 1992 Stock
Plan and Directors Plan for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Weighted Ave. Weighted Ave.
Shares Exercise Price Fair Value of Grants
------ -------------- --------------------
<S> <C> <C> <C>
Outstanding,
December 31, 1994 655,850 $7.23
Granted 174,650 $9.06 $6.76
Exercised (19,000) $1.08
Forfeited (61,588) $9.84
---------
Outstanding,
December 31, 1995 749,912 $7.60
Granted 456,350 $15.99 $11.95
Exercised (32,317) $5.48
Forfeited (14,264) $10.97
---------
Outstanding,
December 31, 1996 1,159,681 $10.92
Granted 403,845 $14.14 $10.17
Exercised (72,922) $5.10
Forfeited (48,106) $13.25
---------
Outstanding,
December 31, 1997 1,442,498 $12.04
--------- ------
--------- ------
</TABLE>
The following table summarizes information about stock options outstanding
under the Company's stock option plans at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------ -----------------------------------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices As of 12/31/97 Contractual Life Exercise Price As of 12/31/97 Exercise Price
------------------------------------------------------------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.1600 - $9.3750 426,202 6.50 $5.84 345,107 $5.16
$9.4375 - $14.1563 587,033 8.58 $13.37 186,013 $12.55
$14.3125 - $18.0000 369,163 8.80 $15.72 111,311 $15.83
$18.1250 - $20.5000 60,100 8.45 $20.31 45,695 $20.42
----------- --------------- ------------ ------------ --------------
$0.1600 - $20.5000 1,442,498 8.02 $12.04 688,126 $9.90
</TABLE>
The number of shares and weighted average price of options exercisable at
December 31, 1997, 1996 and 1995 were 688,126 shares at $9.90, 487,750 shares
at $6.82, and 310,033 shares at $6.36, respectively.
F-11
<PAGE>
The Company has adopted the disclosure-only provisions of SFAS 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 consistent with the provisions of SFAS 123, the Company's net loss
and loss per share would have increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net loss - as reported $5,611,231 $5,080,591 $3,983,451
Net loss - pro forma $8,878,712 $6,497,447 $4,143,062
Net loss per share - as reported $.36 $.33 $.29
Net loss per share - pro forma $.57 $.42 $.31
</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: risk free interest rates of 5.99% (1997) and
6.57% (1996 and 1995) and, expected volatility of 70% (1997) and 74% (1996
and 1995). An expected option life of 5 years and a dividend rate of zero is
assumed for all years presented.
Because SFAS 123 has not been applied to options granted prior to January 1,
1995, the resulting pro forma compensation cost may not be representative of
that to be expected in future years.
7. RELATED PARTIES
Included in other assets at December 31, 1997 and 1996, is the long-term
portion of notes receivable, representing amounts due from certain officers
and employees of the Company. Imputed interest is applied at the applicable
federal rate. The loan agreements allow for the notes to be forgiven under
certain circumstances over the next two years. The long-term portion is
$25,000 and $50,000 at December 31, 1997 and 1996, respectively. The current
portion, included in receivables and other, is $25,000 at December 31, 1997
and 1996.
8. INCOME TAXES
As of December 31, 1997, the Company has available net operating loss
carryforwards of approximately $29,100,000 and research and development
credit carryforwards of approximately $1,300,000 to reduce future federal
income taxes, if any. These carryforwards expire through 2012 and are
subject to review and possible adjustment by the Internal Revenue Service.
The Tax Reform Act of 1986 limits a company's ability to utilize certain net
operating loss and tax carryforwards in the event of cumulative change in
ownership in excess of 50%, as defined. The Company has completed numerous
financings that have resulted in a change in ownership in excess of 50%, as
defined. The utilization of net operating loss and tax credit carryforwards
may be limited due to these ownership changes.
The Company has a deferred tax asset of approximately $13,900,000 related
primarily to its net operating loss and tax credit carryforwards. A
valuation allowance has been recognized to offset the entire amount of the
deferred tax asset as realization of such asset is uncertain.
9. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution savings plan under section 401(k) of
the Internal Revenue Code. The plan covers substantially all employees. The
Company matches employee contributions made to the plan according to a
specified formula. The Company's matching contributions totaled
approximately $94,000, $78,000, and $71,000 in 1997, 1996, and 1995,
respectively.
10. SUBSEQUENT EVENT
In February 1998, the Company signed an agreement allowing Centocor, Inc. to
use Vical's naked DNA technology to develop and market gene-based vaccines
for the potential treatment of certain types of cancer. The agreement will
result in an initial payment to Vical of $2,000,000, and may result in
further payments plus royalties if Centocor successfully develops products
using the Vical technology. The new agreement grants to Centocor exclusive
worldwide licenses and options to license Vical's naked DNA technology to
deliver certain antigens to induce immune responses against the associated
cancer cells.
F-12
<PAGE>
11. SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of the unaudited quarterly results of operations
for the years ended December 31, 1997 and 1996 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Quarter Ended
1997 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 1,126 $ 867 $ 3,480 $ 2,330
Research and development costs 2,794 2,797 3,319 3,026
Total operating costs and
expenses 3,691 3,678 4,247 4,054
Net loss (2,002) (2,267) (225) (1,117)
Net loss per common
share (basic and diluted) (.13) (.15) (.01) (.07)
Shares used in per share
calculation 15,423 15,448 15,458 15,609
<CAPTION>
1996 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 520 $ 3,555 $ 541 $ 2,124
Research and development costs 2,380 3,133 2,628 3,177
Total operating costs and
expenses 3,110 3,872 3,378 4,126
Net income (loss) (1,905) 350 (2,190) (1,336)
Net earnings (loss) per common
share (basic and diluted) (.12) .02 (.14) (.09)
Shares used in per share
calculation 15,373 15,791 15,385 15,392
</TABLE>
F-13
<PAGE>
EXHIBIT 4.3
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made as of the 3rd
day of November, 1997 by and between VICAL INCORPORATED, a Delaware
corporation (the "Company"), and MERCK HOLDINGS, INC., a Delaware corporation
("Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF STOCK.
1.1 SALE AND ISSUANCE OF COMMON STOCK. Subject to the terms and
conditions of this Agreement, Investor hereby purchases and the Company
hereby sells and issues to Investor 261,812 shares (the "Shares") of the
Company's Common Stock for the purchase price of the greater of $16.00 per
share or 125% of the average Nasdaq closing price per share during the 20-day
consecutive trading period prior to, but not including, the Effective Date of
the Amended License Agreement (as defined herein) between the Company and
Investor (such average Nasdaq closing price is hereinafter referred to as the
"Base Price" and such per share purchase price is hereinafter referred to as
the "Per Share Purchase Price") for an aggregate of $5,000,000 (the "Purchase
Price").
1.2 CLOSING. The purchase and sale of the Common Stock shall take
place at the offices of the Company, 9373 Towne Centre Drive, San Diego,
California, at 10 A.M., on the date which is ten days following the date of
this Agreement, or at such other times and places as the Company and Investor
mutually agree upon, verbally or in writing (which times and places are
designated as the "Closing"). At the Closing the Company shall deliver to
Investor a certificate representing the Common Stock which such Investor is
purchasing against delivery to the Company by such Investor of a bank wire in
same day funds in the amount of the Purchase Price therefor payable to the
Company's order.
1.3 DEFINITIONS.
(a) The following terms, as used herein, have the following meanings:
"Closing Date" means the date of the Closing.
"Common Stock" means the Common Stock, par value $0.01 per share of the
Company, together with the associated preferred stock purchase rights
established pursuant to the Rights Agreement dated March 20, 1995 between the
Company and ChaseMellon Shareholder Services L.L.C. as rights agent (the
"Rights").
<PAGE>
"Material Adverse Effect" means a material adverse effect on the
condition (financial or otherwise), business, assets, results of operations
of a corporation and its subsidiaries taken as a whole.
"1934 Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"1933 Act" means the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.
"Person" shall mean an individual, corporation, partnership, trust,
business trust, association, joint stock company, joint venture, pool,
syndicate, sole proprietorship, unincorporated organization, governmental
authority or any other form of entity not specifically listed herein.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to Investor that:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to carry on its business as now conducted. The Company is duly
qualified to transact business and is in good standing in each jurisdiction
in which the failure so to qualify would have a Material Adverse Effect.
2.2 CAPITALIZATION. The authorized capital of the Company consists of:
(i) PREFERRED STOCK. 5,000,000 shares of Preferred Stock, of which
40,000 shares have been designated Series A Participating Preferred Stock,
par value $.01 per share (the "Participating Preferred Stock"). There are no
shares of Participating Preferred Stock issued and outstanding.
(ii) COMMON STOCK. 40,000,000 shares of Common Stock, of which
15,460,802 shares were issued and outstanding on August 15, 1997.
2.3 AUTHORIZATION. All corporate action on the part of the Company,
its officers, directors and stockholders necessary for (i) the authorization,
execution and delivery of this Agreement, (ii) the performance of all
obligations of the Company hereunder and (iii) the authorization, issuance
(or reservation for issuance) and delivery of the Common Stock being sold
hereunder, to the extent that the foregoing requires performance on or prior
to the Closing, has been taken and this Agreement constitutes the valid and
legally binding obligation of the Company, enforceable against the Company in
accordance with its terms.
-2-
<PAGE>
2.4 VALID ISSUANCE OF COMMON STOCK. The Common Stock purchased by the
Investor hereunder has been duly and validly issued and is fully paid and
nonassessable and, based in part upon the representations of the Investor in
this Agreement, was issued in compliance with all applicable federal and
state securities laws.
2.5 SEC FILINGS. The Company has registered its Common Stock pursuant
to Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the Common Stock is listed and trades on the NASDAQ
National Market System. The Company has filed all forms, reports and
documents required to be filed pursuant to the federal securities laws and
the rules and regulations promulgated thereunder for a period of at least
twelve (12) months immediately preceding the offer or sale of the Shares (or
for such shorter period that the Company has been required to file such
material). The Company's filings with the SEC complied as of their
respective filing dates, or in the case of registration statements, their
respective effective dates, in all material respects with all applicable
requirements of the Securities Act of 1933 (the "Securities Act") and the
Exchange Act and the rules and regulations promulgated thereunder. None of
such filings, including, without limitation, any exhibits, financial
statements or schedules included therein, at the time filed, or in the case
of registration statements, at their respective filing dates, contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
2.6 LITIGATION. Except as disclosed in the Company's filings with the
SEC, there is no action, suit or proceeding before or by any court or
governmental agency or body, domestic or foreign, now pending or, to the
knowledge of the Company, threatened, against or affecting the Company, or
any of its properties, which might result in any material adverse change in
the condition (financial or otherwise) or in the earnings, business affairs
or business prospects of the Company, or which might materially and adversely
affect the properties or assets thereof.
2.7 NO DEFAULT. Except as disclosed in the Company's filings with the
SEC, the Company is not in default in the performance or observance of any
material obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust or other material agreement or INSTRUMENT
to which it is a party or by which it or its property may be bound, except
for defaults that have not had and would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect.
2.8 SUBSEQUENT EVENTS. Since December 31, 1996, (i) the Company has
incurred no liability or obligation, contingent or otherwise, that taken as a
whole, is material in the aggregate to the Company, except in the ordinary
course of
-3-
<PAGE>
business, and (ii) there has been no material adverse change in the condition
or results of operations, financial or otherwise, of the Company, taken as a
whole.
2.9 CONSENTS AND APPROVALS. No consent, approval, qualification, order
or authorization of, or filing with, any local, state or federal governmental
authority or any third party is required on the part of the Company in
connection with the Company's valid execution, delivery or performance of
this Agreement, or the offer, sale or issuance of the Shares by the Company,
other than the filings that have been made prior to the Closing, except that
any notices of sale required to be filed by the Company with the SEC under
Regulation D of the Securities Act, or such post-closing filings as may be
required under applicable state securities laws, which will be timely filed
within the applicable periods therefor.
2.10 COMPLIANCE WITH LAWS AND COURT ORDERS. The Company is not in
violation of any applicable law, rule, regulation, judgment, injunction,
order or decree except for violations that have not had and would not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect.
3. REPRESENTATIONS AND WARRANTIES OF INVESTOR. This Agreement is
made with Investor in reliance upon the Investor's representation and
warranties to the Company, which by such Investor's execution of this
Agreement the Investor hereby confirms, that:
3.1 ORGANIZATION AND EXISTENCE. Investor is a corporation duly
incorporated, validly existing and in good standing under the laws of
Delaware and has all corporate powers and all material governmental licenses,
authorizations, permits, consents and approvals required to carry on its
business as now conducted, except for those licenses, authorizations,
permits, consents and approvals the absence of which would not, individually
or in the aggregate, have a Material Adverse Effect.
3.2 CORPORATE AUTHORIZATION. This execution, delivery and
performance by Investor of this Agreement are within the corporate powers of
Investor and have been duly authorized by all necessary corporate action on
the part of Investor. This Agreement constitutes its valid and legally
binding obligation, enforceable in accordance with its terms.
3.3 PURCHASE ENTIRELY FOR OWN ACCOUNT. The Common Stock to be
received by Investor will be acquired for investment for Investor's own
account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that Investor has no present intention
of selling, granting any participation in, or otherwise distributing the
same. By executing this Agreement, Investor further represents that Investor
does not have any contract, undertaking, agreement or
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arrangement with any person to sell, transfer or grant participation to such
person or to any third person, with respect to any of the Common Stock.
3.4 CONFIDENTIALITY. Investor hereby represents, warrants and
covenants that it shall maintain as confidential all information provided to
it by the Company hereunder in accordance with and under the same terms as
Article VI of the Amended License Agreement.
3.5 RESTRICTED SECURITIES. Investor understands that the shares of
Common Stock it is purchasing are characterized as "restricted securities"
under the federal securities laws inasmuch as they are being acquired from
the Company in a transaction not involving a public offering and that under
such laws and applicable regulations such securities may be resold without
registration under the 1933 Act, only in certain limited circumstances. In
this connection Investor represents that it is familiar with Securities and
Exchange Commission ("SEC") Rule 144, as presently in effect, and understands
the resale limitations imposed thereby and by the 1933 Act.
3.6 LEGENDS. It is understood that the certificates evidencing the
Common Stock may bear one or all of the following legends:
(a) "These securities have not been registered under the Securities
Act of 1933. They may not be sold, offered for sale, pledged or hypothecated
in the absence of a registration statement in effect with respect to the
securities under such Act or an opinion of counsel satisfactory to the
Company that such registration is not required or unless sold pursuant to
Rule 144 of such Act."
(b) If required by the authorities of any state in connection with
the issuance or sale of the Common Stock the legend required by such state
authority.
4. ADDITIONAL DELIVERIES TO INVESTOR AT CLOSING. The obligations
of Investor under Subsection of this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions, the
waiver of which shall not be effective if such Investor does not consent in
writing thereto:
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<PAGE>
4.1 COMPLIANCE CERTIFICATE. The President or a Vice President of
the Company shall deliver to Investor at the Closing a certificate stating
that there has been no material adverse change in the business, affairs,
prospects, operations, properties, assets or condition of the Company since
June 30, 1997 other than because of operating losses and changes in the
ordinary course of business.
4.2 SECRETARY'S CERTIFICATE. The Secretary of the Company shall
deliver to Investor at the Closing a certificate certifying that attached
thereto are true and complete copies of each of the following documents:
(a) Restated Certificate of Incorporation as in effect on the
Closing Date, of the Company;
(b) Bylaws, as amended as in effect on the Closing Date, of the
Company; and
(c) Copies of the resolutions of the Company's Board of Directors
authorizing execution and delivery of this Agreement and to the Third
Amendment to Research Collaboration and License Agreement, dated May 31,
1991, amended as of the date hereof, between the Company and Investor (the
"Amended License Agreement") and performance of the transactions contemplated
herein and therein.
4.3 HSR ACT. If applicable, the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, including any
extensions of said waiting period, shall have expired and any investigations
relating to the transactions contemplated herein and in the Amended License
Agreement that may have been opened by either the Department of Justice or
the Federal Trade Commission (by means of a request for additional
information or otherwise) shall have been terminated.
5. REGISTRATION RIGHTS. The Company covenants and agrees as
follows:
5.1 CERTAIN ADDITIONAL DEFINITIONS.
As used in this Agreement, the following capitalized terms shall have
the following meanings:
"PROSPECTUS" shall mean the prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement with
respect to the terms of the offering of any portion of the Registrable
Securities covered by such Registration Statement and by all other amendments
and supplements to the prospectus, including post-effective amendments and
all material incorporated by reference in such prospectus.
"REGISTER," "REGISTERED" and "REGISTRATION" refer to a registration
effected by preparing and filing a registration
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<PAGE>
statement or similar document in compliance with the 1933 Act, and such
registration statement or document becoming effective under the 1933 Act.
"REGISTRABLE SECURITIES" shall mean (i) the Common Stock of the Company
purchased by the Investor pursuant to this Agreement; and (ii) any Common
Stock of the Company issued as (or issuable upon the conversion or exercise
of any warrant, right or other security which is issued as) a dividend or
other distribution with respect to, or in exchange for or in replacement of,
such Common Stock.
"REGISTRATION STATEMENT" shall mean any registration statement of the
Company that covers any of the Registrable Securities pursuant to the
provisions of this Agreement, including the Prospectus, amendments and
supplements to such Registration Statement, including post-effective
amendments, all exhibits and all material incorporated by reference in such
Registration Statement.
5.2 REGISTRATION. The Company will use its reasonable best efforts to
effect a registration to permit the sale of the Registrable Securities as
described below, and pursuant thereto the Company will:
(a) prepare and file within one year from the date hereof, and use its
reasonable best efforts to thereafter have declared effective by the SEC, a
Registration Statement on Form S-3 relating to resale of all of the shares of
the Registrable Securities and use its reasonable best efforts to cause such
Registration Statement to remain continuously effective for a period which
will terminate when all Registrable Securities covered by such Registration
Statements, as amended from time to time, have been sold or when the
Registrable Securities may be sold under Rule 144(k) under the 1933 Act.
(b) prepare and file with the SEC such amendments and post-effective
amendments to the Registration Statement and the Prospectus as may be
necessary to keep such Registration Statement effective for the period
specified in Section 5.2(a) and to comply with the provisions of the 1933 Act
and the 1934 Act with respect to the distribution of all Registrable
Securities;
(c) notify Investor promptly, and confirm such notice in writing, (i)
when the Prospectus or any supplement or post-effective amendment has been
filed, and, with respect to the Registration Statement or any post-effective
amendment, when the same has become effective, (ii) of any request by the SEC
for amendments or supplements to the Registration Statement or Prospectus or
for additional information, (iii) of the issuance by the SEC of any stop
order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose, and (iv) of the receipt by
the Company of any notification with respect to the suspension of the
qualification of the Registrable Securities for sale in any jurisdiction or
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<PAGE>
the initiation or threatening of any proceeding for such purpose;
(d) make every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of the Registration Statement at the earliest
possible moment;
(e) furnish to the Investor, without charge, at least one copy of the
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules, all, upon a Investor's request, documents
incorporated therein by reference and all exhibits thereto (including those
incorporated by reference);
(f) deliver to the Investor, without charge, as many copies of the
Prospectus (including each preliminary prospectus) and any amendment or
supplement thereto as it may reasonably request in order to facilitate the
disposition of the Registrable Securities;
(g) cause all Registrable Securities covered by the Registration
Statement to be listed on each securities exchange or market on which similar
securities issued by the Company are then listed, and if the securities are
not so listed to use its reasonable best efforts promptly to cause all such
securities to be listed on either the New York Stock Exchange, the American
Stock Exchange or the Nasdaq Stock Market;
(h) use reasonable best efforts to qualify or register the Registrable
Securities for sale under (or obtain exemptions from the application of) the
Blue Sky laws of such jurisdictions as are applicable. The Company shall not
be required to qualify as a foreign corporation or to file a general consent
to service of process in any such jurisdiction where it is not presently
qualified or where it would be subject to general service of process or
taxation as a foreign corporation in any jurisdiction where it is not now so
subject.
(i) otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the SEC under the 1933 Act and the 1934
Act and take such other actions as may be reasonably necessary to facilitate
the registration of the Registrable Securities hereunder.
Investor shall furnish to the Company such information regarding the
distribution of such securities as the Company may from time to time
reasonably request in writing.
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<PAGE>
If at any time, the Company delivers a certificate in writing to the
Investor, to the effect that a delay in the sale of Registrable Securities by
the Investor under the Registration Statement is necessary because a sale
pursuant to such Registration Statement in its then current form would
reasonably be expected to constitute a violation of the federal securities
laws the Investor shall agree not to sell or otherwise transfer such
Registrable Securities for the period of time specified by the Company in its
certificate. In no event shall such delay exceed ten (10) business days;
PROVIDED, HOWEVER, that if, prior to the expiration of such ten (10) business
day period, the Company delivers a certificate in writing to the Investor to
the effect that a further delay in such sale beyond such ten (10) business
day period is necessary because a sale pursuant to such Registration
Statement in its then current form would reasonably be expected to constitute
a violation of the federal securities laws, the Company may refuse to permit
the Investor to resell any Registrable Securities pursuant to such
Registration Statement for an additional period not to exceed five (5)
business days.
5.3 REGISTRATION EXPENSES. All expenses incident to the Company's
performance of or compliance with this Agreement, including without
limitation all registration and filing fees, fees with respect to the filings
required to be made with the National Association of Securities Dealers,
Inc., fees and expenses of compliance with the securities or blue sky laws,
printing expenses, messenger, telephone and delivery expenses, fees and
disbursements of counsel for the Company, fees and disbursements of all
independent certified public accountants of the Company, fees and expenses
incurred in connection with the listing of the securities, rating agency fees
and the fees and expenses of any person, including special experts, retained
by the Company, will be borne by the Company, regardless of whether the
Registration Statement becomes effective; provided, however, that the Company
will not be required to pay discounts, commissions or fees of underwriters,
selling brokers, dealer managers or similar securities industry professionals
relating to the distribution of the Registrable Securities or fees or
disbursements of any other counsel to the Investor.
5.4 RULE 144.
The Company covenants that it will file the reports required to be
filed by it under the 1933 Act and the 1934 Act and the rules and regulations
thereunder, and it will take such further action as the Investor may
reasonably request, all to the extent required to enable Investor to sell
Registrable Securities without registration under the 1933 Act in reliance on
the exemption provided by Rule 144 or Rule 144A under the 1933 Act or any
successor or similar rules or statues. Upon the request of the Investor, the
Company will deliver to the Investor a written statement as to whether the
Company has complied with such information and requirements.
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<PAGE>
MISCELLANEOUS.
6.1 SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective permitted
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto
or their respective successors and assigns any rights, remedies, obligations,
or liabilities under or by reason of this Agreement, except as expressly
provided in this Agreement.
6.2 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of California (irrespective of its choice of law
principles).
6.3 COUNTERPARTS. 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.
6.4 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.5 NOTICES. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified, or if
sent by telex or telecopier, upon receipt of the correct answerback, or upon
deposit with the United States Post Office, by registered or certified mail,
or upon deposit with an overnight air courier, in each case postage prepaid
and addressed to the party to be notified at the address as follows, or at
such other address as such party may designate by ten days' advance written
notice to the other party:
If to the Company:
Vical Incorporated
9373 Towne Centre Drive
Suite 100
San Diego, CA 92121
Attn: Secretary
Fax: (619) 646-1150
with a copy to:
Pillsbury Madison & Sutro LLP
P.O. Box 7880
San Francisco, CA 94104
Attn: Thomas E. Sparks, Jr.
Fax: (415) 983-1200
If to the Investor:
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<PAGE>
Merck Holdings, Inc.
c/o Merck & Co., Inc.
One Merck Drive
P.O. Box 100, WS2A-10
Whitehouse Station, NJ 08889-0100
Attn: Senior Director, Corporate Licensing
Fax: 908-423-7321
6.6 FINDERS' FEE. Each party represents that it neither is nor will be
obligated for any finders' fee or commission in connection with this
transaction. Investor agrees to indemnify and hold harmless the Company from
any liability for any commission or compensation in the nature of a finders'
fee (and the costs and expenses of defending against such liability or
asserted liability) for which the Investor or any of its officers, partners,
employees or representatives is responsible.
The Company agrees to indemnify and hold harmless Investor from any
liability for any commission or compensation in the nature of a finders' fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees or
representatives is responsible.
6.7 EXPENSES. The Company and the Investor shall pay their respective
costs and expenses incurred with respect to the negotiation, execution,
delivery and performance of this Agreement.
6.8 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the
Investor. Any amendment or waiver effected in accordance with this paragraph
shall be binding upon each holder of any securities purchased under this
Agreement at the time outstanding, each future holder of all such securities,
and the Company.
6.9 SEVERABILITY. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of this Agreement shall be interpreted as
if such provision were so excluded and shall be enforceable in accordance
with its terms.
6.10 ENTIRE AGREEMENT. This Agreement and the Amended License
Agreement constitute the entire agreement between the parties with respect to
the subject matter hereof and thereof and supersede all prior agreements and
understandings, both oral and written, between the parties with respect to
the subject matter hereof and thereof. No representation, inducement,
promise, understanding, condition or warranty not set forth herein or therein
has been made or relied upon by either party hereto. Neither this Agreement
nor any provision hereof is intended to confer upon any Person other
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<PAGE>
than the parties hereto any rights or remedies hereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
VICAL INCORPORATED
By /s/ Alain B. Schreiber
---------------------------
Title President & C.E.O.
------------------------
MERCK HOLDINGS, INC.
By /s/ Peter Nugent
---------------------------
Title President
------------------------
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EXHIBIT 10.19
Confidential Treatment requested. Confidential portions of this document have
been redacted and separately filed with the Securities and Exchange
Commission.
THIRD AMENDMENT TO RESEARCH COLLABORATION
AND LICENSE AGREEMENT DATED MAY 31, 1991
This Third Amendment dated this 3rd day of November, 1997 between
Merck & Co., Inc. ("Merck") and Vical Incorporated ("Vical").
WHEREAS on May 31, 1991 Merck and Vical entered into a Research
Collaboration and License Agreement, as amended on April 27, 1994 and
December 13, 1995 (the "Agreement") under which Merck obtained an exclusive
license under VICAL PATENT RIGHTS and VICAL KNOW-HOW to develop, make, have
made, use and sell LICENSED PRODUCTS in the TERRITORY (all as defined
therein) upon the terms and conditions set forth therein; and
WHEREAS the parties wish to further amend the Agreement to provide
that Merck shall have rights to vaccine products for the treatment of
patients infected with Human Immunodeficiency Virus and Hepatitis B Virus
upon the terns and conditions of the Agreement as amended hereby;
NOW, THEREFORE, in consideration of the premises and covenants set
forth herein, the parties hereto agree as follows:
1. This Third Amendment shall be effective as of the date set forth above.
2. Article 1.3 of the Agreement is amended by adding at the end thereof the
following sentence:
"LICENSED PRODUCT shall also mean TREATMENT VACCINE(S)."
3. The Agreement is amended by adding to Article 1 a new section as follows:
<PAGE>
1.14 TREATMENT VACCINE(S) shall mean a bulk or finished vaccine for
the treatment of (i) Human Immunodeficiency Virus (HIV-1) and/or
diseases caused by infection with HIV-1 in humans and (ii)
Hepatitis B Virus ("HBV") and/or diseases caused by infection
with HBV in humans, which utilizes the Technology or technology
which is developed by VICAL during and as a result of the
RESEARCH COLLABORATION PROGRAM.
4. The Agreement is amended by adding Article 8.3(g) as follows:
8.3(g) Merck shall make the non-refundable research milestone payments
provided for in Schedule E to the Third Amendment for the first
TREATMENT VACCINE for HIV-1 and/or diseases caused by infection
with HIV-1 in humans and the first TREATMENT VACCINE for HBV
and/or diseases caused by infection with HBV in humans.
5. Article 8.4 is hereby amended to be replaced in its entirely as follows:
8.4(a) Except as set forth in Article 8.4(b) with respect to royalties
for TREATMENT VACCINE(S), in consideration of the license granted
in Article 3, MERCK shall pay royalties 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.
8.4(b) In consideration of the license granted in Article 3 for
TREATMENT VACCINE(S), royalties shall be payable to VICAL in each
calendar year as follows:
<PAGE>
8.4(b)(i) for sales outside the United States, its territories and
possessions by MERCK, its AFFILIATES or permitted sublicensees
for each TREATMENT VACCINE:
(A) the sale of which is covered by VALID PATENT RIGHTS in the
country of sale, for the term of the relevant VALID PATENT RIGHTS
in the following amounts:
For annual NET SALES less than or equal
to ( ) ( ) of NET SALES
For annual NET SALES greater than ( ), for
( ) of NET SALES
that portion of NET SALES greater than ( )
(B) the sale of which is not covered by VALID PATENT RIGHTS in the
country of sale, in the amount of ( ) of NET SALES for a period
of five (5) years from the date of first commercial sale in such
country. MERCK shall pay royalties to VICAL pursuant to this
section 8.4(b)(i)(B) and such royalties shall be in lieu of
patent royalties and shall not be additive where patents later
issue in a country.
8.4(b)(ii)For sales in the United States, its territories and possessions,
whether or not covered by a claim of VALID PATENT RIGHTS:
For annual NET SALES less than or equal
to ( ) ( ) of NET SALES
For annual NET SALES greater than ( ) and
less than or equal to ( ), for that portion
( ) of NET SALES
of NET SALES greater than ( )
For annual NET SALES greater than ( ) or
equal to ( ), for that portion of ( ) of
NET SALES
NET SALES greater than ( )
For annual NET SALES greater than ( ) ( )
of NET SALES
<PAGE>
for that portion of NET SALES greater than ( )
(A) In the event the sale of TREATMENT VACCINE is covered by VALID
PATENT RIGHTS in the country of sale, the royalty set forth in
8.4(b)(ii) shall be payable for the life of such VALID PATENT
RIGHTS.
(B) In the event the sale of TREATMENT VACCINE are not covered by
VALID PATENT RIGHTS in the country of sale, royalties shall begin
on the date of first commercial sale and shall be payable for a
period of five (5) years from first commercial sale. The
royalties payable under this section shall be in lieu of patent
royalties and shall not be additive where patents later issue in
a country.
8.4(c) For purposes of calculating royalties due to Vical under Articles
8.4(b)(i) (A) and 8.4(b)(ii), the sales level tiers set forth
therein will be adjusted cumulatively, using the U.S.
Pharmaceutical Price Index for sales in the U.S., its territories
and possessions and the corresponding European index for sales
outside the U.S. Said adjustments will be made based on the
change in each such Index from the effective date of this Third
Amendment as compared to the dates of the first commercial
Ex-U.S. and U.S. sales, respectively, of each TREATMENT VACCINE.
Thereafter, the sales level tiers will be adjusted as of each
anniversary date of such first commercial sale, based on the
change in the weighted average selling price of each TREATMENT
VACCINE for, respectively, U.S. and Ex-U.S. sales, based on a
comparison of the two prior years weighted average selling price.
It is understood that for the first anniversary, the weighted
average selling price at launch will be compared to the weighted
average selling price over the first year, in each case.
<PAGE>
6. Article 8.5 is amended by adding the following at the beginning thereof:
"Other than for TREATMENT VACCINE(S),..."
7. Article 8.8 is hereby amended to be replaced in its entirety as follows:
8.8(a) Except for royalties for TREATMENT VACCINE(S), which is addressed
in Article 8.8(b), 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 ( ).
8.8(b) If MERCK is required to pay cumulative royalties in excess of (
) for licenses required to commercialize a
particular TREATMENT VACCINE (including the royalties set forth
under this Agreement), the royalties payable to VICAL with
respect to such TREATMENT VACCINE shall be reduced by
( ) of the royalties beyond such (
) figure; provided, however, that in no event shall the
royalties due VICAL with respect to any country, after taking
into account the above reduction, be reduced by more than
( ). Unused royalty credits may be carried
into subsequent royalty periods.
<PAGE>
8. The Agreement is amended by adding Articles 8.10, 8.11 and 8.12 thereto
as follows:
8.10 Within thirty (30) days of the date of this Third Amendment,
Merck will purchase duly issued and validly authorized
unregistered shares of VICAL common stock having an aggregate
purchase price of $5,000,000 (five million dollars) on the terms
and subject to the conditions of the Stock Purchase Agreement
dated of even date herewith, between VICAL and MERCK, at a price
per share equal to the greater of $ 16.00 per share or 125% of
the average of VICAL's per share closing price for the twenty
(20) trading days prior to, but not including, the Effective Date
of the Third Amendment.
8.11 VICAL is hereby granted an option (the "OPTION") to co-promote
TREATMENT VACCINE(S) in the United States to a select target
audience that will be agreed upon by the parties. With respect to
each TREATMENT VACCINE, the OPTION will be exercisable by VICAL
at any time prior to MERCK's completion of Phase III clinical
trials for such TREATMENT VACCINE. Prior to exercising its OPTION
with respect to a TREATMENT VACCINE, VICAL will establish, to
MERCK's reasonable satisfaction, that at the estimated time of
the first PLA filing in the United States for such TREATMENT
VACCINE, VICAL will have a sales force of at least ( )
professional representatives who will be available to make at
least 6 detail calls per day on at least 200 days per year with
respect to such TREATMENT VACCINE. The parties will enter into a
co-promotion agreement for such co-promotion by VICAL within six
(6) months of the exercise of the OPTION. The co-promotion
agreement will contain reasonable terms and conditions,
consistent with industry standards and the terms of this
Agreement. The co-promotion agreement will contain the financial
terms set forth on Schedule F of this Third Amendment.
<PAGE>
8.12 In the event a TREATMENT VACCINE is also capable of being used
for the prevention of the same human infectious disease, in its
sole discretion VICAL may choose to have royalty payments made
under Article 8.4(a) and Article 8.5 or, alternatively, under
Articles 8.4(b) and 8.11 (co-promotion option).
9. The effectiveness of this Third Amendment is subject to the execution and
delivery of the Stock Purchase Agreement dated as of even date herewith,
between VICAL and MERCK and payment by MERCK of the $5,000,000 (five million
dollars) thereunder.
10. Except as amended hereby, all other terms and conditions of the Agreement
shall remain unchanged and shall continue in full force and effect.
Capitalized terms in this Third Amendment shall have the meaning set forth in
the Agreement.
IN WITNESS WHEREOF, the parties hereto have had this Third Amendment
executed by their authorized representatives as set forth below.
MERCK & CO., INC. VICAL INCORPORATED
BY: (s) Ray Gilmartin BY: (s) Alain B. Schreiber, M.D.
TITLE: Chairman, President and TITLE: President & C.E.O.
Chief Executive Officer
DATE: November 3, 1997 DATE: October 27, 1997
<PAGE>
SCHEDULE E - MILESTONES FOR TREATMENT PRODUCTS
( )* ( )
( )* ( )
( ) ( )
( ) ( )
* If the milestone is paid on the identified date, it will be paid only once
and credited against the milestone due when the event is achieved.
"Major Market Country" shall mean the United States, EC countries, Canada, or
Japan.
<PAGE>
SCHEDULE F - CO-PROMOTION FINANCIAL TERMS
1. All sales made by VICAL under the Co-Promotion Agreement will be booked by
Merck.
2. VICAL will, in addition to the royalties set forth in Article 8.4(b),
receive the following amounts in consideration for its Co-Promotion
efforts:
A. If VICAL provides between 25 and 49 sales representatives for the
co-promotion VICAL will receive the following royalty increment on U.S. NET
SALES:
For annual U.S. NET SALES less than ( ) ( )
For annual U.S. NET SALES equal to or greater than ( )
( ) and less than or equal to ( )
for that portion of U.S. NET SALES equal to or greater than
( )
For annual U.S. NET SALES greater than ( ) ( )
for that portion of U.S. NET SALES greater than ( )
B. If VICAL provides 50 or more sales representatives for the co-promotion,
VICAL will receive the following royalty increment on U.S. NET SALES:
For annual U.S. NET SALES less than ( ) ( )
For annual U.S. NET SALES equal to or greater than ( ) ( )
and less than or equal to ( ) for that portion of
U.S. NET SALES equal to or greater than ( )
For annual U.S. NET SALES greater than ( ) ( )
for that portion of U.S. NET SALES greater than ( )
3. It is understood that with respect to each TREATMENT VACCINE, the size of
VICAL's sales force for such TREATMENT VACCINE on the date that VICAL
exercises its option will determine permanently the level of incremental
royalty that VICAL will receive on U.S. sales of such TREATMENT VACCINE,
notwithstanding that VICAL may subsequently increase the size of such sales
force.
4. It is understood that all costs related to the VICAL sales force, including
training, will be for the account of VICAL.
5. For purposes of calculating the royalty increment described in Paragraph 2,
above, the Sales level tiers set forth therein will be adjusted
cumulatively, using the U.S. Pharmaceutical Price Index. Said adjustments
will be made based on the change in such Index from the effective date of
this Third Amendment as compared to the date of the First Commercial sale
of each TREATMENT VACCINE in the U.S.. Thereafter, the sales level tiers
will be adjusted as of each anniversary date of such first commercial sale
based on the change in the weighted average selling price of each TREATMENT
VACCINE, based on a comparison of the two prior years weighted average
selling price. It is understood that for the first anniversary, the
weighted
<PAGE>
average selling price at launch will be compared to the weighted
average selling price over the first year in each case.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K into Vical
Incorporated's previously filed Registration Statements Files No. 33-60826,
No. 33-60824, No. 33-81602, No. 33-81600, No. 33-87972 and 333-30181.
ARTHUR ANDERSEN LLP
San Diego, California
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF OPERATIONS OF THE COMPANY'S FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 12,157
<SECURITIES> 33,397
<RECEIVABLES> 1,567
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 47,121
<PP&E> 6,555
<DEPRECIATION> 4,334
<TOTAL-ASSETS> 50,691
<CURRENT-LIABILITIES> 2,265
<BONDS> 1,232
0
0
<COMMON> 157
<OTHER-SE> 47,037
<TOTAL-LIABILITY-AND-EQUITY> 50,691
<SALES> 0
<TOTAL-REVENUES> 7,803
<CGS> 0
<TOTAL-COSTS> 11,936
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 192
<INCOME-PRETAX> (5,611)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,611)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,611)
<EPS-PRIMARY> (.36)
<EPS-DILUTED> (.36)
</TABLE>
