<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-21088
VICAL INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 93-0948554
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9373 Towne Centre Dr., Suite 100, San Diego, California 92121
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(Address of principal executive offices) (Zip code)
(619) 453-9900
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days -- Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 30, 1998
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Common Stock, $.01 par value 15,818,165
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VICAL INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
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PAGE NO.
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COVER PAGE...................................................................................1
TABLE OF CONTENTS............................................................................2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of September 30, 1998, and December 31, 1997........................3
Statements of Operations for the Three Months Ended September 30, 1998 and
1997, and for the Nine Months Ended September 30, 1998 and 1997.......................4
Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997........5
Notes to Financial Statements.........................................................6
ITEM 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................7
ITEM 3.
Quantitative and Qualitative Disclosure About Market Risk.............................*
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................................*
ITEM 2. Changes in Securities........................................................*
ITEM 3. Defaults upon Senior Securities..............................................*
ITEM 4. Submission of Matters to a Vote of Security Holders..........................12
ITEM 5. Other Information............................................................*
ITEM 6. Exhibits and Reports on Form 8-K.............................................12
SIGNATURE....................................................................................13
EXHIBIT LIST.................................................................................14
* No information provided due to inapplicability of item.
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VICAL INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED)
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<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 12,412,394 $ 12,157,149
Marketable securities - available-for-sale 28,480,755 33,397,482
Receivables and other 2,336,261 1,566,532
------------------- -------------------
Total current assets 43,229,410 47,121,163
------------------- -------------------
Property and Equipment:
Equipment 5,085,975 4,966,955
Leasehold improvements 1,558,554 1,587,554
------------------- -------------------
6,644,529 6,554,509
Less--accumulated depreciation and amortization (4,809,805) (4,334,224)
------------------- -------------------
1,834,724 2,220,285
------------------- -------------------
Patent costs, net of accumulated amortization 1,268,856 1,247,059
Other assets 134,354 102,500
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$ 46,467,344 $ 50,691,007
------------------- -------------------
------------------- -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,576,737 $ 1,424,603
Current portion of capital lease obligations 460,530 448,261
Current portion of notes payable 213,773 213,773
Deferred revenue 500,000 178,261
------------------- -------------------
Total current liabilities 2,751,040 2,264,898
------------------- -------------------
Long-Term Obligations:
Long-term obligations under capital leases 803,942 911,794
Notes payable 106,887 320,660
------------------- -------------------
Total long-term obligations 910,829 1,232,454
------------------- -------------------
Stockholders' Equity:
Preferred stock, $0.01 par value--5,000,000 shares authorized--
none outstanding -- --
Common stock, $0.01 par value--40,000,000 shares authorized--
15,818,165 and 15,731,316 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively 158,182 157,313
Additional paid-in capital 78,155,480 77,267,971
Accumulated other comprehensive income 153,161 24,028
Accumulated deficit (35,661,348) (30,255,657)
----------------- ----------------
Total stockholders' equity 42,805,475 47,193,655
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Total Liabilities and Stockholders' Equity $ 46,467,344 $ 50,691,007
------------------- -------------------
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</TABLE>
3
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VICAL INCORPORATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------- ------------------------------------
1998 1997 1998 1997
------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
License/royalty revenue $ 1,536,992 $ 3,349,434 $ 4,617,138 $ 4,147,564
Contract revenue 158,834 130,999 370,694 1,325,925
----------------- ---------------- ---------------- ---------------
1,695,826 3,480,433 4,987,832 5,473,489
----------------- ---------------- ---------------- ---------------
Expenses:
Research and development 3,157,774 3,319,102 9,310,700 8,910,514
General and administrative 854,716 927,968 2,836,114 2,705,180
----------------- ---------------- ---------------- ---------------
4,012,490 4,247,070 12,146,814 11,615,694
----------------- ---------------- ---------------- ---------------
Loss from operations (2,316,664) (766,637) (7,158,982) (6,142,205)
Interest income 607,846 590,731 1,879,342 1,798,100
Interest expense 41,057 48,598 126,051 149,555
----------------- ---------------- ---------------- ---------------
Net loss $ (1,749,875) $ (224,504) $ (5,405,691) $ (4,493,660)
----------------- ---------------- ---------------- ---------------
----------------- ---------------- ---------------- ---------------
Net loss per share (basic and diluted--Note 2) $ (.11) $ (.01) $ (.34) $ (.29)
----------------- ---------------- ---------------- ---------------
----------------- ---------------- ---------------- ---------------
Weighted average shares used in computing
net loss per share 15,817,412 15,458,404 15,786,838 15,443,212
----------------- ---------------- ---------------- ---------------
----------------- ---------------- ---------------- ---------------
</TABLE>
4
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VICAL INCORPORATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------------
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (5,405,691) $ (4,493,660)
Adjustments to reconcile net loss to net cash provided from
(used in) operating activities:
Depreciation and amortization 694,653 690,440
Write-off of abandoned patent costs 94,800 54,388
Change in operating assets and liabilities:
Receivables and other (769,729) 575,356
Accounts payable and accrued expenses 152,134 3,397
Deferred revenue 321,739 (834,782)
------------------- -------------------
Net cash used in operating activities (4,912,094) (4,004,861)
------------------- -------------------
INVESTING ACTIVITIES:
Marketable securities 5,045,860 (1,278,687)
Capital expenditures (25,388) (449,184)
Deposits and other (2,854) 197,810
Patent expenditures (155,509) (196,091)
------------------- -------------------
Net cash provided from (used in) investment activities 4,862,109 (1,726,152)
------------------- -------------------
FINANCING ACTIVITIES:
Principal payments under capital lease obligations (369,375) (378,038)
Principal payments on notes payable (213,773) (106,887)
Issuance of common stock, net 888,378 310,821
------------------- -------------------
Net cash provided from (used in) financing activities 305,230 (174,104)
------------------- -------------------
Net increase (decrease) in cash and cash equivalents 255,245 (5,905,117)
Cash and cash equivalents at beginning of period 12,157,149 12,609,277
------------------- -------------------
Cash and cash equivalents at end of period $ 12,412,394 $ 6,704,160
------------------- -------------------
------------------- -------------------
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Equipment acquired under capital leases $ 273,792 $ 379,374
------------------- -------------------
------------------- -------------------
</TABLE>
5
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VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Vical was incorporated in April 1987 and has devoted substantially all
of its resources since that time to its research and development
programs. The Company is currently focusing its resources on the
development of its direct gene transfer and related technologies.
BASIS OF PRESENTATION
The information contained herein has been prepared in accordance with
instructions for Form 10-Q. The information at September 30, 1998, and
for the three-month and nine-month periods ended September 30, 1998 and
1997, is unaudited. In the opinion of management, the information
reflects all adjustments necessary to make the results of operations
for the interim periods a fair statement of such operations. All such
adjustments are of a normal recurring nature. Interim results are not
necessarily indicative of results for a full year. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. For
a presentation including all disclosures required by generally accepted
accounting principles, these financial statements should be read in
conjunction with the audited financial statements for the year ended
December 31, 1997, included in the Vical Incorporated Form 10-K filed
with the Securities and Exchange Commission.
2. NET LOSS PER SHARE
Net loss per share (basic and diluted) for the three-month and
nine-month periods ended September 30, 1998 and 1997, has been computed
using the weighted average number of common shares outstanding during
the respective periods. Diluted loss per share does not include any
assumed exercise of stock options as the effect would be antidilutive.
3. COMPREHENSIVE INCOME
The Company implemented Statement of Financial Accounting Standards No.
130, "Comprehensive Income", effective January 1, 1998. 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 is 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. In interim financial results, this information is allowed to
be presented in the notes to the financial statements. For the
three-month periods ended September 30, 1998 and 1997, other
comprehensive income was $148,889 and $61,663, respectively, and total
comprehensive loss was $1,600,986 and $162,841, respectively. For the
nine-month periods ended September 30, 1998 and 1997, other
comprehensive income was $129,133 and $71,653, respectively, and total
comprehensive loss was $5,276,558 and $4,442,007, respectively.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Vical was incorporated in April 1987 and has devoted substantially all of its
resources since that time to its research and development programs. The
Company is focusing its resources on the development of its direct gene
transfer and related technologies. Currently, the Company is developing its
ALLOVECTIN-7, LEUVECTIN and VAXID cancer product candidates internally, while
developing vaccine product candidates for infectious diseases primarily in
collaboration with corporate partners Merck & Co., Inc. ("Merck") and Pasteur
Merieux Connaught ("PMC"). In February 1998, the Company and Centocor, Inc.
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. To date, the Company has not
received revenues from the sale of products. The Company expects to incur
substantial operating losses for at least the next several years, due
primarily to expansion of its research and development programs and the cost
of preclinical studies and clinical trials. As of September 30, 1998, the
Company's accumulated deficit was approximately $35.7 million.
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.
In May 1998, the Company initiated registration-supportive expanded Phase II
and Phase III multi-center clinical trials in certain patients with
metastatic melanoma. Either or both of the pivotal trials could support
initial product registration if endpoints are achieved. The FDA has reviewed
data from previous studies and has confirmed acceptability of the designs,
endpoints, and analysis plans for both new trials. The open-label,
multi-center Phase II trial is designed to confirm the efficacy of
ALLOVECTIN-7 in the defined patient population which appeared to benefit most
in earlier Phase II trials. Enrollment will be open to patients with
metastatic (spread beyond the initial site), refractory (unresponsive to
standard therapy), Stage III or IV disease that has not yet spread to
multiple internal organs. Up to 70 advanced melanoma patients will be
enrolled at approximately 15 leading cancer treatment centers throughout
North America. The objective is a clinical partial or complete response in at
least 15 percent of the evaluable patients, persisting with a median duration
of at least four months.
The open-label, multi-center, randomized, controlled Phase III trial is
designed to determine the efficacy of ALLOVECTIN-7 when combined with
standard chemotherapy in patients with unresectable, metastatic melanoma not
previously treated with chemotherapy. In prior trials, ALLOVECTIN-7 was used
only after standard therapies had failed. In the new trial, patients may be
enrolled upon diagnosis or upon progression to Stage III or Stage IV disease
when surgery or radiation therapy are usually no longer curative. Because
ALLOVECTIN-7 is intended to trigger an immune response against tumor cells,
the Company believes the treatment may be more effective in patients whose
immune systems have not been compromised.
Approximately 140 patients per group, randomized by sex, age, and extent of
disease spread, will be enrolled into a chemotherapy-plus-ALLOVECTIN-7
experimental group or a chemotherapy-only control group. The objective is a
greater relative clinical benefit for the experimental group than for the
control group. Acceptable endpoints are either an improvement in the median time
to disease progression, or in the rate of objective clinical responses.
7
<PAGE>
Results from another Phase I/II trial of ALLOVECTIN-7 suggested potential
efficacy in certain patients with unresectable head and neck cancer.
Results for 22 evaluable patients in a multi-center Phase II trial yielded
one clinical complete response lasting more than 8 months. Eight patients
experienced stable disease for 2 to 18 months and continuing, of which three
patients had significant (25 percent to 40 percent) tumor shrinkage. The
median time to disease progression was 26 weeks among the nine patients that
derived clinical benefit, compared with 6 weeks among the 13 non-responders.
Notably, median survival was 41 weeks among patients who derived clinical
benefit, compared with 23 weeks among non-responders. Overall median survival
for patients in the Phase II trial, including non-responders, was 36 weeks,
which is more than 50 percent longer than the expected median survival (23
weeks) for this patient population.
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. 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.
Phase I/II clinical trials testing the safety of LEUVECTIN at varying dosage
levels were completed in patients with advanced melanoma, renal cell
carcinoma, and soft-tissue sarcoma. The Phase I/II results presented in May
1998 indicated that of the 14 evaluable patients in the renal cell carcinoma
trial, two patients achieved clinical partial responses persisting for 13 to
14 months and continuing, and two achieved stable disease, yielding a total
of four out of 14 evaluable patients (29 percent) deriving clinical benefit
from treatment. Among 16 evaluable patients in the melanoma trial, one
achieved a clinical partial response persisting for 11 months and continuing,
and three achieved stable disease. Among 15 evaluable patients in the sarcoma
trial, nine patients achieved stable disease. The results of these trials
indicated that the treatment appeared to be safe and well-tolerated, with no
serious treatment-related adverse events reported. Responses appeared to be
dose-related, with all clinical responses occurring in the two highest dosing
groups. In May 1998 the Company initiated a multicenter Phase II clinical
trial in patients with metastatic renal cell carcinoma. The open-label,
multi-center Phase II trial is designed to evaluate the safety and efficacy
of LEUVECTIN in up to 80 patients with metastatic kidney cancer and determine
response rate and duration.
In June 1997, the Company initiated a Phase I/II clinical trial with
LEUVECTIN in approximately 18 prostate cancer patients. The trial was
designed to test the safety and efficacy of LEUVECTIN as a potential therapy
for patients with tumors apparently confined to the prostate capsule, but
with a high likelihood of metastatic disease recurrence. Treatment with
LEUVECTIN was intended to stimulate a localized immune response against the
primary tumor and a systemic immune response against any tumor cells that may
have escaped from the capsule.
Data measurement and analysis focused on reductions in the patients' serum
levels of prostate-specific antigen (PSA) following treatment with LEUVECTIN.
PSA is a biochemical substance produced exclusively by prostate cancer cells
and used as a marker to detect and monitor the disease. Recent studies have
confirmed that PSA levels, in combination with several other factors, are
highly predictive of disease progression in post-surgical and post-radiation
patients.
Results of the trial were presented in June 1998, and indicated that
LEUVECTIN was well-tolerated and may be successful in causing targeted immune
response against prostate cancer cells. In five of 11 patients scheduled for
radical prostatectomy (complete removal of the prostate gland), serum PSA
levels decreased by at least 50 percent prior to surgery, and remained at
undetectable levels following surgery for up to 11 months and continuing. Two
additional patients experienced serum PSA reductions between 25 percent and
50 percent prior to surgery and undetectable levels following surgery for up
to 6 months and continuing. In four of eight patients with recurrent disease
following radiation therapy, serum PSA levels decreased by at least 50
percent. Three additional patients experienced serum PSA reductions between
25 percent and 50 percent.
8
<PAGE>
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 July 1998, the Company announced the initiation of a Phase I/II clinical
trial to study the safety and potential efficacy of an experimental DNA
vaccine for patients with metastatic melanoma. The trial is being sponsored
by the National Cancer Institute under the direction of Dr. Steven A.
Rosenberg, M.D., Ph.D., Chief of Surgery. The experimental vaccine contains a
gene which may cause cells at the injection site to produce a modified gp100
melanoma antigen. The antigen is expected to trigger an immune response
against melanoma tumor cells. In earlier studies, Dr. Rosenberg tested a
vaccine using peptides (portions of the modified antigen) in combination
therapy with interleukin (IL-2), a naturally occurring protein that
stimulates the immune system. A DNA vaccine may be more generally applicable
and may provide advantages in manufacturing and product handling.
In July 1997, the Company and PMC began a Phase I clinical trial of an
experimental naked DNA vaccine against the parasite that causes malaria. The
Company and PMC sponsored the trial under their Research, Collaboration and
License Agreement. The trial was conducted by the U.S. Naval Medical Research
Institute. In April 1998, the Company released preliminary results from
approximately 20 human participants in the trial which indicated that the
vaccine was well-tolerated and safe. Preliminary analysis of specimens from
trial participants suggested a good cellular immune response with features
that the physicians conducting the trial believe may be important in
preventing the disease. In the October 16, 1998, issue of SCIENCE, the
Company and its collaborators at the Naval Medical Research Center and PMC
reported that subjects immunized with a potential malaria DNA vaccine
developed dose-related "killer" T cell immune responses. These T-cells are
believed to be essential for vaccines against malaria and other infectious
diseases. This was the first demonstration of safety and immune responses in
healthy human volunteers with a vaccine using the Company's patented naked
DNA technology. To date, no effective vaccine has been developed against
malaria, which is among the most prevalent and fatal infectious diseases
worldwide. In September 1998, the Company signed a cooperative agreement with
the Office of Naval Research for funding of up to $2,700,000 to develop a
multi-gene malaria DNA vaccine and test its ability to protect humans against
malaria.
In September 1998, the Company and Boston Scientific Corporation entered into
a license and option agreement for the development of intravascular gene
delivery technology. The agreement specified an initial payment of $1,100,000
which was received in October 1998.
The Company's product candidates may not prove to be safe and effective in
clinical trials and no commercially successful products may ultimately be
developed by the Company.
This Form 10-Q contains, in addition to historical information,
forward-looking statements. 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, including whether the Company's product candidates will be
shown to be safe or efficacious in clinical trials, whether the Company's
corporate collaborations will be successful, and whether the Company's
product candidates will ultimately be successfully developed or receive
necessary regulatory approvals and other matters discussed in Item 1 under
the caption "Risk Factors" in the Company's Form 10-K for the year ended
December 31, 1997 filed with the Securities and Exchange Commission, which
could cause actual results to differ materially from those projected. These
forward-looking statements speak only as of the date hereof. The Company
undertakes no obligation to update these forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
9
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RESULTS OF OPERATIONS
Revenues of $1,696,000 were recorded for the quarter ended September 30,
1998. License revenue primarily consisted of a license fee of $1,100,000
(which the Company received in October 1998) related to a license and option
agreement with Boston Scientific for the development of vascular gene
therapy, recognition of deferred license fees of $250,000 from the existing
Merial license agreement and royalty revenue of $183,000. In the second
quarter of 1998, the Company received $1,000,000 from Merial for the
extension of its option on vaccine targets. This license fee is being
recognized as revenue over the twelve-month option period. Accordingly,
$250,000 was recognized as revenue in each of the second and third quarters
of 1998 and $500,000 of the initial payment is reflected as current deferred
revenue in the balance sheet at September 30, 1998. In addition, for the
quarter ended September 30, 1998, the Company recognized net contract revenue
of $159,000, primarily from a contract entered into in September 1998 with
the Office of Naval Research for the development work on a potential naked
DNA vaccine to prevent malaria. This multi-year grant could provide up to
$2,700,000 of funding to the Company.
The Company had revenues of $3,480,000 for the quarter ended September 30,
1997. License revenue of $3,178,000 was derived primarily from an initial
payment of $2,000,000 from Merck under a license and option agreement for use
of the Company's technology to deliver certain growth factors and a milestone
payment from PMC for the start of the malaria clinical trial. License revenue
for the quarter ended September 30, 1997, also included amortization of
deferred license fees under earlier agreements with PMC and Merial and
royalty revenues of $171,000. Contract revenues were primarily from PMC.
Revenues for the nine months ended September 30, 1998, were $4,988,000. In
addition to the revenue recognized in the third quarter, revenue for the nine
months ended September 30, 1998, also included $2,200,000 of license revenue
from Centocor, Inc., $428,000 of license revenue from amortization of
deferred revenue from PMC and Merial, contract revenue from PMC and royalty
revenue of $524,000. Revenues for the nine months ended September 30, 1997,
were $5,473,000 and, in addition to contract and license revenue from Merck,
PMC and Merial, and royalty revenue, included a grant from the Department of
Defense of $209,000.
The Company's total operating expenses for the quarter ended September 30,
1998, were $4,012,000 compared with $4,247,000 for the second quarter of
1997. Total operating expenses for the nine months ended September 30, 1998,
were $12,147,000 compared with $11,616,000 for the same period in 1997.
Research and development expenses decreased to $3,158,000 for the three
months ended September 30, 1998, from $3,319,000 for the same period in 1997.
For the nine months ended September 30, 1998, research and development
expenses were $9,311,000 compared with $8,911,000 in the same period of 1997.
The decrease in research and development expenses for the quarter ended
September 30, 1998 is because the comparable quarter of the prior year
included clinical trial costs for the malaria clinical trial and costs for
contract services which were not incurred at the same level in 1998. These
decreases were partially offset by increased costs of personnel. The increase
in research and development expenses for the nine months ended September 30,
1998 was generally due to increased clinical trial costs and additional
royalties for license agreements.
General and administrative expenses decreased to $855,000 for the three
months ended September 30, 1998, from $928,000 for the same period in 1997.
General and administrative expenses for the nine months ended September 30,
1998, increased to $2,836,000 from $2,705,000 for the same period in 1997.
The decrease for the three-month period primarily is due to lower insurance
and facilities costs. The increase for the nine-month period is attributable
to the Company's expanding research and development activities, partially
offset by lower insurance and facilities costs.
10
<PAGE>
Investment income for the three-month and nine-month periods ended September
30, 1998, was $608,000 and $1,879,000, respectively. Investment income for
the three-month and nine-month periods ended September 30, 1997, was $591,000
and $1,798,000, respectively. The increases are primarily a result of higher
rates of return on investments.
The net loss was $.11 per share for the three months ended September 30,
1998, compared with net loss per share of $.01 for the same period of 1997.
For the nine months ended September 30, 1998, the net loss was $.34 per share
compared with a net loss of $.29 per share for the same period in the prior
year. The Company expects to incur losses throughout the remainder of 1998
and to report a net loss per share for the year ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Vical has financed its operations primarily through
private placements of preferred and common stock, three public offerings of
common stock and revenues from collaborative agreements. As of September 30,
1998, the Company had working capital of approximately $40.5 million compared
with $44.9 million at December 31, 1997. Cash and marketable securities
totaled approximately $40.9 million at September 30, 1998, compared with
$45.6 million at December 31, 1997.
The Company expects to incur substantial additional research and development
expense including continued increases in personnel costs and costs related to
preclinical testing and clinical trials. The Company's future capital
requirements will depend on many factors, including continued scientific
progress in its research and development programs, the scope and results of
preclinical testing and clinical trials, the time and costs involved in
obtaining regulatory approvals, the costs involved in filing, prosecuting and
enforcing patent claims, competing technological and market developments, the
cost of manufacturing and scale-up, and commercialization activities and
arrangements. The Company intends to seek additional funding through research
and development relationships with suitable potential corporate collaborators
or through public or private financing. Additional funding may not be
available on favorable terms or at all.
If additional funding is not available, Vical anticipates that its available
cash and existing sources of funding will be adequate to satisfy its
operating needs through 2000.
YEAR 2000 ISSUES
The Company has performed a review of its computer applications and equipment
to determine whether they will function for the year 2000 and beyond and what
modifications, if any, would be required to ensure their continuing
functionality. 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
adversely affected. The Company is communicating with strategic partners to
assess the risk of Year 2000 issues. The Company has not completed the
inquiries of the strategic partners. However, the Company is not aware, at
this time, of any material year 2000 issues regarding its dealings with its
strategic partners. The Company anticipates that its assessment will be
completed by July 31, 1999. 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. Since no significant issues
have been identified, the Company does not have a contingency plan to address
any material Year 2000 issues. Such contingency plan, if required, will be
developed for all applications and systems that affect core business
functions upon completion of the Company's assessment of Year 2000 issues.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
If a stockholder wishes to have a stockholder proposal considered at the
Company's next annual meeting, the stockholder must have given timely notice
of the proposal in writing to the Secretary of the Company. To be timely, a
stockholder's notice of the proposal must be delivered to or mailed and
received at the executive offices of the Company not less than 50 days nor
more than 75 days prior to the date of the annual meeting; provided, however,
that notice of the proposal to be timely must be received no later than the
close of business on the 15th day following the day on which such notice of
the date of the annual meeting was mailed or public disclosure of the meeting
date was made.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
EXHIBIT 27 Financial Data Schedule
2. Reports on Form 8-K
None
12
<PAGE>
VICAL INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
Vical Incorporated
Date: November 12, 1998 By /s/MARTHA J. DEMSKI
--------------------
Martha J. Demski
Vice President and
Chief Financial Officer
(on behalf of the registrant and
as the registrant's Principal
Financial and Accounting
Officer)
13
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
1. EXHIBIT 27 Financial Data Schedule
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF OPERATIONS AND BALANCE SHEET FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 12,412
<SECURITIES> 28,481
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 43,229
<PP&E> 6,645
<DEPRECIATION> 4,810
<TOTAL-ASSETS> 46,467
<CURRENT-LIABILITIES> 2,751
<BONDS> 911
0
0
<COMMON> 158
<OTHER-SE> 42,647
<TOTAL-LIABILITY-AND-EQUITY> 46,467
<SALES> 0
<TOTAL-REVENUES> 4,988
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,311
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 126
<INCOME-PRETAX> (5,406)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,406)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,406)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
</TABLE>
