<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 June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-21088
VICAL INCORPORATED
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 93-0948554
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9373 Towne Centre Dr., Suite 100, San Diego, California 92121
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(858) 646-1100
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days -- Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT JUNE 30, 1999
----- ----------------------------
Common Stock, $.01 par value 16,190,913
<PAGE>
VICAL INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
COVER PAGE.....................................................................................1
TABLE OF CONTENTS..............................................................................2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of June 30, 1999, and December 31, 1998.............................3
Statements of Operations for the Three Months Ended June 30, 1999 and 1998, and
for the Six Months Ended June 30, 1999 and 1998.......................................4
Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998..............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.........................15
ITEM 5. Other Information............................................................*
ITEM 6. Exhibits and Reports on Form 8-K............................................16
SIGNATURE.....................................................................................17
EXHIBIT LIST..................................................................................18
* No information provided due to inapplicability of item.
</TABLE>
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
VICAL INCORPORATED
BALANCE SHEETS
June 30, December 31,
1999 1998
(Unaudited)
---------------- ----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 11,107,132 $ 13,567,817
Marketable securities - available-for-sale 30,405,667 26,615,939
Receivables and other 1,338,669 1,432,711
---------------- ----------------
Total current assets 42,851,468 41,616,467
---------------- ----------------
Property and Equipment:
Equipment 5,426,830 5,139,944
Leasehold improvements 1,558,088 1,558,554
---------------- ----------------
6,984,918 6,698,498
Less--accumulated depreciation and amortization (5,248,136) (4,992,121)
---------------- ----------------
1,736,782 1,706,377
---------------- ----------------
Patent costs, net of accumulated amortization 1,487,137 1,387,936
Other assets 147,892 133,385
---------------- ----------------
$ 46,223,279 $ 44,844,165
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 2,143,604 $ 2,281,252
Current portion of capital lease obligations 554,166 473,466
Current portion of notes payable 160,330 213,773
Deferred revenue 935,276 250,000
---------------- ----------------
Total current liabilities 3,793,376 3,218,491
---------------- ----------------
Long-Term Obligations:
Long-term obligations under capital leases 800,280 747,807
Notes payable - 53,443
---------------- ----------------
Total long-term obligations 800,280 801,250
---------------- ----------------
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--
16,190,913 and 15,866,544 shares issued and outstanding at
June 30, 1999 and December 31, 1998, respectively 161,909 158,665
Additional paid-in capital 83,173,596 78,332,483
Accumulated other comprehensive income (loss) (92,482) 69,440
Accumulated deficit (41,613,400) (37,736,164)
---------------- --------------
Total stockholders' equity 41,629,623 40,824,424
---------------- ----------------
Total Liabilities and Stockholders' Equity $ 46,223,279 $ 44,844,165
================ ================
</TABLE>
See accompanying notes.
-3-
<PAGE>
VICAL INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------------- --------------------------------
1999 1998 1999 1998
---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
License/royalty revenue $ 610,371 $ 548,170 $ 3,275,706 $ 3,080,145
Contract revenue 643,095 11,500 1,257,934 211,860
---------------- ---------------- --------------- ---------------
1,253,466 559,670 4,533,640 3,292,005
---------------- ---------------- --------------- ---------------
Expenses:
Research and development 3,737,835 3,058,086 7,352,063 6,152,924
General and administrative 1,121,793 1,014,332 2,134,735 1,981,398
---------------- ---------------- --------------- ---------------
4,859,628 4,072,418 9,486,798 8,134,322
---------------- ---------------- --------------- ---------------
Loss from operations (3,606,162) (3,512,748) (4,953,158) (4,842,317)
Interest income 568,086 619,770 1,139,260 1,271,495
Interest expense 30,115 41,770 63,338 84,994
---------------- ---------------- --------------- ---------------
Net loss $ (3,068,191) $ (2,934,748) $ (3,877,236) $ (3,655,816)
================ ================ =============== ===============
Net loss per share (basic and diluted--Note 2) $ (.19) $ (.19) $ (.24) $ (.23)
================ ================ =============== ===============
Weighted average shares used in computing net loss per share 16,190,840 15,789,206 16,072,318 15,771,298
(Note 2) ================ ================ =============== ===============
</TABLE>
See accompanying notes.
-4-
<PAGE>
VICAL INCORPORATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (3,877,236) $ (3,655,816)
Adjustments to reconcile net loss to net cash provided from
(used in) operating activities:
Depreciation and amortization 530,592 467,202
Write-off of abandoned patent costs - 60,144
Change in operating assets and liabilities:
Receivables and other 94,042 377,171
Accounts payable and accrued expenses (137,648) (32,167)
Deferred revenue 685,276 571,739
---------------- ----------------
Net cash used in operating activities (2,704,974) (2,211,727)
---------------- ----------------
INVESTING ACTIVITIES:
Marketable securities (3,951,650) (145,810)
Capital expenditures (159,985) (16,253)
Deposits and other 14,493 (4,074)
Patent expenditures (145,447) (86,501)
---------------- ----------------
Net cash used in investment activities (4,242,589) (252,638)
---------------- ----------------
FINANCING ACTIVITIES:
Principal payments under capital lease obligations (250,593) (249,970)
Payments on notes payable (106,886) (160,330)
Issuance of common stock, net 4,844,357 863,521
---------------- ----------------
Net cash provided from financing activities 4,486,878 453,221
---------------- ----------------
Net decrease in cash and cash equivalents (2,460,685) (2,011,144)
Cash and cash equivalents at beginning of period 13,567,817 12,157,149
---------------- ----------------
Cash and cash equivalents at end of period $ 11,107,132 $ 10,146,005
================ ================
Supplemental Disclosure of Non-Cash Investing and Financing
Activities: Equipment acquired under capital leases $ 383,766 $ 179,135
================ ================
</TABLE>
See accompanying notes.
-5-
<PAGE>
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
(unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Vical was incorporated in April 1987 and has devoted substantially all
of its resources since that time to its research and development
programs. The Company is currently focusing its resources on the
development of its direct gene transfer and related technologies.
BASIS OF PRESENTATION
The information contained herein has been prepared in accordance with
instructions for Form 10-Q. The information at June 30, 1999, and for
the three-month and six-month periods ended June 30, 1999 and 1998, is
unaudited. In the opinion of management, the information reflects all
adjustments necessary to present fairly the financial position and
results of operations for the interim periods. 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, 1998, 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
six-month periods ended June 30, 1999 and 1998, 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 (LOSS)
Accumulated other comprehensive income (loss) represents unrealized
gain or loss on marketable securities. For the three-month periods
ended June 30, 1999 and 1998, other comprehensive loss was $109,835
and $19,031, respectively, and total comprehensive loss was $3,178,026
and $2,953,779, respectively. For the six-month periods ended June 30,
1999 and 1998, other comprehensive loss was $161,922, and $19,756,
respectively, and total comprehensive loss was $4,039,158 and
$3,675,572, respectively.
-6-
<PAGE>
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. 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"). Vical and Centocor, Inc. have 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. The Company has an agreement with Boston Scientific for the
use of Vical's technology in catheter-based intravascular gene delivery.
Vical has an agreement with Rhone-Poulenc Rorer to use its gene delivery
technology to deliver certain neurological proteins for neurodegenerative
diseases. Vical also has agreements with Pfizer Inc. for use of its
technology for gene delivery of therapeutic proteins in certain animal health
applications and with Merial for use of its technology for DNA vaccines in
certain animal infectious disease targets.
To date, the Company has not received revenues from the sale of products. The
Company expects to incur substantial operating losses for at least the next
several years, due primarily to expansion of its research and development
programs and the cost of preclinical studies and clinical trials. As of June
30, 1999, the Company's accumulated deficit was approximately $41.6 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 with ALLOVECTIN-7 in certain
patients with metastatic melanoma. Either or both of the pivotal trials could
support product registration if endpoints are achieved. Vical also has a
multi-center Phase II study underway with ALLOVECTIN-7 in patients with head
and neck cancer.
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 efficacy similar to systemic IL-2 therapy with fewer side
effects.
In May 1998, the Company initiated a multicenter Phase II clinical trial
using LEUVECTIN in patients with metastatic renal cell carcinoma. Preliminary
results presented in May 1999 indicated that LEUVECTIN appears to be safe and
well tolerated, appears to stimulate an intended immune response against
tumors, and may inhibit progression of the disease in patients with
metastatic kidney cancer. In May 1999, data were presented from a Phase I/II
trial testing LEUVECTIN in patients with prostate cancer. Vical began Phase
II clinical trials in prostate cancer during the second quarter of 1999.
In collaboration with Stanford University Medical Center, the Company is
conducting a Phase I/II clinical trial of VAXID, a naked DNA vaccine against
low-grade non-Hodgkin's B-cell lymphoma. VAXID contains a gene that encodes
the patient-specific idiotype (characteristic feature) of cancerous B-cells.
The Company believes that immunization of post-chemotherapy patients with
VAXID could result in the
-7-
<PAGE>
elimination of residual disease and the prevention of the relapse of disease.
The National Cancer Institute (NCI) published data from a previous NCI
clinical trial indicating a 42 percent response rate in end-stage melanoma
patients after treatment with systemic IL-2 and a peptide-based vaccine using
a modified gp100 protein developed at NCI. This Phase I/II study is being
repeated at the National Cancer Institute with a naked DNA version of the
gp100 vaccine provided by Vical.
Vical is collaborating with PMC and the U.S. Naval Medical Research Center
(NMRC) to develop a DNA vaccine against malaria. In July 1997, Vical and PMC
began a Phase I trial of an experimental vaccine against the parasite that
causes malaria. NMRC conducted the clinical trial with approximately twenty
volunteers. Trial results, reported in an October 1998 issue of SCIENCE,
indicated that subjects immunized with a potential malaria DNA vaccine
developed dose-related killer T-cell immune responses. As a result of these
data, further clinical development is planned.
In January 1999, Vical and Pfizer Inc. entered into a license and option
agreement granting Pfizer rights to use Vical's proprietary naked DNA
technologies to deliver therapeutic proteins for animal health applications.
The agreement resulted in a $1,000,000 license payment to Vical, a $6,000,000
investment in approximately 318,000 shares of Vical common stock at $18.87
per share, and a commitment to fund Vical research for a total of $1,500,000
over the next three years. In March 1999, Vical received $1,100,000 from
Merial for the extension to March 2000 of its option on vaccine targets.
During the second quarter of 1999, Vical was awarded a multi-year SBIR grant
of up to $553,000 from the National Cancer Institute (NCI) for cancer vaccine
development work. Vical also was awarded multi-year contracts by the National
Institute of Allergies and Infectious Diseases for infectious disease vaccine
support work of at least $250,000. In recent months, several Vical patents
were issued including patents which cover: compositions and methods for naked
DNA vaccination against Lyme disease; a class of cationic lipids useful in
gene delivery; a method of inducing and repressing the activity of genes
after IN VIVO delivery into cells; and specific plasmids and uses
encompassing Vical's ALLOVECTIN-7 product candidate. In addition a European
patent was issued which covers a class of cationic lipids including those
used in Vical's ALLOVECTIN-7 and LEUVECTIN product candidates.
Merck is planning to initiate a clinical trial before year-end with a vaccine
using Vical's patented naked DNA gene delivery technology to protect against
infection by human immunodeficiency virus (HIV), the virus that causes
acquired immunodeficiency syndrome. In May 1991, Vical entered into a
research collaboration and license agreement with Merck to develop vaccines
utilizing Vical's intramuscular delivery technology to prevent infection
and/or disease in humans. 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: HIV, influenza,
herpes simplex, hepatitis B, hepatitis C, human papillomavirus and
tuberculosis. In exchange for the license granted under this agreement, Merck
has paid Vical initial license and option fees, option exercise fees,
research and development payments, and payments for the achievement of
development milestones. Merck is obligated to pay additional fees if
development milestones are achieved with respect to the products developed
under the Merck agreement and royalties on net sales by Merck of products, if
any products are developed and marketed. There can be no assurance that any
products will be developed under the license agreement, that any products
would be shown to be safe and efficacious in clinical trials, that any
products would receive the necessary regulatory approvals, or that any
products would be marketed by Merck.
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
-8-
<PAGE>
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 under the caption "Risk Factors" below , which could cause
actual results to differ materially from those projected. These
forward-looking statements speak only as of the date hereof. The Company
undertakes no obligation to update these forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
RESULTS OF OPERATIONS
Revenues of $1,253,000 were recorded for the quarter ended June 30, 1999.
License revenue primarily represented recognition of deferred license fees of
$275,000 from Merial and royalty revenue of $281,000. Contract revenue
recognized was $643,000, and was primarily from a contract 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, of which $1,758,000 was recognized as revenue through
June 30, 1999.
The Company had revenues of $560,000 for the quarter ended June 30, 1998.
License revenue for the quarter ended June 30, 1998, included recognition of
deferred license fees of $350,000 under earlier agreements with PMC and
Merial and royalty revenues of $183,000.
Revenues for the six months ended June 30, 1999, were $4,534,000. In addition
to the revenue recognized in the second quarter of 1999, revenue for the six
months ended June 30, 1999, also included $1.0 million of license fee and
$1.2 million of equity premium pursuant to January 1999 agreements with
Pfizer Inc., recognition of deferred license fees of $250,000 from Merial,
royalty revenue of $215,000 and contract revenue of $615,000 primarily from
the Office of Naval Research.
Revenues for the six months ended June 30, 1998, were $3,292,000, and in
addition to the revenue recognized in the second quarter of 1998, also
included license payments of $2,200,000 from Centocor under a license and
option agreement and reimbursement of certain costs, recognition of deferred
license fees from PMC and Merial and royalty revenue totaling $332,000, and
$200,000 of contract revenues from PMC.
The Company's total operating expenses for the quarter ended June 30, 1999,
were $4,860,000 compared with $4,072,000 for the second quarter of 1998.
Total operating expenses for the six months ended June 30, 1999, were
$9,487,000 compared with $8,134,000 for the same period in 1998.
Research and development expenses increased to $3,738,000 for the three
months ended June 30, 1999, from $3,058,000 for the same period in 1998. For
the six months ended June 30, 1999, research and development expenses were
$7,352,000 compared with $6,153,000 in the same period of 1998. The increase
in research and development expenses for the three-month and six-month
periods was generally due to increased preclinical and clinical trial costs,
and personnel-related costs. The increase for the six-month period ended June
30, 1999 was partially offset by lower license payments to third parties.
General and administrative expenses increased to $1,122,000 for the three
months ended June 30, 1999, from $1,014,000 for the same period in 1998.
General and administrative expenses for the six months ended June 30, 1999,
increased to $2,135,000 from $1,981,000 for the same period in 1998. The
increase primarily is attributable to increased personnel costs.
Investment income for the three-month and six-month periods ended June 30,
1999, was $568,000 and $1,139,000, respectively. Investment income for the
three-month and six-month periods ended June 30, 1998, was $620,000 and
$1,271,000, respectively. The decreases primarily are a result of lower
investment balances and lower rates of return on investments.
-9-
<PAGE>
The net loss was $.19 per share for both the three months ended June 30,
1999, and the three months ended June 30, 1998. For the six months ended June
30, 1999, the net loss was $.24 per share compared with a net loss of $.23
per share for the same period in the prior year. The Company expects to incur
losses throughout the remainder of 1999 and to report a net loss per share
for the year ended December 31, 1999.
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 June 30, 1999,
the Company had working capital of approximately $39.1 million compared with
$38.4 million at December 31, 1998. Cash and marketable securities totaled
approximately $41.5 million at June 30, 1999, compared with $40.2 million at
December 31, 1998.
The Company expects to incur substantial additional research and development
expense and general and administrative expense, including continued increases
in personnel costs, costs related to preclinical testing and clinical trials,
outside services and facilities. 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 at least 2000.
YEAR 2000 ISSUES
The Year 2000 problem is due to many computer systems using only two
digits rather than four to designate a specific year. As a result, many of
these systems may fail to function properly if a date beyond 1999 is entered.
We have completed our assessment of any potential Year 2000 issues for our
internal computer applications, including embedded control systems in
equipment, to determine whether they will function for the year 2000 and
beyond and what modifications would be required to ensure their continuing
functionality. We upgraded our existing business applications software to the
latest Year 2000 compliant release of the software. We also plan to implement
a new financial and accounting system and related hardware to meet our
growing needs into the near future. This new system will be Year 2000
compliant and implemented prior to year-end. Given the relatively small size
of our systems and the predominantly new hardware, software and operating
systems, we do not anticipate any significant delays in becoming Year 2000
compliant. To date our costs for Year 2000 compliance have been immaterial
and we expect our costs to finish becoming Year 2000 compliant to be
immaterial.
We are unable to control whether our current and future strategic
partners' systems are Year 2000 compliant. The failure of systems maintained
by our strategic partners or suppliers could cause us to incur significant
expenses to remedy any problems, or otherwise seriously damage our business.
We have communicated with strategic partners to assess the risk of Year 2000
issues. Based on these results, at this time, we do not expect any material
Year 2000 issues regarding our dealings with our strategic partners.
At this time, we have no reason to believe that Year 2000 changes
will have a material impact on Vical's business, financial condition or
results of operations. Since no significant issues have been identified, we
do not have a comprehensive contingency plan to address any material Year
2000 issues. We plan to perform backups of the existing and upgraded versions
of the computer system so that in the event
-10-
<PAGE>
our planned new financial and accounting system and related hardware do not
function properly we can continue to operate under the old system. Vical has
not identified what it believes would be a reasonably likely worst case
scenario with respect to Year 2000 failures.
RISK FACTORS
You should carefully consider the following risk factors when
evaluating Vical and its prospects as presented in this report or elsewhere
by management.
UNCERTAINTY CONCERNING OUR POTENTIAL PRODUCTS AND TECHNOLOGY MAY
ADVERSELY AFFECT US
Very little data exists regarding the safety and efficacy of gene
therapy. Moreover, existing studies do not necessarily predict that gene
therapy will be safe or effective in humans. This is significant because all
of our potential products are either in research or development. A failure to
successfully develop and commercialize products will materially adversely
affect us. We must conduct a substantial amount of additional research and
development before any U.S. or foreign regulatory authority will approve any
of our products. This research and development may indicate that our
potential products are unsafe or ineffective, in which case, regulatory
authorities may not approve them. Even if approved, our products may not be
commercially successful.
OUR LOSSES
We have not sold any products and do not expect to sell any products
for the next several years. We have incurred cumulative losses totaling
approximately $41.6 million through June 30, 1999. Moreover, we expect that
our negative cash flow and losses from operations will continue and increase
for the foreseeable future. Indeed, we may never generate sufficient product
revenue to become profitable. We also expect to have quarter-to-quarter
fluctuations in revenues, expenses and losses, some of which could be
significant.
OUR ADDITIONAL FINANCING REQUIREMENTS AND LACK OF ACCESS TO CAPITAL
COULD ADVERSELY AFFECT US
We will need to raise more money to continue the research and
development necessary to bring products to market and to establish
manufacturing and marketing capabilities. If we cannot obtain more money we
will be materially and adversely affected. The amount of money we will need
will depend on many factors, including:
- the progress of our research and development programs
- the scope and results of our preclinical studies and clinical
trials
- the time and costs involved in:
- obtaining necessary regulatory approvals
- filing, prosecuting and enforcing patent claims
- scaling up our manufacturing capabilities
- competing technological and market developments
- the commercial arrangements we may establish
- other factors not within our control
We intend to seek additional funds through public and private stock
offerings, arrangements with corporate collaborators or other sources.
However, we may be unable to obtain the money we need on acceptable terms. If
this happens, we may have to eliminate or scale back some or all of our
research and development programs or license others to develop products
and/or technologies that we otherwise would seek to develop ourselves.
THE REGULATORY APPROVAL PROCESS IS EXPENSIVE, TIME CONSUMING AND
UNCERTAIN WHICH MAY ADVERSELY AFFECT US
-11-
<PAGE>
The regulations governing gene therapy products are evolving and
uncertain; seeking to comply with them is expensive and time consuming.
Failure to obtain FDA approval of our products will materially and adversely
affect us. For example, the FDA has not established guidelines concerning the
length of the clinical trial period required for gene therapy products. Nor
has that agency indicated how many patients it will require to be enrolled in
clinical trials to establish the safety, efficacy and potency of gene therapy
products. Furthermore, existing regulations are subject to substantial review
by various governmental agencies. Therefore, future U.S. or foreign
regulations could prevent or delay regulatory approval of our products or
affect adversely our ability to develop, test, manufacture and market our
products.
We believe that the FDA and comparable foreign regulatory bodies will
regulate the commercial use of any of our products as either biologics or
drugs. These agencies are likely to regulate each product containing a
particular gene as a separate biologic or drug depending on its intended use
and evolving policy. Presently, to commercialize any product we must sponsor
and file a regulatory application for each proposed product. We then must
conduct clinical studies to demonstrate the safety, efficacy and potency of
the product necessary to obtain FDA approval.
The NIH also has established guidelines for research involving
recombinant DNA molecules which is conducted at or supported by the NIH. We
must comply with these guidelines because we and some of our collaborators
use recombinant DNA molecules in our research and we have received grants
from the NIH. Under current guidelines, we must submit for review to the NIH
and the Recombinant DNA Advisory Committee each of our proposals to conduct
clinical research.
We may be unable to obtain the necessary approvals for clinical
trials or for the manufacturing or marketing of our products. Even if we do
obtain regulatory clearance, marketed products remain subject to continual
review by U.S. regulators. If regulators discover a previously unknown
problem with one of our products, or if we fail to comply with applicable
regulations, regulators may:
- restrict marketing of the product
- withdraw the product from the market
- impose civil or criminal sanctions
In addition, many other companies and academic institutions are conducting
research in the gene therapy field using a variety of approaches and
technologies. If any of these researchers were to obtain adverse results in
preclinical or clinical studies this could adversely affect the regulatory
environment for gene therapy products in general, possibly leading to delays
in the approval process for our potential products.
UNCERTAINTY REGARDING OUR INTELLECTUAL PROPERTY RIGHTS MAY HARM US
Patents may not issue from any of our applications. Moreover, if
patents do issue, governmental authorities may not allow claims in such
patents sufficient to protect our technology. Finally, others may challenge
or seek to circumvent or invalidate patents that are issued to us or to
licensors of our technology. In that event, the rights granted under patents
may be inadequate to protect our proprietary technology or to provide any
commercial advantage.
Our success will depend in part on our ability to obtain patent
protection for our products and processes both in the United States and in
other countries. The patent positions of biotechnology and pharmaceutical
companies, however, can be highly uncertain and involve complex legal and
factual questions. Therefore, it is difficult to predict the breadth of
claims allowed in the biotechnology and pharmaceutical fields. We also seek
to protect our proprietary technology through confidentiality agreements with
corporate collaborators, employees, consultants and contractors. Others may
breach these agreements and we may not have a remedy that is adequate to
protect our rights.
-12-
<PAGE>
Protecting intellectual property rights can also be very expensive.
Litigation may be necessary to enforce a patent or to determine the scope and
validity of third-party proprietary rights. Moreover, if a competitor were to
file a patent application claiming technology also invented by us, we would
have to participate in an interference proceeding before the U.S. Patent and
Trademark Office or in a foreign counterpart to determine the priority of the
invention.
Our success also will depend in part on our ability to keep from
infringing upon patents issued to competitors and breaching the technology
licenses that might cover technology used in our products. We do not know
whether any patents held by others will require us to alter our products or
processes, obtain licenses, or stop activities. A number of genetic sequences
or proteins encoded by genetic sequences that we are investigating are, or
may become, patented by others. As a result, we may have to obtain licenses
to test, use or market these products. Our business may suffer if we cannot
obtain licenses, or if we can obtain them only on terms that are commercially
unfavorable.
OUR DEPENDENCE ON OTHERS MAY ADVERSELY AFFECT US
Our strategy for the research, development and commercialization of
our products requires us to enter into contractual arrangements with
corporate collaborators, licensors, licensees and others. Our success depends
upon the performance by these persons of their responsibilities under these
arrangements. We cannot control the timing of their performance or the amount
of resources they will devote to these activities. Some persons may not
perform their obligations as we expect or we may not derive any revenue from
these arrangements.
We have collaborative agreements with several pharmaceutical
companies. We do not know whether these companies will successfully develop
and market any products under their respective agreements. Moreover, some of
our collaborators are also researching competing technologies to treat the
diseases targeted by our collaborative programs. We may be unsuccessful in
entering into other collaborative arrangements to develop and commercialize
our products.
THE EFFECT OF COMPETITION AND TECHNOLOGICAL CHANGE MAY HURT US
Gene therapy is a new and rapidly evolving field. We expect that the
field will continue to undergo significant and rapid technological change.
Such change could render our products or technologies obsolete.
We compete with companies in the field of gene therapy and with
companies pursuing other forms of treatment or prevention for the diseases we
have targeted. Several development stage and established entities, including
major pharmaceutical and biotechnology firms, are exploring the field of
human gene therapy or are actively engaged in research and development in
areas related to gene therapy. We also may 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 aspects of gene therapy which may
materially and adversely affect our business.
Some of our competitors and potential competitors have substantially
greater product development capabilities and financial, scientific, marketing
and human resources than we do. Other companies may succeed in developing
products earlier than we do, obtaining FDA approval for products more rapidly
than we do, or developing products that are more effective than those we
propose to develop. While we will seek to expand our technological
capabilities to remain competitive, research and development by others might
render our technology or products obsolete or noncompetitive or result in
treatments or cures superior to any therapy developed by us. Additionally,
consumers may not prefer therapies developed by us over existing or newly
developed therapies.
-13-
<PAGE>
WE CANNOT MANUFACTURE OR MARKET PRODUCTS ON A COMMERCIAL SCALE WHICH
MAY HURT US
We have neither the resources nor the capability to manufacture or
market our proposed products on a commercial scale. We may be dependent
initially on corporate partners, licensees or others to manufacture and
market our products commercially. If we decide to establish a
commercial-scale manufacturing facility, we will require substantial
additional funds and personnel. We also will be required to comply with
extensive regulations applicable to a manufacturing facility. We may be
unable to enter into any arrangement for the manufacture or marketing of our
products. We also may be unable to obtain additional capital to perform these
activities ourselves.
THERE IS UNCERTAINTY CONCERNING INSURANCE COVERAGE AND REIMBURSEMENT
FOR OUR POTENTIAL PRODUCTS WHICH MAY ADVERSELY AFFECT US
As with many health care products and services, the commercial
viability of our gene therapy products and related treatments may depend in
part on whether their costs are covered by health insurers. These insurers
include:
- government health administration authorities
- private health coverage insurers
- managed care organizations
- other similar organizations
Whenever a new health care product is approved by the regulatory
authorities it is always uncertain whether insurers will cover the product.
We do not know whether or to what extent insurers will cover our potential
products. If purchasers or users of our potential products are not entitled
to adequate reimbursement for the cost of using our potential products, they
may decide not to use them or to limit their use. This could harm our
business.
OUR USE OF HAZARDOUS MATERIALS COULD ADVERSELY AFFECT US
Although we do not manufacture commercial quantities of our potential
products we do produce limited quantities of our potential products for
clinical trials. Our research and development processes involve the
controlled storage, use and disposal of hazardous materials, biological
hazardous materials and radioactive compounds. We are subject to federal,
state and local regulations governing the use, manufacture, storage, handling
and disposal of materials and waste products. There is a risk of accidental
contamination or injury from these materials. In the event of an accident, we
could be held liable for any damages that result, and any liability could
exceed our resources. We could be required to incur significant costs to
comply with current or future environmental laws and regulations. This could
materially or adversely affect our operations, business or assets.
VOLATILITY OF STOCK PRICE AND ABSENCE OF DIVIDENDS
The market price of our common stock, like that of many other life
sciences companies, has been highly volatile and is likely to continue to be
highly volatile. The following factors, among others, could have a
significant adverse impact on the market price of our common stock:
- the results of our preclinical studies and clinical trials or
those of one of our collaborators or competitors
- other evidence of the safety or efficacy of our potential
products or the products of our competitors
-14-
<PAGE>
- the announcement by us or one of our competitors of
technological innovations or new products
- governmental regulatory actions
- developments with our collaborators
- developments concerning our patent or other proprietary rights
or those of one of our competitors (including litigation)
- concern as to the safety of our potential products
- period to period fluctuations in our operating results
- market conditions for life science stocks in general
- other factors not within our control
We have never paid cash dividends on our common stock and do not anticipate
paying any cash dividends in the foreseeable future.
YEAR 2000 ISSUES
We are unable to control whether our current and future strategic
partners' computer systems are Year 2000 compliant. Any of the following
events could affect our operations:
- if a strategic partner were unable to purchase our clinical
materials or services
- if a strategic partner were unable to manage its clinical
trials or research and development activities
- if a strategic partner were unable to pay its invoices owed to
us
- if a supplier were unable to manufacture and ship materials to
us or provide requested contract services
Failure of systems maintained by our strategic partners or suppliers
could cause us to incur significant expenses to remedy any problems, or
otherwise seriously damage our business.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 27, 1999, the Company held its Annual Meeting of Stockholders. The
following actions were taken at the annual meeting.
1. The following Class I directors were elected:
a. Alain B. Schreiber, M.D.--13,594,355 shares voted in favor of the
nominee, 84,287 withheld their vote.
b. Philip M. Young-- 13,593,015 shares voted in favor of the nominee,
85,627 withheld their vote.
The Company's Class II directors, Dr. M. Blake Ingle and R. Gordon
Douglas, Jr., M.D continue in office until 2000.
The Company's Class III directors, Patrick F. Latterell, Gary A. Lyons
and Dale A. Smith, continue in office until 2001.
2. The amendment and restatement of the Stock Incentive Plan of Vical
Incorporated was approved. Shares voted for the proposal were 10,342,846,
with 3,226,748 shares voted against the proposal and 109,048 shares abstained.
-15-
<PAGE>
3. The selection of the Company's independent auditors was ratified. Shares
voted in favor of the proposal were 13,610,998, with 23,129 shares voted
against the proposal and 44,515 shares abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
EXHIBIT 27 Financial Data Schedule
2. Reports on Form 8-K
None
-16-
<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: August 12, 1999 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)
-17-
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
1 EXHIBIT 27 Financial Data Schedule
----------
-18-
<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-Q FOR THE SIX-MONTH
PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 11,107
<SECURITIES> 30,406
<RECEIVABLES> 358
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 42,851
<PP&E> 6,985
<DEPRECIATION> 5,248
<TOTAL-ASSETS> 46,223
<CURRENT-LIABILITIES> 3,793
<BONDS> 800
0
0
<COMMON> 162
<OTHER-SE> 41,468
<TOTAL-LIABILITY-AND-EQUITY> 46,223
<SALES> 0
<TOTAL-REVENUES> 4,534
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,352
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63
<INCOME-PRETAX> (3,877)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,877)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,877)
<EPS-BASIC> (.24)
<EPS-DILUTED> (.24)
</TABLE>
