<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, 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 September 30, 1999
----- ---------------------------------
Common Stock, $.01 par value 16,198,723
<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 September 30, 1999, and December 31, 1998........................3
Statements of Operations for the Three Months Ended September 30, 1999 and 1998,
and for the Nine Months Ended September 30, 1999 and 1998.............................4
Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998........5
Notes to Financial Statements.........................................................6
ITEM 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................8
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...........................*
ITEM 5. Other Information.............................................................*
ITEM 6. Exhibits and Reports on Form 8-K.............................................17
SIGNATURE......................................................................................18
EXHIBIT LIST...................................................................................19
* No information provided due to inapplicability of item.
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VICAL INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 11,186,838 $ 13,567,817
Marketable securities - available-for-sale 27,748,337 26,615,939
Receivables and other 1,797,903 1,432,711
------------ ------------
Total current assets 40,733,078 41,616,467
------------ ------------
Property and Equipment:
Equipment 5,468,711 5,139,944
Leasehold improvements 1,646,023 1,558,554
------------ ------------
7,114,734 6,698,498
Less--accumulated depreciation and amortization (5,487,129) (4,992,121)
------------ ------------
1,627,605 1,706,377
------------ ------------
Patent costs, net of accumulated amortization 1,371,529 1,387,936
Other assets 147,377 133,385
------------ ------------
$ 43,879,589 $ 44,844,165
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------
Current Liabilities:
Accounts payable and accrued expenses $ 2,881,079 $ 2,281,252
Current portion of capital lease obligations 613,460 473,466
Current portion of notes payable 106,887 213,773
Deferred revenue 710,637 250,000
------------ ------------
Total current liabilities 4,312,063 3,218,491
------------ ------------
Long-Term Obligations:
Long-term obligations under capital leases 712,360 747,807
Notes payable - 53,443
------------ ------------
Total long-term obligations 712,360 801,250
------------ ------------
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--
16,198,723 and 15,866,544 shares issued and outstanding at
September 30, 1999 and December 31, 1998, respectively 161,987 158,665
Additional paid-in capital 83,259,509 78,332,483
Accumulated other comprehensive income (loss) (116,123) 69,440
Accumulated deficit (44,450,207) (37,736,164)
------------ ------------
Total stockholders' equity 38,855,166 40,824,424
------------ ------------
Total Liabilities and Stockholders' Equity $ 43,879,589 $ 44,844,165
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
3
<PAGE>
VICAL INCORPORATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Revenues:
License/royalty revenue $ 495,024 $ 1,536,992 $ 3,770,731 $ 4,617,138
Contract revenue 733,817 158,834 1,991,750 370,694
------------ ------------ ------------ ------------
1,228,841 1,695,826 5,762,481 4,987,832
------------ ------------ ------------ ------------
Expenses:
Research and development 3,514,247 3,157,774 10,866,310 9,310,700
General and administrative 1,066,402 854,716 3,201,137 2,836,114
------------ ------------ ------------ ------------
4,580,649 4,012,490 14,067,447 12,146,814
------------ ------------ ------------ ------------
Loss from operations (3,351,808) (2,316,664) (8,304,966) (7,158,982)
Interest income 548,490 607,846 1,687,750 1,879,342
Interest expense 33,489 41,057 96,827 126,051
------------ ------------ ------------ ------------
Net loss $ (2,836,807) $ (1,749,875) $ (6,714,043) $ (5,405,691)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per share (basic and diluted--Note 2) $ (.18) $ (.11) $ (.42) $ (.34)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average shares used in computing net loss per share 16,196,078 15,817,412 16,114,024 15,786,838
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
(Note 2)
</TABLE>
See accompanying notes.
4
<PAGE>
VICAL INCORPORATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (6,714,043) $ (5,405,691)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 795,742 694,653
Write-off of abandoned patent application costs - 94,800
Change in operating assets and liabilities:
Receivables and other (365,192) (769,729)
Accounts payable and accrued expenses 599,827 152,134
Deferred revenue 460,637 321,739
-------------------- --------------------
Net cash used in operating activities (5,223,029) (4,912,094)
-------------------- --------------------
INVESTING ACTIVITIES:
Marketable securities (1,317,960) 5,045,860
Capital expenditures (182,509) (25,388)
Deposits and other 15,008 (2,854)
Patent expenditures (53,800) (155,509)
-------------------- --------------------
Net cash provided from (used in) investment activities (1,539,261) 4,862,109
-------------------- --------------------
FINANCING ACTIVITIES:
Principal payments under capital lease obligations (388,707) (369,375)
Payments on notes payable (160,329) (213,773)
Issuance of common stock, net 4,930,347 888,378
-------------------- --------------------
Net cash provided from financing activities 4,381,311 305,230
-------------------- --------------------
Net increase (decrease) in cash and cash equivalents (2,380,979) 255,245
Cash and cash equivalents at beginning of period 13,567,817 12,157,149
-------------------- --------------------
Cash and cash equivalents at end of period $ 11,186,838 $ 12,412,394
-------------------- --------------------
-------------------- --------------------
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Equipment acquired under capital leases $ 493,254 $ 273,792
-------------------- --------------------
-------------------- --------------------
</TABLE>
See accompanying notes.
5
<PAGE>
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS
September 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 naked DNA 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, 1999, and
for the three-month and nine-month periods ended September 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
nine-month periods ended September 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 September 30, 1999 and 1998, other comprehensive income (loss)
was ($23,641) and $148,889, respectively, and total comprehensive loss
was $2,860,448 and $1,600,986, respectively. For the nine-month periods
ended September 30, 1999 and 1998, other comprehensive income (loss)
was ($185,563), and $129,433, respectively, and total comprehensive
loss was $6,899,608 and $5,276,558, respectively.
4. COMMITMENTS
Vical renewed leases on three facilities. Two leases were scheduled to
terminate on November 30, 1999, but will now both expire on December 1,
2004. Vical has the option to renew both leases for an additional
five-year period. Under one lease, Vical increased its office space by
approximately 5,100 square feet effective August 1, 1999.
6
<PAGE>
A third lease was amended in November 1999 and extends to November 30,
2004 a lease which was scheduled to expire on March 31, 2001. This
lease can be extended for two additional five-year periods. Total
leased space effective August 1, 1999, was approximately 43,000 square
feet. Total monthly rental on all facilities, including common area
maintenance costs, was approximately $107,000 effective August 1,
1999. Minimum lease payments for operating leases are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1999 $ 1,208,000
2000 1,340,000
2001 1,384,000
2002 1,431,000
2003 1,479,000
2004 1,395,000
-----------
Total minimum lease
payments for operating leases $ 8,237,000
-----------
-----------
</TABLE>
5. SUBSEQUENT EVENTS
On November 3, 1999, Vical received a $2 million payment from Merck in
accordance with a 1997 license agreement. The payment extends Merck's
exclusive worldwide rights to use Vical's patented naked DNA technology
to develop and market therapeutic vaccines against human
immunodeficiency virus (HIV) and hepatitis B virus (HBV).
In November 1999, Vical entered into an unsecured line of credit
agreement with a bank to provide financing for leasehold improvements.
Under the terms of the agreement, Vical may borrow up to $1,000,000
through May 1, 2000. Interest is payable monthly for any borrowings
beginning November 1, 1999. Commencing June 1, 2000, the outstanding
principal and interest will be repaid in 42 equal monthly payments.
Interest under this agreement is at the bank's reference rate minus .25
percentage points. The borrowings can be prepaid without penalty. The
agreement contains certain financial covenants.
7
<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 naked DNA 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 DNA-based 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
September 30, 1999, the Company's accumulated deficit was approximately $44.5
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. The treatment may also trigger an immune
response against additional tumor cells, both locally and systemically, by
exposing other features of the tumor cells to the immune system.
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 multi-center 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, encouraging 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
8
<PAGE>
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 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 naked DNA vaccine targets for
animal health applications.
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.
In October, we announced that our lead product candidate, ALLOVECTIN-7, was
granted orphan drug designation for the treatment of invasive and metastatic
melanoma by the U.S. Food and Drug Administration (FDA) Office of Orphan
Products Development. Orphan drug designation provides U.S. marketing
exclusivity for seven years upon marketing approval by the FDA, in addition
to tax benefits.
On November 3, 1999, Vical received a $2 million payment from Merck in
accordance with a 1997 license agreement. The payment extends Merck's exclusive
worldwide rights to use Vical's patented naked DNA technology to develop and
market therapeutic vaccines against human immunodeficiency virus (HIV) and
hepatitis B virus (HBV).
Merck is planning to initiate a clinical trial before year-end with a vaccine
using Vical's patented naked DNA 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 naked DNA 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,
9
<PAGE>
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
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 $1,229,000 were recorded for the quarter ended September 30, 1999.
License revenue primarily represented recognition of deferred license fees of
$275,000 from Merial, and royalty and other revenue of $220,000. Contract
revenue recognized was $734,000, 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 cumulatively $2,231,000 was recognized as
revenue through September 30, 1999.
The Company had revenues of $1,696,000 for the quarter ended September 30, 1998.
License revenue primarily consisted of a license fee of $1,100,000 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
Merial license agreement and royalty revenue of $187,000. In addition, for
the quarter ended September 30, 1998, Vical recognized net contract revenue
of $159,000.
Revenues for the nine months ended September 30, 1999, were $5,762,000. In
addition to the revenue recognized in the third quarter of 1999, revenue for
the nine months ended September 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 $525,000
from Merial, royalty and other revenue of $550,000 and contract revenue of
$1,258,000 primarily from the Office of Naval Research.
Revenues for the nine months ended September 30, 1998, were $4,988,000, and in
addition to the revenue recognized in the third 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 $880,000, and $212,000 of
contract revenues, mostly from PMC.
The Company's total operating expenses for the quarter ended September 30, 1999,
were $4,581,000 compared with $4,012,000 for the second quarter of 1998. Total
operating expenses for the nine months ended September 30, 1999, were
$14,067,000 compared with $12,147,000 for the same period in 1998.
10
<PAGE>
Research and development expenses increased to $3,514,000 for the three months
ended September 30, 1999, from $3,158,000 for the same period in 1998. For the
nine months ended September 30, 1999, research and development expenses were
$10,866,000 compared with $9,311,000 in the same period of 1998. The increase in
research and development expenses for the three-month and nine-month periods was
generally due to increased preclinical and clinical trial costs, and
personnel-related costs. The increases for the three-month and nine-month
periods ended September 30, 1999 were partially offset by lower license payments
to third parties.
General and administrative expenses increased to $1,066,000 for the three months
ended September 30, 1999, from $855,000 for the same period in 1998. General and
administrative expenses for the nine months ended September 30, 1999, increased
to $3,201,000 from $2,836,000 for the same period in 1998. The increase
primarily is attributable to increased personnel costs.
Investment income for the three-month and nine-month periods ended September 30,
1999, was $548,000 and $1,688,000, respectively. Investment income for the
three-month and nine-month periods ended September 30, 1998, was $608,000 and
$1,879,000, respectively. The decreases primarily are a result of lower
investment balances and lower rates of return on investments.
The net loss was $.18 per share for the three months ended September 30, 1999,
compared with a net loss of $.11 for the three months ended September 30, 1998.
For the nine months ended September 30, 1999, the net loss was $.42 per share
compared with a net loss of $.34 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 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 September 30, 1999, the
Company had working capital of approximately $36.4 million compared with $38.4
million at December 31, 1998. Cash and marketable securities totaled
approximately $38.9 million at September 30, 1999, compared with $40.2 million
at December 31, 1998. In November 1999, Vical entered into an unsecured line of
credit agreement with a bank to provide financing for leasehold improvements.
Under the terms of the agreement, Vical may borrow up to $1,000,000 through May
1, 2000. Interest is payable monthly for any borrowings beginning November 1,
1999. Commencing June 1, 2000, the outstanding principal and interest will be
repaid in 42 equal monthly payments. Interest under this agreement is at the
bank's reference rate minus .25 percentage points. The borrowings can be prepaid
without penalty. The agreement contains certain financial covenants.
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.
11
<PAGE>
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 implemented a new financial and accounting system and
related hardware to meet our growing needs into the near future. This new
system is Year 2000 compliant. 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
performed backups of the previous computer system so that in the event our 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 DNA
therapeutics. Moreover, existing studies do not necessarily predict that DNA
therapeutics 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 $44.5 million through September 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.
12
<PAGE>
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
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:
13
<PAGE>
- 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.
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
14
<PAGE>
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
DNA therapeutics 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 DNA therapeutics 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 or are
actively engaged in research and development in related areas. 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.
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 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.
15
<PAGE>
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
- 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.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
<TABLE>
<S> <C>
EXHIBIT 10.20 Amendment No. 4 to the Lease dated December 4,
1987, between the Company and Nippon Landic
(U.S.A.), Inc., a Delaware Corporation (as
successor in interest to Nexus GADGO-UTC)
EXHIBIT 27 Financial Data Schedule
</TABLE>
2. Reports on Form 8-K
None
17
<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, 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)
18
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
1. EXHIBIT 10.20 Amendment No. 4 to the Lease dated December 4,
1987, between the Company and Nippon Landic
(U.S.A.), Inc., a Delaware Corporation (as
successor in interest to Nexus GADGO-UTC)
2. EXHIBIT 27 Financial Data Schedule
</TABLE>
19
<PAGE>
FOURTH AMENDMENT TO LEASE EXHIBIT 10.20
This Fourth Amendment to Lease (this "Amendment") is made by and between VICAL
Incorporated, a Delaware Corporation ("Tenant"), and Nippon Landic (U.S.A.),
Inc., a Delaware Corporation ("Landlord"), with reference to that certain lease
(the "Lease") dated December 4, 1987 between Tenant and Landlord with respect to
the premises (the "Premises") described therein. The Lease is hereby amended as
follows:
1. PARAGRAPH 2.1.4. Paragraph 2.1.4 of the Lease shall be amended to add:
"Basic Annual Rent: Effective December 1, 1999, Basic Annual Rent shall be
$447,976.92.
2. PARAGRAPH 2.1.5. Paragraph 2.1.5 of the Lease shall be amended to add:
"Monthly Rental Installments: Effective December 1, 1999, Monthly Rental
Installments of Basic Annual Rent shall be $37,331.41.
3. PARAGRAPH 2.1.7. Paragraph 2.1.7 of the Lease shall be amended to read:
"Term Expiration Date: December 1, 2004."
4. PARAGRAPH 6.1. Paragraph 6.1 of the Lease shall be amended to include:
"The first such Rental Adjustment of the Lease, as amended by the Fourth
Amendment to Lease, shall become effective December 1, 2000."
5. PARAGRAPH 5 OF THIRD AMENDMENT. Paragraph 5 of that certain Third
Amendment to Lease, effective January 1, 1995, by and between Landlord and
Tenant is hereby deleted.
6. NEW PROVISIONS. The following new provisions are hereby added to the
Lease:
(a) TENANT IMPROVEMENTS. In connection with the amendment of the Lease
contemplated by this Amendment, Tenant shall receive a tenant
improvement allowance (the "Allowance") from Landlord in an amount
equal to One Hundred Forty-Nine Thousand Five Hundred Ten Dollars
($149,510.00) to be used for tenant improvements to the Premises (the
"Allowance Improvements"). The Allowance shall be available to Tenant
following the full execution of this Amendment and shall be disbursed
by Landlord to Tenant to timely pay costs of construction in
connection with the Allowance Improvements upon completion of a
particular improvement, contractor lien release, if applicable. The
Allowance Improvements shall be mutually agreed upon by Landlord and
Tenant prior to commencement of construction, with Landlord's approval
not to be unreasonably withheld or delayed, and shall include, by way
of illustration only, improvements to the HVAC system for the building
(the "Building") in which the Premises are located, including cooling
tower improvements, air compressor improvements and boiler
improvements; interior space improvements to the Premises, including
carpeting replacement, painting of the Premises, and replacement and
repair of countertops, flooring, and doors; a kitchen remodel;
conference room built-ins; and related improvements. The foregoing
description is intended as a general description only and shall be
finalized by agreement of the parties. Tenant shall be responsible
for construction of the Allowance Improvements, all of which shall be
completed in a good, workmanlike and lien-free manner, pursuant to a
schedule reasonably approved by the parties. The Allowance
Improvements shall not include, and the Allowance shall not be
allocated for payment of, improvements to any common areas of the
Building. The Allowance shall be available for all reasonable costs
related to construction and
<PAGE>
completion of the Allowance Improvements, including, without
limitation, design and architectural fees, permits and licenses and
all other related hard and soft costs of such construction. The
parties shall also reasonably agree upon Tenant's contractor for such
work and a method of timely disbursements to pay all costs incurred
in connection therewith.
7. OPTION TO RENEW. Landlord grants to Tenant the right to renew the terms of
this Lease for one five (5) year period under the same terms and conditions
existing in the Original Lease and/or as amended, except that Basic Annual
Rent shall be adjusted at the beginning of such renewal term to (90%) of
the then prevailing market rent for similar space in the same general
geographic area. The adjusted Basic Annual Rent shall be determined by
agreement of the parties, or in absence thereof, by a real estate appraiser
with at least five (5) years commercial appraisal experience in the City of
San Diego approved by mutual agreement of the parties, or, in the absence
thereof, by the American Arbitration Association. In no event, however,
shall the adjusted Basic Annual Rent be less than the Basic Annual Rent
payable during the last year of the term as extended by this Amendment.
Tenant shall exercise such right to renew this Lease by written notice to
Landlord no later than six (6) months prior to the end of the term of the
lease as extended by this Amendment. There shall be no further right to
renew the term of the lease beyond said one renewal period.
8. BROKERS: CB Richard Ellis, Inc. represents both Landlord and Tenant in
connection with this Amendment and Landlord and Tenant agree to such dual
representation. In conjunction with this Amendment, CB Richard Ellis,
Inc., shall be paid a leasing commission by Landlord equal to two and
one-half percent (2.5%) of the total nominal lease value (inclusive of
minimum increases) over the five (5)-year Lease extension evidenced by
this Amendment. Such commission shall be due and payable in its entirety
upon invoicing.
9. MISCELLANEOUS. The Lease shall remain in full force and effect, unmodified
except as set forth in this Amendment. This Amendment may be executed in
multiple counterparts and shall be binding upon the parties following full
execution hereof.
IN WITNESS WHEREOF, this Fourth Amendment to Lease is executed as of the
date first set forth above by the undersigned parties hereto.
LANDLORD: TENANT:
NIPPON LANDIC (U.S.A.), INC., VICAL INCORPORATED,
A Delaware Corporation a Delaware Corporation
By: /s/MITSUHIKO HASHIMOTO By: /s/MARTHA J. DEMSKI
---------------------- -------------------
Mitsuhiko Hashimoto Martha J. Demski
General Manager Vice President
Chief Financial Officer
Date: June 2, 1999 Date: May 28, 1999
<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, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 11,187
<SECURITIES> 27,748
<RECEIVABLES> 484
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 40,733
<PP&E> 7,115
<DEPRECIATION> 5,487
<TOTAL-ASSETS> 43,880
<CURRENT-LIABILITIES> 4,312
<BONDS> 712
0
0
<COMMON> 162
<OTHER-SE> 38,693
<TOTAL-LIABILITY-AND-EQUITY> 43,880
<SALES> 0
<TOTAL-REVENUES> 5,762
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,866
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97
<INCOME-PRETAX> (6,714)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,714)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,714)
<EPS-BASIC> (.42)
<EPS-DILUTED> (.42)
</TABLE>
