<PAGE>
Filed pursuant to rule 424(b)4
File No. 333-39542
3,000,000 SHARES
[LOGO]
COMMON STOCK
$7.25 PER SHARE
We are offering 3,000,000 shares of common stock. This is a firm commitment
underwriting. Our common stock trades on the Nasdaq National Market under the
symbol "AVII."
INVESTING IN OUR COMMON STOCK INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Price to the public......................................... $ 7.25 $21,750,000
Underwriting discount....................................... $ .435 $ 1,305,000
Proceeds before expenses to AVI BioPharma, Inc.............. $6.815 $20,445,000
</TABLE>
We have granted Paulson Investment Company, Inc. an over-allotment option of
up to 450,000 additional shares at the public offering price, less underwriting
discount, within 45 days from the effective date of this offering, to cover
over-allotments.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PAULSON INVESTMENT COMPANY, INC.
I-BANKERS SECURITIES, INC.
FIRST COLONIAL SECURITIES GROUP, INC.
The date of this prospectus is July 27, 2000
<PAGE>
------------------------
In this prospectus, "AVI," "we," "us" and "our" refer to AVI BioPharma, Inc.
------------------------
TRADEMARKS
This prospectus includes our registered trademark,
NeuGene-Registered Trademark-, and our unregistered trademarks Avicine-TM-,
Xactin-TM-, Resten-NG-TM-, Oncomyc-NG-TM- and NeuBiotics-TM-. Each other
trademark, trade name or service mark appearing in this prospectus belongs to
its respective owner.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY DOES NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO
YOU. THERE IS MORE DETAILED INFORMATION APPEARING IN OTHER SECTIONS OF THIS
PROSPECTUS. PLEASE READ THE ENTIRE PROSPECTUS CAREFULLY.
OUR COMPANY
BUSINESS
We are a biopharmaceutical company developing therapeutic products based on
our two core technologies, cancer immunotherapy and NeuGene antisense. Our
principal products target life-threatening diseases, with initial applications
in pancreatic and colorectal cancers, cardiovascular restenosis, and infectious
disease as summarized in the following table.
<TABLE>
<CAPTION>
TECHNOLOGY PRODUCT INDICATION STAGE
---------- ---------------------------- ------------------- ------------
<S> <C> <C> <C>
Cancer immunotherapy.......... Avicine therapeutic vaccine Cancer Clinical
Xactin monoclonal antibodies Cancer Pre-clinical
NeuGene antisense............. Resten-NG Restenosis Clinical
Oncomyc-NG Cancer Pre-clinical
NeuBiotics Infectious diseases Pre-clinical
</TABLE>
Currently approved drugs or other therapies for these diseases often prove
to be ineffective in treating advanced stages of these diseases or produce
numerous undesirable side effects. Our pre-clinical and clinical studies
indicate that our two core technologies may produce significantly fewer side
effects and offer more effective treatment options than currently approved
products for these diseases. Our technologies are protected by a strong patent
position including 44 issued patents and 49 applications pending. Each of our
lead products, Avicine and Resten-NG, addresses a large market estimated to
exceed $1 billion worldwide.
CANCER IMMUNOTHERAPY
We have completed three Phase I and two Phase II clinical trials with
Avicine, our therapeutic cancer vaccine, which is our most advanced product.
Avicine is administered to patients who already have cancer to stimulate an
immune response that may be effective in fighting the existing cancer. The
therapeutic benefit of a cancer vaccine depends on the existence of specific
target sites, called tumor antigens, on cancer cells. The target for Avicine is
a hormone called human chorionic gonadotropin, or hCG, which is responsible for
stimulating fetal development during pregnancy. It is also a tumor antigen on
all major types of cancer, including cancers of the colon, pancreas, prostate,
lung and breast. We believe that hCG plays an important role in the spread of
cancer. The effectiveness of Avicine is based on stimulating an immune response
against hCG.
From our clinical studies involving more than 200 patients, we believe that
Avicine is a safe and essentially non-toxic therapy capable of producing a
specific immune response in most patients. Further, the patients who mounted an
immune response to hCG lived longer on average than patients treated with
chemotherapy. We intend to investigate further the use of Avicine alone and in
conjunction with chemotherapy in Phase II and Phase III clinical trials.
In April 2000, we entered into an alliance with SuperGen, Inc. for shared
development and marketing rights for Avicine. Under the terms of the agreement,
AVI and SuperGen, Inc. will equally share in future clinical development and FDA
registration costs as well as in profits from product sales in the United
States. Closing of the transaction occurred in July 2000.
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We have an exclusive product license agreement with Abgenix, Inc. for the
use of its technology to produce fully human monoclonal antibodies against hCG
cancer targets, which we call Xactin antibodies. These Xactin antibodies are
directed at targets identified by our Avicine clinical trials. Two Xactin
antibodies are in pre-clinical development and are designed to treat cancer
patients as a standalone therapy or in combination with Avicine.
NEUGENE ANTISENSE
We have developed gene-inactivating compounds called NeuGene antisense drugs
that we believe are more stable, specific, efficacious, and safe than other
antisense or gene-inactivating technologies. Our NeuGene drugs are distinguished
by a novel chemical structure which differs from the earlier generation
structures of competing technologies.
NeuGenes are synthetic drugs that are designed to block the function of
specific genetic sequences involved in the disease process. Targeting specific
genetic sequences provides for greater selectivity than is available through
conventional drugs. NeuGenes have the potential to provide safe and effective
treatment for a wide range of human diseases.
We have completed pre-clinical studies using our NeuGene compounds in the
treatment of restenosis, which is the blockage of arteries following balloon
angioplasty, and cancer. We finished a Phase I clinical trial of Resten-NG for
restenosis in April 2000 and a Phase II clinical study commenced in June 2000.
We began Phase I testing of the oral formulation of Resten-NG in July 2000. We
plan to commence Phase I/II clinical studies in cancer with Oncomyc-NG late in
2000. Finally, we intend to complete pre-clinical development of our first
NeuGene-based antibiotics, called NeuBiotics, later this year.
DEVELOPMENT AND COMMERCIALIZATION STRATEGY
Our experience and resources enable us to initiate drug discovery and
development and to move drug candidates through pre-clinical development and
into Phase I and II human clinical trials. Our near-term strategy is to
co-develop products with strategic partners or to license the marketing rights
for our products to pharmaceutical partners after we complete one or more Phase
II clinical trials. In this manner, costs associated with late-stage clinical
development and marketing will be shared with, or the responsibility of, our
strategic partners. With additional resources we may consider assuming greater
responsibility for the late-stage clinical development and marketing
opportunities of future product candidates.
Our executive offices are located at One SW Columbia, Suite 1105, Portland,
Oregon 97258, and we can be reached at (503) 227-0554. Our World Wide Web
address is "http://www.avibio.com." Information on our web site does not
constitute a part of this prospectus.
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THE OFFERING
<TABLE>
<S> <C>
Common stock.............................. 3,000,000 shares
Common stock to be outstanding after this
offering................................ 21,432,523 shares
Use of proceeds........................... To finance clinical trial costs of Avicine and clinical
trial costs of our NeuGene antisense program, for
research and development, including pre-clinical testing
of our other product candidates, to finance
manufacturing-related leasehold improvements and related
manufacturing equipment, and for working capital and
general corporate purposes.
</TABLE>
The outstanding share information above is based on the number of shares
outstanding as of July 15, 2000 and excludes:
- 7,907,842 shares of our common stock issuable upon the exercise of
outstanding options and warrants;
- shares of our common stock issuable to SuperGen, Inc. upon the exercise of
a warrant for up to 10% of our outstanding common stock;
- up to 450,000 shares of our common stock issuable upon exercise of the
over-allotment option granted to Paulson Investment Company, Inc.; and
- 300,000 shares of our common stock issuable upon exercise of the
underwriters' warrants.
EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE OVER-ALLOTMENT OPTION OR THE UNDERWRITERS' WARRANTS.
5
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SUMMARY FINANCIAL INFORMATION
The following table sets forth our summary financial information. You should
read this information together with our financial statements and other related
information elsewhere in this prospectus.
The pro forma as adjusted balance sheet data reflect the receipt of the
estimated net proceeds from the sale of 3,000,000 shares of our common stock, at
the price of $7.25 per share, after deducting the underwriting discount and
estimated offering expenses.
<TABLE>
<CAPTION>
THREE MONTHS
JULY 22, 1980 ENDED JULY 22, 1980
YEARS ENDED DECEMBER 31, (INCEPTION) TO MARCH 31, (INCEPTION) TO
------------------------------ DECEMBER 31, ------------------- MARCH 31,
1997 1998 1999 1999 1999 2000 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA) -------- -------- -------- -------------- -------- -------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................. $ 14 $ 120 $ 17 $ 841 $ 4 $ 1,132 $ 1,973
------- -------- ------- -------- ------- ------- --------
Research and development................. (2,737) (6,307) (6,672) (24,728) (1,343) (1,936) (26,664)
General and administrative............... (1,282) (1,621) (1,745) (9,199) (418) (436) (9,635)
Acquired in-process R&D(1)............... -- (19,473) (72) (19,545) (60) -- (19,545)
Other income............................. 389 547 194 1,576 77 101 1,677
------- -------- ------- -------- ------- ------- --------
Net loss................................. $(3,616) $(26,734) $(8,278) $(51,054) $(1,739) $(1,140) $(52,194)
======= ======== ======= ======== ======= ======= ========
Net loss per share--basic & diluted...... $ (0.36) $ (2.27) $ (0.62) -- $ (0.13) $ (0.07) --
======= ======== ======= ======== ======= ======= ========
Cash flow from operations................ $(3,006) $ (6,736) $(7,561) $(26,751) $(1,622) $(1,417) $(28,168)
======= ======== ======= ======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 2000
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and investments........................................ $14,380 $34,199
Working capital............................................. 13,662 33,481
Total assets................................................ 15,791 35,610
Shareholders' equity........................................ 15,024 34,843
</TABLE>
------------------------------
(1) Amounts relate to acquired in-process research and development expenses
incurred in connection with the acquisition of ImmunoTherapy Corporation.
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RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE SPECIFIC FACTORS LISTED BELOW, TOGETHER WITH THE
CAUTIONARY STATEMENT THAT FOLLOWS THIS SECTION AND THE OTHER INFORMATION
INCLUDED IN THIS PROSPECTUS, BEFORE PURCHASING SHARES IN THIS OFFERING. IF THE
POSSIBILITIES DESCRIBED AS RISKS BELOW ACTUALLY OCCUR, OUR OPERATING RESULTS AND
FINANCIAL CONDITION WOULD LIKELY SUFFER, AND THE TRADING PRICE OF OUR COMMON
STOCK MAY FALL, CAUSING YOU TO LOSE SOME OR ALL OF YOUR INVESTMENT IN THE SHARES
WE ARE OFFERING.
RISKS RELATING TO OUR BUSINESS
OUR PRODUCTS ARE IN AN EARLY STAGE OF DEVELOPMENT AND MAY NOT BE DETERMINED TO
BE SAFE OR EFFECTIVE.
Although we began operations in 1980, we are only in the early stages of
clinical development with our NeuGene antisense pharmaceutical products. We have
devoted almost all of our time to research and development of our technology and
products, protecting our proprietary rights and establishing strategic
alliances. Our proposed NeuGene products are in the pre-clinical or clinical
stages of development and will require significant further research,
development, clinical testing and regulatory clearances. We have no products
available for sale and we do not expect to have any products available for sale
for several years. Our proposed products are subject to development risks. These
risks include the possibilities that any of the products could be found to be
ineffective or toxic, or could fail to receive necessary regulatory clearances.
Although we have obtained favorable results in Phase II trials using Avicine to
treat colorectal cancer patients, we cannot assure that we will obtain similar
results in the contemplated Phase III trial protocol. We have not received any
significant revenues from the sale of products and we cannot assure investors
that we will successfully develop marketable products, that our sales will
increase or that we will become profitable. Third parties may develop superior
or equivalent, but less expensive, products.
WE HAVE INCURRED NET LOSSES SINCE OUR INCEPTION, AND WE MAY NOT ACHIEVE OR
SUSTAIN PROFITABILITY.
We incurred a net operating loss of $8.3 million in 1999 and of
$1.1 million for first quarter 2000. "Net operating loss" represents the amount
by which our expenses, other than interest expense, exceed revenues. As of
March 31, 2000, our accumulated deficit was $52.2 million. Our losses have
resulted principally from expenses incurred in research and development of our
technology and products and from selling, general and administrative expenses
that we have incurred while building our business infrastructure. We expect to
continue to incur significant operating losses in the future as we continue our
research and development efforts and seek to obtain regulatory approval of our
products. Our ability to achieve profitability depends on our ability to
complete development of our products, obtain regulatory approvals and market our
products. It is uncertain when, if ever, we will become profitable.
IF WE FAIL TO ATTRACT SIGNIFICANT ADDITIONAL CAPITAL, WE MAY BE UNABLE TO
CONTINUE TO SUCCESSFULLY DEVELOP OUR PRODUCTS.
Since we began operations, we have obtained operating funds primarily by
selling shares of our company. Based on our current plans, we believe that
current cash balances will be sufficient to meet our operating needs for at
least the next 24 months. Furthermore, the actual amount of funds that we will
need will be determined by many factors, some of which are beyond our control.
These factors include the success of our research and development efforts, the
status of our pre-clinical and clinical testing, costs relating to securing
regulatory approvals and the costs and timing of obtaining new patent rights,
regulatory changes, competition and technological developments in the market. We
may need funds sooner than currently anticipated.
We anticipate that we may need to obtain additional funds at the end of this
24-month period. If necessary, potential sources of additional funding include
strategic relationships, public or private sales
7
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of shares of our common stock or debt or other arrangements. We do not have any
committed sources of additional financing at this time. It is uncertain whether
we can obtain additional funding when we need it on terms that will be
acceptable to us or at all. If we raise funds by selling additional shares of
our common stock or securities convertible into our common stock, the ownership
interest of our existing shareholders will be diluted. If we are unable to
obtain financing when needed, our business and future prospects would be
materially adversely affected.
IF WE FAIL TO RECEIVE NECESSARY REGULATORY APPROVALS, WE WILL BE UNABLE TO
COMMERCIALIZE OUR PRODUCTS.
All of our products are subject to extensive regulation by the United States
Food and Drug Administration, or FDA, and by comparable agencies in other
countries. The FDA and comparable agencies require new pharmaceutical products
to undergo lengthy and detailed clinical testing procedures and other costly and
time-consuming compliance procedures. Avicine has completed three Phase I and
two Phase II studies but has not started Phase III trials. Our first NeuGene
Antisense drug, Resten-NG, completed Phase I trials but has not yet entered
Phase II efficacy studies. We cannot predict when we will initiate and complete
our clinical trials or when we will be able to submit our products for
regulatory review. Even if we submit a new drug application, there may be delays
in obtaining regulatory approvals, if we obtain them at all. Sales of our
products outside the United States will also be subject to regulatory
requirements governing clinical trials and product approval. These requirements
vary from country to country and could delay introduction of our products in
those countries. We cannot assure you that any of our products will receive
marketing approval from the FDA or comparable foreign agencies.
WE MAY FAIL TO COMPETE EFFECTIVELY, PARTICULARLY AGAINST LARGER, MORE
ESTABLISHED PHARMACEUTICAL COMPANIES, CAUSING OUR BUSINESS TO SUFFER.
The biotechnology industry is highly competitive. We compete with companies
in the United States and abroad that are engaged in the development of
pharmaceutical technologies and products. They include: biotechnology,
pharmaceutical, chemical and other companies; academic and scientific
institutions; governmental agencies; and public and private research
organizations.
Many of these companies and many of our other competitors have much greater
financial and technical resources and production and marketing capabilities than
we do. Our industry is characterized by extensive research and development and
rapid technological progress. Competitors may successfully develop and market
superior or less expensive products which render our products less valuable or
unmarketable.
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL,
HIGHLY-SKILLED PERSONNEL REQUIRED FOR OUR ACTIVITIES, OUR BUSINESS WILL
SUFFER.
Our success will depend to a large extent on the abilities and continued
service of several key employees, including Drs. Denis Burger, Patrick Iversen
and Dwight Weller. The loss of any of these key employees could significantly
delay the achievement of our goals. Competition for qualified personnel in our
industry is intense, and our success will depend on our ability to attract and
retain highly skilled personnel.
ASSERTING, DEFENDING AND MAINTAINING OUR INTELLECTUAL PROPERTY RIGHTS COULD BE
DIFFICULT AND COSTLY, AND OUR FAILURE TO DO SO WILL HARM OUR ABILITY TO
COMPETE AND THE RESULTS OF OUR OPERATIONS.
Our success will depend on our existing patents and licenses, and our
ability to obtain additional patents in the future. We have been issued
44 patents and have filed an additional 49 patent applications in the United
States, Canada, Europe, Australia and Japan. We license the composition,
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manufacturing and use of Avicine in all fields except fertility regulation from
The Ohio State University.
We cannot assure investors that our pending patent applications will result
in patents being issued in the United States or foreign countries. In addition,
we cannot guarantee that patents which have been or will be issued will afford
meaningful protection for our technology and products. Competitors may develop
products similar to ours which do not conflict with our patents. Others may
challenge our patents and, as a result, our patents could be narrowed or
invalidated. The patent position of biotechnology firms generally is highly
uncertain, involves complex legal and factual questions, and has recently been
the subject of much litigation. No consistent policy has emerged from the United
States Patent and Trademark Office, or USPTO, or the courts regarding the
breadth of claims allowed or the degree of protection afforded under
biotechnology patents.
Our success will also depend partly on our ability to operate without
infringing upon the proprietary rights of others, as well as our ability to
prevent others from infringing on our proprietary rights. We may be required at
times to take legal action to protect our proprietary rights and, despite our
best efforts, we may be sued for infringing on the patent rights of others.
Patent litigation is costly and, even if we prevail, the cost of such litigation
could adversely affect our financial condition. If we do not prevail, in
addition to any damages we might have to pay, we could be required to stop the
infringing activity or obtain a license. We cannot be certain that any required
license would be available to us on acceptable terms, or at all. If we fail to
obtain a license, our business might be materially adversely affected.
To help protect our proprietary rights in unpatented trade secrets, we
require our employees, consultants and advisors to execute confidentiality
agreements. However, we cannot guarantee that these agreements will provide us
with adequate protection if confidential information is used or disclosed
improperly. In addition, in some situations, these agreements may conflict with,
or be subject to, the rights of third parties with whom our employees,
consultants or advisors have prior employment or consulting relationships.
Further, others may independently develop substantially equivalent proprietary
information and techniques, or otherwise gain access to our trade secrets.
IF OUR RELATIONSHIP WITH SUPERGEN, INC. IS UNSUCCESSFUL, OUR BUSINESS COULD BE
HARMED.
Our strategic relationship with SuperGen, Inc. is important to our success.
We cannot assure you that we will receive any additional payments from SuperGen
or that the relationship will be commercially successful. The transactions
contemplated by our agreements with SuperGen, Inc., including the equity
purchases and cash payments, are subject to numerous risks and conditions. For
example, we may fail to achieve clinical and sales milestones; Avicine may fail
to achieve regulatory approval; Avicine may not be commercially successful;
SuperGen, Inc. may fail to perform its obligations under our agreements, such as
failing to devote sufficient resources to marketing Avicine; and our agreements
with SuperGen, Inc. may be terminated against our will. The occurrence of any of
these events could severely harm our business.
WE HAVE LIMITED SALES CAPABILITY AND MAY NOT BE ABLE TO SUCCESSFULLY
COMMERCIALIZE OUR PRODUCTS.
We have been engaged solely in the development of pharmaceutical technology.
Although some of our management have experience in biotechnology company
operations, we have limited experience in manufacturing or selling
pharmaceutical products. We also have only limited experience in negotiating and
maintaining strategic relationships, and in conducting clinical trials and other
later-stage phases of the regulatory approval process. We cannot assure
investors that we will successfully engage in any of these activities.
9
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WE MAY BE SUBJECT TO PRODUCT LIABILITY LAWSUITS AND OUR INSURANCE MAY NOT BE
ADEQUATE TO COVER DAMAGES.
The use of our products will expose us to the risk of product liability
claims. Although we intend to obtain product liability insurance coverage, we
cannot guaranty that product liability insurance will continue to be available
to us on acceptable terms or that our coverage will be sufficient to cover all
claims against us. A product liability claim, even one without merit or for
which we have substantial coverage, could result in significant legal defense
costs, thereby increasing our expenses, lowering our earnings and, depending on
revenues, potentially resulting in additional losses.
CONTINUING EFFORTS OF GOVERNMENT AND THIRD-PARTY PAYERS TO CONTAIN OR REDUCE THE
COSTS OF HEALTH CARE MAY ADVERSELY AFFECT OUR REVENUES AND FUTURE
PROFITABILITY.
In addition to obtaining regulatory approval, the successful
commercialization of our products will depend on our ability to obtain
reimbursement for the cost of the product and treatment. Government authorities,
private health insurers and other organizations, such as health maintenance
organizations are increasingly challenging the prices charged for medical
products and services. Also, the trend toward managed health care in the United
States, the growth of healthcare organizations such as HMOs, and legislative
proposals to reform healthcare and government insurance programs could
significantly influence the purchase of healthcare services and products,
resulting in lower prices and reducing demand for our products. The cost
containment measures that healthcare providers are instituting and any
healthcare reform could affect our ability to sell our products and may have a
material adverse effect on our operations. We cannot assure investors that
reimbursement in the United States or foreign countries will be available for
any of our products, that any reimbursement granted will be maintained, or that
limits on reimbursement available from third-party payors will not reduce the
demand for, or the price of, our products. The lack or inadequacy of third-party
reimbursements for our products would have a material adverse effect on our
operations. We cannot forecast what additional legislation or regulation
relating to the healthcare industry or third-party coverage and reimbursement
may be enacted in the future, or what effect the legislation or regulation would
have on our business.
IF WE FAIL TO ESTABLISH STRATEGIC RELATIONSHIPS WITH LARGER PHARMACEUTICAL
PARTNERS, OUR BUSINESS MAY SUFFER.
We do not intend to conduct late-stage or Phase III human clinical trials
ourselves. We anticipate entering into relationships with larger pharmaceutical
companies to conduct later pharmaceutical trials and to market our products and
we also plan to continue to use contract manufacturing for our products. We may
be unable to enter into corporate partnerships. Lack of corporate partnerships
could impede our ability to bring our products to market. We cannot assure
investors that any corporate partnerships, if entered, will be on favorable
terms or will result in the successful development or marketing of our products.
If we are unsuccessful in establishing advantageous clinical testing,
manufacturing and marketing relationships, we are not likely to generate
significant revenues and become profitable.
RISKS RELATED TO SHARE OWNERSHIP
OUR RIGHT TO ISSUE PREFERRED STOCK, OUR CLASSIFIED BOARD OF DIRECTORS AND OREGON
ANTI-TAKEOVER LAWS MAY PREVENT YOU FROM REALIZING A PREMIUM.
Our authorized capital consists of 50,000,000 shares of common stock and
2,000,000 shares of preferred stock. Our board of directors, without any further
vote by the shareholders, has the authority to issue preferred shares and to
determine the price, preferences, rights and restrictions, including voting and
dividend rights, of these shares. The rights of the holders of shares of common
stock may be
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affected by the rights of holders of any preferred shares that our board of
directors may issue in the future. For example, our board of directors may allow
the issuance of preferred shares with more voting rights, higher dividend
payments or more favorable rights upon dissolution, than the shares of common
stock. If preferred shares are issued in the future, it may also be more
difficult for others to acquire a majority of our outstanding voting shares.
In addition, we have a "classified" board of directors, which means that
only one-half of our directors are eligible for election each year. Therefore,
if shareholders wish to change the composition of our Board of Directors, it
could take at least two years to remove a majority of the existing directors or
to change all directors. Having a classified board of directors may, in some
circumstances, deter or delay mergers, tender offers or other possible
transactions which may be favored by some or a majority of our shareholders.
The Oregon Control Share Act and Business Combination Act limit parties who
acquire a significant amount of voting shares from exercising control over us.
These acts may lengthen the period for a proxy contest or for a person to vote
their shares to elect the majority of our Board.
OUR STOCK PRICE IS VOLATILE AND MAY FLUCTUATE DUE TO FACTORS BEYOND OUR CONTROL.
Historically, the market price of our stock has been highly volatile. The
following types of announcements could have a significant impact on the price of
our common stock: positive or negative results of testing and clinical trials;
delays in entering into corporate partnerships; technological innovations or
commercial product introductions by ourselves or competitors; changes in
government regulations; developments concerning proprietary rights, including
patents and litigation matters; public concern relating to the commercial value
or safety of any of our products; general stock market conditions.
Further, the stock market has in recent months experienced and may continue
to experience significant price and volume fluctuations. These fluctuations have
particularly affected the market prices of equity securities of many
biopharmaceutical companies that are not yet profitable. Often, the effect on
the price of such securities is unrelated or disproportionate to the operating
performance of such companies. These broad market fluctuations may adversely
affect the ability of a shareholder to dispose of his or her shares at a price
equal to or above the price at which the shares were purchased.
THE SIGNIFICANT NUMBER OF OUR SHARES OF COMMON STOCK ELIGIBLE FOR FUTURE SALE
MAY CAUSE THE PRICE OF COMMON STOCK TO FALL.
As of July 15, 2000, we have outstanding 18,432,523 shares of common stock
and all are eligible for sale under Rule 144 or are otherwise freely tradable,
except for 4,541,358 shares of common stock which are not freely tradable until
we file a registration statement on such shares. The timing of the effectiveness
of this registration statement is uncertain. In addition:
- Our employees and others hold options to buy a total of 2,498,288 shares
of common stock as of July 15, 2000. The shares of common stock to be
issued upon exercise of these options, have been registered, and therefore
may be freely sold when issued.
- There are outstanding warrants to buy 5,409,554 shares of common stock as
of July 15, 2000. The shares issuable upon exercise of 4,399,499 warrants
are registered. These shares may be freely sold when issued. The holders
of warrants covering 400,000 shares have incidental registration rights to
have the shares issuable upon the exercise of their warrants registered.
Once registered, those shares may be freely sold when issued, for so long
as the registration statement is effective and current. The remaining
warrants have no registration rights.
- We may issue options to purchase up to an additional 456,036 shares of
common stock under our stock option plans as of July 15, 2000, which also
will be freely saleable when issued.
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- In July 2000, we issued to SuperGen, Inc. a warrant to purchase up to 10%
of our common stock, subject to antidilution provisions.
Sales of substantial amounts of shares into the public market could lower
the market price of our common stock.
WE HAVE GRANTED CERTAIN RIGHTS TO SUPERGEN, INC. WHICH COULD NEGATIVELY IMPACT
YOUR INVESTMENT.
We have granted SuperGen, Inc. a warrant to purchase shares of our common
stock so that upon its exercise SuperGen, Inc. could own up to 25% of our
outstanding common stock, when aggregated with SuperGen, Inc.'s present holdings
of our common stock. If SuperGen, Inc. exercises its warrant, the stock
ownership of our other stockholders will be diluted and SuperGen, Inc. may have
significant influence over us. SuperGen Inc.'s right to exercise this warrant,
and its share ownership after exercise, may discourage other parties from
acquiring us.
FORWARD-LOOKING STATEMENTS
The statements which are not historical facts contained in this discussion
are forward-looking statements that involve risks and uncertainties, including,
but not limited to, the results of research and development efforts, the results
of pre-clinical and clinical testing, the effect of regulation by the FDA and
other agencies, the impact of competitive products, product development,
commercialization and technological difficulties, and other risks detailed in
our Securities and Exchange Commission filings.
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COMMON STOCK MARKET PRICE DATA
Our common stock is traded on the Nasdaq National Market under the symbol
"AVII." The following table shows, for the periods indicated, the high and low
sale prices per share of our common stock as reported on the Nasdaq National
Market from the time of our initial public offering, June 3, 1997.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1997
Second Quarter (from June 3, 1997)........................ $ 7.25 $5.75
Third Quarter............................................. 7.50 6.44
Fourth Quarter............................................ 9.50 6.69
1998
First Quarter............................................. $ 7.82 $5.75
Second Quarter............................................ 8.00 5.62
Third Quarter............................................. 6.31 2.62
Fourth Quarter............................................ 5.19 2.50
1999
First Quarter............................................. $ 4.09 $2.47
Second Quarter............................................ 5.00 2.94
Third Quarter............................................. 5.88 3.00
Fourth Quarter............................................ 7.94 2.88
2000
First Quarter............................................. $27.25 $5.31
Second Quarter............................................ 14.50 8.06
</TABLE>
The last reported sale price of our common stock on the Nasdaq National
Market on July 26, 2000 was $7.50 per share. The approximate number of our
shareholders of record as of July 15, 2000 was 598.
13
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 3,000,000 shares of common stock we
are offering are estimated to be $19.8 million, or $22.9 million if Paulson
Investment Company, Inc. exercises its over-allotment option in full, after
deducting the underwriting discount of $1.3 million, or $1.5 million if the
over-allotment option is exercised in full, and our offering expenses of
$626,250.
We intend to use the estimated net proceeds from this offering as follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
AMOUNT PERCENTAGE
----------- -----------
<S> <C> <C>
Avicine clinical trials..................................... $ 4,000,000 20%
NeuGene clinical trials..................................... 5,500,000 28%
Pre-clinical R&D............................................ 4,000,000 20%
Manufacturing leasehold improvements........................ 2,000,000 10%
Working capital and general purposes........................ 3,319,000 22%
----------- ---
Total offering proceeds..................................... $19,819,000 100%
=========== ===
</TABLE>
The cost, timing and amount of funds required for such uses by us cannot be
precisely determined at this time and will be based on the demand for
manufacturing capacity, competitive developments, the rate of our progress in
research and development, the results of pre-clinical studies and clinical
trials, the timing of regulatory approvals, determination of the commercial
potential of our product candidates, the rate at which operating losses are
incurred, payments under collaboration agreements, availability of alternate
methods of financing and other factors beyond our control.
We may also use some of the net proceeds to invest in or acquire other
companies, technologies or products that complement our business, although we do
not currently have any agreements to do so. We have not yet determined with any
certainty the manner in which we will allocate the net proceeds. The amounts and
timing of these expenditures will vary depending on a number of factors,
including the amount of cash generated by our operations, competitive and
technological developments, and the rate of growth, if any, of our business.
Pending these uses, the net proceeds of this offering will be invested in
short-term, interest-bearing securities. Our board of directors has broad
discretion in determining how the net proceeds of this offering will be applied.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. We intend
to retain earnings from operations for use in the operation and expansion of our
business and do not anticipate paying cash dividends with respect to our common
stock in the foreseeable future.
14
<PAGE>
CAPITALIZATION
The following table shows:
- The capitalization of AVI as of March 31, 2000; and
- The capitalization of AVI as of March 31, 2000, assuming the completion of
this offering, at the public offering price of $7.25 per share, after
deducting the underwriting discount and other estimated expenses of this
offering.
The "as adjusted" number excludes 7,803,265 shares of our common stock
reserved for issuance under outstanding options and warrants. The "as adjusted"
number also excludes 1,684,211 shares of our common stock issued to
SuperGen, Inc. in July 2000 and shares equaling up to 10% of our common stock
issuable upon the exercise of a warrant issued to SuperGen, Inc. in July 2000.
The capitalization information contained in this table should be read in
conjunction with the more detailed Financial Statements and the Notes to
Financial Statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and investments........................................ $ 14,380 $ 34,199
======== ========
Shareholders' equity:
Preferred Stock, $.0001 par value; 2,000,000 shares
authorized, none issued and outstanding.................
Common Stock, $.0001 par value; 50,000,000 shares
authorized, 16,658,784 shares issued and outstanding,
actual; 19,658,784 shares issued and outstanding, as
adjusted................................................ 2 2
Additional paid-in capital.............................. 65,313 85,132
Accumulated other comprehensive income.................. 1,903 1,903
Deficit accumulated during the development stage........ (52,194) (52,194)
-------- --------
Total shareholders' equity............................ 15,024 34,843
-------- --------
Total capitalization.................................. $ 15,024 $ 34,843
======== ========
</TABLE>
15
<PAGE>
DILUTION
Our net tangible book value as of March 31, 2000, was approximately
$14,174,562, or $.85 per share of common stock. Net tangible book value per
share represents the amount of our total tangible assets less total liabilities,
divided by the number of shares of our common stock.
The dilution in our pro forma net tangible book value per share represents
the difference between the per share amount paid for shares sold in this
offering, and the net tangible book value per share immediately after completion
of this offering. After giving effect to the sale of 3,000,000 shares of common
stock in this offering at the public offering price of $7.25 per share, and
deducting the anticipated underwriting discount and estimated offering expenses
payable by us, our pro forma net tangible book value would have been $33,993,312
or $1.73 per share, at March 31, 2000. This will represent an immediate increase
in our net tangible book value of $.88 per share to existing stockholders and an
immediate dilution or reduction in the net tangible book value of $5.52 per
share to investors purchasing common stock in this offering. These changes are
illustrated in the following table:
<TABLE>
<S> <C> <C>
Initial public offering price per common share.............. $ 7.25
Net tangible book value per share at March 31, 2000....... $ .85
Increase per share attributable to new investors.......... $ .88
Net tangible book value per common share after this
offering.................................................. $ 1.73
Dilution per common share to new investors.................. $ 5.52
</TABLE>
The following table compares the number of shares that will be owned by our
existing shareholders, together with the effective prices they paid for such
shares, with the number of shares to be purchased and the prices that will be
paid for such shares in this offering, at the offering price per share of $7.25:
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PAID
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
Existing shareholders.................... 16,658,784 85% $65,315,173 75% $3.92
New investors............................ 3,000,000 15% 21,750,000 25% $7.25
---------- --- ----------- ---
Total.................................. 19,658,784 100% $87,065,173 100%
========== === =========== ===
</TABLE>
------------------------
(1) The number of shares excludes a total of 7,803,265 shares that will be
issuable on exercise of currently outstanding warrants and stock options
that are exercisable at a weighted average price of $10.20 per share. To the
extent that these options are exercised, there will be further dilution to
new investors.
16
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data shown below should be read with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our audited financial statements. We have derived the statement of operations
data for years ended December 31, 1995 and 1996 and the balance sheet data as of
December 31, 1995, 1996 and 1997 from audited financial statements not included
in this prospectus. We have derived the statement of operations data for the
three years ended December 31, 1999, the period from July 22, 1980 to
December 31, 1999 and the balance sheet data as of December 31, 1998 and 1999
from our audited financial statements included elsewhere in this prospectus. We
have derived the statement of operations data for the periods from July 22, 1980
to March 31, 1999 and 2000, and the three-month periods ended March 31, 1999 and
2000 and the balance sheet data as of March 31, 2000 from our unaudited interim
financial statements included elsewhere in this prospectus. Historical results
do not necessarily predict the results to be expected for any future period.
<TABLE>
<CAPTION>
JULY 22, 1980
YEARS ENDED DECEMBER 31, (INCEPTION) TO
---------------------------------------------------- DECEMBER 31,
1995 1996 1997 1998 1999 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA) -------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 83 $ 27 $ 14 $ 120 $ 17 $ 841
Research and development................ (2,098) (1,729) (2,737) (6,307) (6,672) (24,728)
General and administrative.............. (610) (614) (1,282) (1,621) (1,745) (9,199)
Acquired in-process R&D................. -- -- -- (19,473) (72) (19,545)
Other income............................ 68 229 389 547 194 1,576
------- ------- ------- -------- ------- --------
Net loss.............................. $(2,557) $(2,087) $(3,616) $(26,734) $(8,278) $(51,054)
======= ======= ======= ======== ======= ========
Net loss per share--basic & diluted..... $ (0.37) $ (0.25) $ (0.36) $ (2.27) $ (0.62) --
======= ======= ======= ======== ======= ========
Cash flow from operations............... $(1,779) $(1,608) $(3,006) $ (6,736) $(7,561) $(26,751)
======= ======= ======= ======== ======= ========
<CAPTION>
THREE MONTHS
ENDED JULY 22, 1980
MARCH 31, (INCEPTION) TO
------------------- MARCH 31,
1999 2000 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA) -------- -------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 4 $ 1,132 $ 1,973
Research and development................ (1,343) (1,936) (26,664)
General and administrative.............. (418) (436) (9,635)
Acquired in-process R&D................. (60) -- (19,545)
Other income............................ 77 101 1,677
------- ------- --------
Net loss.............................. $(1,739) $(1,140) $(52,194)
======= ======= ========
Net loss per share--basic & diluted..... $ (0.13) $ (0.07) --
======= ======= ========
Cash flow from operations............... $(1,622) $(1,417) $(28,168)
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments........................................ $ 894 $3,041 $17,639 $ 8,510 $11,621 $14,380
Working capital............................................. 647 2,739 17,194 7,833 10,612 13,662
Total assets................................................ 2,325 4,249 18,782 10,192 12,930 15,791
Shareholders' (deficit) equity.............................. (1,051) 796 18,318 9,006 11,889 15,024
</TABLE>
----------------------------------
(1) Amounts relate to acquired in-process research and development expenses
incurred in connection with the acquisition of ImmunoTherapy Corporation.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS TOGETHER WITH OUR
FINANCIAL STATEMENTS AND THE NOTES TO FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN
THIS PROSPECTUS. RESULTS OF OPERATIONS FOR THE PERIODS DISCUSSED BELOW DO NOT
NECESSARILY PREDICT THE RESULTS TO BE EXPECTED IN ANY FUTURE PERIOD. THE
FOLLOWING DISCUSSION AND ANALYSIS CONTAINS STATEMENTS AND ANALYSES CONCERNING
THE FUTURE THAT ARE FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS
ARE SUBJECT TO RISKS AND UNCERTAINTIES, AND OUR ACTUAL RESULTS OF OPERATIONS MAY
DIFFER MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS.
OVERVIEW
From our inception in 1980, we have devoted our resources primarily to fund
our research and development efforts. We have been unprofitable since inception
and, other than limited interest and grant revenues, we have had no material
revenues from the sale of products or from other sources, and we do not expect
material revenues for at least the next 12 months. We expect to continue to
incur losses for the foreseeable future as we expand our research and
development efforts. As of March 31, 2000, our accumulated deficit was
$52,193,759.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 2000. Revenues, from license fees, grants and research contracts,
increased from $4,115 in the first quarter of 1999 to $1,131,873 in the first
quarter of 2000 due to the receipt and recognition of a $1,000,000 fee for
expansion of a license for diagnostic applications, and receipts under an
existing grant of $131,873. During the first quarter of 2000, we modified an
existing agreement with the Anti-Gene Development Group, or AGDG. Under our
previous agreement with AGDG, AGDG had a non-exclusive, royalty bearing right to
use certain technology in the development of diagnostics and an obligation to
pay royalties on any sales resulting from this development. The agreement
modification resulted in AGDG having an exclusive right to the technology and
having no future royalty obligation to us. In consideration for this
modification, we received a $1 million license fee and a reduction in future
royalties to be paid to AGDG resulting from the sale of therapeutic products.
The $1 million was recognized as license fee revenue during the period ended
March 31, 2000.
Operating expenses increased from $1,820,113 in the first quarter of 1999 to
$2,372,536 in the first quarter of 2000 due to increases in research and
development staffing and increased expenses associated with outside
collaborations and pre-clinical and clinical testing of our technologies.
Additionally, increased general and administrative costs were incurred to
support the research expansion, and to continue to broaden our investor and
public relations efforts. Net interest income increased from $76,539 in the
first quarter of 1999 to $100,781 in the first quarter of 2000 due to earnings
on increased cash balances.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31,
1999. Operating expenses decreased from $27,401,395 in 1998 to $8,489,392 in
1999 principally due to a one-time charge of $19,473,154 for acquired in-process
research and development reflecting the acquisition of ImmunoTherapy Corporation
or ITC in September 1998 offset by increases in research and development
staffing and increased expenses associated with outside collaborations and
pre-clinical testing of our technologies. Additionally, increased general and
administrative costs were incurred to support the research expansion. Net
interest income decreased from $547,081 in 1998 to $193,927 in 1999 due to
smaller earnings on decreased cash balances.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31,
1998. Operating expenses increased from $4,019,386 in 1997 to $27,401,395 in
1998 principally due to a one-time charge of $19,473,154 for acquired in-process
research and development reflecting the acquisition of ITC and
18
<PAGE>
increases in research and development staffing and increased expenses associated
with outside collaborations and pre-clinical testing of our technologies. In
connection with the purchase price allocation for ITC, we estimated the fair
value of the intangible assets which indicated that the majority of all of the
acquired intangible assets consisted of research and development projects in
process. At that time, the development of these projects had not reached
technological feasibility and the technology was believed to have no alternative
future use. In accordance with generally accepted accounting principles, the
acquired in-process research and development has been reflected in the
accompanying financial statements. We currently believe that the research and
development efforts may result in commercially feasible products after at least
36 months and at an additional estimated cost of at least $10 million.
Additionally, increased general and administrative costs were incurred to
support the research expansion, and to broaden our investor and public relations
efforts due to our change in status to a public company in mid-1997. Net
interest income increased from $389,051 in 1997 to $547,081 in 1998 due to
earnings on increased cash balances, which consisted of net proceeds from the
initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through equity
sales totaling $44,374,198 and license fees, grants and contract research
funding of $1,973,090 from various sources. Our cash and cash equivalents were
$9,580,282 at March 31, 2000, compared with $8,683,005 at December 31, 1999. The
increase of $897,277 was due primarily to the exercise of options and warrants
during the first quarter of 2000 and the $1,000,000 license fee, offset by
increases in research and development staffing and increased expenses associated
with outside collaborations and pre-clinical and clinical testing of our
technologies. In addition, the value of the Company's short-term securities
increased $1,862,500 to $4,800,000 at March 31, 2000 due to unrealized gains in
the value of these securities.
In December 1999, we completed a private offering with institutional
investors and an equity sale to a prospective corporate partner. In the private
offering, 1,857,147 shares of our common stock and 628,573 warrants to purchase
our common stock at $4.025 per share were issued. Substantially all of the
warrants issued in connection with the private placement are currently
exercisable and expire in five years. We received net proceeds of $5,808,003
from the offering. In the equity sale to the prospective corporate partner,
1,000,000 shares were issued in exchange for net proceeds of $5,247,000 in cash
and securities including 100,000 shares of the prospective corporate partner's
common stock. Subsequent to December 31, 1999, the shares received from the
prospective corporate partner were registered for public resale and have no
restrictions.
Our future expenditures and capital requirements will depend on numerous
factors, including without limitation, the progress of our research and
development programs, the progress of our pre-clinical and clinical trials, the
time and costs involved in obtaining regulatory approvals, the cost of filing,
prosecuting, defending and enforcing any patent claims and other intellectual
property rights, competing technological and market developments, our ability to
establish collaborative arrangements and the terms of any such arrangements, and
the costs associated with commercialization of our products. Our cash
requirements are expected to continue to increase each year as we expand our
activities and operations. There can be no assurance, however, that we will ever
be able to generate product revenues or achieve or sustain profitability.
We expect that our cash requirements over the next 24 months will be
satisfied by existing cash resources. We will continue to look for opportunities
to finance our ongoing activities and operations through accessing corporate
partners or the public equity markets, as we currently have no credit facility,
nor do we intend to seek one.
19
<PAGE>
EFFECT OF INFLATION
Inflation did not materially affect our business during the last several
years.
YEAR 2000
The year 2000 issue resulted from computer programs operating incorrectly
when the calendar year changed to January 1, 2000. Computer programs that have
date-sensitive software may have recognized a two-digit date using "00" as
calendar year 1900 rather than the year 2000. This could result in system
failure or miscalculations and could cause disruptions of operations, including,
among other things, a temporary inability to engage in normal business
activities.
We have evaluated our technology and data, including imbedded
non-informational technology, used in the creation and development of our
products and services and in our internal operations and have experienced no
significant year 2000 issues. The core business systems are compliant. We have
not incurred material costs and we believe that future costs associated with
addressing the year 2000 issue will have an immaterial effect on our financial
results.
Although we inquired of certain of our significant vendors as to the status
of their year 2000 compliance initiatives, no binding assurances were received.
We believe that parts and services used in normal operations can be obtained
from multiple sources and therefore we are not overly reliant on any single
vendor.
20
<PAGE>
BUSINESS
CLINICAL DEVELOPMENT OVERVIEW
We are a biopharmaceutical company developing therapeutic products based on
cancer immunotherapy and NeuGene antisense technology for the treatment of
life-threatening diseases, with initial applications in cancer and
cardiovascular restenosis. Currently approved drugs or other therapies often
prove to be ineffective in treating advanced stages of these diseases or produce
numerous undesirable side effects. Our core technologies are specifically aimed
at meeting these challenges. We currently have products at various stages of
clinical development as summarized below.
<TABLE>
<CAPTION>
PRODUCT PRE-CLINICAL PHASE I PHASE II PHASE III
------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
CANCER IMMUNOTHERAPY
Avicine .............................. Completed Completed Completed Planned 2000
Vaccine for colorectal cancer 1993 1995 1998
Avicine .............................. Completed Completed Completed
Vaccine for pancreatic cancer 1994 1995 1998; another
in progress
2000
Avicine .............................. Completed Completed Planned 2000
Vaccine for prostate cancer 1995 1995
Xactin ............................... In progress
Human monoclonal antibodies 2000
NEUGENE ANTISENSE
Resten-NG ............................ Completed Completed In progress
Antisense drug for restenosis 1999 2000 2000
Oncomyc-NG ........................... Completed Completed Planned 2000
Antisense drug for cancer 1999 2000
NeuBiotics ........................... In progress Planned 2001
Antisense antibiotics 2000
Oral NeuGene Delivery ................ Completed In progress
Antisense to c-myc 1999 2000
</TABLE>
BUSINESS STRATEGY
Our strategy is to:
- reduce risk associated with product development by exploiting two core
technology platforms;
- select disease targets with broad or multiple disease applications;
- manage drug discovery, pre-clinical and early stage clinical development
in-house; and
- co-develop or license products to strategic partners after completion of
Phase II clinical trials to enhance value and share the costs of Phase III
trials and commercialization.
CANCER IMMUNOTHERAPY
Cancer is the second leading cause of death in the United States with an
incidence of 1,500 deaths per day. There are approximately eight million
Americans living with a history of cancer, and 500,000 new cases are diagnosed
annually. Lung, prostate, breast and colorectal cancers are the four most common
types of cancer, accounting for over 50% of all new diagnoses. In 1999, the
market
21
<PAGE>
opportunities for drugs to treat each of these cancer types were estimated to be
in excess of $1 billion annually.
About half of newly diagnosed cancer patients have localized disease and can
be cured with surgery alone. The other half of the patients either have
metastatic disease at diagnosis or will eventually develop metastatic disease.
The principal therapy available for the second group of patients traditionally
has been chemotherapy. Chemotherapeutic approaches produce considerable toxic
and undesirable side effects and historically have done little to influence
patient survival.
Immunotherapy with vaccines or antibodies is among the newer strategies
being investigated for treating cancer. Historically, vaccines were developed
and used to induce an immune response in order to prevent a disease. In
contrast, therapeutic vaccines are administered when the patient already has the
disease. Treatment of rabies with the rabies vaccine is an example of this
approach.
For a therapeutic vaccine to be effective in fighting a disease such as
cancer, it is necessary to first identify specific target sites on the tumor
cells, called tumor antigens. The more selective the target is to the tumor, the
greater the likelihood that the stimulated immune response will be directed at
attacking only the cancer cells. The identification of highly specific targets
has been one of the greatest challenges in the development of a useful cancer
vaccine.
AVICINE THERAPEUTIC CANCER VACCINE
TECHNICAL OVERVIEW
Avicine, our therapeutic cancer vaccine, is designed to produce an immune
response against a well-characterized target, human chorionic gonadotropin, or
hCG. hCG is a hormone produced during pregnancy that fosters the development of
a fetus in several ways. Through extensive research, scientists found that hCG
is also present in most cancers. In fact, cancer is believed to be the only
significant exception to normal hCG expression during pregnancy. Given the
selective production of hCG in cancer, we believe it represents a highly
specific target for a therapeutic cancer vaccine.
The use of hCG as a cancer vaccine target may offer the following advantages
over other potential tumor antigens:
- hCG is not usually found on normal cells, with the exception of those
present during a pregnancy. This means that it is highly selective.
- hCG is widely expressed by and found on many types of cancer, including
colon, pancreas, prostate, lung and breast.
- hCG expression has been correlated with tumor aggressiveness. In other
words, the higher the level of hCG, the more aggressive the rate of growth
or spread of the cancer.
- Antibodies to hCG are believed to block the hormonal functions that hCG
plays in pregnancy and cancer, including rapid cell division, formation of
blood vessels, invasion of other tissues, and dampening of immune
responses.
Because hCG is a natural human protein, people will not mount an immune
response to it unless they are actively immunized. We believe that the mechanism
of action of our anti-hCG vaccine is to stimulate an immune response against the
tumor and to neutralize the hormonal affects provided by hCG.
The hCG component in Avicine is a small peptide from this hormone. The
peptide is joined to a carrier, diphtheria toxoid, to enhance the immune
response. Diphtheria toxoid was selected since most of the world's population
has been vaccinated against it and there is significant experience with it as a
vaccine component in man.
22
<PAGE>
Avicine's distinguishing characteristics include:
- Fully characterized synthetic vaccine;
- Capable of being produced inexpensively in large quantities;
- Targets a widely expressed tumor antigen, hCG;
- Ready for Phase III clinical testing in colorectal cancer patients;
- Applicable to most cancer types in multiple clinical settings; and
- Twenty years of research and development and safety data.
AVICINE CLINICAL TRIAL PROGRAM
PHASE I CLINICAL TRIALS: We have completed three Phase I clinical trials
using Avicine in 87 patients with cancer. Overall, these studies showed Avicine
to be safe and essentially non-toxic, and to be effective in stimulating an
immune response to hCG in most patients. Moreover, apparent survival benefits
and some tumor regressions were noted.
COLORECTAL CANCER TRIALS: We conducted a multicenter Phase II study of
Avicine was conducted in 77 patients with advanced colorectal cancer. The
objectives of this trial were to determine whether administration of Avicine
would induce an immune response in patients with metastatic colorectal cancer,
and to measure safety and efficacy in these patients. Overall, 51 of the 77
patients responded to our vaccine by producing antibodies to hCG. The patients
that were antibody responders had a median survival of 42 weeks. Patients who
did not respond had a median survival of just 17 weeks.
Analysis of the Phase II data showed that patients who produced antibodies
to both targets on the hCG peptide had a median survival of 66 weeks. Camptosar,
the current standard of care for treating advanced colorectal cancer patients,
produces a median survival of 37-40 weeks. Through additional research efforts,
we have learned how to stimulate production of antibodies to both hCG targets in
most patients by reformulating the vaccine.
Overall, these clinical data suggest that the patients who received Avicine
and responded by making hCG antibodies had improved median survival compared to
patients treated with chemotherapeutic drugs. Avicine was found to be safe and
did not exhibit the toxicity associated with cytotoxic drug treatment. Based on
these data, we plan to initiate a Phase III pivotal trial in 500 patients with
metastatic colorectal cancer in 2000. This trial randomizes patients receiving
first-line therapy for metastatic colorectal cancer to one of two treatments:
combination chemotherapy or combination chemotherapy plus Avicine. The trial
will be evaluated by comparing time-to-disease progression and median survival
in the two treatments.
PANCREATIC AND PROSTATE CANCER TRIALS: We have completed a pilot Phase II
study using Avicine in 10 patients with advanced pancreatic cancer. For the 10
patients treated, the median survival was approximately 33 weeks. Patients with
advanced pancreatic cancer are currently treated with chemotherapy and have a
median survival of approximately 18 to 25 weeks. We believe these results are
encouraging enough to warrant the design of additional trials in pancreatic
cancer. A Phase II study of 50 patients with pancreatic cancer was initiated in
October 1999, and patient enrollment should be completed in 2000. In addition,
we plan to initiate a Phase II clinical trial involving 24 patients with
prostate cancer in 2000 to broaden our clinical applications to other types of
cancer.
23
<PAGE>
AVICINE CLINICAL TRIAL SUMMARY
<TABLE>
<CAPTION>
TRIAL DESCRIPTION & TYPE PATIENTS STATUS
----- ----------------------------------------------- ---------- -----------
<C> <S> <C> <C>
1 Phase I safety study........................... 43 treated Completed
2 Phase I metastatic cancer...................... 21 treated Completed
3 Phase Ib metastatic cancer..................... 23 treated Completed
4 Phase II pancreatic and extension.............. 10 treated Completed
5 Phase II colorectal............................ 77 treated Completed
6 Phase II pancreatic............................ 50 In progress
7 Phase II prostate.............................. 24 2000
8 Phase III colorectal licensing trial........... 500 2000
</TABLE>
XACTIN--HUMAN MONOCLONAL ANTIBODIES FOR CANCER
Antibodies are important proteins produced by the immune system and serve as
the first line of defense against foreign pathogens. Antibodies bind to these
pathogens and help neutralize or eliminate these foreign substances.
Historically, most antibody product candidates were generated in mice and,
as a result, contained mouse protein. The presence of mouse protein in these
antibodies causes undesirable side effects in patients receiving the products.
Various approaches have evolved to engineer mouse antibodies so that they
contain mostly human proteins and thus produce fewer side effects in patients.
The XenoMouse technology that we licensed from Abgenix, Inc. enables the rapid
generation of antibodies with fully human proteins. The XenoMouse has been
genetically engineered to replace the genes that a mouse uses to make antibodies
with the genes that humans use to make antibodies. XenoMouse-generated
antibodies have several potential advantages over traditional therapies,
including:
- Faster product development;
- Fewer undesirable side effects; and
- An extended therapeutic effect.
There are now eight therapeutic antibody products marketed in the United
States, six of which were approved in the past three years. Moreover, industry
analysts estimate that antibodies account for over 20% of all biotechnology
products in clinical development today.
From our cancer vaccine clinical trials, we learned which anti-hCG
antibodies are important in prolonging patient survival. We have produced human
monoclonal antibodies to these hCG targets using the Abgenix technology. These
monoclonal antibodies, called Xactin antibodies, are both potential companion
products to Avicine and independent cancer therapeutics and are now in
pre-clinical development.
NEUGENE ANTISENSE TECHNOLOGY
TECHNICAL OVERVIEW
Most human diseases arise from the function or dysfunction of genes within
the body, either those of pathogens, such as viruses, or of one's own genes. The
Human Genome Project has led to the identification of the genes associated with
most of the major human diseases and to the determination of the sequence of
their genetic codes. Using modern methods of chemical synthesis, compounds can
be prepared that recognize target gene sequences in a pathogen or pathogenic
process. When these compounds bind tightly to the disease-causing sequence, the
genetic process is inhibited, and thus the pathogen or pathogenic process is
disabled. This is called antisense technology because the sense of the genetic
code is blocked.
24
<PAGE>
Antisense compounds are composed of repeating structures, or subunits, that
are linked together forming a polymer, referred to as the antisense backbone.
Each subunit carries a genetic letter that pairs with its corresponding letter
in the gene target. Although the genetic letters are a feature common to all
antisense compounds, the structure of the subunits and the linkage groups that
string them together may differ greatly. These differences in the subunits and
the linkages define the different types of antisense backbones and their
corresponding physical and biological properties. Our NeuGene technology is
distinguished from all other antisense technologies by the characteristics of
our patented antisense backbone. The subunits which carry the genetic letters on
our backbone are synthetic products rather than modified natural materials. In
addition, the linkages used to string the subunits together carry no charge in
our backbone. We believe these differences provide pharmaceutical advantages
that are critical for antisense drug development to meet the challenges of broad
clinical utility.
The first antisense compounds had backbones composed of natural genetic
materials and linkages. These natural compounds were degraded or broken down by
enzymes in the blood and within cells and had difficulty crossing cellular
membranes to enter the cells that contained their genetic target. Researchers
developed modified backbones which were designed to resist degradation by
enzymes and to enter tissues and cells more efficiently. The most common of
these types, the phosphorothioate backbones used by ISIS Pharmaceuticals, Inc.,
Genta, Incorporated, and others, use natural DNA subunits linked together by a
charged linkage. After extensive investigation, we concluded that these early
product candidates lacked the pharmaceutical properties desirable for broad
clinical utility. We abandoned development of similar structures in 1988 and
started development of a novel backbone chemistry designed to address these
drawbacks.
NEUGENE TECHNOLOGY
We have developed and patented a new class of antisense compounds, known as
NeuGenes, which have a backbone of synthetic subunits carrying each genetic
letter, with each subunit linked together by a patented uncharged linkage group.
We believe our principal competitive advantage in the antisense area is the
chemical structure of the NeuGene backbone that we developed specifically to
have the following pharmaceutical properties:
- STABILITY: Biological stability is principally determined by the degree of
resistance to enzymatic degradation. Because the NeuGene backbone is a
unique synthetic structure, there are no enzymes found in man to degrade
it. Our NeuGene drugs have been shown to be completely stable in our human
clinical trials.
- EFFICACY AND SPECIFICITY: Efficacy refers to the efficiency with which
antisense compounds block selected gene targets. In direct comparisons
with other technologies, our NeuGene compounds exhibited significantly
better efficacy in inhibition of targeted genetic sequences and
substantially greater specificity.
- DELIVERY: To reach their targets, antisense compounds must cross tissue
and cellular barriers, including cellular and nuclear membranes. Our
extensive research in the last three years has shown that NeuGene
antisense compounds achieve functional delivery in a variety of animal
models and in human clinical trials.
- SAFETY: Our Phase I human clinical trial results indicate that NeuGene
antisense agents have an excellent safety profile, even at doses in vast
excess of those anticipated for our initial human therapeutic
applications.
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<PAGE>
NEAR-TERM PRODUCT DEVELOPMENT--RESTENOSIS AND CANCER
The first application of our antisense technology is designed to treat
diseases involving abnormal cell division, such as cancer and certain
cardiovascular and inflammatory diseases, including restenosis, psoriasis,
polycystic kidney disease and chronic graft rejection. The NeuGene target for
these diseases is the genetic component named c-myc. We have finished
pre-clinical development of two NeuGene drugs, Resten-NG and Oncomyc-NG, based
on this target. In late 1999, we filed an Investigational New Drug Application,
or IND, and initiated a Phase I clinical trial for restenosis and cancer. These
Phase I safety studies in 32 patients completed in April 2000 showed these
compounds to be safe and essentially non-toxic.
In our ongoing Phase II clinical trial, Resten-NG will be used to block
c-myc expression in restenosis, a frequent complication that follows balloon
angioplasty for coronary artery disease. Restenosis, the blockage of the
arteries following balloon angioplasty, affects 100,000 to 200,000 people per
year in the United States and its occurrence is unpredictable. We believe
Resten-NG, with its combination of potency and lack of toxicity, may be useful
as a preventative measure in the more than one million balloon angioplasty
procedures performed worldwide each year.
Pre-clinical studies with Resten-NG indicated that it was both more potent
and less toxic than other antisense agents currently in clinical development for
other indications. Our trials also indicated significant preservation of vessel
passageways and prevention of arterial wall thickening following catheter
delivery of Resten-NG. We commenced Phase II human clinical trials, which will
involve 150 patients, in cardiovascular restenosis in June 2000.
We are finishing pre-clinical development of our second NeuGene drug,
Oncomyc-NG, for cancer indications. We plan to initiate Phase I/II trials for
our first cancer indication later this year.
The broad applicability of our antisense platform has allowed us to initiate
pre-clinical development of NeuGene drugs for viral, bacterial, and inflammatory
diseases, as outlined in the following table.
NEUGENE ANTISENSE DEVELOPMENT PROGRAM
<TABLE>
<CAPTION>
ANTISENSE TARGET CLINICAL INDICATION
---------------- -------------------
<S> <C>
c-myc................................ Restenosis, cancer, psoriasis, chronic graft rejection
Cytochrome P450...................... Metabolic redirection of cancer drugs
NF kappa B........................... Crohn's Disease, chronic inflammation, autoimmune disorders,
arthritis, septic shock, asthma
Bacterial ribosomes.................. NeuBiotics for infectious diseases
Hepatitis B, C viruses............... Hepatitis
</TABLE>
COLLABORATIVE AGREEMENTS
We believe that our vaccine and antisense technologies are broadly
applicable for the potential development of pharmaceutical products in many
therapeutic areas. To exploit our core technologies as fully as possible, our
strategy is to enter into collaborative development agreements with strategic
partners, including major pharmaceutical companies, for cancer applications for
Avicine, and agreements directed at specific molecular targets for our NeuGene
antisense technology.
26
<PAGE>
SUPERGEN ALLIANCE
In April 2000, we entered into an alliance with SuperGen, Inc. for shared
development and marketing rights for Avicine. Under the terms of the agreement,
SuperGen and we will share equally clinical development and Food and Drug
Administration, or FDA, registration costs going forward and share profit
equally from product sales in the United States with SuperGen. We will be
responsible for the manufacturing of Avicine and SuperGen will be responsible
for marketing and sales. Closing of the transaction will occur prior to the
effectiveness of this offering. Upon closing, we will receive a $20 million
equity investment from SuperGen and could receive additional payments of up to
$80 million based upon achievement of commercialization milestones.
ABGENIX ALLIANCE
We currently have an alliance with Abgenix, Inc. for the development of
human monoclonal antibodies for cancer. We have licensed the use of Abgenix
XenoMouse technology for the production of human monoclonal antibodies against
hCG. Our Avicine clinical trials have defined the hCG targets that are important
in prolonging patient survival. We have developed human monoclonal antibodies to
these targets and two of them are now in pre-clinical trials. Abgenix is to
receive payments based on achievement of clinical development milestones and a
royalty on sales if our antibodies are commercialized.
NEUGENE ALLIANCES
We anticipate that NeuGene antisense collaborative research agreements may
provide us with funding for internal programs aimed at discovering and
developing antisense compounds to inhibit the production of additional molecular
targets. Partners in antisense may be granted options to obtain licenses to
co-develop and to market drug candidates resulting from their collaborative
research programs. We currently have a research alliance with XTL
Biopharmaceuticals Ltd. for pre-clinical development of Hepatitis B and C
antisense drugs. If this program moves into clinical development stages, XTL and
we will negotiate a joint venture development and marketing agreement with XTL
under basic terms previously set forth.
We plan to market the initial products for which we obtain regulatory
approval, through co-development and marketing arrangements with strategic
partners or other licensing arrangements with larger pharmaceutical companies.
Implementation of this strategy will depend on many factors, including the
market potential of any products we develop and our financial resources. We do
not expect to establish a direct sales capability for therapeutic compounds for
at least the next several years. The timing of our entry into marketing
arrangements or other licensing arrangements will depend on successful product
development and regulatory approval within the regulatory framework established
by the Federal Food, Drug and Cosmetics Act. Although the implementation of
initial aspects of our marketing strategy may be undertaken before this process
is completed, the development and approval process typically is not completed in
less than three to five years after the filing of an IND application and our
marketing strategy therefore may not be implemented for several years.
MANUFACTURING
For our vaccine, we have identified potential Good Manufacturing Practices,
or GMP, manufacturers who could meet large scale, low-cost manufacturing
requirements for future Phase III trials and commercial introduction. We have
developed proprietary manufacturing techniques that will allow large-scale,
low-cost synthesis and purification of NeuGenes. Because our NeuGene compounds
are based upon a flexible backbone chemistry, we believe that NeuGene synthesis
will be more cost-effective than competing technologies. We have established
sufficient manufacturing capacity to meet research and development and
pre-clinical requirements.
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<PAGE>
We currently intend to retain manufacturing rights for all products
incorporating our patented antisense technology, whether sold directly by us or
through collaborative agreements with industry partners. We have contracted with
a GMP facility to produce our near term NeuGene products for pre-clinical and
clinical trial studies. We are currently upgrading our in-house manufacturing
capability to meet GMP standards for Phase I and II human clinical trials.
Our laboratory facility and procedures have not been formally inspected by
the FDA and will have to be approved as products move from the research phase
through the clinical testing phase and into commercialization. We will be
required to comply with GMP in connection with human clinical trials and
commercial production.
PATENTS AND PROPRIETARY RIGHTS
We own 44 patents covering various aspects of our technologies. We have 49
pending applications relating to Avicine, NeuGene, and other technologies. Our
patents cover composition of matter, genetic targets, and use of our
technologies in broad medical applications. We intend to protect our proprietary
technology with additional filings as appropriate.
We have also acquired certain product/technology licenses from The Ohio
State University and Dr. Vernon Stevens. These properties include exclusive
royalty-bearing licenses covering the composition, manufacturing and use of
Avicine in all fields of use, including treating and preventing cancer, with the
exception of fertility regulation. We have the right to commercialize any new
intellectual property relating to our licensed subject matter including access
and use of all new experimental data resulting from Dr. Stevens' research. Our
licenses have been granted for a period of 30 years or 10 years from the
expiration of the last issued patent, whichever comes later. Under these
licensing agreements, we have the right to sublicense our products and
technology throughout the world.
The proprietary nature of, and protection for, our product candidates,
processes and know-how are important to our business. We plan to prosecute and
aggressively defend our patents and proprietary technology. Our policy is to
patent the technology, inventions and improvements that are considered important
to the development of our business. We also depend upon trade secrets, know-how,
and continuing technological innovation to develop and maintain our competitive
position.
DRUG APPROVAL PROCESS AND OTHER GOVERNMENT REGULATION
The United States system of new drug approvals is the most rigorous in the
world. According to the Pharmaceutical Research and Manufacturers of America, it
costs an average of $500 million and takes an average of almost 15 years from
the discovery of a compound to bring a single new pharmaceutical to market. For
every 5,000 to 10,000 chemically synthesized molecules screened, only 250 are
ever issued an Investigational New Drug Application, or IND, and tested in
humans. Of those, the FDA will approve only one for commercialization. Yet, in
recent years, societal and governmental pressures have created the expectation
that biotech and pharmaceutical companies will reduce the costs for drug
discovery and development without sacrificing safety, efficacy and innovation.
The need to significantly improve or provide alternative strategies for
successful pharmaceutical discovery, research and development remains a major
health care industry challenge.
DRUG DISCOVERY: In the initial stages of drug discovery before a compound
reaches the laboratory, tens of thousands of potential compounds are randomly
screened for activity against an assay assumed to be predictive for particular
disease targets. This drug discovery process can take several years. Once a
company locates a screening lead, or starting point for drug development,
isolation and structural determination may begin. The development process
results in numerous chemical modifications to the screening lead in an attempt
to improve its drug properties. After a compound emerges from the above process,
the next steps are to conduct further preliminary studies on the mechanism of
action, further
28
<PAGE>
in vitro test tube screening against particular disease targets and, finally,
some in vivo or animal screening. If the compound passes these barriers, the
toxic effects of the compound are analyzed by performing preliminary exploratory
animal toxicology. If the results are positive, the compound emerges from the
basic research mode and moves into the pre-clinical phase.
PRE-CLINICAL TESTING: During the pre-clinical testing stage, laboratory and
animal studies are conducted to show biological activity of the compound against
the targeted disease, and the compound is evaluated for safety. These tests
typically take approximately three and one-half years to complete.
INVESTIGATIONAL NEW DRUG APPLICATION: During the pre-clinical testing, an
IND is filed with the FDA to begin human testing of the drug. The IND becomes
effective if not rejected by the FDA within 30 days. The IND must indicate the
results of previous experiments, how, where and by whom the new studies will be
conducted, the chemical structure of the compound, the method by which it is
believed to work in the human body, any toxic effects of the compound found in
the animal studies and how the compound is manufactured. In addition, an
Institutional Review Board, comprised of physicians at the hospital or clinic
where the proposed studies will be conducted, must review and approve the IND.
Progress reports detailing the results of the clinical trials must be submitted
at least annually to the FDA.
PHASE I CLINICAL TRIALS: After an IND becomes effective, Phase I human
clinical trials can begin. These tests, involving usually between 20 and 80
patients or healthy volunteers, typically take approximately one year to
complete. The Phase I clinical studies also determine how a drug is absorbed,
distributed, metabolized and excreted by the body, and the duration of its
action.
PHASE II CLINICAL TRIALS: In Phase II clinical trials, controlled studies
are conducted on approximately 100 to 300 volunteer patients with the targeted
disease. The purpose of these tests is to evaluate the effectiveness of the drug
on the volunteer patients as well as to determine if there are any side effects.
These studies generally take approximately two years, and may be conducted
concurrently with Phase I clinical trials. In addition, Phase I/II clinical
trials may be conducted to evaluate not only the efficacy of the drug on the
patient population, but also its safety.
PHASE III CLINICAL TRIALS: This phase typically lasts about three years and
usually involves 1,000 to 3,000 patients. During the Phase III clinical trials,
physicians monitor the patients to determine efficacy and to observe and report
any reactions that may result from long-term use of the drug.
NEW DRUG APPLICATION: After the completion of all three clinical trial
phases, if the data indicate that the drug is safe and effective, a New Drug
Application, or NDA, is filed with the FDA. The NDA must contain all of the
information on the drug gathered to that date, including data from the clinical
trials. NDAs are often over 100,000 pages in length. The average NDA review time
for new pharmaceuticals is now between 6 and 12 months.
MARKETING APPROVAL: If the FDA approves the NDA, the drug becomes available
for physicians to prescribe. Periodic reports must be submitted to the FDA,
including descriptions of any adverse reactions reported. The FDA may request
additional Phase IV studies to evaluate long-term effects.
PHASE IV CLINICAL TRIALS AND POST-MARKETING STUDIES: In addition to studies
requested by the FDA after approval, these trials and studies are conducted to
explore new indications. The purpose of these trials and studies and related
publications is to broaden the application and use of the drug and its
acceptance in the medical community.
COMPETITION
Companies developing cancer vaccines include Progenics
Pharmaceutical, Inc., Corixa Corporation, Biomira Inc., and Bristol
Meyers-Squibb. Their products are in late stage clinical development, in
29
<PAGE>
patients with cancers of different types than Avicine is being used to treat. We
believe that Avicine will have broader patient applications than other cancer
vaccines in development due to the characteristics of its target. Moreover, we
do not expect any company to introduce a cancer vaccine into the broad
commercial market in the immediate future.
Several companies are pursuing the development of antisense technology,
including Genta, Incorporated, Hybridon, Inc., ISIS Pharmaceuticals, Inc., and
Lorus Therapeutics Inc. All of these companies have products in development
stages, and, in some cases, are in human trials with antisense compounds
generally similar to our NeuGene compounds. ISIS Pharmaceuticals has received
marketing approval from the FDA for an antisense drug to treat a viral infection
of the eye in patients with AIDS. While we believe that none of these companies
is likely to introduce an additional antisense compound into the broad
commercial market in the immediate future, many pharmaceutical and biotechnology
companies have financial and technical resources greater than those currently
available to us. Moreover, some potential competitors have more established
collaborative relationships with industry partners than we do. We believe that
the combination of pharmaceutical properties of our NeuGene compounds for
restenosis and cancer affords us competitive advantages when compared with the
antisense compounds of competitors.
We can also expect to compete with other companies exploiting alternative
technologies that address the same therapeutic needs as do our technologies. The
biopharmaceutical market is subject to rapid technological change, and it can be
expected that competing technologies will emerge and will present a competitive
challenge to us.
EMPLOYEES
As of May 31, 2000, we had 56 employees, 23 of whom hold advanced degrees.
Fifty employees are engaged directly in research and development activities, and
six are in administration. None of our employees is covered by collective
bargaining agreements, and we consider relations with our employees to be good.
PROPERTIES
We occupy 27,000 square feet of leased laboratory and office space at 4575
S.W. Research Way, Suite 200, Corvallis, Oregon 97333. The lease on our space
expires in December 2007. Our executive office is located in 2,400 square feet
of leased space at One S.W. Columbia, Suite 1105, Portland, Oregon 97258. This
lease expires in July 2001. We believe that our facilities are suitable and
adequate for our present operational requirements for the foreseeable future.
LEGAL PROCEEDINGS
We are not aware of any legal proceedings against us that, individually or
in the aggregate, would have a material advserse effect on our business, results
of operations or financial condition.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- ----------------------------------
<S> <C> <C>
Denis R. Burger, Ph.D............. 57 Chief Executive Officer and
Chairman of the Board
Alan P. Timmins................... 40 President, Chief Operating Officer
and Director
Gordon W. Duncan, Ph.D............ 67 Vice President of Regulatory
Affairs and Clinical Development
Patrick L. Iversen, Ph.D.......... 45 Senior Vice President of Research
and Development and Director
Mark M. Webber.................... 45 Chief Financial Officer
Dwight D. Weller, Ph.D............ 49 Senior Vice President of Chemistry
and Manufacturing and Director
Nick Bunick....................... 64 Director
Bruce L.A. Carter, Ph.D........... 55 Director
John W. Fara, Ph.D................ 57 Director
James B. Hicks, Ph.D.............. 53 Director
Joseph Rubinfeld, Ph.D............ 67 Director
</TABLE>
DENIS R. BURGER, PH.D. has served as our Chief Executive Officer since
January 1996, as our Chairman of the Board since 1998. From 1992 until
May 2000, he served as our President and from 1992 until 1995 as our Chief
Operating Officer. Dr. Burger has also been a member of Sovereign Ventures, LLC,
a biotechnology consulting and merchant banking venture, since 1991. Dr. Burger
is a member of the Board of Directors of SuperGen, Inc. and Trinity Biotech,
PLC. Dr. Burger received a B.A. in Bacteriology and Immunology from the
University of California, Berkeley, and his M.S. and Ph.D. degrees in
Microbiology and Immunology from the University of Arizona.
ALAN P. TIMMINS has served as our President and Chief Operating Officer
since May 2000, as our Chief Operating Officer since 1996, and as a director
since 1997. He served as our Executive Vice President and Chief Financial
Officer from 1992 until May 2000. Mr. Timmins received a B.B.A. in Accounting
and Management from the University of Portland and an M.B.A. from Stanford
University. He is a Certified Public Accountant.
GORDON W. DUNCAN, PH.D. has served as our Vice President of Regulatory
Affairs and Clinical Development of AVI since 1997. From 1991 to 1996, he was
Vice President for Research and a Director of ProCyte Corporation, and
previously served as Vice President for Administration of Upjohn Laboratories
(now part of Pharmacia and Upjohn) for more than 20 years. He is a founding and
current director of the Program for Appropriate Technology in Health, a Senior
Project Officer with the Concept Foundation, and the Executive Vice President
and Chief Operating Officer for Women's Capital Corporation. Dr. Duncan received
a B.S. in Animal Husbandry from Cornell University and an M.S. and Ph.D. in
Physiology from Iowa State University.
PATRICK L. IVERSEN, PH.D. has served as our Senior Vice President of
Research and Development and a director since 1997. From 1987 through 1997,
Dr. Iversen was on staff at the University of Nebraska Medical Center, most
recently as a Professor in the College of Medicine. Dr. Iversen, who has
published extensively on antisense research and development, additionally served
as a consultant to various pharmaceutical and biotechnology companies, including
GLAXO Inc., Innovir Pharmaceuticals, Lynx Therapeutics, and Isis
Pharmaceuticals, as well as to AVI, and he is a former member of the Leukemia
Society of America Board of Directors. Dr. Iversen holds a B.S. in Biology from
Westminster
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College and a Ph.D. in Biochemical Pharmacology and Toxicology from the
University of Utah, followed by post-doctoral work at the Eppley Institute for
Research in Cancer and Allied Diseases.
MARK M. WEBBER has served as our Chief Financial Officer since May 2000 and
as our Controller since October 1997. From 1993 to 1997, he was Director of
Finance for Pacific Rehabilitation and Sports Medicine, Inc. Mr. Webber holds a
B.S. degree in accounting from the University of Oregon.
DWIGHT D. WELLER, PH.D. has served as our Senior Vice President of Chemistry
and Manufacturing since 1997, and as a director of AVI since 1991. He served as
our Vice President of Research and Development of AVI from 1992 to 1997.
Dr. Weller received a B.S. in Chemistry from Lafayette College and a Ph.D. in
Chemistry from the University of California at Berkeley, followed by
postdoctoral work in Bio-Organic Chemistry at the University of Illinois.
NICK BUNICK has served as a director since 1992. Mr. Bunick is the President
and Chairman of the Board of three real estate development companies and one
investment management company. Mr. Bunick received a B.S. in Business
Administration and Marketing from the University of Florida.
BRUCE L. A. CARTER, PH.D. has been a director of AVI since 1998. From 1997
to 1998, Dr. Carter was a director of ImmunoTherapy Corporation and a member of
its Science Advisory Board from 1996 to 1998. He is Executive Vice President and
Chief Science Officer of Novo Nordisk A/S in Copenhagen, Denmark and Seattle,
Washington and President and CEO of ZymoGenetics, Inc. of Seattle, a wholly
owned Novo Nordisk subsidiary, a position he also held from 1988 through 1993.
Dr. Carter serves on several Boards of Directors, including Virginia Mason
Hospital Research Center, Anergen, Inc., as well as Novo Nordisk A/S and
ZymoGenetics, Inc. Dr. Carter received his Ph.D. in Microbiology from the
University of London, where he was a member of Queen Elizabeth College. In 1996
he was elected to the Faculty of the University of Washington as Associate
Professor of BioChemistry.
JOHN W. FARA, PH.D. has served as a director of AVI since May 2000. He
served as the President and Chief Executive Officer of Depot Med, Inc. a
biopharmaceutical company, since 1996, and as its Chairman of the Board since
April 2000. Between 1990 and 1996, he served as President and Chief Executive
Officer of Avergen, Inc., a biotechnology company, and was President of
Prototek, Inc., an early state pharmaceutical development company. Dr. Fara
holds a B.S. in Biology from the University of Wisconsin and a Ph.D. in
physiology from the University of California at Los Angeles.
JAMES B. HICKS, PH.D. has served as a director of AVI since 1997. He has
served as the Chief Executive Officer, Chief Scientist and a director of Hedral
Therapeutics, Inc., a biotechnology company, since its founding in 1993.
Dr. Hicks received his B.A. degree in Biology from Willamette University and his
Ph.D. in Molecular Biology from the University of Oregon, followed by
post-doctoral research at Cornell University.
JOSEPH RUBINFELD, PH.D. has served as a director of AVI since 1996. He has
served as Chief Executive Officer, President, Chief Scientific Officer and a
director of SuperGen, Inc. since its inception in 1991. He received his B.S. in
Chemistry from C.C.N.Y., and his M.A. and Ph.D. degrees in Chemistry from
Columbia University.
BOARD OF DIRECTORS
We currently have eight directors, who serve until the expiration of their
term or until their successor is duly elected or appointed. Our articles of
incorporation and bylaws provide that if the number of directors is fixed at six
or more, our directors are divided into two classes and serve for terms of two
years, with one class being elected by the shareholders each year. Drs. Burger,
Carter and Iversen and Mr. Bunick will serve until our 2001 annual meeting and
Drs. Hicks, Rubinfeld and Weller and Mr. Timmins will serve until our 2002
annual meeting.
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<PAGE>
BOARD COMMITTEES
Our executive committee currently consists of Drs. Burger and Weller and
Mr. Timmins. The compensation committee currently consists of Drs. Carter and
Hicks. The compensation committee reviews and makes recommendations regarding
our compensation policies and all forms of compensation to be provided to our
executive officers and directors, including annual salaries, bonuses, stock
options and other incentive compensation agreements. The compensation committee
also administers our 1992 Stock Incentive Plan and our 2000 Employee Stock
Purchase Plan.
The audit committee currently consists of Drs. Carter and Hicks. The audit
committee reviews and monitors our corporate financial reporting and external
audits, including our internal control functions, the results and scope of the
annual audit and other services provided by our independent auditors and our
compliance with legal matters that have a significant impact on our financial
reports. The audit committee also consults with our management and our
independent auditors prior to the presentation of financial statements to
shareholders and, as appropriate, initiates inquiries into aspects of our
financial affairs.
DIRECTOR COMPENSATION
Our non-employee directors currently receive, at the time they commence
service on our Board of Directors, a non-qualified option to purchase 33,334
shares of our common stock at the fair market value of the common stock on the
date of grant, which vests over four years. In addition, each outside director
receives $1,000 for each Board meeting attended in person. We reimburse Drs.
Carter, Fara and Rubinfeld for their expenses to attend our Board meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee is currently, or has been
at any time since the beginning of our last fiscal year, one of our officers or
employees. Dr. Burger serves as a member and chairman of the Compensation
Committee of SuperGen, Inc., of which our director Dr. Rubinfeld is Chief
Executive Officer and Chairman of the Board. During the fiscal year ended
December 31, 1999, none of our other executive officers served as a member of
the board of directors or compensation committee of any entity that has one or
more officers serving as a member of our board of directors or compensation
committee.
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EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning the
compensation of our Chief Executive Officer and each of our three other most
highly compensated executive officers, or the named executive officers, for the
fiscal years ending December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
------------------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS COMPENSATION(1)
--------------------------- -------- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Denis R. Burger, Ph.D ................... 1999 $250,400 -- -- $7,487
President and Chief Executive 1998 240,400 $25,000 200,000 7,250
Officer(2) 1997 216,650 25,000 100,000 3,558
Alan P. Timmins ......................... 1999 $185,400 -- -- $5,537
President, Chief Operating Officer and 1998 175,400 $25,000 135,000 4,662
Chief Financial Officer(2) 1997 130,400 25,000 50,000 2,265
Patrick L. Iversen, Ph.D ................ 1999 $160,400 -- 28,000 $4,787
Senior Vice President of Research and 1998 150,400 -- 56,000 851
Development 1997 39,634 -- 100,000 --
Dwight D. Weller, Ph.D .................. 1999 $160,400 -- -- $4,787
Senior Vice President of Chemistry and 1998 150,400 -- 84,000 3,925
Manufacturing 1997 130,817 -- 50,000 2,412
</TABLE>
------------------------
(1) 401(k) company match.
(2) Dr. Burger resigned as President effective May 11, 2000 and Mr. Timmins was
appointed President effective May 11, 2000. Mr. Timmins resigned as Chief
Financial Officer effective May 11, 2000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options granted to the
named executives during the year ended December 31, 1999, under AVI
BioPharma, Inc.'s 1992 Stock Incentive Plan.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES
SECURITIES TOTAL OPTIONS OF STOCK APPRECIATION
UNDERLYING GRANTED EXERCISE FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ---------------------
NAME GRANTED(1) 1999 SHARE DATE 5% 10%
---- ---------- ------------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Patrick L. Iversen, Ph.D...... 28,000 20.64% $3.69 01/21/2009 $65,047 $164,735
</TABLE>
------------------------
(1) All options granted in 1999 for Dr. Iversen become exercisable starting
12 months after the grant date, with one-quarter of the options becoming
exercisable at that time with an additional one-quarter of the options
becoming exercisable on the second, third and fourth anniversary dates of
the option grant, respectively.
(2) The amounts shown are hypothetical gains based on the indicated assumed
rates of appreciation of our common stock compounded annually for a 10-year
period. Actual gains, if any, on stock option exercises are dependent on the
future performance of the common stock and overall stock market conditions.
There can be no assurance that the common stock will appreciate at any
particular rate or at all in future years.
34
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table provides information, with respect to the named
executive officers, concerning the exercise of options during the year ended
December 31, 1999, and unexercised options held as of December 31, 1999. No
options were exercised in 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1999 AT DECEMBER 31, 1999(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Denis R. Burger, Ph.D.......................... 599,068 66,667 $314,761 --
Alan P. Timmins................................ 246,667 45,000 59,800 --
Patrick L. Iversen, Ph.D....................... 78,000 106,000 $48,930
Dwight D. Weller, Ph.D......................... 200,017 28,001 78,334 --
</TABLE>
------------------------
(1) Represents the total gain which would be realized if all in-the-money
options held at December 31, 1999 were exercised, determined by multiplying
the number of shares underlying the options by the difference between the
per share option exercise price and the fair market value of $5.4375 per
share at December 31, 1999. An option is in-the-money if the fair market
value of the underlying shares exceeds the exercise price of the option.
35
<PAGE>
CERTAIN TRANSACTIONS AND RELATIONSHIPS
James E. Summerton, Ph.D., our former President and Chief Scientific Officer
and a former director, is the general partner of a partnership called Anti-Gene
Development Group, or AGDG.
On February 9, 1993, AGDG we entered into a Technology Transfer Agreement
whereby effective May 19, 1993, AGDG conveyed to us all intellectual property in
its control related to antisense technology. As part of the conveyance, we
tendered to AGDG for liquidation all partnership units received under an
exchange offer and received a 49.37% undivided interest in the intellectual
property. We then purchased the remaining undivided interest in the intellectual
property for future payments of 4.05% of gross revenues in excess of
$200 million, if any, from sales of products by us which would, in the absence
of the Technology Transfer Agreement, infringe a valid claim under any patent
transferred to us. Our obligation to pay these technology fees with respect to a
particular product terminates upon the expiration of all patents transferred to
us pursuant to the Technology Transfer Agreement related to that product.
Under a License and Option Agreement between AGDG and us dated February 9,
1993, we granted to AGDG a royalty-free nonexclusive license to use the
intellectual property for internal research and development and to sell small
quantities of products incorporating the intellectual property. In addition, if
AGDG develops any specific prototype products which incorporate any of the
intellectual property, we have the right to commercialize and market the
products for future payments of 4.05% of gross revenues, in excess of the
$200 million exemption for all products utilizing the intellectual property, to
AGDG. If we elect not to commercialize the proposed AGDG product or fail to meet
certain product development milestones, we are required to grant AGDG a license
to develop and market the proposed product. We are entitled to payments for the
AGDG license but only if the proposed product incorporates patented improvements
developed by us to the intellectual property. The amount of the license fee
payable to us by AGDG for products sold is covered by the Technology Transfer
Agreement. AGDG also has the right to obtain an exclusive royalty-free license
to use, develop, make, sell, distribute and sublicense products utilizing the
intellectual property at any time we have less than 10 full-time employees
engaged in developing, testing or marketing products based upon the intellectual
property for a period of at least 180 consecutive days.
In March 2000, AGDG and we amended the Technology Transfer Agreement to give
to AGDG and Gene Tools LLC, a related organization of which Dr. Summerton is the
primary shareholder, exclusive, non royalty-bearing rights to in vitro
diagnostic applications of the intellectual property. In consideration for this
amendment, Gene Tools paid us $1 million and reduced the royalty that we would
pay to AGDG under the Technology Transfer Agreement on future sales of
therapeutic products from 4.05% to 3.00%.
On June 8, 1998, we loaned $440,000 to Mr. Jeffrey L. Lillard, a former Vice
President and a former director, to assist Mr. Lillard with his relocation to
Portland, Oregon. The indebtedness of Mr. Lillard to us was fully paid on
March 31, 1999.
In December 1999, we sold one million shares of our common stock to
SuperGen, Inc., whose Chairman and Chief Executive Officer, Joseph Rubinfeld,
Ph.D., sits on our Board of Directors. In exchange for the common stock, we
received $2.5 million and 100,000 shares of SuperGen common stock. In connection
with this transaction, we granted to SuperGen an exclusive negotiating period
for certain rights to our Company's therapeutic cancer vaccine technology.
In April 2000, we entered into an alliance with SuperGen, Inc. for shared
development and marketing rights for Avicine. Under the terms of the agreement,
SuperGen and we will equally share future clinical development and FDA
registration costs and equally share profit from Avicine sales in the United
States. Closing of this transaction will occur prior to the effectiveness of
this offering.
36
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of our common stock as of July 15, 2000, with respect to:
- each person known by us to beneficially own more than 5% of the
outstanding shares of our common stock;
- each of our directors;
- each of our named executive officers; and
- all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options and
warrants currently exercisable, or exercisable within 60 days of July 15, 2000,
are deemed beneficially owned and outstanding for computing the percentage of
the person holding the securities, but are not considered outstanding for
computing the percentage of any other person.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------------
PERCENT PERCENT
BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER OFFERING OFFERING
--------------------------------------- --------- -------- --------
<S> <C> <C> <C>
Joseph Rubinfeld, Ph.D.(2)(3) .............................. 2,709,211 14.7% 12.6%
Two Annabel Lane #220
San Ramon, CA 94583
SuperGen, Inc.(3) .......................................... 2,684,211 14.6% 12.5%
Two Annabel Lane #220
San Ramon, CA 94583
The Tail Wind Fund, Ltd.(4) ................................ 1,142,858 6.2% 5.3%
Windermere House
404 East Bay Street
P.O. Box SS-5539
Nassau, Bahamas
Denis R. Burger, Ph.D.(5) .................................. 733,886 4.0% 3.4%
Dwight D. Weller, Ph.D.(6) ................................. 388,621 2.1% 1.8%
Alan P. Timmins(7) ......................................... 298,958 1.6% 1.4%
Nick Bunick(8) ............................................. 195,734 1.1% *
Patrick L. Iversen, Ph.D.(9) ............................... 137,900 * *
Bruce L.A. Carter, Ph.D.(10) ............................... 25,973 * *
James B. Hicks, Ph.D.(11) .................................. 25,000 * *
Gordon W. Duncan, Ph.D.(12) ................................ 23,540 * *
Mark M. Webber(13) ......................................... 12,709 * *
All directors and officers as a group (10 persons)(14) ..... 4,551,532 24.7% 21.2
</TABLE>
------------------------
* Less than 1%.
(1) Unless otherwise indicated, the address of each person in this table is c/o
AVI BioPharma, Inc., 1 SW Columbia, Suite 1105, Portland, Oregon 97258.
37
<PAGE>
(2) Includes 2,684,211 shares held by SuperGen, Inc. of which Dr. Rubinfeld is
Chairman of the Board and Chief Executive Officer. Also includes 25,000
shares subject to options held by Dr. Rubinfeld exercisable within 60 days
of July 15, 2000.
(3) Excludes a number of shares equal to up to 10% of our outstanding shares of
common stock issuable upon the exercise of a warrant issued to
SuperGen, Inc.
(4) Includes 214,286 shares subject to warrants exercisable within 60 days of
July 15, 2000.
(5) Includes 34,434 shares held by Sovereign Ventures, LLC, a limited liability
company in which Dr. Burger is a general partner. Also includes 534,161
shares subject to options exercisable within 60 days of July 15, 2000.
(6) Includes 247,634 shares held jointly or by others over which Dr. Weller
exercises voting and investment power, 134,000 shares subject to options
exercisable by Dr. Weller and 14,609 shares subject to options exercisable
by Dr. Weller's spouse within 60 days of July 15, 2000.
(7) Includes 271,667 shares subject to options exercisable within 60 days of
July 15, 2000.
(8) Includes 50,667 shares held jointly or by others over which Mr. Bunick
exercises voting and investment power and includes 33,334 shares subject to
options exercisable within 60 days of July 15, 2000.
(9) Includes 113,000 shares subject to options exercisable within 60 days of
July 15, 2000.
(10) Includes 25,973 shares subject to options exercisable within 60 days of
July 15, 2000.
(11) Includes 25,000 shares subject to options exercisable within 60 days of
July 15, 2000.
(12) Includes 22,540 shares subject to options exercisable within 60 days of
July 15, 2000.
(13) Includes 6,386 shares subject to options exercisable within 60 days of
July 15, 2000.
(14) Includes 1,205,670 shares subject to options exercisable within 60 days of
July 15, 2000.
38
<PAGE>
DESCRIPTION OF SECURITIES
Our authorized capital consists of 50,000,000 shares of common stock, par
value $0.0001 per share, and 2,000,000 shares of preferred stock, par value
$0.0001 per share.
COMMON STOCK
We are authorized to issue 50,000,000 shares of common stock. As of
July 15, 2000, 18,432,523 shares of common stock were outstanding and were held
of record by approximately 598 shareholders. Holders of common stock are
entitled to one vote for each share at all meetings of our shareholders. Subject
to preferences of preferred stockholders, common stockholders are entitled to
receive ratably dividends declared by our board. Common stockholders have no
preemptive, subscription, redemption or conversion rights. If we are liquidated
or dissolved, common stockholders would share equally in our assets remaining
after the payment of all our liabilities and the liquidation preference of any
preferred stockholders.
PREFERRED STOCK
Our Board of Directors is authorized to issue up to 2,000,000 shares of
undesignated preferred stock. No shares of preferred stock have been issued. Our
Board has the authority to issue preferred stock in one or more series and to
fix the rights, preferences, privileges and restrictions of the preferred stock,
as well as fix the number of shares, without any further vote or action by the
shareholders. Our Board, without shareholder approval, may issue preferred stock
with voting and conversion rights superior to the voting rights of the common
shares. The preferred stock may also decrease the amount of earnings and assets
distributed to common stockholders. Issuance of preferred stock may delay or
prevent a change in control.
WARRANTS
UNDERWRITERS' WARRANTS. On completion of this offering, we will issue stock
purchase warrants that will entitle the underwriters of this offering to
purchase a number of shares of our common stock equal to 10% of the shares sold
in this offering, exclusive of shares that may be sold pursuant to the
underwriters' over-allotment option. The per share purchase price will be equal
to 120% of the per share public offering price set forth on the cover page of
this prospectus. These warrants will be exercisable for a period of four years
commencing one year after the date of this prospectus. We have granted the
underwriters certain registration rights which, if exercised, will enable them
to sell the shares received upon exercise of their warrants without restriction,
commencing as early as one year following the completion of this offering.
REPRESENTATIVES' WARRANTS. We issued 200,000 warrants to the
representatives of the underwriters of our initial public offering to purchase
400,000 shares of our common stock. The representatives' warrants entitle the
holders to acquire up to 200,000 units, each unit consisting of a share of
common stock and a warrant to purchase a share of common stock for $10.80 per
unit, and are exercisable until June 3, 2002. Each warrant initially entitles
the holder to purchase one share of common stock at a price of $13.50. As of
July 15, 2000, there were 142,500 representatives' warrants outstanding.
NASDAQ WARRANTS. We have outstanding warrants to purchase 2,300,000 shares
of our common stock that were issued in our initial public offering and are
traded on the Nasdaq National Market under the symbol "AVIIW." These warrants
are exercisable until June 3, 2002. We may redeem them at a price of $0.25 per
warrant if the closing bid price of our common stock has been at least 200% of
the warrant exercise price for 20 consecutive trading days. The initial exercise
price of these warrants is $13.50.
39
<PAGE>
ITC MERGER WARRANTS. We have outstanding warrants to purchase 2,116,814
shares of our common stock that were issued in connection with our acquisition
of ImmunoTherapy Corporation. These warrants are exercisable after
September 15, 2000 and until July 15, 2003. We may redeem them at a price of
$0.25 per warrant if the closing bid price of our common stock has been at least
200% of the exercise price for 20 consecutive trading days and the warrants have
been exercisable. These warrants are traded on the Nasdaq National Market under
the symbol "AVIIZ." The initial exercise price of these warrants is $13.50.
OTHER WARRANTS. In December 1999, we issued 628,573 warrants to purchase
common stock at $4.025 per share in a private placement to five institutional
investors and the placement agent. A total of 557,144 are exercisable until
December 20, 2004 and 71,429 are exercisable after December 20, 2000 and until
December 20, 2004. We have also issued and outstanding additional warrants to
purchase 21,667 shares of our common stock. These warrants are currently
exercisable and do not have a termination date.
STOCK OPTIONS
A total of 3,200,000 shares of our common stock are reserved for issuance
under our 1992 Stock Incentive Plan. As of July 15, 2000, we had outstanding
2,320,004 options to purchase shares under the 1992 Stock Incentive Plan.
In 1998, we assumed the obligations under the 1997 Stock Option Plan of
ImmunoTherapy Corporation. As of July 15, 2000, 178,284 options to purchase
shares of our common stock were outstanding under the 1997 plan.
EMPLOYEE STOCK PURCHASE PLAN
A total of 250,000 shares of our common stock have been reserved for
issuance under our 2000 Employee Stock Purchase Plan. As of July 15, 2000, no
shares had been issued under the plan.
RIGHTS OF CERTAIN SHAREHOLDERS TO ADDITIONAL STOCK OR REDEMPTION OF SHARES
Holders of 1,857,147 shares of our common stock have the right to receive
additional shares of our common stock without additional payment to us if we
sell shares of our common stock, or engage in similar financing transactions, at
a price of less than $3.50 per share prior to December 16, 2002. If the holdings
of our stock by the group that has this right will exceed 20 percent of our
outstanding common stock due to the issuance of new shares, we must redeem a
sufficient number of the new shares to be issued at a price equal to $3.85 per
share so that the holdings of this group do not exceed 20 percent.
REGISTRATION RIGHTS
We are required to file a registration statement under the Securities Act
covering the 2,116,814 shares of our common stock underlying the warrants that
were issued in connection with our acquisition of ImmunoTherapy Corporation
prior to the date those warrants become exercisable, or September 15, 2000. Upon
the filing of that registration statement and after September 14, 2000, a person
will be able to sell any shares received upon the exercise of the warrants
without restriction.
OREGON CONTROL SHARES AND BUSINESS COMBINATION STATUTES
We are subject to the Oregon Control Share Act. The Control Share Act
generally provides that a person who acquires voting stock of an Oregon
corporation in a transaction that results in the acquiring person holding more
than 20.0%, 33.3% or 50.0% of the total voting power of the
40
<PAGE>
corporation cannot vote the shares it acquires in the control share acquisition
unless voting rights are accorded to the control shares by (1) a majority of
each voting group entitled to vote and (2) the holders of a majority of the
outstanding voting shares, excluding the control shares held by the acquiring
person and shares held by our officers and inside directors. The terms acquiring
person are broadly defined to include persons acting as a group.
The acquiring person may, but is not required to, submit to us a statement
setting forth certain information about the acquiring person and its plans with
respect to us. The statement may also request that we call a special meeting of
shareholders to determine whether voting rights will be accorded to the control
shares. If the acquiring person does not request a special meeting of
shareholders, the issue of voting rights of control shares will be considered at
the next annual meeting or special meeting of shareholders. If the acquiring
person's control shares are accorded voting rights and represent a majority or
more of all voting power, shareholders who do not vote in favor of voting rights
for the control shares will have the right to receive the appraised "fair value"
of their shares which may not be less than the highest price per share by the
acquiring person for the control shares.
We are subject to certain provisions of the Oregon Business Corporation Act
that govern business combinations between corporations and interested
shareholders. The Business Combination Act generally provides that if a person
or entity acquires 15% or more of the voting stock of an Oregon corporation, the
corporation and the interested shareholder, or any affiliated entity of the
interested shareholder, may not engage in certain business combination
transactions for three years following the date the person became an interested
shareholder. Business combination transactions for this purpose include (1) a
merger or plan of share exchange, (2) any sale, lease, mortgage or other
disposition of 10% or more of the assets of the corporation, and (3) certain
transactions that result in the issuance of capital stock of the corporation to
the interested shareholder. These restrictions do not apply if (1) the
interested shareholder, as a result of the transaction in which such person
became an interested shareholder, owns at least 85% of the outstanding voting
stock of the corporation, disregarding shares owned by directors who are
officers and certain employee benefit plans, (2) the Board of Directors approves
the share acquisition or business combination before the interested shareholder
acquires 15% or more of the corporation's outstanding voting stock or (3) the
Board of Directors and the holders of at least two-thirds of the outstanding
voting stock of the corporation, disregarding shares owned by the interested
shareholders, approve the transaction after the interested shareholder acquires
15% or more of the corporation's voting stock.
TRANSFER AGENT
Our transfer agent and registrar is ChaseMellon Shareholder Services, LLC.
41
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Our common stock is listed on the Nasdaq National Market under the symbol
"AVII." Future sales of substantial amounts of our common stock in the public
market, following this offering, could adversely affect prevailing market prices
and our ability to raise additional capital at a time and price favorable to us.
Upon completion of this offering, we will have 21,432,523 shares of common
stock outstanding, assuming no exercise of the over-allotment option granted to
Paulson Investment Company, Inc. Of these shares, the 3,000,000 shares sold in
this offering will be freely tradable without restriction or further
registration under the Securities Act, unless they are purchased by our
"affiliates" as that term is used under the Securities Act of 1933, or the
Securities Act. Of the 18,432,523 shares that will be held by our existing
shareholders, a total of 14,004,069 are freely tradable without restriction. Of
the remaining 4,428,454 shares, 1,661,651 are owned by officers or directors and
will become eligible for sale 90 days after the date of this offering, but sales
of such shares will be subject to certain volume limitations and manner of sale
restrictions contained in Rule 144 under the Securities Act, which is summarized
below. Approximately 1,082,592 shares are owned by former shareholders of
ImmunoTherapy Corporation, which we acquired in 1998. These shares are subject
to a lock-up which expires on September 15, 2000. The remaining 1,684,211 shares
are owned by SuperGen, Inc. and are not tradable until a registration statement
has been filed with respect to such shares.
As a condition of this offering, all officers and directors will agree with
the underwriters that they will not sell any common stock owned by them for a
period of 90 days after the effective date of this offering without the prior
written consent of Paulson Investment Company, Inc. A total of 1,661,651 shares
of common stock will be subject to this 90-day lock-up. Upon the expiration of
the 90-day lock-up period, or earlier upon the consent of Paulson Investment
Company, Inc., those shares will become eligible for sale subject to the volume
and other restrictions of Rule 144.
In general, under Rule 144, as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year, including a person who may be deemed to be our
affiliate, may sell within any three-month period a number of shares of common
stock that does not exceed a specified maximum number of shares. This maximum is
equal to the greater of 1% of the then outstanding shares of our common stock or
the average weekly trading volume in the common stock during the four calendar
weeks immediately preceding the sale. Sales under Rule 144 are also subject to
restrictions relating to manner of sale, notice and availability of current
public information about us. In addition, under Rule 144(k) of the Securities
Act, a person who is not our affiliate, has not been an affiliate of ours within
three months prior to the sale and has beneficially owned shares for at least
two years would be entitled to sell such shares immediately without regard to
volume limitations, manner of sale provisions, notice or other requirements of
Rule 144.
OPTIONS AND WARRANTS
As of July 15, 2000, a total of 3,200,000 shares were reserved for issuance
under our 1992 Stock Incentive Plan and we had outstanding 2,320,004 options to
purchase shares under the 1992 Stock Incentive Plan. In 1998, we assumed the
obligations of ImmunoTherapy Corporation under its 1997 Stock Option Plan. As of
July 15, 2000, options to purchase 178,284 shares were outstanding under this
plan. A total of 250,000 shares have been reserved for issuance under our 2000
Employee Stock Purchase Plan. As of July 15, 2000, no shares had been issued
under the plan. We have filed, or will file promptly after the effectiveness of
this offering, registration statements on Form S-8 under the Securities Act
covering all shares of common stock reserved for issuance under these plans.
We have outstanding warrants to purchase 5,409,554 shares of our common
stock at initial exercise prices from $4.025 to $13.50 per share. A total of
3,142,144 of the shares of our common stock to be
42
<PAGE>
purchased on the exercise of these warrants are eligible for sale upon exercise.
We intend to file a registration statement under the Securities Act covering
2,116,814 shares of common stock underlying certain of the warrants.
On completion of this offering, we will issue stock purchase warrants that
will entitle the underwriters of this offering to purchase a number of our
shares of common stock equal to 10% of the shares sold in this offering,
exclusive of shares that may be sold pursuant to the underwriters'
over-allotment option. The per share purchase price will be equal to 120% of the
per share public offering price set forth on the cover page of this prospectus.
These warrants will be exercisable for a period of four years commencing one
year after the effective date of this offering. We have granted the underwriters
certain registration rights which, if exercised, will enable them to sell the
shares received upon exercise of their warrants without restriction, commencing
as early as one year following the effective date of this offering.
43
<PAGE>
UNDERWRITING
Paulson Investment Company, Inc. is acting as the representative of the
underwriters. We and the underwriters named below have entered into an
underwriting agreement with respect to the shares of our common stock being
offered. In connection with this offering and subject to certain conditions,
each of the underwriters named below has severally agreed to purchase, and we
have agreed to sell, the number of shares set forth opposite the name of each
underwriter.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ----------
<S> <C>
Paulson Investment Company, Inc............................. 2,250,000
I-Bankers Securities, Inc................................... 450,000
First Colonial Securities Group, Inc........................ 300,000
----------
Total................................................... 3,000,000
==========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares offered by this prospectus, other than those covered
by the over-allotment option, if any shares are purchased. The underwriting
agreement also provides that the obligations of the several underwriters to pay
for and accept delivery of the shares are subject to the approval of certain
legal matters by counsel and certain other conditions. These conditions include
the requirements that no stop order suspending the effectiveness of the
registration statement is in effect and that no proceedings for such purpose
have been instituted or threatened by the Securities and Exchange Commission.
The representative has advised us that the underwriters propose to offer our
shares to the public initially at the offering price set forth on the cover page
of this prospectus and to selected dealers at such price less a concession of
not more than $.29 per share. The underwriters and selected dealers may reallow
a concession to other dealers, including the underwriters, of not more than $.10
per share. After completion of the initial public offering of the shares, the
offering price, the concessions to selected dealers and the reallowance to their
dealers may be changed by the underwriters.
The underwriters have informed us that they do not expect to confirm sales
of ours shares offered by this prospectus to any accounts over which they
exercise discretionary authority.
OVER-ALLOTMENT OPTION
Pursuant to the underwriting agreement, we have granted Paulson Investment
Company, Inc. an option, exercisable for 45 days from the effective date of this
offering, to purchase up to an additional 450,000 shares on the same terms as
the shares being purchased by the underwriters from us. Paulson Investment
Company, Inc. may exercise the option solely to cover over-allotments, if any,
in the sale of the shares that the underwriters have agreed to purchase. If the
over-allotment option is exercised in full, the total public offering price,
underwriting discount and proceeds to us before offering expenses will be
$25,012,500, $1,500,000 and $23,511,750, respectively.
STABILIZATION AND OTHER TRANSACTIONS
Until the distribution of the shares offered by this prospectus is
completed, rules of the Securities and Exchange Commission may limit the ability
of the underwriters to bid for and purchase shares. As an exception to these
rules, the underwriters may engage in transactions that stabilize the price of
the shares. Paulson Investment Company, Inc., on behalf of the underwriters, may
engage in over-allotment sales, stabilizing transactions, syndicate covering
transactions and penalty bids in accordance with Regulation M under the
Securities Exchange Act of 1934.
44
<PAGE>
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of shares in the open
market after the distribution has been completed in order to cover
syndicate short positions. The underwriters may also elect to reduce any
short position by exercising all or part of the over-allotment option to
purchase additional shares as described above.
- Penalty bids permit the representative to reclaim a selling concession
from a syndicate member when the shares originally sold by the syndicate
member are purchased in a syndicate covering transaction to cover
syndicate short positions.
In general, the purchase of a security to stabilize or to reduce a short
position could cause the price of the security to be higher than it might be
otherwise. These transactions may be effected on the Nasdaq National Market or
otherwise. Neither we nor the underwriters can predict the direction or
magnitude of any effect that the transactions described above may have on the
price of the shares. In addition, neither we nor the underwriters can represent
that the underwriters will engage in these types of transactions or that these
types of transactions, once commenced, will not be discontinued without notice.
INDEMNIFICATION
The underwriting agreement provides for indemnification between us and the
underwriters against specified liabilities, including liabilities under the
Securities Act, and for contribution by us and the underwriters to payments that
may be required to be made with respect to those liabilities. We have been
advised that, in the opinion of the Securities and Exchange Commission,
indemnification for liabilities under the Securities Act of 1933 is against
public policy as expressed in the Securities Act and is therefore unenforceable.
UNDERWRITERS' COMPENSATION
We have agreed to sell the shares to the underwriters at the initial
offering price of $7.25, less the 6% underwriting discount. The underwriting
agreement also provides that upon the closing of the sale of the shares offered,
Paulson Investment Company, Inc. will be paid a nonaccountable expense allowance
equal to 1.5% of the gross proceeds from the sale of the shares offered by this
prospectus, including the over-allotment option.
We have also agreed to issue warrants to the underwriters to purchase from
us up to 300,000 shares at an exercise price per share equal to 120% of the
offering price per share. These warrants are exercisable during the four-year
period beginning one year from the date of effectiveness of the registration
statement. These warrants, and the securities underlying the warrants, are not
transferable for one year following the effective date of the registration,
except to an individual who is an officer or partner of an underwriter, by will
or by the laws of descent and distribution, and are not redeemable. These
warrants will have registration rights. We will cause the registration statement
to remain effective until the earlier of the time that all of the underwriters'
warrants have been exercised and the date which is five years after the
effective date of this offering. The common stock issued to the representative
upon exercise of these warrants will be freely tradable.
The holders of the underwriters' warrants will have, in that capacity, no
voting, dividend or other shareholder rights. Any profit realized by the
representative on the sale of the shares issuable upon exercise of the
underwriters warrants may be deemed to be additional underwriting compensation.
The shares underlying the underwriters' warrants are being registered on the
registration statement. During
45
<PAGE>
the term of the underwriters' warrants, the holders thereof are given the
opportunity to profit from a rise in the market price of our common stock. We
may find it more difficult to raise additional equity capital while the
underwriters' warrants are outstanding. At any time at which the underwriters'
warrants are likely to be exercised, we may be able to obtain additional equity
capital on more favorable terms.
LOCK-UP AGREEMENTS
Our officers and directors have agreed that, for a period of 90 days from
the date this registration statement becomes effective, they will not sell,
contract to sell, grant any option for the sale or otherwise dispose of any of
our equity securities, or any securities convertible into or exercisable or
exchangeable for our equity securities, other than through intra-family
transfers or transfers to trusts for estate planning purposes, without the
consent of Paulson Investment Company, Inc., as the representative of the
underwriters, which consent will not be unreasonably withheld.
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus will
be passed upon for us by Ater Wynne LLP, Portland, Oregon, our counsel. Certain
legal matters will be passed upon for the underwriters by Weiss Jensen Ellis &
Howard, P.C., Portland, Oregon, counsel to the underwriters.
EXPERTS
The financial statements as of December 31, 1998 and 1999, for the
three-year period ended December 31, 1999 and for the period from inception
(July 22, 1980) to December 31, 1999 included in this registration statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
46
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission, or SEC. Our filings are
available to the public over the Internet at the SEC's web site at
"http://www.sec.gov." You can read and copy any document that we file with the
SEC at the following public reference facilities:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, NY 10048 Suite 1400
Chicago, IL 60661
</TABLE>
You can also obtain copies of the documents at prescribed rates by writing
to the SEC's Public Reference Section at 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call 1-800-SEC-0330 for further information on the operation
of the SEC's public reference facilities. You also can inspect copies of our
filings at The Nasdaq Stock Market at 1735 K Street, N.W., Washington, D.C.
20006.
* * * *
47
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Annual financial statements of the Company and the Report of Arthur Andersen
LLP, Independent Public Accountants, are included on the pages indicated:
<TABLE>
<S> <C>
Report of Arthur Andersen LLP, Independent Public
Accountants............................................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statement of Changes in Shareholders' Equity... F-5
Consolidated Statements of Cash Flow........................ F-6
Notes to Consolidated Financial Statements.................. F-7
Financial statements for the quarterly period ended
March 31, 2000
Interim financial statements of the Company are included on
the pages indicated:
Consolidated Balance Sheets................................. F-18
Consolidated Statements of Operations....................... F-19
Consolidated Statements of Cash Flow........................ F-20
Notes to Consolidated Financial Statements.................. F-21
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
AVI BIOPHARMA, INC.
We have audited the accompanying balance sheets of AVI BIOPHARMA, INC. (an
Oregon corporation in the development stage) as of December 31, 1999 and 1998,
and the related statements of operations, shareholders' equity and cash flows
for the three years then ended and for the period from inception (July 22, 1980)
to 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 AVI BIOPHARMA, INC. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the three years then ended and for the period from inception (July 22, 1980)
to December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen, LLP
Portland, Oregon
January 28, 2000
F-2
<PAGE>
AVI BIOPHARMA, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 8,683,005 $ 8,510,020
Short-term securities--available-for-sale................. 2,937,500 --
Other current assets...................................... 31,242 509,428
------------ ------------
Total Current Assets.................................... 11,651,747 9,019,448
Property and Equipment, net of accumulated depreciation and
amortization of $2,518,494 and $2,386,310................. 403,303 411,828
Patent Costs, net of accumulated amortization of $418,268
and $305,310.............................................. 844,731 730,960
Other Assets................................................ 29,847 29,847
------------ ------------
Total Assets............................................ $ 12,929,628 $ 10,192,083
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 727,673 $ 891,928
Accrued liabilities....................................... 312,481 294,471
------------ ------------
Total Current Liabilities............................... 1,040,154 1,186,399
Shareholders' Equity:
Preferred stock, $.0001 par value, 2,000,000 shares
authorized; none issued and outstanding................. -- --
Common stock, $.0001 par value, 50,000,000 shares
authorized; 16,236,428 and 13,346,166 issued and
outstanding............................................. 1,624 1,335
Additional paid-in capital................................ 62,901,227 51,779,785
Accumulated other comprehensive income.................... 40,500 --
Deficit accumulated during the development stage.......... (51,053,877) (42,775,436)
------------ ------------
Total Shareholders' Equity.............................. 11,889,474 9,005,684
------------ ------------
Total Liabilities and Shareholders' Equity.............. $ 12,929,628 $ 10,192,083
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
AVI BIOPHARMA, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, JULY 22, 1980
---------------------------------------- (INCEPTION) TO
1999 1998 1997 DECEMBER 31, 1999
----------- ------------ ----------- ------------------
<S> <C> <C> <C> <C>
Revenues, from grants and research
contracts........................... $ 17,024 $ 120,351 $ 14,345 $ 841,217
Operating expenses:
Research and development............ 6,672,027 6,306,860 2,737,172 24,727,633
General and administrative.......... 1,745,491 1,621,381 1,282,214 9,198,668
Acquired in-process research and
development....................... 71,874 19,473,154 -- 19,545,028
----------- ------------ ----------- ------------
8,489,392 27,401,395 4,019,386 53,471,329
Other Income:
Interest income, net................ 193,927 547,081 389,051 1,479,485
Realized gain on sale of short-term
investments....................... -- -- -- 96,750
----------- ------------ ----------- ------------
193,927 547,081 389,051 1,576,235
----------- ------------ ----------- ------------
Net loss.............................. $(8,278,441) $(26,733,963) $(3,615,990) $(51,053,877)
=========== ============ =========== ============
Net loss per share--basic and
diluted............................. $ (0.62) $ (2.27) $ (0.36)
=========== ============ ===========
Weighted average number of common
shares outstanding for computing
basic and diluted loss per share.... 13,440,205 11,801,453 10,078,962
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
AVI BIOPHARMA, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED
COMMON STOCK ADDITIONAL OTHER DURING THE TOTAL
PARTNERSHIP --------------------- PAID-IN COMPREHENSIVE DEVELOPMENT SHAREHOLDERS'
UNITS SHARES AMOUNT CAPITAL INCOME STAGE EQUITY
----------- ---------- -------- ----------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 22, 1980
(Inception) $-- -- $-- $ -- $-- $ -- $ --
Issuance of partnership units,
warrants and common stock... 3,615 5,972,916 598 15,715,254 -- -- 15,715,852
Compensation expense related
to issuance of warrants for
common stock and partnership
units....................... -- -- -- 537,353 -- -- 537,353
Exercise of warrants for
partnership units and common
stock....................... 42 1,164,263 116 179,036 -- -- 179,152
Conversion of debt into common
stock and partnership
units....................... 9 9,634 1 87,859 -- -- 87,860
Issuance of common stock in
exchange for partnership
units....................... (1,810) 1,632,950 163 (163) -- -- --
Withdrawal of partnership net
assets upon conveyance of
technology.................. (1,856) -- -- (176,642) -- -- (176,642)
Common stock subject to
rescission.................. -- (1,292,973) (129) (3,121,836) -- -- (3,121,965)
Net loss...................... -- -- -- -- -- (12,425,483) (12,425,483)
------ ---------- ------ ----------- ------- ------------ ------------
BALANCE AT DECEMBER 31,
1996........................ -- 7,486,790 749 13,220,861 -- (12,425,483) 796,127
Exercise of warrants for
common stock................ -- 50,000 5 5,010 -- -- 5,015
Exercise of options for common
stock....................... -- 59,903 6 281,804 -- -- 281,810
Issuance of common stock and
warrants for cash, $9.00 per
unit, net of offering
costs....................... -- 2,300,000 230 18,017,400 -- -- 18,017,630
Reclassified upon completion
of rescission offering...... -- 1,228,924 123 2,833,047 -- -- 2,833,170
Net loss...................... -- -- -- -- -- (3,615,990) (3,615,990)
------ ---------- ------ ----------- ------- ------------ ------------
BALANCE AT DECEMBER 31,
1997........................ -- 11,125,617 1,113 34,358,122 -- (16,041,473) 18,317,762
Exercise of warrants for
common stock................ -- 34,567 3 17,922 -- -- 17,925
Exercise of options for common
stock....................... -- 35,990 4 166,944 -- -- 166,948
Issuance of common stock and
warrants for the acquisition
of ImmunoTherapy
Corporation................. -- 2,132,592 213 17,167,199 -- -- 17,167,412
Issuance of common stock for
consulting services, $4.00
per share................... -- 17,400 2 69,598 -- -- 69,600
Net loss...................... -- -- -- -- -- (26,733,963) (26,733,963)
------ ---------- ------ ----------- ------- ------------ ------------
BALANCE AT DECEMBER 31,
1998........................ -- 13,346,166 $1,335 $51,779,785 $-- $(42,775,436) $ 9,005,684
Exercise of warrants for
common stock................ -- 16,667 2 3 -- -- 5
Exercise of options for common
stock....................... -- 16,448 1 66,722 -- -- 66,723
Issuance of common stock and
warrants for cash and
securities, net of offering
costs....................... -- 2,857,147 286 11,054,717 -- -- 11,055,003
Unrealized gain on short-term
securities--
available-for-sale.......... -- -- -- -- 40,500 -- 40,500
Net loss...................... -- -- -- -- -- (8,278,441) (8,278,441)
------ ---------- ------ ----------- ------- ------------ ------------
BALANCE AT DECEMBER 31,
1999........................ -- 16,236,428 $1,624 $62,901,227 $40,500 $(51,053,877) $ 11,889,474
====== ========== ====== =========== ======= ============ ============
</TABLE>
F-5
<PAGE>
AVI BIOPHARMA, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED DECEMBER 31, JULY 22, 1980
---------------------------------------- (INCEPTION) TO
1999 1998 1997 DECEMBER 31, 1999
----------- ------------ ----------- -----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................... $(8,278,441) $(26,733,963) $(3,615,990) $(51,053,877)
Adjustments to reconcile net loss to net cash flows
used in operating activities:
Depreciation and amortization.................... 313,238 223,186 467,250 3,053,531
Realized gain on sale of short-term investments--
available for sale............................. -- -- -- (96,750)
Compensation expense on issuance of common stock
and partnership units.......................... -- 69,600 -- 251,992
Compensation expense on issuance of options and
warrants to purchase common stock or
partnership units.............................. -- -- -- 562,353
Conversion of interest accrued to common stock... -- -- -- 7,860
Acquired in-process research and development..... 71,874 19,473,154 -- 19,545,028
(Increase) decrease in:
Other current assets........................... 478,186 (490,386) 9,213 (31,242)
Other assets................................... -- -- -- (29,847)
Net increase (decrease) in accounts payable and
accrued liabilities............................ (146,245) 721,947 133,645 1,040,154
----------- ------------ ----------- ------------
Net cash used in operating activities........ (7,561,388) (6,736,462) (3,005,882) (26,750,798)
Cash flows from investing activities:
Proceeds from sale or redemption of short-term
investments........................................ -- -- 30,000 247,750
Purchase of property and equipment................... (135,075) (109,657) (323,798) (2,981,886)
Patent costs......................................... (283,409) (264,434) (128,877) (1,319,679)
Acquisition costs.................................... (71,874) (2,203,236) (102,506) (2,377,616)
----------- ------------ ----------- ------------
Net cash used in investing activities........ (490,358) (2,577,327) (525,181) (6,431,431)
Cash flows from financing activities:
Proceeds from sale of common stock, warrants, and
partnership units, net of offering costs, and
exercise of options and warrants................... 8,224,731 184,873 18,447,565 42,250,671
Buyback of common stock pursuant to rescission
offering........................................... -- -- (288,795) (288,795)
Withdrawal of partnership net assets................. -- -- -- (176,642)
Issuance of convertible debt......................... -- -- -- 80,000
----------- ------------ ----------- ------------
Net cash provided by financing activities.... 8,224,731 184,873 18,158,770 41,865,234
Increase (decrease) in cash and cash equivalents....... 172,985 (9,128,916) 14,627,707 8,683,005
Cash and cash equivalents:
Beginning of period.................................. 8,510,020 17,638,936 3,011,229 --
----------- ------------ ----------- ------------
End of period........................................ $ 8,683,005 $ 8,510,020 $17,638,936 $ 8,683,005
=========== ============ =========== ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
AND FINANCING ACTIVITIES:
Short-term securities--available-for-sale received
in connection with the private offering.......... $ 2,897,000 $ -- $ -- $ 2,897,000
Unrealized gain on short-term securities--
available-for-sale............................... $ 40,500 $ -- $ -- $ 40,500
</TABLE>
The accompanying notes are an integral part of these statements
F-6
<PAGE>
AVI BIOPHARMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS:
AVI BioPharma, Inc. (the Company) was incorporated in the State of Oregon on
July 22, 1980. The mission of the Company is to develop and commercialize
therapeutic products based upon antisense and cancer immunotherapy technology.
Through May 1993, the financial statements included the combined accounts of
the Company and ANTI-GENE DEVELOPMENT GROUP, a limited partnership (AGDG or the
Partnership) founded in 1981 and registered in the State of Oregon.
Substantially all income generated and proceeds from the Partnership unit sales
have been paid to the Company under the terms of research and development
contracts entered into by the Partnership and the Company. Significant
transactions between the Company and the Partnership have been eliminated.
In March 1993, the Company offered to all partners in the Partnership the
opportunity to exchange their partnership units or warrants to purchase
partnership units (unit warrants) for common stock or warrants to purchase
common stock. Under the terms of the offer, which was completed May 1, 1993,
each partner could elect to exchange each unit held or unit warrant held for
1,100 shares of common stock or warrants to purchase 1,100 shares of common
stock of the Company, respectively. Total shares and warrants to purchase shares
issued in the exchange offer were 1,632,950 and 381,700, respectively.
Effective May 19, 1993, the Company and the Partnership entered into a
Technology Transfer Agreement wherein the Partnership conveyed all intellectual
property in its control to the Company. As part of the conveyance, the Company
tendered to the Partnership for liquidation all partnership units received
pursuant to the exchange offer and received a 49.37 percent undivided interest
in the intellectual property. The Company then purchased the remaining undivided
interest in the intellectual property for rights to payments of 4.05 percent of
gross revenues in excess of $200 million, from sales of products, which would,
in the absence of the Technology Transfer Agreement, infringe a valid claim
under any patent transferred to the Company. The Company also granted to the
Partnership a royalty-bearing license to make, use and sell small quantities of
product derived from the intellectual property for research purposes only.
In March 2000, the Company and AGDG amended the Technology Transfer
Agreement to give to AGDG and Gene Tools LLC, a related organization, exclusive,
non royalty-bearing rights to in vitro diagnostic applications of the
intellectual property. In consideration for this amendment, Gene Tools paid the
Company $1 million and reduced the royalty that the Company would pay to AGDG
under the Technology Transfer Agreement on future sales of therapeutic products
from 4.05% to 3.00%.
The remaining net assets of the Partnership, $176,642 of cash, were no
longer combined with those of the Company in May 1993. Under the terms of the
Technology Transfer Agreement, the Partnership ceased active sales of
partnership units and income generating activities and no longer will enter into
research and development contracts with the Company. The Partnership currently
exists primarily for the purpose of collecting potential future payments from
the Company as called for in the Technology Transfer Agreement.
Beginning in 1991, the Company changed its fiscal year from a fiscal year
ending on October 31, to a calendar year. The new fiscal year was adopted
prospectively.
F-7
<PAGE>
AVI BIOPHARMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND NATURE OF BUSINESS: (CONTINUED)
The Company is in the development stage. Since its inception in 1980 through
December 31, 1999, the Company has incurred losses of approximately
$51 million, substantially all of which resulted from expenditures related to
research and development, general and administrative expenses and a one-time
charge in 1998 of $19,473,154 for acquired in-process research and development
reflecting the acquisition of ImmunoTherapy Corporation. The Company has not
generated any material revenue from product sales to date, and there can be no
assurance that revenues from product sales will be achieved. Moreover, even if
the Company does achieve revenues from product sales, the Company nevertheless
expects to incur operating losses over the next several years.
The financial statements have been prepared assuming that the Company will
continue as a going concern. The Company's ability to achieve a profitable level
of operations in the future will depend in large part on its completing product
development of its cancer vaccine, antisense and/or drug delivery products,
obtaining regulatory approvals for such products and bringing these products to
market. During the period required to develop these products, the Company will
require substantial financing. There is no assurance that such financing will be
available when needed or that the Company's planned products will be
commercially successful. If necessary, the Company's management will curtail
expenditures in an effort to conserve operating funds.
The likelihood of the long-term success of the Company must be considered in
light of the expenses, difficulties and delays frequently encountered in the
development and commercialization of new pharmaceutical products, competitive
factors in the marketplace as well as the burdensome regulatory environment in
which the Company operates. There can be no assurance that the Company will ever
achieve significant revenues or profitable operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Approximately
$2.5 million of the Company's cash balance at December 31, 1999 is subject to
return to a certain investor by March 31, 2000 if that investor returns to the
Company 500,000 of the Company's shares of common stock. Management believes
that the possibility of such a return of cash is remote given the marketability
of the shares and their current per share price.
SHORT-TERM SECURITIES--AVAILABLE-FOR-SALE
The Company accounts for its short-term securities in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities"
F-8
<PAGE>
AVI BIOPHARMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
(SFAS 115). As such, the Company has classified its investment securities as
available-for-sale and, accordingly, such investment securities are stated on
the balance sheet at their fair market value, which exceeded cost by $40,500 at
December 31, 1999. The unrealized difference between the cost and the fair
market value of these securities has been reflected as a separate component of
shareholders' equity. These short-term securities included common stock with a
fair value of $2,937,500 at December 31, 1999.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets, generally five years, using the straight-line
method. Leasehold improvements are amortized over the shorter of the lease term
or the estimated useful life of the asset.
PATENT COSTS
Patent costs consist primarily of legal and filing fees incurred to file
patents on proprietary technology developed by the Company. Patent costs are
amortized on a straight-line basis over the shorter of the estimated economic
lives or the legal lives of the patents, generally 17 years.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS 109). Under SFAS 109, deferred tax assets and liabilities are recorded
based on the tax effected difference between the tax bases of assets and
liabilities and their carrying amount for financial reporting purposes, referred
to as temporary differences, using enacted marginal income tax rates.
NET LOSS PER SHARE
Basic EPS is calculated using the weighted average number of common shares
outstanding for the period and diluted EPS is computed using the weighted
average number of common shares and dilutive common equivalent shares
outstanding. Given that the Company is in a loss position, there is no
F-9
<PAGE>
AVI BIOPHARMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
difference between basic EPS and diluted EPS since the common stock equivalents
would be antidilutive.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
----------------------- ----------- ------------ -----------
<S> <C> <C> <C>
Net loss.............................................. $(8,278,441) $(26,733,963) $(3,615,990)
Weighted average number of shares of common stock and
common stock equivalents outstanding:
Weighted average number of common shares outstanding
for computing basic earnings per share.............. 13,440,205 11,801,453 10,078,962
Dilutive effect of warrants and stock options after
application of the treasury stock method............ * * *
----------- ------------ -----------
Weighted average number of common shares outstanding
for computing diluted earnings per share............ 13,440,205 11,801,453 10,078,962
=========== ============ ===========
Net loss per share--basic and diluted................. $ (0.62) $ (2.27) $ (0.36)
=========== ============ ===========
</TABLE>
------------------------
* The following common stock equivalents are excluded from earnings per share
calculation as their effect would have been antidilutive:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
----------------------- --------- --------- ---------
<S> <C> <C> <C>
Warrants and stock options.............................. 7,722,621 7,102,242 4,073,309
</TABLE>
SEGMENT REPORTING
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 (SFAS 131), Disclosures about Segments of an Enterprise and
Related Information. Based upon definitions contained within SFAS 131, the
Company has determined that it operates in one segment.
COMPREHENSIVE INCOME
The Statement of Financial Accounting Standards No. 130 (SFAS 130),
"Reporting Comprehensive Income," establishes standards for reporting and
display of comprehensive income. Comprehensive income includes charges or
credits to equity that did not result from transactions with shareholders. SFAS
No. 130 became effective during 1998. The Company's only component of "other
comprehensive income" is unrealized gain on short-term securities
available-for-sale.
RECENT PRONOUNCEMENTS
In June 1999, Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 137). SFAS 137 is an amendment to Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative and Hedging
Activities." SFAS 137 is effective for the Company beginning January 1, 2001.
F-10
<PAGE>
AVI BIOPHARMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The Company currently does not have any derivative instruments and, accordingly,
does not expect the adoption of SFAS 137 to have an impact on its results of
operations or financial position.
3. SHAREHOLDERS' EQUITY:
In March 1996, the Company commenced a private offering wherein 712,500
shares of common stock were sold for net proceeds of $4,031,532, which included
warrants to purchase 60,201 shares of common stock at $9.00 per share. These
warrants are exercisable through the earlier of five years from issuance or
three years from the filing for an initial public offering.
In November 1996, the shareholders approved a reverse split of the Company's
outstanding Common Stock on the basis of one share for each three shares of the
then-outstanding common stock. The share information in the accompanying
financial statements has been retroactively restated to reflect the reverse
split. The Common Stock continues to have $.0001 par value. The shareholders
approved the authorization of a new class of preferred stock which includes
2,000,000 shares at $.0001 par value.
In May 1997, as a condition to its planned initial public offering, the
Company offered to holders of 1,292,973 shares of its common stock, the right to
rescind their purchase of shares of the Company's common stock. In July 1997,
the Company completed its rescission offering to certain shareholders. In this
offering, the Company repurchased 64,049 shares of its common stock for payments
totaling $408,419, which included interest expense of $119,624.
In June 1997, in its initial public offering, the Company sold 2,000,000
units (the Units), each Unit consisting of one share of the Company's common
stock, and one warrant to purchase one share of common stock for $13.50. The
Units separated immediately following issuance and now trade only as separate
securities. Net proceeds of $15,555,230 were received by the Company.
In July 1997, the Company's Underwriters exercised their over-allotment
option and purchased 300,000 additional Units at $9 per Unit, the initial public
offering price. Proceeds of $2,462,400 were received by the Company.
In December 1999, the Company completed a private offering with
institutional investors and an equity sale to a prospective corporate partner.
In the private offering, 1,857,147 shares of common stock and 628,573 warrants
to purchase common stock at $4.025 per share were issued. Substantially all of
the warrants issued in connection with the private placement are currently
exercisable and expire in five years. Net proceeds of $5,808,003 were received.
In the equity sale to the prospective corporate partner, 1,000,000 shares were
issued in exchange for net proceeds of $5,247,000 in cash and securities
including 100,000 shares of the prospective corporate partner's common stock.
Subsequent to December 31, 1999, the shares received from the prospective
corporate partner were registered and have no restrictions.
At December 31, 1999, the Company had two stock option plans, the 1992 Stock
Incentive Plan and the 1997 Stock Option Plan (the Plans). The 1992 Plan
provides for the issuance of incentive stock options to its employees and
nonqualified stock options, stock appreciation rights and bonus rights to
employees, directors of the Company and consultants. The 1997 Plan provides for
the assumption of the ImmunoTherapy Options under the Merger Agreement. The
Company has reserved 2,314,193
F-11
<PAGE>
AVI BIOPHARMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SHAREHOLDERS' EQUITY: (CONTINUED)
shares of common stock for issuance under the Plans. Options issued under the
Plans generally vest ratably over four years and expire five to ten years from
the date of grant.
The Financial Accounting Standards Board has issued SFAS 123, which defines
a fair value based method of accounting for an employee stock option and similar
equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the method of accounting prescribed by Accounting Principles Board Opinion
No. 25 (APB 25). Entities electing to remain with the accounting in APB 25 must
make pro forma disclosures of net income (loss) and, if presented, earnings
(loss) per share, as if the fair value based method of accounting defined in
SFAS 123 had been adopted. The Company has elected to account for its
stock-based compensation plans under APB 25; however, the Company has computed,
for pro forma disclosure purposes, the value of all options granted during 1999
and 1998 using the Black-Scholes options pricing model as prescribed by
SFAS 123 using the following weighted average assumptions for grants:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
----------------------- -------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate..................................... 6.25% 6.25% 6.25%
Expected dividend yield..................................... 0% 0% 0%
Expected lives.............................................. 6 Years 6 Years 6 Years
Expected volatility......................................... 91% 76% 56%
</TABLE>
Using the Black-Scholes methodology, the total value of options granted
during 1999, 1998 and 1997 was $366,767, $3,043,771 and $1,984,033,
respectively, which would be amortized on a pro forma basis over the vesting
period of the options (typically four years). The weighted average fair value of
options granted during 1999, 1998 and 1997 was $2.70, $4.08 and $3.95,
respectively. Included in options granted during 1998, are options assumed in
connection with the ImmunoTherapy Corporation acquisition as discussed in
Note 6. As the fair value of the assumed options was recorded as part of the
purchase price allocation, these assumed options have not been included in the
SFAS 123 fair value calculation.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net income and net income per share
would approximate the pro forma disclosures below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- --------------------------- -------------------------
FOR THE YEAR ENDED DECEMBER 31, AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------------------------- ----------- ----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net loss..................... $(8,278,441) $(9,867,318) $(26,733,963) $(28,791,068) $(3,615,990) $(4,949,440)
Net loss per share--basic and
diluted.................... $ (0.62) $ (0.73) $ (2.27) $ (2.44) $ (0.36) $ (0.49)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. Additional awards are anticipated in future years.
F-12
<PAGE>
AVI BIOPHARMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SHAREHOLDERS' EQUITY: (CONTINUED)
A summary of the status of the Company's stock option plans and changes are
presented in the following table:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
FOR THE YEAR ENDED DECEMBER 31, SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------------------------- --------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning
of year...................... 2,136,894 $5.32 1,240,209 $5.30 1,123,838 $4.73
Granted........................ 135,631 3.47 971,856 5.29 502,361 6.51
Exercised...................... (16,448) 4.06 (35,990) 4.64 (59,903) 4.70
Canceled....................... (60,710) 3.43 (39,181) 4.65 (326,087) 5.29
--------- ----- --------- ----- --------- -----
Options outstanding at end of
year......................... 2,195,367 5.27 2,136,894 5.32 1,240,209 5.30
========= ===== ========= ===== ========= =====
Exercisable at end of year..... 1,752,226 $5.17 1,428,798 $5.05 980,206 $5.01
========= ===== ========= ===== ========= =====
</TABLE>
At December 31, 1999, 118,826 shares were available for future grant.
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OUTSTANDING SHARES AT REMAINING CONTRACTUAL EXERCISABLE
EXERCISE PRICE DECEMBER 31, 1999 LIFE (YEARS) OPTIONS
-------------- --------------------- --------------------- -----------
<S> <C> <C> <C>
0.04$..... 12,600 5.93 12,600
3.31..... 97,631 6.05 60,139
3.69..... 33,000 8.30 5,000
3.75..... 33,334 8.92 8,333
3.81..... 134,768 5.50 86,268
3.97..... 199,696 6.17 197,176
4.56..... 576,580 2.50 576,580
4.95..... 129,843 4.98 129,843
5.00..... 5,000 4.95 --
6.00..... 79,543 5.83 52,875
6.38..... 239,007 7.36 214,007
6.63..... 520,992 8.03 340,199
6.69..... 100,000 7.70 50,000
7.94..... 5,040 3.02 5,040
8.13..... 28,333 7.84 14,166
</TABLE>
The Company has also issued warrants for the purchase of common stock in
conjunction with financing and compensation arrangements. The value of warrants
granted in 1999 have not been considered in the fair value based method of
accounting defined in SFAS 123 as such warrant grants related to the raising of
additional equity. Of the 2,166,814 warrants granted during 1998, 2,116,814 were
in connection with the ImmunoTherapy Corporation acquisition as discussed in
Note 6. The fair
F-13
<PAGE>
AVI BIOPHARMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SHAREHOLDERS' EQUITY: (CONTINUED)
value of such warrants was considered in the purchase price of ImmunoTherapy
Corporation and therefore has not been considered in the fair value based method
of accounting defined in SFAS 123. A summary of the status of the Company's
warrants and changes are presented in the following table:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
FOR THE YEAR AVERAGE AVERAGE AVERAGE
ENDED DECEMBER 31, SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------------ --------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Warrants outstanding at
beginning of year............ 4,965,348 $13.17 2,833,101 $12.88 427,434 $ 4.42
Granted........................ 628,573 4.025 2,166,814 13.36 2,700,000 13.30
Exercised...................... (16,667) 0.0003 (34,567) 0.54 (50,000) 0.10
Canceled....................... (50,000) 7.25 -- -- (244,333) 5.39
--------- ------ --------- ------ --------- ------
Warrants outstanding at end of
year......................... 5,527,254 12.22 4,965,348 13.17 2,833,101 12.88
========= ====== ========= ====== ========= ======
Exercisable at end of year..... 5,455,825 $12.33 4,965,348 $13.17 2,433,101 $12.99
========= ====== ========= ====== ========= ======
</TABLE>
In connection with the initial public offering, the Company authorized the
issuance of the Underwriters' Warrants (the Warrants) and reserved 400,000
shares of Common Stock for issuance upon exercise of such Warrants (including
the warrants to purchase common stock issuable upon exercise of the Warrants).
The Warrants entitle the holder to acquire up to an aggregate of 200,000 Units
at an exercise price of $10.80 per Unit and are currently exercisable and expire
June 2002. Each Unit consists of one share of Common Stock and one redeemable
warrant. Each warrant initially entitles the holder thereof to purchase one
share of Common Stock at a price of $13.50 per share.
The following table summarizes information about warrants outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING WEIGHTED AVERAGE
EXERCISE WARRANTS AT REMAINING CONTRACTUAL
PRICE DECEMBER 31, 1999 LIFE (YEARS) EXERCISABLE WARRANTS
-------- ----------------- --------------------- --------------------
<S> <C> <C> <C>
$0.0003.. 16,667 Varies 16,667
1.14... 5,000 Varies 5,000
4.025.. 628,573 4.97 557,144
9.00... 60,200 0.42 60,200
10.80.. 200,000 2.42 200,000
13.50.. 4,616,814 Varies 4,616,814
</TABLE>
F-14
<PAGE>
AVI BIOPHARMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES:
At December 31, 1999 and 1998, the Company had federal and state tax net
operating loss carryforwards of approximately $30,700,000 and $23,900,000,
respectively. The difference between the operating loss carryforwards on a tax
basis and a book basis is due principally to differences in depreciation,
amortization, and treatment of research and development costs. The federal
carryforwards began to expire in 1997 and the state carryforwards will begin to
expire in 2008, if not otherwise used. Of this $30,700,000, approximately
$4,150,000 relates to net operating losses assumed as part of the ImmunoTherapy
Corporation acquisition. Utilization of such losses is limited to approximately
$1,200,000 per year. In addition, the Internal Revenue Code rules under
Section 382 could limit the future use of the remaining $26,550,000 in losses
based on ownership changes and the value of the Company's stock.
The Company had a net deferred tax asset of $13,203,000 and $10,566,000 at
December 31, 1999 and 1998, primarily from net operating loss carryforwards. A
valuation allowance was recorded to reduce the net deferred tax asset to zero.
The net change in the valuation allowance for deferred tax assets was an
increase of approximately $2,637,000 and $4,306,000 for the years ended
December 31, 1999 and 1998, respectively, mainly due to the increase in the net
operating loss carryforwards.
An analysis of the deferred tax assets and liabilities as of December 31,
1999, is as follows:
<TABLE>
<CAPTION>
DEFERRED TAX DEFERRED TAX
ASSET LIABILITY TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Net operating loss carryforwards....... $12,278,000 $ -- $ 12,278,000
Depreciation........................... 2,000 -- 2,000
Research and development tax credits... 1,261,000 -- 1,261,000
Patent costs........................... -- (338,000) (338,000)
----------- --------- ------------
$13,541,000 $(338,000) 13,203,000
=========== =========
Valuation allowance.................... (13,203,000)
------------
$ --
============
</TABLE>
An analysis of the deferred tax assets and liabilities as of December 31,
1998, is as follows:
<TABLE>
<CAPTION>
DEFERRED TAX DEFERRED TAX
ASSET LIABILITY TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Net operating loss carryforwards....... $ 9,569,000 $ -- $ 9,569,000
Depreciation........................... 4,000 -- 4,000
Research and development tax credits... 1,285,000 -- 1,285,000
Patent costs........................... -- (292,000) (292,000)
----------- --------- ------------
$10,858,000 $(292,000) 10,566,000
=========== =========
Valuation allowance.................... (10,566,000)
------------
$ --
============
</TABLE>
F-15
<PAGE>
AVI BIOPHARMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LEASE OBLIGATIONS:
The Company leases office and laboratory facilities under various
noncancelable operating leases through December 2004. Rent expense under these
leases was $322,000, $293,000 and $313,000 for the years ended December 31,
1999, 1998 and 1997, respectively, and $1,762,000 for the period from July 22,
1980 through December 31, 1999.
At December 31, 1999, the aggregate noncancelable future minimum payments
under these leases are as follows:
<TABLE>
<S> <C>
Year ending December 31,
2000........................................................ $ 319,000
2001........................................................ 327,000
2002........................................................ 335,000
2003........................................................ 319,000
2004........................................................ 281,000
Thereafter.................................................. --
----------
Total minimum lease payments................................ $1,581,000
==========
</TABLE>
6. ACQUISITION:
On September 15, 1998, the Company acquired all of the equity of
ImmunoTherapy Corporation (ITC), a privately held biotechnology company based in
Seattle, Washington. The purchase consideration consisted of 2,132,592 shares of
AVI BioPharma common stock and 2,116,814 warrants to purchase AVI BioPharma
common stock. The transaction was accounted for as a purchase. In connection
with the purchase price allocation, the Company estimated that substantially all
of the intangible assets consist of research and development projects in
process. At that time, the development of these projects had not reached
technology feasibility and the technology was believed to have no alternative
future use. In accordance with generally accepted accounting principles, a
one-time charge for acquired in-process research and development of $19,473,154,
or $1.65 per share, has been reflected in the accompanying financial statements.
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
expected product sales of such products, and discounting the net cash flows to
their present value using a risk-adjusted discount rate.
Remaining development efforts for the acquired R&D projects include various
stages of clinical testing and development work to manufacture the product in
accordance with functional and commercial specifications. If none of these
products is successfully developed, the sales and profitability of the combined
company may be adversely affected in future periods.
F-16
<PAGE>
AVI BIOPHARMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. ACQUISITION: (CONTINUED)
Unaudited pro forma combined statements of operations assume the ITC acquisition
occurred at beginning of each period and include acquired in-process research
and development are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997
----------------------- ------------ -----------
<S> <C> <C>
Revenues.......................................... $ 120,351 $ 14,345
Net loss.......................................... (27,684,092) (4,940,483)
Net loss per share--basic and diluted............. $ (2.08) $ (0.40)
</TABLE>
As part of the acquisition, the Company loaned $440,000 in relocation related
costs to a former ITC executive who joined the management of the Company. The
resulting note receivable was repaid by March 31, 1999 in accordance with the
terms on the note receivable.
F-17
<PAGE>
\
AVI BIOPHARMA, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 9,580,282 $ 8,683,005
Short-term securities--available-for-sale................. 4,800,000 2,937,500
Other current assets...................................... 48,717 31,242
------------ ------------
Total Current Assets.................................... 14,428,999 11,651,747
Property and Equipment, net of accumulated depreciation and
amortization of $2,552,567 and $2,518,494................. 423,229 403,303
Patent Costs, net of accumulated amortization of $454,268
and $418,268.............................................. 849,852 844,731
Other Assets................................................ 89,309 29,847
------------ ------------
Total Assets............................................ $ 15,791,389 $ 12,929,628
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 509,874 $ 727,673
Accrued liabilities....................................... 257,101 312,481
------------ ------------
Total Current Liabilities............................... 766,975 1,040,154
Shareholders' Equity:
Preferred Stock, $.0001 par value, 2,000,000 shares
authorized; none issued and outstanding................. -- --
Common stock, $.0001 par value, 50,000,000 shares
authorized; 16,658,784 and 16,236,428 issued and
outstanding............................................. 1,666 1,624
Additional paid-in capital................................ 65,313,507 62,901,227
Accumulated other comprehensive income.................... 1,903,000 40,500
Deficit accumulated during the development stage.......... (52,193,759) (51,053,877)
------------ ------------
Total Shareholders' Equity.............................. 15,024,414 11,889,474
------------ ------------
Total Liabilities and Shareholders' Equity.............. $ 15,791,389 $ 12,929,628
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-18
<PAGE>
AVI BIOPHARMA, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, JULY 22, 1980
------------------------- (INCEPTION) TO
2000 1999 MARCH 31, 2000
----------- ----------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues, from license fees, grants and research
contracts........................................... $ 1,131,873 $ 4,115 $ 1,973,090
Operating expenses:
Research and development............................ 1,936,473 1,342,650 26,664,106
General and administrative.......................... 436,063 417,624 9,634,731
Acquired in-process research and development........ -- 59,839 19,545,028
----------- ----------- ------------
2,372,536 1,820,113 55,843,865
Other Income:
Interest income, net................................ 100,781 76,539 1,580,266
Realized gain on sale of short-term investments..... -- -- 96,750
----------- ----------- ------------
100,781 76,539 1,677,016
----------- ----------- ------------
Net loss.............................................. $(1,139,882) $(1,739,459) $(52,193,759)
=========== =========== ============
Net loss per share--basic and diluted................. $ (0.07) $ (0.13)
=========== ===========
Weighted average number of common shares outstanding
for computing basic and diluted loss per share...... 16,359,671 13,349,358
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE>
AVI BIOPHARMA, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED FOR THE PERIOD
MARCH 31, JULY 22, 1980
------------------------- (INCEPTION) TO
2000 1999 MARCH 31, 2000
----------- ----------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,139,882) $(1,739,459) $(52,193,759)
Adjustments to reconcile net loss to net cash flows used
in operating activities:
Depreciation and amortization........................... 72,722 69,812 3,126,253
Realized gain on sale of short-term
investments--available for sale....................... -- -- (96,750)
Compensation expense on issuance of common stock and
partnership units..................................... -- -- 251,992
Compensation expense on issuance of options and warrants
to purchase common stock or partnership units......... -- -- 562,353
Conversion of interest accrued to common stock.......... -- -- 7,860
Acquired in-process research and development............ -- 59,839 19,545,028
(Increase) decrease in:
Other current assets.................................. (17,475) 466,115 (48,717)
Other assets.......................................... (59,462) -- (89,309)
Net increase (decrease) in accounts payable and accrued
liabilities........................................... (273,179) (478,068) 766,975
----------- ----------- ------------
Net cash used in operating activities............... (1,417,276) (1,621,761) (28,168,074)
Cash flows from investing activities:
Proceeds from sale or redemption of short-term
investments........................................... -- -- 247,750
Purchase of property and equipment...................... (56,648) (101,707) (3,038,534)
Patent costs............................................ (41,121) (50,519) (1,360,800)
Acquisition costs....................................... -- (59,839) (2,377,616)
----------- ----------- ------------
Net cash used in investing activities............... (97,769) (212,065) (6,529,200)
Cash flows from financing activities:
Proceeds from sale of common stock, warrants, and
partnership units, net of offering costs, and exercise
of options............................................ 2,412,322 15,000 44,662,993
Buyback of common stock pursuant to rescission
offering.............................................. -- -- (288,795)
Withdrawal of partnership net assets.................... -- -- (176,642)
Issuance of convertible debt............................ -- -- 80,000
----------- ----------- ------------
Net cash provided by financing activities........... 2,412,322 15,000 44,277,556
Increase (decrease) in cash and cash equivalents.......... 897,277 (1,818,826) 9,580,282
Cash and cash equivalents:
Beginning of period..................................... 8,683,005 8,510,020 --
----------- ----------- ------------
End of period........................................... $ 9,580,282 $ 6,691,194 $ 9,580,282
=========== =========== ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES AND
FINANCING ACTIVITIES:
Short-term securities--available-for-sale received in
connection with the private offering.................. $ -- $ -- $ 2,897,000
Unrealized gain on short-term
securities--available-for-sale........................ $ 1,862,500 $ -- $ 1,903,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE>
AVI BIOPHARMA, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The financial information included herein for the three-month periods ended
March 31, 2000 and 1999, the financial information as of March 31, 2000, and the
financial information from inception (July 22, 1980) to March 31, 2000 is
unaudited; however, such information reflects all adjustments consisting only of
normal recurring adjustments which are, in the opinion of management, necessary
for a fair presentation of the financial position, results of operations and
cash flows for the interim periods. The financial information as of
December 31, 1999 is derived from AVI BioPharma, Inc.'s (the Company's)
Form 10-K. The interim financial statements should be read in conjunction with
the financial statements and the notes thereto included in the Company's
Form 10-K. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
NOTE 2. EARNINGS PER SHARE
Basic EPS is calculated using the weighted average number of common shares
outstanding for the period and diluted EPS is computed using the weighted
average number of common shares and dilutive common equivalent shares
outstanding. Given that the Company is in a loss position, there is no
difference between basic EPS and diluted EPS since the common stock equivalents
would be antidilutive.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net loss.................................................... $(1,139,882) $(1,739,459)
Weighted average number of shares of common stock and common
stock equivalents outstanding............................. -- --
Weighted average number of common shares outstanding for
computing basic earnings per share........................ 16,359,671 13,349,358
Dilutive effect of warrants and stock options after
application of the treasury stock method.................. * *
----------- -----------
Weighted average number of common shares outstanding for
computing diluted earnings per share...................... 16,359,671 13,349,358
=========== ===========
Net loss per share--basic and diluted....................... $ (0.07) $ (0.13)
=========== ===========
</TABLE>
------------------------
* The following common stock equivalents are excluded from earnings per share
calculation as their effect would have been antidilutive:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Warrants and stock options.................................. 7,803,265 7,078,051
</TABLE>
F-21
<PAGE>
AVI BIOPHARMA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3. SUBSEQUENT EVENT
In April 2000, we entered into an alliance with SuperGen, Inc. for shared
development and marketing rights for Avicine. Under the terms of the agreement,
AVI and SuperGen will equally share in future clinical development and FDA
registration costs as well as in profits from product sales in the United
States. Upon closing of the transaction in July 2000, the Company received from
SuperGen, Inc. an initial payment in the form of cash in the amount of
$5,000,000 and SuperGen common stock in exchange for 1,684,211 shares of our
common stock and a warrant to purchase up to 10% of our outstanding common
stock, subject to antidilution provisions.
F-22
<PAGE>
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT, AND THE UNDERWRITERS HAVE NOT, AUTHORIZED ANY OTHER PERSON TO PROVIDE
YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. INFORMATION CONTAINED ON
OUR WEB SITE DOES NOT CONSTITUTE A PART OF THIS PROSPECTUS. THE INFORMATION IN
THIS PROSPECTUS MAY ONLY BE ACCURATE AS OF THE DATE APPEARING ON THE COVER PAGE
OF THIS PROSPECTUS, REGARDLESS OF THE TIME THIS PROSPECTUS IS DELIVERED OR OUR
COMMON STOCK IS SOLD.
WE ARE NOT, AND THE UNDERWRITERS ARE NOT, MAKING AN OFFER TO SELL THE SHARES
IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. NO ACTION IS BEING
TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO PERMIT A PUBLIC OFFERING
OF OUR COMMON STOCK OR THE POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN ANY
SUCH JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS PROSPECTUS IN
JURISDICTIONS OUTSIDE OF THE UNITED STATES ARE REQUIRED TO INFORM THEMSELVES
ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE DISTRIBUTION
OF THIS PROSPECTUS APPLICABLE IN THIS JURISDICTION.
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 7
Forward-Looking Statements........... 12
Common Stock Market Price Data....... 13
Use of Proceeds...................... 14
Dividend Policy...................... 14
Capitalization....................... 15
Dilution............................. 16
Selected Financial Data.............. 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 18
Business............................. 21
Management........................... 31
Executive Compensation............... 34
Certain Transactions and
Relationships...................... 36
Principal Shareholders............... 37
Description of Securities............ 39
Shares Eligible for Future Sale...... 42
Underwriting......................... 44
Legal Matters........................ 46
Experts.............................. 46
Where You Can Find More Information.. 47
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
3,000,000 SHARES
[LOGO]
COMMON STOCK
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PROSPECTUS
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PAULSON INVESTMENT COMPANY, INC.
I-BANKERS SECURITIES, INC.
FIRST COLONIAL SECURITIES GROUP, INC.
JULY 27, 2000
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