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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
/ X / Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended DECEMBER 31, 1999, or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from to .
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Commission file number: 0-21088
VICAL INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of 93-0948554
incorporation or organization) (IRS Employer Identification No.)
9373 TOWNE CENTRE DRIVE, SUITE 100, SAN DIEGO, CA 92121-3088
Address of principal executive offices
(858) 646-1100
Registrant's telephone number including area code
Securities registered pursuant to
Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, Par Value $0.01
Preferred Stock Purchase Rights,
Par Value $0.01 (Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[X]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant, based upon the last sale price of the Common Stock reported on
the National Association of Securities Dealers Automated Quotation National
Market System on March 15, 2000, was $560,514,000.
The number of shares of Common Stock outstanding as of March 15, 2000, was
19,814,986.
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DOCUMENTS INCORPORATED BY REFERENCE
(To the Extent Indicated Herein)
Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the
Registrant's 2000 Annual Meeting of Stockholders to be held on May 18, 2000,
is incorporated by reference in Part III, Items 10 (as to directors), 11, 12
and 13 of this Form 10-K.
FORWARD-LOOKING STATEMENTS
The statements incorporated by reference or contained in this report
discuss our future expectations, contain projections of our results of
operations or financial condition, and include other "forward-looking"
information within the meaning of Section 27A of the Securities Act of 1933,
as amended. Our actual results may differ materially from those expressed in
forward-looking statements made or incorporated by reference in this report.
Forward-looking statements that express our beliefs, plans, objectives,
assumptions or future events or performance may involve estimates,
assumptions, risks and uncertainties. Therefore, our actual results and
performance may differ materially from those expressed in the forward-looking
statements. Forward-looking statements often, although not always, include
words or phrases such as the following:
- "will likely result,"
- "are expected to,"
- "will continue,"
- "is anticipated,"
- "estimate,"
- "intends,"
- "plans,"
- "projection," and
- "outlook."
You should not unduly rely on forward-looking statements contained
or incorporated by reference in this report. Actual results or outcomes may
differ materially from those predicted in our forward-looking statements due
to the risks and uncertainties inherent in our business, including risks and
uncertainties in:
- clinical trial results,
- obtaining and maintaining regulatory approval,
- market acceptance of and continuing demand for our products,
- the attainment of patent protection for any of these products,
- the impact of competitive products, pricing and reimbursement
policies,
- our ability to obtain additional financing to support our operations,
- the continuation of our corporate collaborations, and
- changing market conditions and other risks detailed below.
You should read and interpret any forward-looking statements
together with the following documents:
- our Quarterly Reports on Form 10-Q,
- the risk factors contained in this report under the caption
"Risk Factors," and
- our other filings with the Securities and Exchange Commission.
Any forward-looking statement speaks only as of the date on which
that statement is made. We will not update any forward-looking statement to
reflect events or circumstances that occur after the date on which such
statement is made.
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PART I
ITEM 1. BUSINESS
OVERVIEW
We develop biopharmaceutical products based on our patented naked
DNA gene transfer technologies for the prevention and treatment of
life-threatening diseases. We currently focus our development on innovative
cancer therapies to induce an immune response against cancer cells without
causing serious side effects. We have retained all rights to our internally
developed cancer product candidates. Our lead immunotherapy product
candidate, ALLOVECTIN-7, is in Phase III and Phase II registration trials for
patients with advanced metastatic malignant melanoma, an aggressive form of
skin cancer, and in a Phase II clinical trial for patients with persistent or
recurrent cancer of the head and neck. Our second immunotherapy product
candidate, LEUVECTIN, is in Phase II clinical trials for patients with
advanced metastatic kidney cancer and for high-risk patients with locally
confined prostate cancer. VAXID, a cancer vaccine intended to prevent
recurrence of low-grade, non-Hodgkin's B-cell lymphoma, is in a Phase I/II
clinical trial. We are supporting clinical testing of a cancer vaccine for
the treatment of advanced metastatic melanoma in a collaboration with the
National Cancer Institute, NCI.
We enter into collaborations with major pharmaceutical companies to
leverage our technologies primarily for non-cancer applications such as
vaccines for infectious diseases and optimized delivery of therapeutic
proteins. We have established relationships through the license of our
technology with a growing number of corporate partners and collaborators
including:
- - Merck and Co., Inc.,
- - Two divisions of Aventis S.A., formerly Rhone-Poulenc S.A.,
- Aventis Pasteur, formerly Pasteur Merieux Connaught,
- Aventis Pharma, formerly Rhone-Poulenc Rorer
Pharmaceuticals, Inc.,
- - Pfizer Inc,
- - Merial, the animal health joint venture between Merck and
Rhone Merieux,
- - Centocor, a wholly-owned subsidiary of Johnson & Johnson,
- - Boston Scientific Corporation.
- - Human Genome Sciences, Inc., and Vascular Genetics Inc.
HISTORICAL APPROACHES TO GENE DELIVERY
A typical living cell in the body contains thousands of different
proteins essential to cellular structure, growth, and function. Proteins are
produced by the cell according to a set of genetic instructions encoded by
DNA, which contains all the information necessary to control the cell's
biological processes.
DNA is organized into segments called genes, with each gene
containing the information required to produce a specific protein. Production
of the protein encoded by a particular gene is known as gene expression. The
improper expression of even a single gene can severely alter a cell's normal
function, frequently resulting in a disease. Gene delivery is an approach to
the treatment and prevention of diseases in which genes are introduced into
cells to direct the production of specific proteins which have a desired
biological effect.
Historically, gene delivery was accomplished by inserting the
desired gene into a delivery vehicle, or vector. The most common vectors were
viruses that had been genetically disabled so that they could not reproduce
and infect other cells. Gene delivery approaches using viruses suffer several
drawbacks that may limit their widespread usefulness, including adverse
immune responses and inflammation that may inhibit the activity of the
virus-based therapy and prevent repeated administration. In addition, viruses
can induce permanent changes in the patient's genetic makeup, which may lead
to cancer. Some gene delivery product candidates under development at
competing companies use viral vectors, but many of the newer formulations are
using non-viral or synthetic vectors such as lipids or polymers.
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OUR NAKED DNA TECHNOLOGY
The key discovery leading to our patented naked DNA direct gene
delivery technology was that some muscle tissues can absorb genetic material
directly, without the use of viral components, and subsequently express a
desired protein for periods ranging from weeks to several months. Our naked
DNA gene delivery approach involves the design and construction of plasmids,
DNA segments whose ends are attached together to form a highly stable closed
loop. These plasmids contain the gene encoding the protein of interest as
well as short segments of DNA that control the rate and location of protein
expression. Plasmids can be manufactured through conventional fermentation
and purification techniques. Since the initial discovery of the naked DNA
technology, our researchers have improved the design of our plasmids to
provide dramatic increases in efficiency of gene delivery and expression. In
addition, we are developing other synthetic technologies to deliver DNA
directly into some non-muscle tissues, including the use of lipid molecules
that facilitate direct absorption of DNA into cells.
A narrow definition of "naked DNA" includes only pure plasmid DNA. A
broader definition includes plasmid DNA formulated with agents such as lipids
or polymers. We call ourselves "The Naked DNA Company-(TM)-" because all of
our product candidates are based on these synthetic, non-viral gene delivery
methods, and because we own exclusive, broad rights to the naked DNA gene
delivery technologies through our series of core patents.
Our naked DNA gene delivery approach may offer novel treatment
alternatives for diseases that are currently poorly addressed. Benefits of
our gene delivery technology may include:
- - BROAD APPLICABILITY. Our naked DNA gene delivery technology may be useful
in developing novel treatments for cancer, DNA vaccines to prevent or treat
infectious diseases and methods to efficiently deliver human and animal
therapeutic proteins.
- - CONVENIENCE. Our naked DNA therapeutics are intended to be administered
like conventional pharmaceuticals on an outpatient basis.
- - SAFETY. Our product candidates contain no viral components which may cause
unwanted immune responses, infections, or malignant and permanent changes in
the cell's genetic makeup.
- - EASE OF MANUFACTURING. Our product candidates are manufactured using
conventional fermentation techniques and standard purification procedures.
- - COST-EFFECTIVENESS. Our naked DNA gene delivery technology may prove to be
more cost-effective than therapies which require genetic modification and
controlled propagation of viral vectors. The DNA, once introduced into the
body, is intended to stimulate the production of a therapeutic protein over a
prolonged period of time, which may be more cost-effective than administering
the protein itself.
Potential applications of our naked DNA gene delivery technology
include DNA therapeutics for cancer, in which the expressed protein is an
immune system stimulant or cancer-killing agent, DNA vaccines for infectious
diseases, in which the expressed protein is an antigen, and DNA therapeutic
protein delivery, in which the expressed protein is a therapeutic agent.
BUSINESS STRATEGY
There are three basic elements to our business strategy:
INDEPENDENTLY DEVELOP CANCER THERAPEUTICS
We currently focus our resources on the independent development of
cancer therapeutics. The large and rapidly growing market for cancer products
is poorly addressed by existing treatment alternatives. In addition, this
market is well-suited to a development-stage company with limited resources
such as Vical because:
- - Clinical testing usually can be conducted in a small number of patients
and benefits can be detected and verified in reasonably short periods of
time,
- - Testing occurs in patients with advanced, life-threatening diseases with
limited treatment alternatives, which may expedite the regulatory approval
process,
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- - Product acceptance is driven by objective clinical data, potentially
reducing marketing costs, and
- - Treatment decisions are made at regional cancer centers by oncologists
who can be served by a small, specialized sales force.
We intend to retain significant participation in the
commercialization of our proprietary cancer products, although we may choose
to enlist the support of a marketing partner to accelerate market penetration.
EXPAND THE APPLICATIONS OF OUR TECHNOLOGY THROUGH STRATEGIC
COLLABORATIONS
Our naked DNA technology can potentially be applied to the treatment
or prevention of a wide range of diseases in addition to cancer. In markets
that would require large-scale development, high-capacity manufacturing or
mass marketing, we have chosen to establish partnerships with major
pharmaceutical companies. These companies have the resources necessary to
develop and commercialize products for these markets. The resulting
collaborations typically provide us with upfront and milestone payments
during product development, as well as the potential for ongoing royalties
from product sales. Our collaborations to date have involved multiple
applications for DNA vaccines and DNA therapeutic protein delivery.
DEVELOP FUTURE PRODUCT OPPORTUNITIES
We are actively pursuing the development of future products,
refinement of our plasmids and lipids, the exploration of alternative gene
delivery technologies, and the evaluation of potential enhancements to our
core naked DNA technologies. We also seek and develop additional applications
of our technologies by testing new approaches to disease control or
prevention. These efforts could lead to further independent product
development or to additional licensing opportunities. In addition, we
continually evaluate compatible technologies or products that may be of
potential interest for in-licensing or acquisition.
PRODUCT DEVELOPMENT
The following table summarizes the status of our independent and
collaborative product development programs and identifies corporate partners
where relevant.
In the table below:
- - "Research" indicates research related to identification and synthesis
of lead compounds.
- - "Preclinical" indicates that a specific compound is undergoing
toxicology testing and manufacturing scale-up, among other things, in
preparation for filing an application for an Investigational New Drug,
IND.
In Phase I, trials are conducted with a small number of healthy
volunteers to determine the safety profile, the pattern of drug distribution
and metabolism. In Phase II, trials are conducted with a larger group of
patients afflicted with a target disease in order to determine preliminary
efficacy, optimal dosages and expanded evidence of safety. In the case of
products for life-threatening diseases, the initial human testing is
generally done in patients rather than in healthy volunteers. Since these
patients are already afflicted with the target disease, it is possible that
these studies may provide results traditionally obtained in Phase II trials.
Such trials are frequently referred to as "Phase I/II" trials. In Phase III,
large scale, multi-center, comparative trials are conducted with patients
afflicted with a target disease in order to provide enough data for the
statistical proof of safety and efficacy required by the FDA and other
regulatory authorities.
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<TABLE>
<CAPTION>
PROJECT TARGET INDICATION(S) DEVELOPMENT STATUS DEVELOPMENT RIGHTS
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<S> <C> <C> <C>
CANCER
ALLOVECTIN-7 Melanoma, Phase III Vical
Head and neck cancer Phase II Vical
LEUVECTIN Renal cell carcinoma Phase II Vical
Prostate cancer Phase II Vical
VAXID B-cell lymphoma Phase I/II Vical
gp100 Melanoma Phase I/II Vical
Therapeutic DNA vaccines Various cancers Preclinical/Phase I Centocor
INFECTIOUS DISEASES
Preventive DNA vaccines Influenza, human Phase I Merck
immunodeficiency virus
Malaria Phase I Aventis Pasteur, formerly
Pasteur Merieux Connaught
Hepatitis B, hepatitis C, Research/preclinical Merck
human immunodeficiency
virus, human papilloma
virus, herpes simplex,
tuberculosis
CMV, H. pylori, Lyme, RSV, Research/preclinical Aventis Pasteur, formerly
varicella zoster Pasteur Merieux Connaught
Therapeutic DNA vaccines Hepatitis B, human Research/preclinical Merck
immunodeficiency virus,
human papilloma virus
OTHER DISEASES
Therapeutic protein DNA Neurodegenerative diseases Research/preclinical Aventis Pharma, formerly
Rhone-Poulenc Rorer
Catheter-based DNA therapy Cardiovascular diseases Research/preclinical Boston Scientific
VETERINARY
Preventive DNA vaccines Various Research Merial
Therapeutic protein DNA Various Research Pfizer
</TABLE>
DNA THERAPEUTICS FOR CANCER
Cancer is a group of diseases in which certain cells grow
uncontrolled by the body's normal self-regulatory mechanisms. Surgery is the
most effective therapy for locally confined cancers. But surgery is not
practical or curative for invasive or metastatic disease that has spread
beyond a few locations. Radiation therapy can shrink or eliminate individual
tumors, but cannot effectively treat widespread metastases. In addition, high
doses of radiation can destroy the healthy underlying tissue. Chemotherapy
seeks to control cancer by killing rapidly dividing cells. However, a number
of non-malignant cells in the body, such as bone marrow cells, also rapidly
divide and are highly susceptible to chemotherapy. Thus, doses sufficient to
eradicate the cancer often cause life-threatening side effects. None of these
conventional approaches can eliminate all cancer cells in advanced disease,
so recurrence after treatment is common.
A therapeutic approach that selectively kills tumor cells would be
far superior to currently available therapies. One approach would be to
generate a specific immune response targeting cancer cells without damaging
other normal tissues. It is generally believed that the immune system can
selectively recognize cancer cells as abnormal and destroy them. However, the
vast majority of cancers arise spontaneously in patients with an otherwise
normal immune system. This observation suggests that cancer cells somehow
escape the normal immune defense mechanisms or that the killer T-cell
response produced by cancer patients is not powerful enough to kill all of
the abnormal cells. A variety of methods can augment the
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immune response against tumor cells, including the systemic administration of
natural immune-enhancing proteins such as interleukin-2, IL-2, and
interferon-alpha either alone or in combination with other agents. These
methods have shown encouraging results in some patients with some tumor
types. However, systemic administration of these agents requires large and
frequent doses that also cause serious side effects.
Our scientists are developing novel gene-based cancer
immunotherapies to address the shortcomings of existing therapies. These
immunotherapeutic product candidates are summarized below.
ALLOVECTIN-7
ALLOVECTIN-7 is a DNA/lipid complex containing the human gene
encoding HLA-B7 antigen which is found infrequently in the human population.
ALLOVECTIN-7 is designed to be injected directly into a tumor, where
malignant cells absorb it and express the HLA-B7 antigen. This antigen alerts
the immune system to the presence of foreign tissue, inducing the type of
powerful immune response seen in organ transplant rejection. In addition, the
treatment may trigger an immune response against additional tumor cells, both
locally and systemically, by enabling the immune system to recognize other
features of the tumor cells. ALLOVECTIN-7 is currently in advanced clinical
testing for patients with metastatic melanoma and for patients with
persistent or recurrent tumors of the head and neck.
METASTATIC MELANOMA
Melanoma is a skin cancer found predominantly in Caucasians,
particularly in fair-skinned individuals who have experienced repeated
sunburn. According to American Cancer Society, ACS, statistics, 44,200 new
cases of melanoma will be diagnosed in the U.S. and 7,300 patients will die
from this disease in 1999. NCI estimates that about 480,000 Americans
currently suffer from malignant melanoma. If detected when the disease is
still limited to one site, known as stage I and II, melanoma usually can be
treated successfully by surgery. If untreated, the disease frequently spreads
to the lymph glands, lungs, liver, brain and other organs. Stage III is
defined as metastatic disease limited to one region and is treated with a
combination of surgery and chemotherapy. Stage IV disease involves advanced
regional or any distant tumors and treatment normally includes some
combination of chemotherapy, radiotherapy, and surgery. The five-year
survival of patients with stage III and stage IV disease is 59 percent and 12
percent, respectively. In patients whose disease continues to progress after
they have received all available treatments, the average survival is seven to
nine months.
We believe ALLOVECTIN-7 will provide an effective, well-tolerated
alternative or supplement to available therapies. In multi-center Phase I/II
and Phase II trials, ALLOVECTIN-7 was well-tolerated, and provided durable
reductions in overall tumor burden or maintained stable disease in some
patients. Combined results from three Phase I/II trials, summarized in May
1998 at the Annual Meeting of the American Society of Clinical Oncology,
included seven out of 36 evaluable patients, or 19 percent, who had achieved
clinical partial or complete responses with a duration of at least eight
months. We believe results from two Phase II melanoma trials indicated the
potential efficacy of ALLOVECTIN-7 in treating melanoma patients, and
suggested a negative correlation between disease spread and such potential
efficacy. Among the 50 evaluable patients with widespread advanced disease
affecting multiple internal organs, combined results from the two Phase II
trials included:
- - two patients who had achieved a clinical response lasting two to 12 months
and continuing at the time of the announcement, and
- - ten patients who had achieved stable disease lasting two to 11 months
and continuing at the time of the announcement.
In patients with soft-tissue metastases in lymph nodes, lungs or
tissues located directly beneath the skin, combined Phase II results included
four of 23 evaluable patients, or 17 percent, who had achieved clinical
partial responses with an average duration of 11 months. We believe the
latter results compare favorably to available clinical data on other
FDA-approved biological agents such as interferon-alpha and interleukin-2.
Updated data from the Phase I/II and Phase II trials, were presented
in December 1999 at the Eighth International Gene Therapy of Cancer
Conference. Of 90 evaluable end-stage patients, 24, or 26
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percent, demonstrated clinical benefit. Tumor regression was noted more often
in patients with soft-tissue metastatic disease than in patients with
multiple-internal organs affected. In the 32 patient soft-tissue subgroup, 12
patients, or 37 percent, demonstrated clinical benefit. The median time to
disease progression was 24 weeks in patients who responded to ALLOVECTIN-7,
compared with nine weeks in all patients. The median length of survival was
99 weeks for responders compared with 38 weeks in all patients.
Side effects from ALLOVECTIN-7 were primarily mild with the most
common complaint being temporary pain at the injection site. No serious side
effects related to ALLOVECTIN-7 were reported in these trials. This
side-effect profile for ALLOVECTIN-7 compares favorably with available
clinical data on other FDA-approved biological agents. Treatment with
interferon-alpha or interleukin-2 frequently causes serious side effects
requiring hospitalization, and occasionally causes life-threatening or fatal
complications.
Based on this promising data, and following discussions with the
FDA, we began registration trials in May 1998. These trials are ongoing in
multiple centers across the United States. In our Phase II trial we are
actively recruiting patients with soft-tissue metastatic melanoma who have
exhausted conventional therapies. For our Phase III trial we are actively
recruiting patients that have metastatic melanoma and who have not received
chemotherapy. The objective of this trial is to compare treatment with
dacarbazine, the only chemotherapeutic agent approved by the FDA for
metastatic melanoma, to treatment with a combination of dacarbazine plus
ALLOVECTIN-7. Positive results from either or both of these trials could
allow us to apply to the FDA for approval to market ALLOVECTIN-7. We
announced in December 1999 that we would continue to recruit patients as
planned in our two ongoing registration trials with ALLOVECTIN-7 in patients
with metastatic melanoma, based on the recommendations of an independent Drug
Safety Review Board.
HEAD AND NECK CANCER
Head and neck cancer describes any of several types of localized
tumors affecting the oral cavity, the pharynx or larynx. Head and neck
cancers occur more frequently in men than in women, and most often in men
over age 40. Risk factors vary with the particular location, but can include
use of tobacco and excessive consumption of alcohol. The ACS estimates that,
in 1999, 41,400 new cases of head and neck cancers will occur and that 12,300
individuals will die from this disease. NCI estimates that about 345,000
Americans currently suffer from head and neck cancer. Most head and neck
cancers are treated by surgical removal and/or localized radiation therapy,
with widely ranging degrees of success depending on the number of tumors,
their size, and their specific location. In advanced disease, standard
treatment may be preceded by systemic chemotherapy to improve outcomes, or
followed by systemic chemotherapy to attack remaining cancer cells, most
often with a combination of agents. The five-year survival rate for head and
neck cancer patients, if treated, varies from more than 80 percent for
localized, accessible disease to less than 20 percent for widespread
malignancies not curable by surgery.
Treatment with ALLOVECTIN-7 in a Phase I/II and an early Phase II
study yielded encouraging results, reported in May 1998 at the Annual Meeting
of the American Society of Clinical Oncology, that included both partial and
complete responses. Of the 11 patients treated in an investigator-sponsored
Phase I/II clinical trial, four achieved complete or partial responses
lasting at least five months. Preliminary results for 23 evaluable patients
in a Vical-sponsored multi-center Phase II trial yielded one clinical
complete response lasting four months and continuing, and 10 patients with
stable disease after two to four months and continuing. A multi-center Phase
II study is ongoing.
LEUVECTIN
LEUVECTIN is a DNA/lipid complex designed for direct injection into
a tumor. LEUVECTIN contains the gene encoding IL-2. Systemic IL-2 protein
therapy is the only FDA-approved treatment for metastatic kidney disease, but
its administration is associated with serious toxicity in the majority of
patients. The LEUVECTIN kidney cancer program seeks to match IL-2's efficacy
without major adverse events. We expect that LEUVECTIN, when injected into
tumors, will cause the malignant cells to produce IL-2. Local expression of
IL-2 may stimulate the patient's immune system to attack and destroy the
tumor cells. Because LEUVECTIN delivers IL-2 locally rather than throughout
the body, it may provide efficacy comparable to the protein treatment with
fewer side effects. LEUVECTIN is being tested in Phase II clinical trials for
patients with kidney cancer and prostate cancer.
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KIDNEY CANCER
The most common type of kidney cancer, renal cell carcinoma, occurs
more frequently in males than in females, and predominantly in people over
35. The greatest single risk factor is cigarette smoking. Other risk factors
include exposure to asbestos, cadmium, or gasoline, and the use of some
former pain medications containing phenacetin. According to ACS statistics,
29,900 new cases of kidney cancer will be diagnosed in the U.S. and 11,600
patients will die from the disease in 1999. NCI estimates that about 200,000
Americans currently suffer from kidney cancer. Primary kidney cancer
frequently spreads to adjacent tissues and ultimately to other internal
organs, most often the lungs, bone, brain or liver. About 30 percent of
patients have metastatic disease when first diagnosed. Treatment of regional
metastatic kidney cancer involves surgical removal of the affected kidney and
surrounding tissue, and frequently is combined with radiation therapy to
alleviate pain.
There are few treatment alternatives for metastatic kidney cancer
and where surgery cannot be curative the five year survival rate is less than
10 percent. Initial results from Phase I/II and Phase II testing in kidney
cancer indicated that LEUVECTIN was well-tolerated and effective in
delivering the IL-2 protein, with a favorable risk-benefit profile in these
patients. A multi-center Phase II study initiated in May 1998 is ongoing.
Initial results from the Phase II trial were reported in May 1999 at the
Annual Meeting of the American Society of Clinical Oncology. Four of the 22
evaluable patients, or 18 percent, experienced significant tumor reductions
of 25 percent or more, including one patient who experienced 90 percent and
100 percent reductions in two non-injected tumors. Twelve additional
patients, or 55 percent, had stabilization of the injected tumor for six to
28 weeks and continuing at the time of the meeting. Six of the 22 patients,
or 27 percent, experienced clinical stable disease for five to seven months
and continuing at the time of the meeting. Side effects from the LEUVECTIN
treatment were primarily mild, with the most common complaint being flu-like
symptoms of chills, low-grade fever, body aches and fatigue. The only serious
side effects reported were two incidents of severe pain at the injection
site. Both were resolved with pain medication during brief hospital stays.
PROSTATE CANCER
Prostate cancer is the most frequently diagnosed type of cancer and
is the second leading cause of cancer fatalities among men in the United
States. Men over age 65 account for over 75 percent of all diagnoses and
African Americans are at significantly greater risk than Caucasians.
According to ACS statistics, 179,300 new cases of prostate cancer will be
diagnosed in the U.S. and 37,000 patients will die from this disease in 1999.
NCI estimates that more than one million American men currently suffer from
prostate cancer. Early detection is increasing the number of annual diagnoses
and improving overall survival rates. All patients diagnosed while the
disease is confined to the prostate gland have a five-year survival rate. If
the disease is discovered after it spreads to connective tissue, lymph nodes,
or other internal organs, survival rates decline. Treatment options include
"watchful waiting" for older patients with no symptoms or with other more
serious illnesses, radiation therapy or cryosurgery, and surgical removal of
the prostate gland and/or affected lymph nodes. Symptoms may also be relieved
by hormone therapy or surgery.
A Phase I/II pilot trial tested LEUVECTIN in patients with prostate
cancer. The data indicated that the treatment was safe and well-tolerated,
that it may stimulate an immune response against the disease, and that it may
result in an increased time to disease progression. Results of the trial were
presented in May 1999 at the Annual Meeting of the American Urological
Association. In eight of 12 patients scheduled for surgery, pre-surgical
serum PSA levels decreased significantly after treatment with LEUVECTIN.
Three patients were diagnosed with metastatic disease at the time of the
surgery and were therefore excluded from the trial. All nine patients who
remained in the trial after surgery maintained negligible PSA levels after 11
to 18 months and continuing at the time of the meeting. In seven of nine
patients with progressive disease following radiation therapy, serum PSA
levels decreased significantly after treatment with LEUVECTIN. In four of
five patients receiving a second treatment course of LEUVECTIN, the rate of
increase in PSA levels was reduced considerably. On the basis of these data,
we initiated two multi-center Phase II clinical trials in June 1999.
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CANCER VACCINES
In collaboration with Stanford University Medical Center, we are
developing a naked DNA vaccine, Vaxid, against low-grade, non-Hodgkin's,
B-cell lymphoma. Non-Hodgkin's B-cell lymphoma is a disease in which cells in
the lymph nodes or other lymphatic tissue grow abnormally. Low-grade
non-Hodgkin's B-cell lymphoma exhibits a slow growth rate and excellent
initial response to current treatments. However, a regular pattern of relapse
to a widespread, aggressive lymphoma occurs for which no curative therapy has
been identified. According to ACS statistics, 56,800 new cases of B-cell
lymphoma will be diagnosed in the U.S. and 25,700 patients will die from this
disease in 1999. NCI estimates that about 300,000 Americans currently suffer
from B-cell lymphoma.
VAXID contains a patient-specific gene encoding a characteristic
molecule of cancerous B-cells. Preclinical studies showed that the injection
into mice of a DNA vaccine that encoded a gene specific to the B-cell
lymphoma resulted in strong and specific immune responses and significant
protection against subsequent tumor challenge. We believe that immunization
of post-chemotherapy patients with VAXID could result in the elimination of
residual disease and the prevention of the relapse of disease. An initial
Phase I/II study of VAXID is ongoing.
In collaboration with the NCI we are supporting the development of
another DNA vaccine which may cause cells to produce a modified
melanoma-related protein known as gp100. This protein is expected to trigger
an immune response against melanoma tumor cells. In earlier studies, the NCI
tested a vaccine using portions of the modified protein in combination with
IL-2 protein therapy. These data indicated a 42 percent response rate in
end-stage melanoma patients after treatment with systemic IL-2 and the gp100
protein. This study is being repeated with a gp100 naked DNA vaccine provided
by us. We believe a DNA vaccine may be more generally applicable and may
provide advantages in manufacturing and administration.
DNA VACCINES FOR INFECTIOUS DISEASES
According to the World Health Organization, infectious and parasitic
diseases cause approximately one-third of all deaths worldwide, making it the
leading cause of death. Most deaths from infectious diseases are caused by
acute lower respiratory infections, tuberculosis, neonatal diarrhea, AIDS and
malaria. Vaccines are generally recognized as the most cost-effective
approach for infectious disease health care. However, the technical
limitations of conventional vaccine approaches have constrained the
development of effective vaccines for many diseases.
Our naked DNA vaccine technology may overcome two deficiencies of
traditional preventive vaccine approaches, which are the inability to
counteract the random changes in the strains of various infectious agents and
the need for safe formulations that boost an antibody response or that cause
sufficient killer T-cell responses, known as adjuvants. We believe our
potential vaccine products should be simpler to manufacture than vaccines
that are made using cumbersome and labor-intensive techniques involving
difficult tissue culture procedures and live viruses.
Our scientists have shown in animal experiments that the
intramuscular injection of plasmid DNA encoding a protein common to all
strains of the influenza virus stimulates both antibody and killer T-cell
responses against the virus itself and virus-infected cells. The immune
response is potent, specific and requires no adjuvants. For over a year
following vaccination, treated animals demonstrated higher survival rates
than untreated control animals when challenged with various strains of
inhaled influenza virus. This observed cross-strain protection, if
reproducible in humans, will offer a key advantage compared with conventional
vaccines. Thus, our direct gene delivery technology may be universal, not
requiring frequent re-design or product modification for each new viral
strain.
Only a few years ago, DNA vaccines were an unproven novelty with
limited acceptance in the scientific community. Today, numerous scientific
publications have documented the efficacy of DNA vaccines in providing potent
immune responses or protective immunity against viruses, bacteria and
parasites in dozens of species from fish to primates, including human
volunteers. Additional studies have extended these findings to other models
of infectious diseases for which there are no approved vaccines, such as HIV,
herpes and malaria.
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Because of the large-scale development programs, manufacturing
capacity and distribution channels required to successfully market a vaccine,
we believe collaborations with major pharmaceutical companies are the most
effective way to apply our patented technology in the emerging DNA vaccine
field. We have long-standing, active partnerships with two of the three
largest vaccine manufacturers in the world, Merck and Aventis Pasteur. These
relationships are summarized below. Further details can be found in
"--Collaboration and Licensing Agreements--Corporate Partners."
MERCK
We have licensed our naked DNA vaccination technology to Merck
for a total of seven preventive vaccine targets:
- - hepatitis B virus, HBV,
- - hepatitis C virus, HCV,
- - human immunodeficiency virus, HIV,
- human papilloma virus, HPV,
- herpes simplex virus, HSV,
- influenza virus, and
- tuberculosis, TB.
In addition, Merck also has a license covering three therapeutic
vaccine targets, HBV, HIV and HPV.
In December 1999, Merck initiated a clinical trial with a naked DNA
vaccine to prevent AIDS. In January 2000, we received $1.0 million from Merck
following initiation of this clinical trial. This candidate vaccine product
is being developed by Merck under the license agreement with us. In November
1999, we received a $2.0 million payment from Merck which extends Merck's
exclusive license to develop and market therapeutic vaccines against HIV and
HBV.
AVENTIS PASTEUR, FORMERLY PASTEUR MERIEUX CONNAUGHT
We also have a license and option agreement with Aventis Pasteur,
formerly Pasteur Merieux Connaught, for a total of six preventive vaccine
targets:
- - cytomegalovirus, CMV,
- - HELICOBACTER PYLORI,
- - Lyme disease,
- - malaria,
- - respiratory syncytial virus, RSV, and
- - varicella zoster virus, VZV.
We are collaborating with Aventis Pasteur and the U.S. Naval Medical
Research Center, NMRC, to develop a DNA vaccine against malaria. There is no
effective vaccine against malaria. This is a severe infectious disease
characterized by fever, headache and joint pain, which if untreated can lead
to death. Infection normally occurs when the parasite enters a victim's
bloodstream during a mosquito bite. Each year, 300 to 500 million people
worldwide are treated for malaria and more than one million die from the
disease, according to the World Health Organization.
In July 1997, in collaboration with Aventis Pasteur, we 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 the October 16, 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 encouraging data, further clinical development is planned.
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DNA THERAPEUTIC PROTEIN DELIVERY
Our naked DNA direct gene delivery technology also may permit the
development of alternatives to therapeutic protein administration for
diseases. Major shortcomings of some therapeutic proteins include their short
duration of action and the potential side effects associated with high levels
of circulating protein after intravenous administration. We believe that
direct injection into muscles of genes that encode the protein of interest
may enable the muscle cells to act as protein factories causing a sustained
release of low levels of the therapeutic proteins, reducing side effects and
the need for repeated dosing. Our technology may be most suitable for the
delivery of proteins that are required in small amounts over prolonged
periods of time.
Much attention is being focused on the emerging field of
angiogenesis, which involves inducing the growth of new blood vessels to
replace those blocked by disease. DNA-based delivery of growth factors has
been successfully demonstrated in human trials. Other potential applications,
still being tested in animal models, could involve the delivery of proteins
that maintain nerve cell function for treating certain neurodegenerative
diseases, or the delivery of biologically active compounds such as insulin to
treat diabetes or erythropoietin to treat certain forms of anemia.
In 1998, we licensed our catheter-based intravascular gene delivery
technology, with potential angiogenesis applications, to Boston Scientific.
On February 24, 2000, the Company and Human Genome Sciences, Inc.
(HGS) signed a reciprocal royalty-bearing license. Under the agreement, Vical
has the option to exclusively license up to three genes from HGS for
gene-based product development. HGS has the option to license Vical's naked
DNA gene delivery technology for use in up to three gene-based products.
Vical also granted an exclusive, royalty-bearing license to Vascular Genetics
Inc., VGI, for naked DNA delivery of Vascular Endothelial Growth Factor-2
(VEGF-2). VGI, a privately held company in which HGS is a major shareholder,
has initiated clinical trials using naked DNA delivery of the VEGF-2 gene to
promote angiogenesis in patients with coronary artery disease and critical
limb ischemia.
We licensed our naked DNA gene delivery technology to Rhone-Poulenc
Rorer, now Aventis Pharma, in 1997 for the delivery of neurologically active
proteins that may be applicable in treating neurodegenerative diseases such
as Alzheimer's, Parkinson's and Lou Gehrig's diseases.
VETERINARY APPLICATIONS
Prior to its development for human therapy, our naked DNA gene
delivery technology was extensively tested in animals. Research scientists
have published numerous papers detailing favorable results in many species
and covering a broad range of disease indications. Animal health encompasses
two distinct market segments: livestock, or animals bred and raised for food
or other products; and companion animals, or pets. Serving the animal health
markets requires highly efficient manufacturing and specialized distribution
channels. Consequently, we have licensed our naked DNA technology to leading
animal health pharmaceutical companies for development and commercialization.
DNA VACCINES FOR VETERINARY INFECTIOUS DISEASES
We entered into a corporate alliance in March 1995 relating to DNA
vaccines in the animal health area with Merial, a joint venture between Merck
and Rhone Merieux. Merial has options to acquire exclusive licenses to our
gene delivery technologies to develop and commercialize DNA-based vaccines to
prevent infectious diseases in domesticated animals. Through September 30,
1999, we had received $3.2 million under this agreement. In December 1999,
Merial paid us $1.6 million for the initial exercise of options under the
agreement. If Merial exercises additional license options and markets these
vaccines, cash payments and royalties on sales would be due to us.
VETERINARY DNA THERAPEUTIC PROTEIN DELIVERY
In January 1999, we entered into a collaborative research, license,
and option agreement granting Pfizer rights to use our patented naked DNA
gene delivery technologies to deliver certain therapeutic proteins for animal
health applications. Pfizer made an initial investment of $6.0 million in our
common stock, paid an initial fee of $1.0 million, and agreed to fund our
research totaling $1.5 million for the first three years of the
collaboration. We may receive milestone payments and royalties if products
are
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successfully developed under the agreement. In addition, we may manufacture
products resulting from the collaboration for Pfizer.
INTELLECTUAL PROPERTY
Patents and other proprietary rights are essential to our business.
We file patent applications to protect our technology, inventions, and
improvements to our inventions that we consider important to the development
of our business.
We also rely upon trade secrets, know-how, continuing technological
innovations and licensing opportunities to develop and maintain our
competitive position. We have filed or participated as licensee in the filing
of more than 35 patent applications in the United States and have made over
280 additional counterpart foreign filings in foreign countries relating to
our technology. Our patent applications seek to cover naked DNA gene delivery
for immunization and to deliver therapeutic proteins to patients, specific
gene sequences and formulations of gene-based product candidates, methods for
producing pharmaceutical-grade DNA and the composition of matter of several
families of lipid molecules and their uses in gene delivery. Many of these
patents have been issued by the U.S. Patent and Trademark Office. Several
other applications are still pending in the United States, and corresponding
foreign applications have been filed.
We and our exclusive licensors have received numerous U.S. and
foreign patents covering various aspects of our proprietary technology. Most
of these patents are recently issued and have considerable patent life
remaining. These patents are described as follows:
- - CORE DNA DELIVERY TECHNOLOGY. We have received issued U.S. patents
covering our core DNA therapeutics technology, including patents on methods
of administering gene sequences for the purposes of expressing therapeutic
proteins or for inducing immune responses. Other issued patents
specifically cover the administration of genes into blood vessels and the
heart. Patent coverage of our core DNA delivery technology has also been
obtained in Europe.
- - CORE LIPID TECHNOLOGY. We have received issued U.S. patents covering numerous
examples of cationic lipid compounds that are used to facilitate delivery of
DNA therapeutics to some tissues. These patented compounds include the lipids
contained in our lead product candidates, ALLOVECTIN-7 and Leuvectin. Patent
protection of these key lipids also has been obtained in Europe and Japan.
- - SPECIFIC DNA THERAPEUTICS. We have supplemented the broad patent coverage
described above with patents covering specific product applications of our
technology. To date, we have received patents issued in the U.S. covering
the DNA components of ALLOVECTIN-7 and Leuvectin.
- - DNA PROCESS TECHNOLOGY. As a result of our pioneering efforts to develop the
use of pure DNA as a therapeutic agent, we have also led the development of
manufacturing processes for producing pharmaceutical-grade DNA. We have
received issued U.S. patents covering various steps involved in the process
of economically producing pure plasmid DNA for pharmaceutical use.
Two of our allowed U.S. patent applications have been suspended from issuance
by the United States Patent & Trademark Office pending possible interference
proceedings with one or more parties unknown to us. The suspension may be
lifted or the application(s) may be drawn into interference. According to
European patent procedures, issued patents may be opposed by parties
interested in challenging the scope or validity of the issued claims. A
European patent covering our core DNA delivery technology is currently being
opposed by several companies under these procedures. We intend to vigorously
defend our patent position in these opposition proceedings. An unfavorable
result in these opposition proceedings could cause us to lose part or all of
our proprietary protection on our potential products in Europe. We believe
that no others hold patents or other intellectual property that would
preclude us from commercializing our proprietary technology.
Some components of our gene-based product candidates are, or may
become, patented by others. As a result, we may be required to obtain
licenses to conduct research, to manufacture or to market such products.
Licenses may not be available on commercially reasonable terms, or at all.
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See "--Risk Factors--Our Patents and Proprietary Rights May Not
Provide Us With Any Benefit and the Patents of Others May Prevent Us From
Commercializing Our Products" and "The Legal Proceedings to Obtain Patents
and Litigation of Third-Party Claims of Intellectual Property Infringement
Could Require Us to Spend Money and Could Impair Our Operations."
COMMERCIALIZATION AND MANUFACTURING
Because of the broad potential applications of our technology, we
intend to develop and commercialize products both on our own and through
corporate partners. We intend to develop and market products to well-defined
specialty markets, such as oncology, infectious diseases and other
life-threatening diseases. Where appropriate, we intend to rely on strategic
marketing and distribution partners for manufacturing and marketing products.
We believe our DNA plasmids can be produced in commercial quantities
through conventional fermentation and purification techniques. The separation
and purification of plasmid DNA is a relatively straightforward procedure
because of the inherent biochemical differences between plasmid DNA and the
majority of other bacterial components. In addition, our lipid formulations
consist of components that are synthesized chemically using traditional,
readily scaleable, organic synthesis procedures.
We produce and supply our product for all of our clinical trials and
intend to produce sufficient supplies for additional clinical investigations.
We may also choose to have outside organizations manufacture our product
candidates for expanded clinical trials under close supervision utilizing our
proprietary processes.
COLLABORATION AND LICENSING AGREEMENTS
We have entered into various arrangements with corporate, academic
and government collaborators, licensors, licensees and others. In addition to
the agreements summarized below, we conduct ongoing negotiations with
potential corporate partners.
CORPORATE PARTNERS
MERCK & CO., INC. In May 1991, we entered into a research
collaboration and license agreement with Merck to develop vaccines utilizing
our intramuscular delivery technology to prevent infection and disease in
humans. In connection with the 1991 agreement, we granted Merck a worldwide
exclusive license to preventive vaccines using our technology against seven
human infectious diseases including influenza, HIV, herpes simplex, HBV, HCV,
HPV and tuberculosis. Merck has the right to terminate this agreement without
cause on 90 days written notice.
In addition, Merck has rights to therapeutic uses of preventive
vaccines developed under the 1991 agreement. In December 1995 and November
1997, Merck acquired additional rights to develop and market therapeutic
vaccines against HPV, HIV and HBV. Under the November 1997 amendment, Merck
made an investment of $5.0 million for approximately 262,000 shares of our
common stock.
In September 1997, we entered into an option and license agreement
granting Merck the rights to use our technology to deliver certain growth
factors. The agreement resulted in a payment to us of $2.0 million. In March
2000, Merck notified us of its intent to terminate this agreement effective
June 2000.
In connection with these agreements, Merck has paid us $21.1 million
as of December 31, 1999. In November 1999, we received a $2.0 million payment
from Merck which extends Merck's exclusive license to develop and market
therapeutic vaccines against HIV and HBV. In December 1999, Merck initiated a
clinical trial with a naked DNA vaccine to prevent AIDS. In January 2000,
Merck paid us a $1.0 milestone payment for the start of this trial. Merck is
obligated to pay additional fees if research milestones are achieved and
royalties on net sales if any products are developed and marketed. For some
indications we may have an opportunity to co-promote product sales.
AVENTIS PASTEUR, FORMERLY PASTEUR MERIEUX CONNAUGHT. In September
1994, we entered into a research, option and license agreement with the
vaccine manufacturer Pasteur Merieux Connaught, now Aventis Pasteur, granting
Aventis Pasteur options to acquire licenses for the use of our proprietary
DNA delivery and technologies for developing vaccines against CMV, RSV, Lyme
disease, HELICOBACTER PYLORI
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and malaria. In April 1996, varicella zoster was added. Aventis Pasteur has
exercised its option to acquire several of these licenses. Aventis Pasteur is
obligated to make milestone and royalty payments to us if any products are
developed and marketed. In July 1997, Aventis Pasteur paid us $1.0 million as
a milestone payment upon initiation of a Phase I trial of an experimental
vaccine against the parasite that causes malaria. Through December 31, 1999,
we had received $7.8 million under this agreement.
PFIZER INC. In January 1999, we entered into a collaborative
research and option agreement with Pfizer to develop and market DNA-based
delivery of therapeutic proteins for animal health applications. Pfizer has
an option to obtain an exclusive royalty-bearing license to our technology
for these applications. The option expires in January 2002. Under the
agreement, Pfizer made an investment of $6.0 million for approximately
318,000 shares of our common stock. Pfizer also paid us a $1.0 million
up-front license fee, and is obligated to pay us $1.5 million for research
and development over the first three years of the agreement. Through December
31, 1999, Pfizer had paid us $0.5 million of this $1.5 million obligation.
MERIAL. We entered into a corporate alliance in March 1995 relating
to DNA vaccines in the animal health area with Merial, a joint venture
between Merck and Rhone Merieux. Merial has options to take exclusive
licenses to our DNA delivery technologies to develop and commercialize
DNA-based vaccines to prevent infectious diseases in domesticated animals. In
December 1999, Merial paid us $1.6 million for the initial exercise of
options and extension of options under the agreement. Through December 31,
1999, we had received $4.8 million under this agreement. If Merial exercises
additional license options and markets these vaccines, cash payments and
royalties on sales would be due to us. Merial has the right to terminate this
agreement without cause on 30 days written notice.
HUMAN GENOME SCIENCES, INC. AND VASCULAR GENETICS INC. On February
24, 2000, the Company and Human Genome Sciences, Inc. (HGS) signed a
reciprocal royalty-bearing license. Under the agreement, Vical has the option
to exclusively license up to three genes from HGS for gene-based product
development. HGS has the option to license Vical's naked DNA gene delivery
technology for use in up to three gene-based products. In addition, the
Company granted an exclusive, royalty-bearing license to Vascular Genetics
Inc. (VGI), a company in which HGS is a major shareholder, for naked DNA
delivery of a gene with potential use for revascularization. In exchange,
Vical received a minority equity interest in VGI.
AVENTIS PHARMA, FORMERLY RHONE-POULENC RORER PHARMACEUTICALS, INC.
In October 1997, we entered into an agreement with Rhone-Poulenc Rorer
Pharmaceuticals, Inc., now Aventis Pharma, granting Aventis Pharma an
exclusive worldwide license to use our naked DNA delivery technology to
deliver certain neurologically active proteins for potential treatment of
neurodegenerative diseases. Under the terms of the agreement, we received
$1.0 million in 1997. This agreement provides for us to receive additional
payments based upon achievement of milestones and royalty payments on product
sales.
CENTOCOR, INC. In February 1998, we entered into an exclusive
license and option agreement allowing Centocor, Inc., subsequently acquired
by Johnson & Johnson, to use our naked DNA technology to develop and market
certain DNA-based vaccines for the potential treatment of some types of
cancer. We received an initial payment of $2.0 million plus reimbursement of
$0.2 million of patent costs. We may receive additional payments based upon
achievement of milestones and royalty payments on product sales.
BOSTON SCIENTIFIC CORPORATION. In April 1997, we entered into a
sublicense agreement with Cardiogene Therapeutics, Inc., formerly known as
Genocor, Inc., for the development of catheter-based intravascular gene
delivery technology under our license agreement with the University of
Michigan described below. Boston Scientific Corporation has subsequently
acquired Cardiogene Therapeutics' rights under this agreement. We received
$1.1 million in October 1998 under this agreement. The agreement provides for
us to receive royalty payments on any related product sales.
Under the Merck, Aventis Pasteur, Merial, Aventis Pharma, Centocor,
Pfizer, Human Genome Sciences, Inc. and Vascular Genetics Inc. agreements, if
we were to receive milestone or royalty payments, we would be required to pay
up to 10 percent of some of these payments to Wisconsin Alumni Research
Foundation. Under the Boston Scientific agreement, if we were to receive
milestone or royalty payments, we would be required to pay up to 25 percent
of some of these payments to the University of
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Michigan. See "--Research Institutions--Wisconsin Alumni Research Foundation"
and "--Research Institutions--The University of Michigan."
RESEARCH INSTITUTIONS
OFFICE OF NAVAL RESEARCH. In September 1998, we entered into an
agreement with the Office of Naval Research, ONR, for the development work on
a potential multi-gene DNA vaccine to prevent malaria. This agreement could
provide total funding of up to $2.8 million through 2000, of which $2.3
million was recognized as revenue through December 31, 1999. We intend to
pursue additional agreements with ONR to continue funding for this
development program, however, we may not be able to enter into any further
agreements.
THE UNIVERSITY OF MICHIGAN. In October 1992, we entered into a
license agreement with the University of Michigan and obtained the exclusive
license to technology for delivering gene-based products into cancer cells
and blood vessels by catheters. In April 1997, we entered into a sublicense
agreement, the rights under which are currently held by Boston Scientific
Corporation, for the development of catheter-based intravascular gene
delivery technology.
WISCONSIN ALUMNI RESEARCH FOUNDATION, WARF. Under a 1989 research
agreement, scientists at the University of Wisconsin, Madison, and our
scientists co-invented a core technology related to intramuscular naked DNA
administration. In 1991, we licensed from WARF its interest in that
technology. We paid WARF an initial license fee and agreed to pay WARF a
royalty on sales of any products incorporating the licensed technology and a
percentage of up-front license payments from third parties.
COMPETITION
The field of gene-based drug development is new and rapidly
evolving, and it is expected to continue to undergo significant and rapid
technological change. Rapid technological development could result in our
potential products or technologies becoming obsolete before we recover a
significant portion of our related research, development and capital
expenditures. We may experience competition both from other companies in the
field and from companies which have other forms of treatment for the diseases
we are targeting.
We are aware of several development-stage and established
enterprises, including major pharmaceutical and biotechnology firms, which
are exploring gene-based drugs or are actively engaged in gene delivery
research and development. These include Avigen, Targeted Genetics Corp.,
Transgene SA and Valentis Inc. We may also experience competition from
companies that have acquired or may acquire technology from companies,
universities and other research institutions. As these companies develop
their technologies, they may develop proprietary positions which may
materially and adversely affect us.
In addition, a number of companies are developing products to
address the same disease indications that we are targeting. For example,
Maxim Pharmaceuticals, Inc. and Corixa Corp. are conducting advanced clinical
trials for the treatment of melanoma. As another example, Aventis, Onyx
Pharmaceuticals, Inc. and ImClone Systems Incorporated are conducting
clinical trials of their products to treat head and neck cancer. If these or
any other companies develop products with efficacy or safety profiles
significantly better than our products, we may not be able to commercialize
our products and sales of any of our commercialized products could be harmed.
Some competitors and potential competitors have substantially
greater product development capabilities and financial, scientific, marketing
and human resources than we do. Other companies may develop products earlier,
obtain FDA approvals for products more rapidly, or develop products that are
more effective than those under development by us. We will seek to expand our
technological capabilities to remain competitive; however, research and
development by others may render our technology or products obsolete or
noncompetitive or result in treatments or cures superior to ours.
Our competitive position will be affected by the disease indications
addressed by our potential products and those of our competitors, the timing
of market introduction for these potential products and the stage of
development of other technologies to address these disease indications. For
us and our competitors, proprietary positions, the ability to complete
clinical trials on a timely basis and with the desired results, and the
ability to obtain timely regulatory approvals to market these potential
products are
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likely to be significant competitive factors. Other important competitive
factors will include the efficacy, safety, reliability, availability and
price of potential products and the ability to fund operations during the
period between technological conception and commercial sales.
GOVERNMENT REGULATION
Any products we develop will require regulatory clearances prior to
clinical trials and additional regulatory clearances prior to
commercialization. New human DNA therapeutics are expected to be subject to
extensive regulation by the FDA and comparable agencies in other countries.
The precise regulatory requirements with which we will have to comply are
uncertain at this time due to the novelty of the DNA-based products and
therapies currently under development. We believe that our potential products
will be regulated either as biological products or as drugs. Drugs are
subject to regulation under the Federal Food, Drug and Cosmetic Act, and
biological products, in addition to being subject to provisions of that Act,
are regulated under the Public Health Service Act. Both statutes and related
regulations govern, among other things, the testing, manufacturing, safety,
efficacy, labeling, storage, record keeping, advertising and other
promotional practices. FDA approval or other clearances must be obtained
before clinical testing, and before manufacturing and marketing of biologics
or drugs.
FDA approval is required prior to marketing a pharmaceutical product
in the United States. To obtain this approval the FDA requires clinical
trials to demonstrate the safety, efficacy, and potency of the product
candidates. Clinical trials are the means by which experimental drugs or
treatments are tested in humans. New therapies typically advance from
laboratory, research, testing through animal, preclinical, testing and
finally through several phases of clinical, human, testing. Upon successful
completion of clinical trials, approval to market the therapy for a
particular patient population may be requested from the FDA in the United
States and/or its counterparts in other countries.
Clinical trials are normally done in three phases. In Phase I,
trials are conducted with a small number of patients or healthy volunteers to
determine the safety profile, the pattern of drug distribution and metabolism
and early evidence on effectiveness. In Phase II, trials are conducted with a
larger group of patients afflicted with a target disease in order to
determine preliminary efficacy, optimal dosages and expanded evidence of
safety. In Phase III, large scale, multi-center, comparative trials are
conducted with patients afflicted with a target disease in order to provide
enough data for the statistical proof of safety, efficacy, and potency
required by the FDA and other regulatory authorities. For life-threatening
diseases, initial human testing generally is done in patients rather than
healthy volunteers. These studies may provide results traditionally obtained
in Phase II trials and are referred to as "Phase I/II" trials.
Obtaining FDA approval has been a costly and time-consuming process.
Generally, in order to gain FDA pre-market approval, preclinical studies must
be conducted in the laboratory and in animal model systems to gain
preliminary information on an agent's efficacy and to identify any major
safety concerns. The results of these studies are submitted as a part of an
application for an Investigational New Drug, IND, which the FDA must review
and allow before human clinical trials can start. The IND includes a detailed
description of the clinical investigations.
A company must sponsor and file an IND for each proposed product and
must conduct clinical studies to demonstrate the safety, efficacy and potency
that are necessary to obtain FDA approval. The FDA receives reports on the
progress of each phase of clinical testing, and it may require the
modification, suspension, or termination of clinical trials if an unwarranted
risk is presented to patients. Human DNA therapeutics are a new category of
therapeutics, and the clinical trial period may be lengthy or the number of
patients may be numerous in order to establish safety, efficacy and potency.
After completion of clinical trials of a new product, FDA marketing
approval must be obtained. If the product is regulated as a biologic, a
Biologic License Application, BLA, is required. If the product is classified
as a new drug, a New Drug Application, NDA, is required. The NDA or BLA must
include results of product development activities, preclinical studies and
clinical trials in addition to detailed manufacturing information.
Applications submitted to the FDA are subject to an unpredictable
and potentially prolonged approval process. The FDA may ultimately decide
that the application does not satisfy its criteria for approval or require
additional preclinical or clinical studies. Even if FDA regulatory clearances
are
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obtained, a marketed product is subject to continual review, and later
discovery of previously unknown problems or failure to comply with the
applicable regulatory requirements may result in restrictions on the
marketing of a product or withdrawal of the product from the market as well
as possible civil or criminal sanctions. Before marketing clearance is
secured, the manufacturing facility will be inspected for current Good
Manufacturing Practices, GMP, compliance by FDA inspectors. The manufacturing
facility must satisfy current GMP requirements prior to marketing clearance.
In addition, after marketing clearance is secured, the manufacturing facility
will be inspected periodically for GMP compliance by FDA inspectors, and, if
the facility is located in California, by inspectors from the Food and Drug
Branch of the California Department of Health Services.
In addition to the FDA requirements, the NIH has established
guidelines for research involving recombinant DNA molecules. These guidelines
apply to all recombinant DNA research which is conducted at or supported by
the NIH, including proposals to conduct clinical research involving DNA
therapeutics. The NIH review of clinical trial proposals is a public process
and usually involves review and approval by the Recombinant DNA Advisory
Committee of the NIH.
In both domestic and foreign markets, sales of any approved products
will depend on reimbursement from third party payers, such as government and
private insurance plans. Third party payers are increasingly challenging the
prices charged for medical products and services. If we succeed in bringing
one or more products to market, these products may not be considered
cost-effective, reimbursement may not be available, or reimbursement policies
may adversely affect our ability to sell our products on a profitable basis.
We also are subject to various federal, state and local laws,
regulations and recommendations relating to safe working conditions,
laboratory and manufacturing practices, the experimental use of animals and
the use and disposal of hazardous or potentially hazardous substances,
including radioactive compounds and infectious disease agents, used in
connection with our research. The extent of government regulation which might
result from any future legislation or administrative action cannot be
accurately predicted.
HUMAN RESOURCES
As of March 1, 2000, we had 119 full-time employees, 22 of whom hold
degrees at the doctorate level. Of these employees, 89 are engaged in, or
directly support, research and development activities, and 30 are in
administrative and business development positions. A significant number of
our management and professional employees have prior experience with
pharmaceutical and biotechnology companies. None of our employees is covered
by collective bargaining agreements, and our management considers relations
with our employees to be good.
FACILITIES
We lease approximately 43,000 square feet of manufacturing, research
laboratory and office space in an established commercial neighborhood in
northern San Diego, California at three sites and with three leases. The
leases terminate in 2004. We have the option to renew two of these three
leases for an additional five-year period and can renew one of the leases for
two additional five-year periods.
Within our existing facilities, we have manufactured sufficient
quantities of pharmaceutical-grade product to supply our previous and ongoing
clinical trials, including the current registration trials. In addition, we
have manufactured preclinical and clinical supplies of DNA for our corporate
partners, for government agencies and for numerous academic researchers. We
believe that the build-out of unfinished space in our facilities will be
sufficient to accommodate manufacturing of initial production quantities of
our most advanced product candidates.
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<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, TOGETHER
WITH ALL OF THE OTHER INFORMATION INCLUDED IN THIS REPORT, BEFORE DECIDING
WHETHER TO INVEST IN OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY
OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE
HARMED. IN THIS CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE,
AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
NONE OF OUR PRODUCTS HAVE BEEN APPROVED FOR SALE. IF WE DO NOT DEVELOP
COMMERCIALLY SUCCESSFUL PRODUCTS, WE MAY BE FORCED TO CURTAIL OR CEASE
OPERATIONS.
Very little data exists regarding the safety and efficacy of DNA
therapeutics. All of our potential products are either in research or
development. 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. Results of our research and development activities may
indicate that our potential products are unsafe or ineffective. In this case,
regulatory authorities will not approve them. Even if approved, our products
may not be commercially successful. If we fail to develop and commercialize
our products, we will not be successful.
WE HAVE A HISTORY OF NET LOSSES. WE EXPECT TO CONTINUE TO INCUR NET LOSSES
AND WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
We have not sold any products and do not expect to sell any products
for the next few years. For the period from our inception to December 31,
1999, we have incurred cumulative net losses totaling approximately $44.6
million. Moreover, our negative cash flow and losses from operations will
continue and increase for the foreseeable future. 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.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE. IF ADDITIONAL CAPITAL IS NOT
AVAILABLE, WE MAY HAVE TO CURTAIL OR CEASE OPERATIONS.
We may need to raise more money to continue the research and
development necessary to bring our products to market and to establish
manufacturing and marketing capabilities. We may seek additional funds
through public and private stock offerings, arrangements with corporate
partners, borrowings under lease lines of credit or other sources. In the
event that we need more money, but are unable to raise more money we may have
to reduce our capital expenditures, scale back our development of new
products, reduce our workforce and license to others products or technologies
that we otherwise would seek to commercialize ourselves. The amount of money
we may 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, and
- the commercial arrangements we may establish.
THE REGULATORY APPROVAL PROCESS IS EXPENSIVE, TIME CONSUMING AND UNCERTAIN
WHICH MAY PREVENT US FROM OBTAINING REQUIRED APPROVALS FOR THE
COMMERCIALIZATION OF OUR PRODUCTS.
Testing of the potential drugs we develop is regulated by numerous
governmental authorities in the United States and other countries. The
regulations are evolving and uncertain. The regulatory process can take many
years and require us to expend substantial resources. For example:
- - the U.S. Food and Drug Administration, the FDA, has not established
guidelines concerning the scope of clinical trials required for DNA
therapeutics,
19
<PAGE>
- - the FDA has not indicated how many patients it will require to be
enrolled in clinical trials to establish the safety and efficacy of
DNA therapeutics, and
- - current regulations are subject to substantial review by various
governmental agencies.
Therefore, U.S. or foreign regulations could prevent or delay
regulatory approval of our products or limit our ability to develop and
commercialize our products. Delays could:
- - impose costly procedures on our activities,
- - diminish any competitive advantages that we attain, and
- - negatively affect our ability to receive royalties.
We believe that the FDA and comparable foreign regulatory bodies
will regulate separately each product containing a particular gene depending
on its intended use. Presently, to commercialize any product we must sponsor
and file a regulatory application for each proposed use. We then must conduct
clinical studies to demonstrate the safety and efficacy of the product
necessary to obtain FDA approval. The results obtained so far in our clinical
trials may not be replicated in our on-going or future trials. This may
prevent any of our potential products from receiving FDA approval.
We use recombinant DNA molecules in our product candidates, and
therefore we also must comply with guidelines instituted by the National
Institutes of Health, the NIH, and its Recombinant DNA Advisory Committee.
The NIH could restrict or delay the development of our products.
ADVERSE EVENTS IN THE FIELD OF GENE THERAPY, OR WITH RESPECT TO OUR POTENTIAL
PRODUCTS, MAY NEGATIVELY IMPACT REGULATORY APPROVAL OR PUBLIC PERCEPTION OF
OUR PRODUCTS.
The recent death of a patient undergoing a viral-based gene therapy
at the University of Pennsylvania in an investigator sponsored trial has been
widely publicized. This death and other adverse events in the field of gene
therapy could result in greater governmental regulation of gene therapies,
including our non-viral naked DNA technology, and potential regulatory delays
relating to the testing or approval of our potential products. In addition,
the field of gene therapy is under increased scrutiny, which may affect our
product development efforts or clinical trials.
For example, one patient who had undergone treatment with
ALLOVECTIN-7 for advanced metastatic melanoma died more than two months later
of progressive disease and numerous other factors, after receiving multiple
other cancer therapies. The death was originally reported as unrelated to the
treatment. Following an autopsy, the death was reclassified as "probably
related" to the treatment because the possibility could not be ruled out. We
do not believe ALLOVECTIN-7 was a significant factor in the patient's death.
The commercial success of our potential products will depend in part
on public acceptance of the use of gene therapies for the prevention or
treatment of human diseases. Public attitudes may be influenced by claims
that gene therapies are unsafe and our naked DNA therapeutics may not gain
the acceptance of the public or the medical community. Negative public
reaction to adverse events in our trials or gene therapy in general could
result in greater government regulation and stricter labeling requirements of
gene therapies, including our naked DNA therapeutics, and could cause a
decrease in the demand for any products we may develop.
OUR PATENTS AND PROPRIETARY RIGHTS MAY NOT PROVIDE US WITH ANY BENEFIT AND
THE PATENTS OF OTHERS MAY PREVENT US FROM COMMERCIALIZING OUR PRODUCTS.
Patents may not issue from any of our current applications.
Moreover, if patents do issue, governmental authorities may not allow claims
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 core DNA delivery technology is covered by a patent issued in
Europe which is being opposed by several companies under European patent
procedures. If we are not successful in this
20
<PAGE>
opposition proceeding we may lose part or all of our proprietary protection
on our potential products in Europe.
Others may have or may receive patents which contain claims
applicable to our products. These patents may impede our ability to
commercialize products.
THE LEGAL PROCEEDINGS TO OBTAIN PATENTS AND LITIGATION OF THIRD-PARTY CLAIMS
OF INTELLECTUAL PROPERTY INFRINGEMENT COULD REQUIRE US TO SPEND MONEY AND
COULD IMPAIR OUR OPERATIONS.
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 rely on protecting our proprietary technology in part
through confidentiality agreements with our corporate collaborators,
employees, consultants and certain contractors. These agreements may be
breached and we may not have adequate remedies for any breach. In addition,
our trade secrets may otherwise become known or independently discovered by
our competitors.
Protecting intellectual property rights can be very expensive.
Litigation may be necessary to enforce a patent issued to us 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. We may be drawn into interferences
with third parties or may have to provoke interferences ourselves to unblock
third party patent rights so as to allow us or our licensees to commercialize
products based on our technology. Litigation could result in substantial
costs and the diversion of management's efforts regardless of the results of
the litigation. An unfavorable result in litigation could subject us to
significant liabilities to third parties, require disputed rights to be
licensed or require us to cease using some technology.
Our products and processes may infringe, or be found to infringe on,
patents not owned or controlled by us. We do not know whether any patents
held by others will require us to alter our products or processes, obtain
licenses, or stop activities. If relevant claims of third-party patents are
upheld as valid and enforceable, we could be prevented from practicing the
subject matter claimed in the patents, or may be required to obtain licenses
or redesign our products or processes to avoid infringement. 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
will suffer if we are not able to obtain licenses at all or on terms
commercially reasonable to us and we may not be able to redesign our products
or processes to avoid infringement.
COMPETITION AND TECHNOLOGICAL CHANGE MAY MAKE OUR POTENTIAL PRODUCTS AND
TECHNOLOGIES LESS ATTRACTIVE OR OBSOLETE.
We compete with companies, including major pharmaceutical and
biotechnology firms, that are pursuing other forms of treatment or prevention
for the diseases we target. 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 which may prevent us from successfully
commercializing products.
Some of our competitors are established companies with greater
financial and other resources than we have. 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 will
seek to 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.
21
<PAGE>
THE METHOD OF ADMINISTRATION OF SOME OF OUR POTENTIAL PRODUCTS CAN CAUSE
ADVERSE EVENTS IN PATIENTS, INCLUDING DEATH.
Some of our potential products are designed to be injected directly
into malignant tumors. There are medical risks inherent in direct tumor
injections. For example, in clinical trials of our potential products,
attending physicians have punctured patients' lungs in less than one percent
of procedures, requiring hospitalization. In addition, a physician
administering our product in an investigator-sponsored clinical trial
inadvertently damaged tissue near the heart of a patient which may have
precipitated the patient's death. These events are reported as adverse events
in our clinical trials and illustrate the medical risks related to direct
injection of tumors. These risks may adversely impact market acceptance of
some of our products.
COMMERCIALIZATION OF SOME OF OUR POTENTIAL PRODUCTS DEPENDS ON COLLABORATIONS
WITH OTHERS. IF OUR COLLABORATORS ARE NOT SUCCESSFUL OR IF WE ARE UNABLE TO
FIND COLLABORATORS IN THE FUTURE, WE MAY NOT BE ABLE TO DEVELOP THESE
PRODUCTS.
Our strategy for the research, development and commercialization of
some of our product candidates requires us to enter into contractual
arrangements with corporate collaborators, licensors, licensees and others.
Our success depends upon the performance by these collaborators of their
responsibilities under these arrangements. Some collaborators 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.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, WE MAY NOT BE ABLE TO PURSUE COLLABORATIONS OR DEVELOP OUR OWN
PRODUCTS.
We are highly dependent on the principal members of our scientific,
manufacturing, marketing and management personnel, the loss of whose services
might significantly delay or prevent the achievement of our objectives. We
face competition from other companies, academic institutions, government
entities and other organizations in attracting and retaining personnel.
WE MAY NOT BE ABLE TO MANUFACTURE PRODUCTS ON A COMMERCIAL SCALE.
We have limited experience in manufacturing our product candidates
in commercial quantities. We may be dependent initially on corporate
partners, licensees or others to manufacture our products commercially. We
also will be required to comply with extensive regulations applicable to
manufacturing facilities. We may be unable to enter into any arrangement for
the manufacture of our products.
WE HAVE NO MARKETING OR SALES EXPERIENCE, AND IF WE ARE UNABLE TO DEVELOP OUR
OWN SALES AND MARKETING CAPABILITY, WE MAY NOT BE SUCCESSFUL IN
COMMERCIALIZING OUR PRODUCTS.
Our current strategy is to market our proprietary cancer products
directly in the United States, but we currently do not possess pharmaceutical
marketing or sales capabilities. In order to market and sell our proprietary
cancer products, we will need to develop a sales force and a marketing group
with relevant pharmaceutical experience, or make appropriate arrangements
with strategic partners to market and sell these products. Developing a
marketing and sales force is expensive and time consuming and could delay any
product launch. Our inability to successfully employ qualified marketing and
sales personnel and develop our sales and marketing capabilities will harm
our business.
HEALTH CARE REFORM AND RESTRICTIONS ON REIMBURSEMENT MAY LIMIT OUR RETURNS ON
POTENTIAL PRODUCTS.
Our ability to earn sufficient returns on our products will depend
in part on the extent to which reimbursement for our products and related
treatments will be available from:
- - government health administration authorities,
22
<PAGE>
- - private health coverage insurers,
- - managed care organizations, and
- - other organizations.
If we fail to obtain appropriate reimbursement, it could prevent us
from successfully commercializing our potential products.
There are efforts by governmental and third party payors to contain
or reduce the costs of health care through various means. We expect that
there will continue to be a number of legislative proposals to implement
government controls. The announcement of proposals or reforms could impair
our ability to raise capital. The adoption of proposals or reforms could
impair our business.
Additionally third party payors are increasingly challenging the
price of medical products and services. If purchasers or users of our
products are not able to obtain adequate reimbursement for the cost of using
our products, they may forego or reduce their use. Significant uncertainty
exists as to the reimbursement status of newly approved health care products,
and whether adequate third party coverage will be available.
WE USE HAZARDOUS MATERIALS IN OUR BUSINESS. ANY CLAIMS RELATING TO IMPROPER
HANDLING, STORAGE OR DISPOSAL OF THESE MATERIALS COULD BE TIME CONSUMING AND
COSTLY.
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. Although we believe that our safety
procedures for handling and disposing of these hazardous materials comply
with the standards prescribed by law and regulation, the risk of accidental
contamination or injury from hazardous materials cannot be completely
eliminated. In the event of an accident, we could be held liable for any
damages that result, and any liability could exceed the limits or fall
outside the coverage of our insurance. We may not be able to maintain
insurance on acceptable terms, or at all. We could be required to incur
significant costs to comply with current or future environmental laws and
regulations.
WE MAY HAVE SIGNIFICANT PRODUCT LIABILITY EXPOSURE.
We face an inherent business risk of exposure to product liability
and other claims in the event that our technologies or products are alleged
to have caused harm. These risks are inherent in the development of chemical
and pharmaceutical products. Although we currently maintain product liability
insurance, we may not have sufficient insurance coverage and we may not be
able to obtain sufficient coverage at a reasonable cost. Our inability to
obtain product liability insurance at an acceptable cost or to otherwise
protect against potential product liability claims could prevent or inhibit
the commercialization of any products developed by us or our collaborators.
We also have liability for products manufactured by us on a contract basis
for third parties. If we are sued for any injury caused by our technology or
products, our liability could exceed our total assets.
OUR STOCK PRICE COULD CONTINUE TO BE HIGHLY VOLATILE AND YOU MAY NOT BE ABLE
TO RESELL YOUR SHARES AT OR ABOVE THE PRICE YOU PAID FOR THEM.
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 impact on the market price of our common stock:
- - the results of our preclinical studies and clinical trials or those of
our collaborators of competitors or for DNA therapeutics in general,
- - evidence of the safety or efficacy of our potential products or the
products of our competitors,
- - the announcement by us or our competitors of technological
innovations or new products,
- - governmental regulatory actions,
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<PAGE>
- - changes or announcements in reimbursement policies,
- - developments with our collaborators,
- - developments concerning our patent or other proprietary rights or
those 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, and
- - changes in estimates of our performance by securities analysts.
IF WE, OUR STRATEGIC PARTNERS OR OUR SUPPLIERS FAIL TO REMEDY YEAR 2000
ISSUES, OUR PRODUCT DEVELOPMENT PROGRAMS COULD BE INTERRUPTED AND OUR
BUSINESS AND OPERATING RESULTS COULD BE HARMED.
If we, our strategic partners, or our suppliers of goods and services fail
to remedy any Year 2000 issues, our business operations and development
programs could be interrupted. Through March 1, 2000, we have not
experienced any immediate adverse impacts related to the Year 2000,
including the impacts of the Year 2000 being a leap year. However, there
may be adverse events which have occurred but which are not yet apparent to
us, our strategic partners and our suppliers. We will continue to monitor
our Year 2000 compliance and that of our strategic partners and suppliers.
Our costs for Year 2000 compliance have been immaterial. We do not believe
that Year 2000 issues will have a material impact on our business,
financial condition or results of operations.
OUR ANTI-TAKEOVER PROVISIONS COULD DISCOURAGE POTENTIAL TAKEOVER ATTEMPTS AND
MAKE ATTEMPTS BY STOCKHOLDERS TO CHANGE MANAGEMENT MORE DIFFICULT.
The approval of two-thirds of our voting stock is required to approve
some transactions and to take some stockholder actions, including the calling of
a special meeting of stockholders and the amendment of any of the anti-takeover
provisions contained in our certificate of incorporation. Further, pursuant to
the terms of our stockholder rights plan adopted in March 1995, we have
distributed a dividend of one right for each outstanding share of common stock.
These rights will cause substantial dilution to the ownership of a person or
group that attempts to acquire us on terms not approved by our Board of
Directors and may have the effect of deterring hostile takeover attempts.
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<PAGE>
EXECUTIVE OFFICERS
The executive officers of Vical are elected annually by the Board of
Directors. Our executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Alain B. Schreiber, M.D. 44 President, Chief Executive Officer and Director
Deirdre Y. Gillespie, M.D. 43 Executive Vice President and Chief Business Officer
Martha J. Demski 47 Vice President, Chief Financial Officer, Treasurer and Secretary
George J. Gray 53 Vice President, Operations
Jon A. Norman, Ph.D. 51 Vice President, Research
Robert H. Zaugg, Ph.D. 50 Vice President, Business Development
</TABLE>
- --------------
ALAIN B. SCHREIBER, M.D., has been our President, Chief Executive
Officer and a director since May 1992. Prior to joining us, Dr. Schreiber held
various executive level positions at Rhone-Poulenc Rorer Inc. from July 1985 to
April 1992, lastly as Senior Vice President of Discovery Research. From October
1982 to June 1985, Dr. Schreiber served as Biochemistry Department Head at
Syntex Corp. Dr. Schreiber is a director of Spiros Development Corp. II Inc. and
is also an appointed adviser for foreign trade of the Belgian Foreign Trade
Counsel in the United States. He received his undergraduate degree and M.D. from
the Free University of Brussels, after which he was awarded a fellowship in
immunology at the Weizmann Institute.
DEIRDRE Y. GILLESPIE, M.D., joined us as Executive Vice President and
Chief Business Officer in March 1998. Prior to joining us, Dr. Gillespie served
as Vice President of Business Development for 3-Dimensional Pharmaceuticals,
Inc. From 1991 to 1996, she held various management positions with the Dupont
Merck Pharmaceutical Co. From 1986 to 1990, Dr. Gillespie directed clinical
research activities for Sandoz Pharma AG. Dr. Gillespie received a B.Sc. in
Pharmacology and Therapeutics and an M.D. from London University. Dr. Gillespie
received her M.B.A. from the London Business School with a specialization in
marketing and international management.
MARTHA J. DEMSKI joined us as Chief Financial Officer in December
1988 and currently serves as Vice President, Chief Financial Officer, Treasurer
and Secretary. From August 1977 until joining us, Ms. Demski held various
positions with Bank of America, lastly as Vice President/Section Head of the
Technology Section. She also served as an adviser to Bank of America on a
statewide basis regarding the biotechnology industry in California. Ms. Demski
received a B.A. from Michigan State University and an M.B.A. in Finance and
Accounting from The University of Chicago Graduate School of Business.
JON A. NORMAN, PH.D., joined us in January 1993 as Vice President,
Research. From 1986 until joining us, Dr. Norman was the Group Leader/Section
Head for the Departments of Pharmacology and Biochemistry at Bristol-Myers
Squibb Corporation. He was a Senior Research Scientist at Ciba-Geigy Corporation
from 1981 to 1986. Dr. Norman received his B.A. and M.A. from the University of
California at Santa Barbara and his Ph.D. in Biochemistry from the University of
Calgary, after which he was awarded a fellowship at the Friederich Miescher
Institute in Basel, Switzerland.
GEORGE J. GRAY joined us in October 1992 as Vice President,
Operations. Prior to that time he was at Rhone-Poulenc Rorer Inc. where he held
various positions since 1975, lastly as Director, Discovery Research Ventures,
US/UK from January 1990 to October 1992, and prior to that as Director, Project
Management from January 1988 to December 1989. Mr. Gray received a B.A. from
George Washington University.
ROBERT H. ZAUGG, PH.D., joined us in July 1991 as the Senior Director,
Business Development and has served as the Vice President of Business
Development since January 1994. Prior to joining us, Dr. Zaugg served as
Director of Business Development & Licensing for Triton Biosciences from 1988 to
1991 and in various business development positions with Sandoz Pharmaceuticals
Corporation from 1982
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<PAGE>
to 1988. He holds a B.A. from the University of California at Los Angeles, a
Ph.D. in Biochemistry from Northwestern University and an M.B.A. from New
York University. He was awarded a post-doctoral fellowship in immunology at
the Massachusetts Institute of Technology.
ITEM 2. PROPERTIES
Vical currently leases approximately 43,000 square feet of laboratory
and office space in San Diego, California, at three sites and with three leases.
The leases terminate in 2004 and contain varying renewal options. Total current
monthly rental on the facilities, including common area maintenance costs, is
approximately $107,000.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Vical's common stock is traded on the Nasdaq National Market under the
symbol "VICL." The following table presents quarterly information on the price
range of high and low sales prices for the common stock on the Nasdaq National
Market for the periods indicated since January 1, 1998.
<TABLE>
<CAPTION>
1998 HIGH LOW
- ----
<S> <C> <C>
First Quarter $18.00 $12.00
Second Quarter 19.00 14.00
Third Quarter 17.88 7.19
Fourth Quarter 18.00 8.00
1999
- ----
First Quarter $17.00 $10.00
Second Quarter 13.50 9.13
Third Quarter 16.66 10.88
Fourth Quarter 30.13 13.13
</TABLE>
As of March 15, 2000, there were approximately 516 stockholders of
record of Vical common stock with 19,814,986 shares outstanding. We have never
declared or paid any dividends and do not expect to pay any dividends in the
foreseeable future.
26
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(in thousands, except per share and share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues: 8,294 5,044 6,477 5,679 5,402
License/royalty revenue....... $ 2,417 $ 876 $ 1,326 $ 1,061 $ 900
----------- ----------- ----------- ----------- -----------
Contract revenue.............. 10,711 5,920 7,803 6,740 6,302
Operating expenses:
Research and development... 15,344 12,054 11,936 11,318 8,997
General and administrative. 4,376 3,650 3,733 3,168 2,902
----------- ----------- ----------- ----------- -----------
Total operating expenses 19,720 15,704 15,669 14,486 11,899
Loss from operations.............. (9,009) (9,784) (7,866) (7,746) (5,597)
Interest income................... 2,229 2,465 2,447 2,773 1,687
Interest expense.................. 129 162 192 108 73
----------- ----------- ----------- ----------- -----------
Net loss.......................... $ (6,909) $ (7,481) $ (5,611) $ (5,081) $ (3,983)
============ ============ ============ ============ ============
Net loss per share (basic and
diluted) ..................... $ (0.43) $ (0.47) $ (0.36) $ (0.33) $ (0.29)
============ ============ ============ ============ ============
Shares used in per share
calculation................... 16,135,590 15,797,585 15,484,952 15,382,848 13,504,790
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities......... $ 37,675 $ 40,184 $ 45,555 $ 46,846 $ 52,528
Working capital................... 35,996 38,398 44,856 46,315 51,541
Total assets...................... 45,059 44,844 50,691 52,440 55,118
Long-term obligations............. 740 801 1,232 1,617 339
Stockholders' equity.............. 38,669 40,824 47,194 48,365 53,264
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We were incorporated in April 1987 and have devoted substantially all
of our resources since that time to our research and development programs. We
focus our resources on the development of our naked DNA direct gene transfer and
related technologies. We are developing our ALLOVECTIN-7, LEUVECTIN and VAXID
cancer product candidates internally, while developing vaccine product
candidates for infectious diseases primarily in collaboration with corporate
partners Merck, and Aventis Pasteur, formerly Pasteur Merieux Connaught. We have
a license agreement allowing Centocor to use our naked DNA technology to develop
and market gene-based vaccines for the potential treatment of types of cancer.
We have an agreement with Boston Scientific for the use of our technology in
catheter-based intravascular gene delivery. We have an agreement with Aventis
Pharma, formerly Rhone-Poulenc Rorer, to use our gene delivery technology to
deliver neurological proteins for neurodegenerative diseases. We also have
agreements with Pfizer for use of our technology for DNA-based delivery of
therapeutic proteins in animal health applications and with Merial for use of
our technology for DNA vaccines in animal infectious disease targets. In
February 2000, the Company and Human Genome Sciences, Inc. (HGS) signed a
reciprocal royalty-bearing license. Under the agreement, Vical has the option to
exclusively license up to
27
<PAGE>
three genes from HGS for gene-based product development. HGS has the option
to license Vical's naked DNA gene delivery technology for use in up to three
gene-based products. In addition, we granted an exclusive, royalty-bearing
license to Vascular Genetics Inc. (VGI), a company in which HGS is a major
shareholder, for naked DNA delivery of a gene with potential use for
revascularization.
To date, we have not received revenues from the sale of products. We
expect to incur substantial operating losses for at least the next few years,
due primarily to the expansion of our research and development programs and the
cost of preclinical studies and clinical trials. Losses may fluctuate from
quarter to quarter as a result of differences in the timing of expenses incurred
and the revenues received from collaborative agreements. Such fluctuations may
be significant. As of December 31, 1999, our accumulated deficit was
approximately $44.6 million.
When used in this discussion, the words "expects," "anticipated" and
similar expressions are intended to identify forward-looking statements. These
statements are subject to risks and uncertainties which could cause actual
results to differ materially from those projected. Readers are cautioned not to
place undue reliance on these forward-looking statements which speak only as of
the date of this report. We undertake no obligation to publicly release the
result of any revisions to these forward-looking statements which may be made to
reflect events or circumstances after the date of this report to reflect the
occurrence of unanticipated events.
RESULTS OF OPERATIONS
Vical had revenues of $10.7 million for the year ended December 31,
1999, compared with $5.9 million in 1998 and $7.8 million in 1997. License
revenue in 1999 included $2.0 million from Merck to extend an agreement covering
therapeutic naked DNA vaccines and $1.0 million for the start of a Phase I
clinical trial of a preventive naked DNA vaccine to protect against HIV
infection; $1.0 million of option fees and $1.2 million of equity premium
pursuant to January 1999 agreements with Pfizer Inc.; and $1.0 million from
Merial for the initial exercise of options covering preventive naked DNA
vaccines for animal health infectious diseases. The equity premium from Pfizer
was a result of Pfizer purchasing for $6.0 million approximately 318,000 shares
of Vical common stock at $18.87 per share. The price per share reflected a
twenty-five percent premium over the trading price of the common stock. The
equity premium was recognized as license revenue in 1999. License revenue also
included recognition of previously deferred license fees of $1.1 million from
Merial, and royalty and other revenue of $1.0 million. Contract revenues for
1999 were $2.4 million, primarily from the Office of Naval Research for the
development work on a potential DNA vaccine to prevent malaria and payments
under the January 1999 agreement with Pfizer to fund research and development of
up to $500,000 per year for three years.
Vical had revenues of $5.9 million for the year ended December 31,
1998. License revenues in 1998 consisted of $2.2 million from Centocor, Inc. for
an agreement covering technology for the potential treatment of some types of
cancer, $1.1 million from an agreement with Boston Scientific Corporation for
the development of catheter-based vascular DNA therapeutics, recognition of $0.9
million of deferred license fees from a further extension of the license and
option agreement with Merial, and royalty and other revenues of $0.9. Contract
revenues in 1998 consisted principally of $0.7 million from the Office of Naval
Research.
Vical had revenues of $7.8 million for the year ended December 31,
1997. License revenues in 1997 were composed of $2.0 million from a 1997 Merck
agreement covering certain growth factors; the equity premium of $1.0 million on
the investment Merck made in 1997 in Vical common stock under an amendment to
the 1991 collaborative agreement; $1.3 million for the Aventis Pasteur
collaboration; $1.0 million for a 1997 collaborative agreement with Aventis
Pharma for neurodegenerative disease targets; and royalties, amortization of
deferred license fees from Merial and other revenue which totaled $1.2 million.
In November 1997, Vical and Merck amended the 1991 agreement and granted Merck
rights to develop and market therapeutic vaccines against HIV and HBV. Under the
November 1997 amendment, Merck made an investment of $5.0 million for
approximately 262,000 shares of Vical common stock. The price per share
reflected a twenty-five percent premium over the trading price of the common
stock. The premium on the investment was reflected in revenue in 1997. License
revenue from Aventis Pasteur of $1.3 million represented $1.0 million for a
milestone payment for the start of the malaria clinical trial and the balance
was the recognition of deferred license fees. Contract revenue in 1997 primarily
represented $1.1 million as payment from Aventis Pasteur for clinical and
preclinical work.
28
<PAGE>
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
- -"Revenue Recognition" (SAB 101). SAB 101 reflects the SEC's views on revenue
recognition. Historically we have recognized revenue from initial option and
license fees in the period in which the agreement was signed if there were no
significant performance obligations remaining. Revenue from milestone
payments was recognized as revenue when the milestones were achieved. SAB 101
would require that revenue from option and license fees and milestone
payments be deferred and recognized over the period of the option or license
agreement. Companies which have not adhered to the guidance in SAB 101 will
be required to reflect a cumulative effect adjustment of a change in
accounting principle in their financial statements for the first fiscal
quarter of the fiscal year beginning after December 15, 1999. We have not
completed our evaluation of the impact of SAB 101 on our financial
statements, however, the potential impact is expected to be material to the
financial statements.
Research and development expense increased to $15.3 million in 1999
from $12.1 million in 1998 and $11.9 million in 1997. The increases in
research and development expense were generally due to expansion of our
research and development activities. The increase in expenses in 1999
compared to 1998 included increased clinical and preclinical efforts which
resulted in increases to clinical trials expense, staffing costs, external
research and contract services. The increase in 1998 compared to 1997
principally was due to increased clinical trial costs and additional royalty
expense for license agreements. Clinical trials expense increased to $3.6
million during 1999 from $1.9 million in 1998. This increase mostly was due
to increased activity in ALLOVECTIN-7 clinical trials. Clinical trials
expense increased to $1.9 million during 1998 from $1.6 million in 1997
primarily due to the commencement of the Phase II and Phase III clinical
trials of ALLOVECTIN 7 for melanoma. Research and development expense is
expected to increase as our preclinical and clinical trial activities
increase.
General and administrative expense increased to $4.4 million in 1999
from $3.6 million during 1998 primarily due to additional staffing and related
expenses. The decrease in general and administrative expense to $3.6 million in
1998 from $3.7 million in 1997 is due to lower insurance and facilities
expenses. General and administrative expenses are expected to continue to
increase as research and development activities expand.
Interest income decreased to $2.2 million in 1999 from $2.5 million in
1998 due to lower average balances of investments and lower rates of return on
investments. Interest income of $2.5 million during 1998 increased from $2.4
million in 1997, due to higher rates of return on investments. Interest expense
decreased during 1999 compared to 1998, and during 1998 compared to 1997, due to
lower average balances of capital lease obligations and a bank note payable.
Interest income is expected to increase in 2000 compared to 1999 due to the sale
of 3,450,000 shares of common stock in January 2000 for net proceeds of
approximately $117.5 million.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Vical has financed its operations primarily
through private placements of common stock and preferred stock, four public
offerings of common stock (including an offering completed in January 2000), and
revenues from collaborative agreements. As of December 31, 1999, we had working
capital of approximately $36.0 million compared with $38.4 million at December
31, 1998. Cash and marketable securities totaled approximately $37.7 million at
December 31, 1999, compared with $40.2 million at December 31, 1998. On January
20, 2000, Vical sold 3,450,000 shares of common stock, including an
over-allotment to the underwriters of 450,000 shares, in a public offering for
$36.50 per share. Net proceeds to Vical were approximately $117.5 million after
deducting underwriting fees and offering costs. In November 1999, we entered
into an unsecured line of credit with a bank to provide financing for leasehold
improvements. Under the terms of the agreement, we may borrow up to $1.0 million
through May 1, 2000. No borrowings were outstanding under this agreement at
December 31, 1999.
We expect to incur substantial additional research and development
expenses and general and administrative expenses, including continued increases
in personnel costs, costs related to preclinical testing and clinical trials,
outside services and facilities. Our future capital requirements will depend on
many factors, including continued scientific progress in our 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
29
<PAGE>
technological and market developments, the cost of manufacturing scale-up, and
commercialization activities and arrangements. We intend to seek additional
funding through research and development relationships with suitable potential
corporate collaborators. We may also seek additional funding through public or
private financings. We cannot assure that additional financing will be available
on favorable terms or at all.
If additional funding is not available, we anticipate that, including
the net proceeds from the January stock offering, our available cash and
existing sources of funding will be adequate to satisfy our operating needs
through at least 2002.
YEAR 2000 ISSUES
Through March 1, 2000, we have not experienced any immediate adverse
impacts related to the Year 2000, including the impacts of the Year 2000 being a
leap year. However, there may be adverse events which have occurred but which
are not yet apparent to us, our strategic partners and our suppliers. We will
continue to monitor our Year 2000 compliance and that of our collaborators and
suppliers. Our costs for Year 2000 compliance have been immaterial. We do not
believe that Year 2000 issues will have a material impact on our business,
financial condition or results of operations.
ITEM 7.a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are subject to interest rate risk. Vical's investment portfolio is
maintained in accordance with our investment policy which defines allowable
investments, specifies credit quality standards and limits the credit exposure
of any single issuer. No investments in equity securities are made. At December
31, 1999, 75 percent of the investments would mature within one year and 25
percent would mature within two years, and the average maturity was nine months.
Our investments are all classified as available-for-sale securities. We
projected an ending fair value of our cash equivalents and marketable securities
using a twelve-month time horizon, a nine-month average maturity and assuming a
150-basis-point increase in interest rates. The decrease in fair value assuming
a 150-basis-point increase in interest rates compared with fair value with no
change in interest rates was not material at December 31, 1999. In January 2000,
Vical sold 3,450,000 shares of common stock, including an over-allotment to the
underwriters of 450,000 shares, in a public offering for $36.50 per share. Net
proceeds to Vical were approximately $117.5 million after deducting underwriting
fees and offering costs. Including the $117.5 million net proceeds from the
stock offering together with the marketable securities balance at December 31,
1999 and using the same assumptions as previously described, would result in a
pro forma potential unrealized decrease of $0.5 million compared with a pro
forma carrying value of these investments of approximately $162.3 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of Vical
required by this item are set forth at the pages indicated in Item 14(a)(1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
The directors of Vical are as follows:
<TABLE>
<CAPTION>
NAME AFFILIATION
- ---- -----------
<S> <C>
R. Gordon Douglas Chairman of the Board, Vical Incorporated
Alain B. Schreiber, M.D. President and CEO, Vical Incorporated
30
<PAGE>
M. Blake Ingle Inglewood Ventures
Patrick F. Latterell Venrock Associates
Gary A. Lyons Neurocrine Biosciences, Inc.
Dale A. Smith Baxter International Inc. (retired)
Philip M. Young U.S. Venture Partners
</TABLE>
The information required by this item (with respect to Directors) is
incorporated by reference from the information under the caption "Election of
Directors" contained in Vical's Proxy Statement to be filed with the Securities
and Exchange Commission in connection with the solicitation of proxies for
Vical's 2000 Annual Meeting of Stockholders to be held on May 18, 2000 ("Proxy
Statement"). The required information concerning Executive Officers of Vical is
contained in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the information under the caption "Executive Compensation" contained in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
the information under the caption "Security Ownership of Certain Beneficial
Owners and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
the information contained under the caption "Certain Transactions" contained in
the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The financial statements required by this item are submitted
in a separate section beginning on page F-1 of this report.
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
--------------------
<S> <C>
Report of Independent Public Accountants F-1
Balance Sheets at December 31, 1999 and 1998 F-2
Statements of Operations for the three years F-3
ended December 31, 1999
Statements of Stockholders' Equity F-4
for the three years ended December 31, 1999
Statements of Cash Flows for the three years F-5
ended December 31, 1999
Notes to Financial Statements F-6
</TABLE>
(2) FINANCIAL STATEMENT SCHEDULES
31
<PAGE>
Schedules have been omitted because of the absence of
conditions under which they are required or because the required
information is included in the financial statements or the notes
thereto.
(3) EXHIBITS
Exhibits with each management contract or compensatory plan or
arrangement required to be filed are identified. See paragraph (c)
below.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1999.
32
<PAGE>
(c) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
3.1(i)(9) Restated Certificate of Incorporation.
3.1(ii)(9) Amended and Restated Bylaws of the Company.
4.1(9) Specimen Common Stock Certificate.
4.2(2) Rights Agreement dated as of March 20, 1995, between the Company and
First Interstate Bank of California.
4.3(10) Stock Purchase Agreement dated November 3, 1997, between the Company
and Merck & Co., Inc.
4.4(11) Stock Purchase Agreement dated as of January 22, 1999, between the
Company and Pfizer Inc.
10.1(4)# Stock Incentive Plan of Vical Incorporated.
10.2(5)# 1992 Directors' Stock Option Plan of Vical Incorporated.
10.3(3) Form of Indemnity Agreement between the Company and its directors and
officers.
10.5(3)# Employment Agreement dated August 20, 1992, between the Company and
Mr. George J. Gray.
10.6(3)# Employment Agreement dated November 2, 1992, between the Company and
Dr. Jon A. Norman.
10.7(3) Stock Purchase Agreement dated February 20, 1992.
10.8(3) Lease dated December 4, 1987, between the Company and Nexus/GADCo.-UTC,
a California Joint Venture, as amended.
10.9(6)* Research Collaboration and License Agreement dated May 31, 1991,
between the Company and Merck & Co., Inc.
10.12(1)* License Agreement dated January 1, 1991, between the Company and
Wisconsin Alumni Research Foundation.
10.14(1)* License Agreement dated October 23, 1992, between the Company and the
Regents of University of Michigan.
10.16(7) Research, Option and License Agreement dated September 29, 1994, between
the Company and Pasteur Merieux Serums & Vaccins.
10.17(8) Amendment dated April 27, 1994, to Research Collaboration and License
Agreement dated May 31, 1991, between the Company and Merck & Co., Inc.
10.19(10)* Amendment dated November 3, 1997, to Research Collaboration and License
Agreement dated May 31, 1991, between the Company and Merck & Co., Inc.
10.20(12) 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)
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule
</TABLE>
------------
(1) Incorporated by reference to the Company's Registration
Statement on Form S-1 (No. 33-56830) filed on January 7, 1993.
(2) Incorporated by reference to the exhibit of the same number to
the Company's Report on Form 10-K for the Fiscal Year ended
December 31, 1994 (No. 0-21088).
(3) Incorporated by reference to the Exhibits of the same number
filed with the Company's Registration Statement on Form S-1 (No.
33-56830) filed on January 7, 1993.
(4) Incorporated by reference to Exhibit 10.1 filed with the
Company's Registration Statement on Form S-8 (file No.
333-80681) filed on June 15, 1999.
(5) Incorporated by reference to Exhibit 10.1 filed with the
Company's Registration Statement on Form S-8 (No. 333-30181)
filed on June 27, 1997.
(6) Incorporated by reference to Exhibit 10.9 of the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994 (No. 0-21088).
33
<PAGE>
(7) Incorporated by reference to Exhibit A of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994.
(8) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1994 (No. 0-21088).
(9) Incorporated by reference to the exhibit of the same number filed
with the Company's Registration Statement on Form S-3
(No. 33-95812) filed on August 15, 1995.
(10) Incorporated by reference to the exhibit of the same number to the
Company's Annual Report on Form 10-K for the year ended December
31, 1997, filed on March 30, 1998.
(11) Incorporated by reference to the exhibit of the same number to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999.
(12) Incorporated by reference to the exhibit of the same number to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
* The Company has received confidential treatment of certain portions
of these agreements.
# Indicates management contract or compensatory plan or arrangement.
(d) FINANCIAL STATEMENT SCHEDULES
The financial statement schedules of Vical Incorporated
required by this item are set forth at the pages indicated in Item
14(a)(2).
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 23, 2000.
VICAL INCORPORATED
By: /s/ ALAIN B. SCHREIBER, M.D.
-------------------------------------
Alain B. Schreiber, M.D.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ ALAIN B. SCHREIBER, M.D. President,
- ----------------------------------------- Chief Executive Officer
Alain B. Schreiber, M.D. and Director March 23, 2000
/s/ MARTHA J. DEMSKI Vice President, Finance
- ----------------------------------------- Chief Financial Officer
Martha J. Demski Secretary and Treasurer March 23, 2000
/s/ R. GORDON DOUGLAS
- -----------------------------------------
R. Gordon Douglas Chairman of the Board of Directors March 23, 2000
/s/ PHILIP M. YOUNG
- -----------------------------------------
Philip M. Young Director March 23, 2000
/s/ PATRICK F. LATTERELL
- -----------------------------------------
Patrick F. Latterell Director March 23, 2000
/s/ DALE A. SMITH
- -----------------------------------------
Dale A. Smith Director March 23, 2000
/s/ M. BLAKE INGLE
- -----------------------------------------
M. Blake Ingle Director March 23, 2000
/s/ GARY A. LYONS
- -----------------------------------------
Gary A. Lyons Director March 23, 2000
</TABLE>
35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Vical Incorporated:
We have audited the accompanying balance sheets of Vical Incorporated, a
Delaware corporation, as of December 31, 1999 and 1998, and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vical Incorporated as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
San Diego, California
February 10, 2000, except with respect to the matter discussed in Note 10 for
which the date is February 24, 2000
F-1
<PAGE>
VICAL INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1999 1998
-------------------- --------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 11,149,587 $ 13,567,817
Marketable securities - available-for-sale 26,525,181 26,615,939
Receivables and other 3,971,621 1,432,711
-------------------- --------------------
Total current assets 41,646,389 41,616,467
-------------------- --------------------
Property and Equipment:
Equipment 5,948,458 5,139,944
Leasehold improvements 1,646,023 1,558,554
-------------------- --------------------
7,594,481 6,698,498
Less--accumulated depreciation and amortization (5,708,349) (4,992,121)
-------------------- --------------------
1,886,132 1,706,377
-------------------- --------------------
Patent costs, net of accumulated amortization of $220,715 and
$126,638 1,380,245 1,387,936
Other assets 146,470 133,385
-------------------- --------------------
$ 45,059,236 $ 44,844,165
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 3,839,642 $ 2,281,252
Current portion of capital lease obligations 627,957 473,466
Current portion of notes payable 106,887 213,773
Deferred revenue 1,076,166 250,000
-------------------- --------------------
Total current liabilities 5,650,652 3,218,491
-------------------- --------------------
Long-Term Obligations:
Long-term obligations under capital leases 739,885 747,807
Notes payable - 53,443
-------------------- --------------------
Total long-term obligations 739,885 801,250
==================== ====================
Commitments
Stockholders' Equity:
Preferred stock, $.01 par value--5,000,000 shares authorized--
none outstanding - -
Common stock, $.01 par value--40,000,000 shares authorized-- 162,011 158,665
16,201,136 and 15,866,544 shares issued and outstanding
in 1999 and 1998, respectively
Additional paid-in capital 83,292,870 78,332,483
Accumulated other comprehensive income (loss) (140,801) 69,440
Accumulated deficit (44,645,381) (37,736,164)
-------------------- --------------------
Total stockholders' equity 38,668,699 40,824,424
-------------------- --------------------
$ 45,059,236 $ 44,844,165
==================== ====================
</TABLE>
See accompanying notes.
F-2
<PAGE>
VICAL INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenues:
License/Royalty revenue $ 8,294,283 $ 5,044,607 $ 6,477,244
Contract revenue 2,417,198 875,773 1,325,925
--------------- --------------- ---------------
10,711,481 5,920,380 7,803,169
--------------- --------------- ---------------
Operating expenses:
Research and development 15,343,586 12,054,367 11,936,068
General and administrative 4,376,471 3,649,841 3,733,290
--------------- --------------- ---------------
19,720,057 15,704,208 15,669,358
--------------- --------------- ---------------
Loss from operations (9,008,576) (9,783,828) (7,866,189)
Other income (expense):
Interest income 2,229,181 2,465,545 2,447,139
Interest expense (129,822) (162,224) (192,181)
--------------- --------------- ---------------
Net loss $ (6,909,217) $ (7,480,507) $ (5,611,231)
=============== =============== ===============
Net loss per share (basic and diluted) $ (0.43) $ (0.47) $ (0.36)
=============== =============== ===============
Weighted average shares used in computing net loss per share 16,135,590 15,797,585 15,484,952
=============== =============== ===============
</TABLE>
See accompanying notes.
F-3
<PAGE>
VICAL INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Additional Accumulated
Common Stock Paid-in Other Comprehensive
Shares Amount Capital Income
------------- ------------ -------------- -------------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996 15,396,582 $ 153,966 $ 72,904,472 $ (48,785)
Issuance of common stock 261,812 2,618 3,992,143 -
Stock option exercises 72,922 729 371,356 -
Unrealized gain on marketable securities
arising during holding period
Reclassification of realized loss included
in net loss
Unrealized gain on marketable securities - - - 72,813
Net loss - - - -
------------- ------------ -------------- -------------------
BALANCE, December 31, 1997 15,731,316 157,313 77,267,971 24,028
Stock option exercises 135,228 1,352 1,064,512 -
Unrealized gain on marketable securities
arising during holding period
Reclassification of realized gain included
in net loss
Unrealized gain on marketable securities - - - 45,412
Net loss - - - -
------------- ------------ -------------- -------------------
BALANCE, December 31, 1998 15,866,544 158,665 78,332,483 69,440
Issuance of common stock 317,969 3,180 4,790,461
Stock option exercises 16,623 166 169,926 -
Unrealized loss on marketable securities
arising during holding period
Reclassification of realized gain included
in net loss
Unrealized loss on marketable securities - - - (210,241)
Net loss - - - -
------------- ------------ -------------- -------------------
BALANCE, December 31, 1999 16,201,136 $ 162,011 $ 83,292,870 $ (140,801)
============= ============ ============== ===================
</TABLE>
<TABLE>
<CAPTION>
Total Total
Accumulated Stockholders' Comprehensive
Deficit Equity Loss
--------------- -------------- --------------
<S> <C> <C> <C>
BALANCE, December 31, 1996 $(24,644,426) $ 48,365,227
Issuance of common stock - 3,994,761
Stock option exercises - 372,085
Unrealized gain on marketable securities
arising during holding period $ 87,763
Reclassification of realized loss included
in net loss (14,950)
--------------
Unrealized gain on marketable securities - 72,813 72,813
Net loss (5,611,231) (5,611,231) (5,611,231)
--------------- -------------- --------------
BALANCE, December 31, 1997 (30,255,657) 47,193,655 $ (5,538,418)
==============
Stock option exercises - 1,065,864
Unrealized gain on marketable securities
arising during holding period $ 57,041
Reclassification of realized gain included
in net loss (11,629)
--------------
Unrealized gain on marketable securities - 45,412 45,412
Net loss (7,480,507) (7,480,507) (7,480,507)
--------------- -------------- --------------
BALANCE, December 31, 1998 (37,736,164) 40,824,424 $ (7,435,095)
==============
Issuance of common stock - 4,793,641
Stock option exercises - 170,092
Unrealized loss on marketable securities
arising during holding period $ (191,191)
Reclassification of realized gain included
in net loss (19,050)
--------------
Unrealized loss on marketable securities - (210,241) (210,241)
Net loss (6,909,217) (6,909,217) (6,909,217)
--------------- -------------- --------------
BALANCE, December 31, 1999 $ (44,645,381) $ 38,668,699 $ (7,119,458)
=============== ============== ==============
</TABLE>
See accompanying notes.
F-4
<PAGE>
VICAL INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (6,909,217) $ (7,480,507) $ (5,611,231)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,041,351 920,695 939,956
Write-off of abandoned patent application costs - 94,800 80,994
Changes in operating assets and liabilities:
Receivables and other (2,538,910) 133,821 359,463
Accounts payable and accrued expenses 1,558,390 856,649 614,219
Deferred revenue 826,166 71,739 (1,013,043)
-------------- -------------- --------------
Net cash used in operating activities (6,022,220) (5,402,803) (4,629,642)
-------------- -------------- --------------
INVESTING ACTIVITIES:
Marketable securities (119,482) 6,826,955 912,645
Capital expenditures (441,324) (34,292) (418,507)
Other assets (13,086) (1,885) 210,400
Patent expenditures (86,386) (288,252) (280,778)
-------------- -------------- --------------
Net cash provided from (used in) investing activities (660,278) 6,502,526 423,760
-------------- -------------- --------------
FINANCING ACTIVITIES:
Principal payments under capital lease obligations (539,136) (487,702) (506,205)
Payments on notes payable (160,329) (267,217) (106,887)
Issuance of common stock, net 4,963,733 1,065,864 4,366,846
-------------- -------------- --------------
Net cash provided from financing activities 4,264,268 310,945 3,753,754
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,418,230) 1,410,668 (452,128)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,567,817 12,157,149 12,609,277
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,149,587 $ 13,567,817 $ 12,157,149
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid $ 128,411 $ 167,622 $ 184,191
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital leases $ 685,705 $ 348,920 $ 434,416
</TABLE>
See accompanying notes.
F-5
<PAGE>
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Vical Incorporated (the "Company"), a Delaware corporation, was incorporated
in 1987 and has devoted substantially all of its resources since that time to
its research and development programs. The Company is focusing its resources
on the development of its DNA gene transfer technologies for the prevention
and treatment of life-threatening diseases.
All of the Company's potential products are in research and development. No
revenues have been generated from the sale of any of such products, nor are
any such revenues expected for at least the next few years. The products
currently under development by the Company will require significant
additional research and development efforts, including extensive preclinical
and clinical testing and regulatory approval, prior to commercial use. There
can be no assurance that the Company's research and development efforts will
be successful and that any of the Company's potential products will prove to
be safe and effective in clinical trials. Even if developed, these products
may not receive regulatory approval or be successfully introduced and
marketed at prices that would permit the Company to operate profitably. The
Company expects to continue to incur substantial losses and not generate
positive cash flow from operations for at least the next few years. No
assurance can be given that the Company can generate sufficient product
revenue to become profitable or generate positive cash flow from operations
at all or on a sustained basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Equipment is stated at cost and depreciated over the estimated useful lives
of the assets (3-5 years) using the straight-line method. Leasehold
improvements are stated at cost and amortized over the shorter of the life of
the lease or the remaining useful life of the asset using the straight-line
method.
PATENT COSTS
The Company capitalizes certain costs related to patent applications.
Accumulated costs are amortized over the estimated economic lives of the
patents using the straight-line method, commencing at the time the patents
are issued. Costs related to patent applications are written off to expense
at the time such costs are deemed to have no continuing value.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are expensed as incurred.
REVENUE UNDER COLLABORATIVE AGREEMENTS
The Company earns revenue from licensing access to its proprietary technology
and performing services under research and development contracts. Initial
fees under license and option agreements are recognized upon contract signing
if the fee is nonrefundable and there are no significant performance
obligations remaining. Fees to extend an option on the technology are
recognized over the option extension period. Revenue from milestones is
recognized as the milestones are achieved. Revenue under research and
development contracts is recognized as the services are performed. Advance
payments received in excess of amounts earned are classified as deferred
revenue.
NET LOSS PER SHARE
Basic and diluted net loss per share for each of the three years in the
period ended December 31, 1999, has been computed using the weighted average
number of shares of common stock outstanding during the periods pursuant to
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Diluted loss per share
F-6
<PAGE>
does not include any stock options as the effect would be antidilutive. See
Note 6 for information on the number of options outstanding and the weighted
average exercise price at December 31, 1999, 1998 and 1997.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes."
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments such as accounts receivable,
accounts payable and accrued expenses reasonably approximate fair value because
of the short maturity of these items. The Company believes the carrying amounts
of the Company's notes payable and obligations under capital leases approximate
fair value because the interest rates on these instruments change with, or
approximate, market interest rates.
COMPREHENSIVE INCOME (LOSS)
The Company has implemented Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income." This statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Accordingly,
in addition to reporting net income (loss), the Company has displayed the impact
of any unrealized gain or loss on marketable securities as a component of
comprehensive income and has displayed an amount representing total
comprehensive income (loss) for each period presented. The Company has presented
the required information in the Statements of Stockholders' Equity.
CAPITALIZED COSTS OF INTERNALLY DEVELOPED SOFTWARE The Company has adopted
AICPA Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement provides
guidance on accounting for the costs of computer software developed or
obtained for internal use. The statement identifies characteristics of
internal use software and assists in determining when computer software is
for internal use. Implementation of this statement in 1999 did not have a
material impact on the Company's financial statements.
BUSINESS SEGMENTS
The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" and has
determined that it operates in one business segment dedicated to research in
gene delivery technology.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 - "Revenue
Recognition" (SAB 101). SAB 101 reflects the SEC's views on revenue recognition.
Historically the Company has recognized revenue from initial option and license
fees in the period in which the agreement was signed if there were no
significant performance obligations remaining. Revenue from milestone payments
was recognized as revenue when the milestones were achieved. SAB 101 would
require that revenue from option and license fees and milestone payments be
deferred and recognized over the period of the option or license agreement.
Companies which have not adhered to the guidance in SAB 101 will be required to
reflect a cumulative effect adjustment of a change in accounting principle in
their financial statements for the first fiscal quarter of the fiscal year
beginning after December 15, 1999. The Company has not completed its evaluation
of the impact of SAB 101 on its financial statements, however, the potential
impact is expected to be material to the financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement changes the previous
accounting definition of derivative, expanding it to include embedded
derivatives and many commodity contracts. Under the Statement, every derivative
is recorded in the balance sheet at its fair value, and any changes in the
derivative's fair value are recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. The Company does not anticipate that the adoption
of SFAS 133 will have a material impact on its financial position or results of
operations.
2. CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company invests its excess cash in debt instruments of financial
institutions, corporations with strong credit ratings, and in U.S. government
obligations. The Company has established guidelines relative to diversification
F-7
<PAGE>
and maturities that maintain safety and liquidity. These guidelines are
periodically reviewed and modified to take advantage of trends in yields and
interest rates. Cash equivalents are short-term, highly liquid investments with
original maturities of less than three months. Cash equivalents at December 31,
1999 and 1998, consist primarily of $8,520,283 and $11,671,743, respectively, in
commercial paper, federal agency discount notes and money market funds.
In accordance with Statement of Financial Accounting Standards No. 115 ("SFAS
115"), "Accounting for Certain Investments in Debt and Equity Securities," the
Company classifies its marketable securities as available-for-sale and records
the unrealized holding gains or losses as a separate component of stockholders'
equity. Realized gains or losses, calculated based on the specific
identification method, were not material for the years ended December 31, 1999,
1998 and 1997.
At December 31, 1999, marketable securities consisted of the following:
<TABLE>
<CAPTION>
Amortized Market
Cost Value Unrealized Loss
----------------- ----------------- ------------------
<S> <C> <C> <C>
U.S. Government obligations $ 6,787,024 $ 6,742,952 $ (44,072)
Corporate bonds 17,835,525 17,747,168 (88,357)
Asset backed securities 2,043,433 2,035,061 (8,372)
----------------- ----------------- ------------------
Total marketable securities $26,665,982 $26,525,181 $ (140,801)
================= ================= ==================
</TABLE>
Approximately 75 percent and 25 percent of these securities mature within one
and two years, respectively, of December 31, 1999.
At December 31, 1998, marketable securities consisted of the following:
<TABLE>
<CAPTION>
Amortized Market
Cost Value Unrealized Gain
----------------- ----------------- ------------------
<S> <C> <C> <C>
U.S. Government obligations $ 5,508,897 $ 5,529,915 $ 21,018
Corporate bonds 17,051,442 17,086,242 34,800
Asset backed securities 3,986,160 3,999,782 13,622
----------------- ----------------- ------------------
Total Marketable Securities $26,546,499 $26,615,939 $ 69,440
================= ================= ==================
</TABLE>
3. SIGNIFICANT CONTRACTS AND LICENSE AGREEMENTS
MERCK & CO., INC.
The Company has entered into three separate agreements with Merck & Co., Inc.
("Merck") which provide Merck with certain exclusive rights to develop and
commercialize vaccines using the Company's "naked" DNA technology for certain
disease targets. The 1991 and 1997 agreements are for human vaccine targets and
the 1992 agreement is for animal vaccine targets. Prior to 1996, Merck exercised
its options to seven preventive human infectious disease vaccines using the
Company's naked DNA technology pursuant to the 1991 agreement. In November 1997,
the Company and Merck amended the 1991 agreement and granted Merck certain
rights to develop and market therapeutic vaccines against the human
immunodeficiency virus (HIV) and hepatitis B virus (HBV). Under the amended
agreement, Merck made an investment of $5,000,000 for approximately 262,000
shares of the Company's common stock including a 25 percent premium over the
average per share closing price for the twenty trading days prior to the date of
the agreement. The premium of $1,000,000 on the investment was reflected in
revenue in 1997 and the balance of the investment, net of costs to issue the
shares of stock, was reflected in common stock and additional paid-in capital.
The September 1997 agreement between the Company and Merck granted Merck the
rights to use the Company's naked DNA technology to deliver certain growth
factors as potential treatments for a range of applications including
revascularization. The agreement resulted in a payment to the Company of
$2,000,000.
In November 1999, Merck paid Vical $2.0 million to extend an agreement covering
therapeutic naked DNA vaccines. In December 1999, Merck started a Phase I
clinical trial of a preventive naked DNA vaccine to protect against HIV
infection. This event triggered a milestone payment of $1.0 million which we
received in January 2000. Vical accrued the revenue for this milestone in
December 1999. Through December 31, 1999, the Company had
F-8
<PAGE>
received a total of $21,130,000 (including the payment for the investment for
common stock) under these agreements. License revenue recognized under these
agreements was $3,000,000, $0, and $3,000,000, in 1999, 1998, and 1997,
respectively. All three agreements provide for the Company to receive
additional payments based upon achievement of certain defined milestones and
royalty payments based on net product sales.
PFIZER INC.
In January 1999, Pfizer Inc. entered into a collaborative and option agreement
and a stock purchase agreement with the Company. Under the terms of the
collaborative and option agreement, Pfizer Inc. paid the Company $1,000,000 in
option fees. In addition the Company agreed to provide access to two full time
equivalent employees to assist Pfizer in its research and development efforts
for $500,000 of research and development expenses annually for three years.
Under the terms of the stock purchase agreement Pfizer paid $6,000,000 for the
purchase of approximately 318,000 shares of common stock at $18.87 per share,
reflecting a 25 percent premium. The $1,000,000 option fee and the $1,200,000
premium on the purchase of stock were recognized as revenue in 1999, and the
balance of the common stock investment, net of costs to issue the shares of
stock, was reflected in common stock and additional paid-in capital in 1999. In
1999, the Company also recognized $353,000 of revenue for research and
development work.
MERIAL
The Company entered into a corporate alliance in March 1995 relating to DNA
vaccines in the animal health area with Merial, a joint venture between Merck
and Rhone Merieux. Merial has options to acquire exclusive licenses to our gene
delivery technologies to develop and commercialize DNA-based vaccines to prevent
infectious diseases in domesticated animals. Merial made payments of $1,100,000
in 1999, and $1,000,000 in 1998 to extend the options under this agreement. In
December 1999, Merial paid the Company $1.6 million for the initial exercise of
options and extension of options under the agreement. License revenue recognized
under this agreement was $2,075,000, $850,000 and $500,000 in 1999, 1998 and
1997, respectively. If Merial exercises additional license options and markets
these vaccines, cash payments and royalties on sales would be due to the
Company.
AVENTIS PASTEUR (FORMERLY PASTEUR MERIEUX CONNAUGHT)
In September 1994, the Company entered into an agreement with Aventis Pasteur
("AP") that included a research collaboration and options for AP to take
exclusive licenses to Vical's naked DNA vaccine technology for each of five
vaccine targets. In addition, Vical was paid an annual research fee through
September 1997 by AP for expenses incurred in performing certain preclinical
work as defined in the agreement. Through 1996, AP had added another option and
exercised four options. In 1997, AP paid the Company $1,000,000 as a milestone
payment under the agreement because the Company and AP began a Phase I clinical
trial of an experimental vaccine against the parasite that causes malaria. The
Company and AP sponsored the trial which was conducted by the U.S. Naval Medical
Research Institute and the U.S. Army Medical Research Institute of Infectious
Diseases. Through December 31, 1999, Vical has received $7,816,000 of which $0,
$239,000, and $2,399,000 was recognized as revenue in 1999, 1998, and 1997,
respectively. The agreement provides for the Company to receive additional
payments based upon achievement of certain defined milestones and royalty
payments based on net product sales.
AVENTIS PHARMA (FORMERLY RHONE-POULENC RORER PHARMACEUTICALS, INC.)
In October 1997, the Company and Aventis Pharma entered into an agreement
granting Aventis Pharma an exclusive worldwide license to use the Company's
naked DNA gene delivery technology to develop certain gene therapy products for
potential treatment of neurodegenerative diseases. Under the terms of the
agreement, the Company received $1,000,000 which was recognized as revenue in
1997. This agreement provides for the Company to receive additional payments
based upon achievement of certain defined milestones and royalty payments based
on net product sales.
CENTOCOR, INC.
In February 1998, the Company signed an agreement allowing Centocor, Inc.
("Centocor") to use Vical's naked DNA technology to develop and market
gene-based vaccines for the potential treatment of certain types of cancer. The
agreement resulted in a payment to Vical of $2,200,000, which was recognized as
revenue in 1998. The payment represented an initial payment of $2,000,000 under
the license agreement and reimbursement of $200,000 of patent costs. The Company
may receive further payments plus royalties if Centocor successfully develops
products using the Vical technology. The agreement grants to Centocor exclusive
worldwide licenses and options to license Vical's naked DNA technology to
deliver certain antigens to induce immune responses against the associated
cancer cells.
F-9
<PAGE>
BOSTON SCIENTIFIC CORPORATION
In September 1998, the Company and Boston Scientific Corporation entered into a
license and option agreement for the development of catheter-based intravascular
gene delivery technology. The Company received $1,100,000 which was recognized
as revenue in 1998. The agreement also provides for the Company to receive
royalty payments on net product sales.
NAVAL MEDICAL RESEARCH INSTITUTE
In September 1998, the Company signed a cooperative agreement with the Office of
Naval Research to develop a multi-gene malaria DNA vaccine and test its ability
to protect humans against malaria. This agreement, as amended, would provide up
to $2,813,000 of funding to Vical, of which $1,778,000 and $499,000 of contract
revenue was recognized under this agreement in 1999 and 1998, respectively.
OTHER RESEARCH AND LICENSING AGREEMENTS
The Company also received revenue under research and licensing agreements with
other entities including the U.S. government of which approximately $1,296,000,
$933,000, and $904,000, was recognized as revenue during the years ended
December 31, 1999, 1998, and 1997, respectively.
Under the Merck, Aventis Pasteur, Merial, Aventis Pharma, Centocor, Pfizer,
Human Genome Sciences, Inc. and Vascular Genetics Inc. (see Note 10 subsequent
events) agreements, if the Company were to receive milestone or royalty
payments, we would be required to pay up to 10 percent of some of these payments
to Wisconsin Alumni Research Foundation. Under the Boston Scientific agreement,
if the Company were to receive milestone or royalty payments, we would be
required to pay up to 25 percent of some of these payments to the University of
Michigan.
4. OTHER FINANCIAL DATA
Accounts payable and accrued expenses consisted of the following at December 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
<S> <C> <C>
Accrued clinical trials cost $1,411,277 $ 492,914
Employee compensation 880,797 692,716
Accounts payable 214,925 768,796
Accrued royalties payable 547,500 137,500
Other accrued liabilities 785,143 189,326
---------------- ---------------
$3,839,642 $2,281,252
================ ===============
</TABLE>
5. COMMITMENTS
LEASES
The Company leases its office and research facilities and certain equipment
under operating and capital leases. The minimum annual rents on the office and
research facilities are subject to increases based on changes in the Consumer
Price Index subject to certain minimum and maximum annual increases. The Company
is also required to pay taxes, insurance and operating costs under the
facilities leases. Two of the three facilities leases can be renewed for one
additional five year period beyond their expiration in 2004 and one facility
lease can be renewed for two additional five-year periods. The equipment capital
leases are secured by substantially all equipment of the Company.
F-10
<PAGE>
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------------- ---------------
<S> <C> <C>
Years ending December 31,
2000 $1,339,586 $ 721,398
2001 1,384,396 369,697
2002 1,430,744 267,812
2003 1,478,687 183,929
2004 1,394,788 -
2005 - -
--------------- ---------------
Total minimum lease
Payments $7,028,201 1,542,836
===============
Less amount representing
Interest (174,994)
---------------
Present value of capital
lease payments 1,367,842
Less current portion (627,957)
---------------
Long-term obligations under
capital leases $ 739,885
===============
</TABLE>
Rent expense for the years ended December 31, 1999, 1998, and 1997, was
$1,085,183, $998,195, and $969,899, respectively.
Cost and accumulated depreciation of equipment under capital leases were as
follows:
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation Net
---------------- ----------------- ----------------
<S> <C> <C> <C>
December 31, 1999 $2,583,485 $1,490,376 $1,093,109
December 31, 1998 $2,163,877 $1,109,781 $1,054,096
</TABLE>
NOTES PAYABLE
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 0.25 percentage points. The borrowings can be
prepaid without penalty. The agreement contains certain financial covenants.
No borrowings were outstanding at December 31, 1999 under this agreement.
The Company also has a term loan which has an outstanding balance of $106,887
and which bears interest at 9% at December 31, 1999. This loan will be paid
by April 1, 2000.
RESEARCH AND LICENSE AGREEMENTS
In 1999 and 1998, the Company continued research and exclusive license
agreements with various universities for continuing research and license
rights to technology related to gene therapy. The agreements generally grant
the Company the right to commercialize any product derived from specified
technology. Fees paid are expensed as incurred and future obligations on
these agreements are not significant.
6. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company's certificate of incorporation, as amended, authorizes the
issuance of up to 5,000,000 preferred shares. No shares of preferred stock
were outstanding at December 31, 1999 or 1998.
F-11
<PAGE>
COMMON STOCK
The Company's certificate of incorporation, as amended, authorizes the
issuance of up to 40,000,000 common shares. Common stock shares totaling
16,201,136 and 15,866,544 were outstanding at December 31, 1999 and 1998,
respectively. (See Note 10--Subsequent Events-for discussion of stock
offering completed in January 2000.)
STOCK PLAN AND DIRECTORS OPTION PLAN
The Company has a stock plan ("Stock Incentive Plan of Vical Incorporated")
under which 3,200,000 shares of common stock are reserved for issuance to
employees, non-employee directors and consultants of the Company. The plan
provides for the grant of incentive and nonstatutory stock options and the
direct award or sale of shares. The exercise price of stock options must
equal at least the fair market value on the date of grant. The maximum term
of options granted under the plan is ten years. Except for annual grants to
directors which vest at the next annual meeting, options generally vest 25
percent on the first anniversary of the date of grant, with the balance
vesting quarterly over the remaining three years. The plan has also limited
the number of options that may be granted to any plan participant in a single
calendar year to 300,000 shares.
The Company also has a directors stock option plan ("Directors Plan") that
provides for the issuance to non-employee directors of up to 210,000 shares
of the Company's common stock, of which options for 202,500 shares have been
granted. The initial grant to a director of options under this plan generally
vests 25 percent on the first anniversary of the date of grant, with the
balance vesting quarterly over the remaining three years. In 1997, the
stockholders approved an amendment to the Stock Incentive Plan of Vical
Incorporated allowing non-employee directors to receive grants under that
plan and, accordingly, it is not anticipated that there will be any future
grants under the Directors Plan.
The following table summarizes stock option transactions for the Company's
stock option plans for the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Weighted Avg. Weighted Avg.
Shares Exercise Price Fair Value of Grants
<S> <C> <C> <C>
Outstanding,
December 31, 1996 1,159,681 $10.92
Granted 403,845 $14.14 $10.17
Exercised (72,922) $ 5.10
Forfeited (48,106) $13.25
--------------
Outstanding,
December 31, 1997 1,442,498 $12.04
Granted 580,875 $15.56 $11.12
Exercised (135,228) $ 7.88
Forfeited (73,100) $13.99
--------------
Outstanding,
December 31, 1998 1,815,045 $13.39
Granted 546,900 $17.89 $13.06
Exercised (16,623) $10.23
Forfeited (50,057) $15.19
--------------
Outstanding
December 31, 1999 2,295,265 $14.45
============== ============
</TABLE>
F-12
<PAGE>
The following table summarizes information about stock options outstanding under
the Company's stock option plans at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------ -------------------------------------
Weighted Weighted
Number Average Average Number Weighted
Range of Outstanding Remaining Exercise Exercisable Average
Exercise Prices As of 12/31/99 Contractual Life Price As of 12/31/99 Exercise Price
- ------------------------------------------------------------------------------ -------------------------------------
<S> <C> <C> <C> <C> <C>
$0.1600 - $13.50 680,647 5.7 $9.23 521,016 $8.47
$13.63 - $15.25 666,162 7.7 $14.60 376,282 $14.64
$15.38 - $20.50 600,256 8.2 $16.54 322,541 $17.09
$20.75 - $21.69 348,200 9.9 $20.77 0 -
--------------- -----------------
$0.1600 - $21.69 2,295,265 7.6 $14.45 1,219,839 $12.65
</TABLE>
The number of shares and weighted average price of options exercisable at
December 31, 1999, 1998 and 1997 were 1,219,839 shares at $12.65, 844,829
shares at $11.53, and 688,126 shares at $9.90, respectively.
The Company has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's stock option plans been
determined consistent with the provisions of SFAS 123, the Company's net loss
and loss per share would have increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- ---------------
<S> <C> <C> <C>
Net loss - as reported $ 6,909,217 $ 7,480,507 $5,611,231
Net loss - pro forma $ 11,591,993 $ 11,645,607 $8,878,712
Net loss per share - as reported $ (0.43) $ (0.47) $ (0.36)
Net loss per share - pro forma $ (0.72) $ (0.74) $ (0.57)
</TABLE>
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants: risk free interest rates of 5.70% (1999), 5.09%
(1998), and 5.99% (1997) and, expected volatility of 71% (1999 and 1998), and
70% (1997). An expected option life of 5 years and a dividend rate of zero is
assumed for all years presented.
7. RELATED PARTIES
Included in other assets at December 31, 1999 and 1998, is the long-term
portion of notes receivable, representing amounts due from certain officers
and employees of the Company. Imputed interest is applied at the applicable
federal rate. The loan agreements allow for the notes to be forgiven under
certain circumstances over the next three years. The long-term portion is
$70,000 and $60,000 at December 31, 1999 and 1998, respectively. The current
portion, included in receivables and other, is $50,000 and $55,000 at
December 31, 1999 and 1998, respectively.
8. INCOME TAXES
As of December 31, 1999, the Company has available net operating loss
carryforwards of approximately $43,770,000 and research and development
credit carryforwards of approximately $3,400,000 to reduce future federal
income taxes, if any. These carryforwards expire through 2019 and are subject
to review and possible adjustment by the Internal Revenue Service.
Effective September 30, 1999, one of the Company's product candidates,
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
certain tax benefits for qualifying expenses.
F-13
<PAGE>
The Tax Reform Act of 1986 limits a company's ability to utilize certain net
operating loss and tax carryforwards in the event of cumulative change in
ownership in excess of 50 percent, as defined. The Company has completed
numerous financings that have resulted in a change in ownership in excess of
50 percent, as defined. The utilization of net operating loss and tax credit
carryforwards may be limited due to these ownership changes.
The Company has a deferred tax asset of approximately $21,031,000 related
primarily to its net operating loss and tax credit carryforwards. A valuation
allowance has been recognized to offset the entire amount of the deferred tax
asset as realization of such asset is uncertain.
9. EMPLOYEE BENEFIT PLANS
The Company has a net defined contribution savings plan under section 401(k)
of the Internal Revenue Code. The plan covers substantially all employees.
The Company matches employee contributions made to the plan according to a
specified formula. The Company's matching contributions totaled approximately
$107,000, $95,000, and $94,000, in 1999, 1998, and 1997, respectively.
10. SUBSEQUENT EVENTS
On January 20, 2000, Vical completed a public offering of 3,450,000 shares of
its common stock, including 450,000 shares issued to cover over-allotments,
at a price of $36.50 per share. Proceeds to Vical net of underwriting fees
and offering expenses were approximately $117,500,000.
On February 24, 2000, the Company and Human Genome Sciences, Inc. (HGS)
signed a reciprocal royalty-bearing license. Under the agreement, Vical has
the option to exclusively license up to three genes from HGS for gene-based
product development. HGS has the option to license Vical's naked DNA gene
delivery technology for use in up to three gene-based products. In addition,
the Company granted an exclusive, royalty-bearing license to Vascular
Genetics Inc. (VGI), a company in which HGS is a major shareholder, for naked
DNA delivery of a gene with potential use for revascularization. In exchange,
Vical received a minority equity interest in VGI.
11. SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of the unaudited quarterly results of operations
for the years ended December 31, 1999 and 1998 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
1999
- ----
Revenues $ 3,281 $ 1,253 $ 1,229 $ 4,948
Research and development
costs 3,614 3,738 3,514 4,478
Total operating expenses 4,627 4,860 4,581 5,652
Net loss (809) (3,068) (2,837) (195)
Net loss per common
share (basic and diluted) (0.05) (0.19) (0.18) (0.01)
Shares used in per share
calculation 15,953 16,191 16,196 16,200
<CAPTION>
March 31 June 30 September 30 December 31
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
1998
- ----
Revenues $ 2,732 $ 560 $ 1,696 $ 932
Research and development
costs 3,095 3,058 3,158 2,743
Total operating expenses 4,062 4,072 4,012 3,558
Net loss (721) (2,935) (1,750) (2,075)
Net loss per common
share (basic and diluted) (0.05) (0.19) (0.11) (0.13)
Shares used in per share
calculation 15,753 15,789 15,817 15,892
</TABLE>
F-14
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K into Vical Incorporated's
previously filed Registration Statements Files No. 33-60826, No. 33-60824, No.
33-81602, No. 33-81600, No. 33-87972, No. 333-30181 and No. 333-80681.
ARTHUR ANDERSEN LLP
San Diego, California
March 22, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF OPERATIONS OF THE COMPANY'S FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1999, AMD IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 11,150
<SECURITIES> 26,525
<RECEIVABLES> 1,865
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 41,646
<PP&E> 7,594
<DEPRECIATION> 5,708
<TOTAL-ASSETS> 45,059
<CURRENT-LIABILITIES> 5,651
<BONDS> 740
0
0
<COMMON> 162
<OTHER-SE> 38,507
<TOTAL-LIABILITY-AND-EQUITY> 45,059
<SALES> 0
<TOTAL-REVENUES> 10,711
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15,344
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 130
<INCOME-PRETAX> (6,909)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,909)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,909)
<EPS-BASIC> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
