<PAGE> 1
===========================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
======================
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
-------- ---------
COMMISSION FILE NUMBER 0-26034
ORAVAX, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3085209
(State or other jurisdiction (I.R.S. Employer
of incorporation of organization) Identification Number)
38 SIDNEY STREET, CAMBRIDGE, MASSACHUSETTS 02139
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 494-1339
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT: NOT APPLICABLE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
<TABLE>
NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUERS CLASS OF COMMON STOCK, AS OF
LATEST PRACTICABLE DATE.
<CAPTION>
CLASS OUTSTANDING AS OF OCTOBER 31, 1996
----- ----------------------------------
<S> <C> <C>
COMMON STOCK, $.001 PAR VALUE 9,956,760
</TABLE>
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<PAGE> 2
ORAVAX, INC.
FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
PAGE
----
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995 ............................................... 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1996 and 1995 ............. 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1996 and 1995 ....................... 5
Notes to Condensed Consolidated Financial Statements ................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .............. 9
PART II. OTHER INFORMATION ......................................... 15
- ---------------------------
SIGNATURES .......................................................... 16
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORAVAX, INC.
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
IN THOUSANDS EXCEPT SHARE DATA
---------
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 19,436 $11,882
Short-term investments 8,336 15,749
Prepaid and other current assets 292 306
-------- -------
Total current assets 28,064 27,937
Property and equipment, net 5,710 1,330
Other assets 375 116
Investment in joint venture 334 450
-------- -------
Total assets $ 34,483 $29,833
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 6,093 $ 3,413
Deferred revenue - related party 873 899
Obligation under capital leases 1,383 516
Installment debt 330 -
-------- -------
Total current liabilities 8,679 4,828
Obligation under capital leases, excluding
current portion 1,724 492
Installment debt, excluding current portion 956 -
-------- -------
Total liabilities 11,359 5,320
Stockholders' equity:
Common stock, $.001 par value; 25,000,000
shares authorized in 1996 and 1995; issued
and outstanding 9,956,633 and 7,615,865
shares in 1996 and 1995 10 8
Preferred stock, $.001 par value; 2,000,000
shares authorized; none issued or outstanding - -
Additional paid-in capital 73,421 58,061
Deferred compensation (242) (296)
Accumulated deficit (50,065) (33,260)
-------- -------
Total stockholders' equity 23,124 24,513
-------- -------
Total liabilities and stockholders' equity $ 34,483 $ 29,833
======== =======
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
<PAGE> 4
ORAVAX, INC.
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA (UNAUDITED)
-----------
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Collaborative research and
development - related party $ 1,627 $ 1,540 $ 4,901 $ 3,014
- other - - - 3,190
Grants and other revenue 378 5 746 147
Interest 396 431 960 689
------- ------- -------- -------
2,401 1,976 6,607 7,040
------- ------- -------- -------
Expenses:
Research and development 5,173 3,430 16,722 8,889
General and administrative 978 722 2,797 2,518
Interest 128 23 400 65
------- ------- -------- -------
6,279 4,175 19,919 11,472
------- ------- -------- -------
Net loss from operations (3,878) (2,199) (13,312) (4,432)
Equity in operations of joint
venture (1,254) (771) (3,493) (1,508)
------- ------- -------- -------
Net loss (5,132) (2,970) (16,805) (5,940)
------- ------- -------- -------
Accretion to redemption
value of preferred stock - - - (108)
------- ------- -------- -------
Net loss to common
stockholders $(5,132) $(2,970) $(16,805) $(6,048)
======= ======= ======== =======
Net loss per common share
and common equivalent $ (.52) $ (.39) $ (2.00) $ (1.77)
Weighted average number of
common and common
equivalent shares
outstanding 9,943,896 7,561,276 8,403,198 3,413,265
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
<PAGE> 5
ORAVAX, INC.
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS (UNAUDITED)
----------
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss from operations $(16,805) $ (5,940)
Adjustments to reconcile net loss from operations to net
cash used in operating activities:
Depreciation and amortization 1,534 475
Equity in operations of joint venture 3,493 1,508
Non-cash compensation 54 297
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 14 3
Other assets (259) (128)
Accounts payable and accrued expenses 2,680 833
Deferred revenue - related party (26) 486
-------- --------
Net cash used in operating activities (9,315) (2,466)
-------- --------
Cash flows from investing activities:
Net purchases of short-term investments 7,413 (18,868)
Expenditures for property and equipment (1,255) (364)
Proceeds from sale-leaseback of property and equipment 408 512
Investment in joint venture (3,377) (1,751)
-------- --------
Net cash provided (used) by investing activities 3,189 (20,471)
-------- --------
Cash flows from financing activities:
Proceeds from stock issuances, net 15,362 29,997
Principal payments under capital lease obligations (1,144) (375)
Principal payments of installment debt, net (538) --
-------- --------
Net cash provided by financing activities 13,680 29,622
-------- --------
Net increase in cash and cash equivalents 7,554 6,685
Cash and cash equivalents at beginning of period 11,882 3,706
-------- --------
Cash and cash equivalents at end of period $ 19,436 $ 10,391
======== ========
</TABLE>
.
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
<PAGE> 6
ORAVAX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED.
1. NATURE OF BUSINESS
OraVax, Inc. (the "Company") is a leader in the discovery and development
of oral vaccines and non-injected antibody products to prevent and treat
diseases which infect the human body at its mucosal linings.
The ultimate success of the Company is dependent upon its ability to raise
capital through equity placement, receipt of contract revenue, sale of product
and interest income on invested capital. The Company's capital requirements may
change depending upon numerous factors, including progress of the Company's
research and development programs, time required to obtain regulatory approvals,
resources the Company devotes to self-funded projects, proprietary manufacturing
methods and advanced technologies and demand for the Company's products, if and
when approved.
While management believes that additional capital will be available to fund
operations, there can be no assurance that additional funds will be available
when required, on terms acceptable to the Company.
The Company is subject to risks common to companies in the biotechnology
industry including, but not limited to, development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology and compliance with government regulations.
2. BASIS OF PRESENTATION
The consolidated balance sheet as of September 30, 1996, and the
consolidated statements of operations and cash flows for the three and nine
months ended September 30, 1996 and 1995 are unaudited, have been prepared on a
basis substantially consistent with the audited financial statements, and, in
the opinion of management, include all adjustments (consisting of normal,
recurring adjustments) necessary for a fair presentation of results for these
interim periods. The preparation of interim financial statements in conformity
with generally accepted accounting principles requires the use of management's
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the interim financial statements and the reported amounts of revenues and
expenses during the reporting period. The results for the nine months ended
September 30, 1996 are not necessarily indicative of results for the entire
year, although the Company expects to incur a significant loss for the year
ending December 31, 1996. These interim financial statements should be read in
conjunction with the annual consolidated financial statements included in the
Company's annual report filed on Form 10-K for the year ended December 31, 1995.
6
<PAGE> 7
ORAVAX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
INFORMATION WITH RESPECT TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED.
Net Loss Per Common Share
Net loss per common share is computed based upon the weighted average
number of common and common equivalent shares (using the treasury stock method)
outstanding after certain adjustments described below. Common equivalent shares
are not included in the per-share calculations where the effect of their
inclusion would be anti-dilutive, except that, in accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 83, all common and common
equivalent shares issued during the twelve-month period prior to the effective
date (June 8, 1995) of the initial public offering (the "IPO") have been
included in the calculation as if they were outstanding for all periods prior to
the IPO, using the treasury stock method and the IPO price of $10.00 per share.
In the computation of the 1995 net loss per common share, accretion of preferred
stock is included as an increase to net loss attributable to common
stockholders.
3. FOLLOW-ON COMMON STOCK OFFERING
In July 1996, the Company closed its follow-on public offering of an
aggregate of 2,300,000 shares of its common stock at $7.25 per share with net
proceeds of $15,215,000. The Company had approximately 10 million shares of
common stock outstanding as of September 30, 1996.
4. JOINT VENTURE
In March, 1995, the Company entered into a collaboration (the "Joint
Venture") with Pasteur Merieux Serums & Vaccins S.A. ( "Merieux") for the
development, manufacturing, marketing and sale of immuno-therapeutic and
preventive vaccines against H. Pylori infections in humans. Under the Joint
Venture, OraVax and Merieux have agreed to develop vaccines which use the urease
protein or any of its sub-units as antigens (the "Target Products"). OraVax and
Merieux will share equally in profits from the sales of the Target Products and
in all future research, development, clinical and commercialization costs.
Merieux made an initial milestone payment of $2.6 million directly to OraVax,
paid the Company directly $0.6 million for research and development conducted in
the first quarter of 1995 and purchased $2.5 million of the Company's Series
Preferred Stock which was subsequently converted to common stock. Merieux
purchased an additional $1.0 million of common stock in the Company's initial
public offering. In addition, Merieux agreed to pay OraVax up to an additional
$12 million during the development period, subject to the achievement of certain
clinical and regulatory milestones, of which $0.6 million was paid to the
Company in December 1995. Merieux is providing technical expertise and will also
provide marketing to the Joint Venture. Beginning in the second quarter of 1995,
research, development and commercialization activities of the Joint Venture were
conducted through two equally controlled partnerships, which have contracted
with OraVax and Merieux to perform research and development and clinical trial
activities. OraVax earned $4,901,000 and $3,014,000 under such contracts in the
nine months ended September 30, 1996 and 1995, respectively. The Joint Venture
provides for certain rights of termination, but, absent any breach, neither
party may unilaterally terminate the Joint Venture prior to March 31, 1997.
From inception of the Joint Venture through September 30, 1996, OraVax and
Merieux together have invested approximately $12.6 million to fund the Joint
Venture Partnerships' operations.
7
<PAGE> 8
ORAVAX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
INFORMATION WITH RESPECT TO THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED.
Total research expenditures by the Joint Venture Partnerships under its
research contracts were $6,980,000 in the nine months ended September 30, 1996
and $3,014,000 in the nine months ended September 30, 1995. OraVax accounts for
its investments in the Joint Venture Partnerships under the equity method of
accounting and, accordingly, recorded its $3,493,000 and $1,508,000 share of the
Joint Venture Partnerships' net losses in the nine months ended September 30,
1996 and 1995, respectively.
<TABLE>
Following are the summarized results of operations of the Joint Venture for
the three and nine months ended September 30, 1996 and 1995.
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Contract research expense
- OraVax $ 1,627,000 $ 1,540,000 $ 4,901,000 $ 3,014,000
- Merieux 600,000 - 1,800,000 -
- Other 279,000 - 279,000 -
----------- ----------- ----------- -----------
Total research expense 2,506,000 1,540,000 6,980,000 3,014,000
----------- ----------- ----------- -----------
Net loss $(2,506,000) $(1,540,000) $(6,980,000) $(3,014,000)
=========== =========== =========== ===========
</TABLE>
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since its inception in 1990, the Company has been engaged in the discovery
and development of oral vaccines and non-injected antibody products to prevent
or treat human infectious diseases.
To date, the Company has not received any revenues from the sale of
products and does not expect to receive any such revenues for at least several
years. The Company's losses incurred since inception resulted principally from
expenditures under its research and development programs and clinical trials and
the Company expects to incur significant operating losses over the next several
years due primarily to expanded research and development efforts, preclinical
testing and clinical trials of its product candidates, the acquisition of
additional technologies, the establishment of manufacturing capability and the
performance of commercialization activities. Results of operations may vary
significantly from quarter to quarter depending on, among other factors, the
progress of the Company's research and development efforts, the receipt, if any,
of milestone payments, the timing of certain expenses and the establishment of
collaborative research agreements.
In July 1996, the Company closed a follow-on public offering of its common
stock with net proceeds of $15,215,000. Cash and investments at September 30,
1996 were $27,772,000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1995
The Company's total revenues increased to $2,401,000 in the three months
ended September 30, 1996 from $1,976,000 in the three months ended September 30,
1995. In the three months ended September 30, 1996, the Company's revenues
consisted of $1,627,000 of collaborative research revenues earned under the
Company's collaboration (the "Joint Venture") with Pasteur Merieux Serums &
Vaccins S.A. ("Merieux"), $378,000 from government grants and an initial license
fee earned in connection with sublicensing its Cag A antigen for use in
diagnostic tests and $396,000 in interest earned on invested funds. In the three
months ended September 30, 1995, the Company's revenues consisted of $1,540,000
of collaborative research revenues earned by the Company under the Joint
Venture, $5,000 from government grants and $431,000 in interest earned on
invested funds.
The Company's total costs and expenses increased to $6,279,000 in the three
months ended September 30, 1996 from $4,175,000 in the three months ended
September 30, 1995. Research and development expenses increased 51% to
$5,173,000 in the three months ended September 30, 1996 from $3,430,000 in the
three months ended September 30, 1995, reflecting growth in the Company's
primary product development programs, principally from clinical trials.
Significant contributors to the Company's increased research and development
expenses during the third quarter of 1996 included conducting Phase 2 clinical
trials under its H. pylori program, and conducting Phase 3 clinical trials under
its RSV program in four countries in the Southern Hemisphere. The 35% increase
in general and administrative expenses to $978,000 in the three months ended
September 30, 1996 from $722,000 in the three months ended September 30, 1995
resulted principally from increased administrative costs incurred in support of
expanded research and development. Interest expense increased to $128,000 in the
three months ended September 30, 1996 from $23,000 in the three months ended
September 30, 1995 due to the assumption of
9
<PAGE> 10
capitalized leases and installment debt associated with the acquisition of
equipment and leasehold improvements for the Company's manufacturing facility in
January 1996.
OraVax accounts for its investment in the Joint Venture Partnerships,
through which the Joint Venture began conducting its research beginning in the
second quarter of 1995, under the equity method of accounting. Accordingly, the
Company recorded its $1,254,000 and $771,000 share of the Joint Venture
Partnerships' losses during the three months ended September 30, 1996 and 1995,
respectively. The increase was principally attributable to increased budgeted
research activities of the Joint Venture in 1996 as compared with 1995.
The Company incurred a net loss of $5,132,000 in the three months ended
September 30, 1996 compared to a net loss of $2,970,000 in the three months
ended September 30, 1995.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1995
The Company's total revenues decreased to $6,607,000 in the nine months
ended September 30, 1996 from $7,040,000 in the nine months ended September 30,
1995. In the nine months ended September 30, 1996, the Company's revenues
consisted of $4,901,000 of collaborative research revenues earned under the
Company's collaboration (the "Joint Venture") with Pasteur Merieux Serums &
Vaccins S.A. ("Merieux") which was entered into during the first quarter of
1995, $746,000 from government grants and an initial license fee earned in
connection with sublicensing its Cag A antigen for use in diagnostic tests and
$960,000 in interest earned on invested funds. In the nine months ended
September 30, 1995, the Company's revenues consisted of $2,600,000 of milestone
payments paid directly to the Company by Merieux, $590,000 and $3,014,000 of
collaborative research revenues paid to the Company by Merieux and the Joint
Venture, respectively, $147,000 from government grants and $689,000 in interest
earned on invested funds.
The Company's total costs and expenses increased to $19,919,000 in the nine
months ended September 30, 1996 from $11,472,000 in the nine months ended
September 30, 1995. Research and development expenses increased 88% to
$16,722,000 in the nine months ended September 30, 1996 from $8,889,000 in the
nine months ended September 30, 1995, principally reflecting growth in the
Company's primary product development programs. Significant contributors to the
Company's increased research and development expenses during the first three
quarters of 1996 included conducting Phase 2 clinical trials under both its H.
pylori and RSV programs, as well as manufacturing of clinical materials for,
commencing and conducting Phase 3 clinical trials under its RSV program in the
Southern Hemisphere. There was a 11% increase in general and administrative
expenses to $2,797,000 in the nine months ended September 30, 1996 from
$2,518,000 in the nine months ended September 30, 1995. This was the net result
of increased administrative costs in 1996 incurred for compliance with the
information reporting requirements of the Securities and Exchange Commission, as
well as increased patent and other administrative costs necessary to support the
growth of research and development, offset by one-time expenses associated with
the consummation of the Joint Venture agreements in 1995. Interest expense
increased to $400,000 in the nine months ended September 30, 1996 from $65,000
in the nine months ended September 30, 1995 due to assumption of capitalized
leases and installment debt associated with the acquisition of equipment and
leasehold improvements for the Company's manufacturing facility in January 1996.
The Company recorded its $3,493,000 and $1,508,000 share of the Joint
Venture Partnerships' losses during the nine months ended September 30, 1996 and
1995, respectively. The increase was principally attributable to nine months of
research activity under an expanded Joint Venture budget in 1996 as compared
with only six months of related activity in 1995.
The Company incurred a net loss of $16,805,000 in the nine months ended
September 30, 1996 compared to a net loss of $5,940,000 in the nine months ended
September 30, 1995.
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<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
In January and March 1995, the Company sold an aggregate of 216,237 shares
of Series Preferred Stock for net cash proceeds of $9.2 million. These shares
were converted to common stock upon the closing of the Company's initial public
offering in September 1995.
In March 1995, the Company entered into a Joint Venture with Merieux for
the development, manufacturing, marketing and sale of immuno-therapeutic and
preventive vaccines against H. pylori infections in humans. Under the Joint
Venture, OraVax and Merieux agreed to develop vaccines which use the urease
protein or any of its sub-units as an antigen (the "Target Products"). OraVax
and Merieux will share equally in profits from the sales of the Target Products
and in all future research, development, clinical and commercialization costs.
OraVax and Merieux estimate that research, development and clinical costs will
exceed $50.0 million. Merieux is providing technical expertise and will also
provide marketing expertise to the Joint Venture. Merieux made an initial
milestone payment of $2.6 million directly to OraVax, paid the Company directly
$0.6 million for research and development conducted in the first quarter of 1995
and purchased $2.5 million of the Company's Series Preferred Stock.
Subsequently, Merieux purchased an additional $1.0 million of common stock in
the Company's initial public offering. In addition, Merieux agreed to pay the
Company directly up to $12.0 million during the development period, subject to
the achievement of certain clinical and regulatory milestones, of which $0.6
million was paid to OraVax in December 1995. However, there can be no assurance
that the milestones which trigger such future payments will be achieved.
Beginning in the second quarter of 1995, research, development and
commercialization activities of the Joint Venture were conducted through two
equally controlled partnerships which have contracted with OraVax to perform
research and development and clinical trial activities. OraVax earned $4.9
million under these contracts in the first three quarters of 1996. The Joint
Venture provides for certain rights of termination, but, absent any breach,
neither party may unilaterally terminate the Joint Venture prior to March 31,
1997.
In September 1995, the Company sold 2,300,000 shares of its common stock
for $10.00 per share in an initial public offering, providing net proceeds of
approximately $20.7 million.
In 1995, the Company entered into a five-year operating lease, with renewal
options, to consolidate its current research and administrative operations and
provide for its longer-term expansion plans in an approximately 53,000 square
foot facility in Cambridge, Massachusetts. Occupancy of the new facility began
in December 1995. There were no material impairments of long-lived assets as a
result of the move.
In January 1996, the Company leased an approximately 47,000 square foot
GMP-compliant manufacturing facility in Canton, Massachusetts and acquired
related equipment and leasehold improvements from the former tenant. The
facility is intended to be used for commercial production of the Company's
monoclonal antibody (HNK20) designed to prevent viral pneumonia in children
caused by respiratory syncytial virus. This facility was specifically designed
and equipped by the former tenant for the manufacture of monoclonal antibodies
for pharmaceutical use, although other production uses are possible. Existing
building and capital equipment leases, which include renewal and purchase
options, were transferred to the Company. In addition, the Company purchased
leasehold improvements and other related assets from the former tenant, payable
in installments through 1999.
The costs to lease and equip these facilities will be funded in whole, or
in part, either through existing cash and investments, proceeds from offerings
of securities, or other methods of financing including mortgage or lease
financing, if available to the Company on acceptable terms. In addition, the
Company expects to continue its current practice of leasing most of its capital
equipment, provided such lease financing continues to be available to the
Company on acceptable terms.
11
<PAGE> 12
In July 1996, the Company closed its follow-on public offering of an
aggregate of 2,300,000 shares of its common stock at $7.25 per share for net
proceeds of $15,215,000.
The Company's aggregate cash and investments were $27,772,000 at September
30, 1996, an increase of $141,000 since December 31, 1995. Cash used by
operations during the nine months ended September 30, 1996, principally to
support research and development, was $9,315,000. The Company expended
$1,255,000 for property and equipment, of which $408,000 was recovered under
sale-leaseback arrangements, and repaid $1,144,000 of its capital lease
obligations during the period. In addition, the Company invested $3,377,000 in
the Joint Venture Partnerships and repaid $538,000 of installment debt, net of
accrued interest, during the nine months ended September 30, 1996.
Since inception, the Company's cash expenditures have exceeded its
revenues. Operations have been funded principally through public and private
placements of equity securities, equipment lease financing, revenues from the
Company's Joint Venture with Merieux, government grants and interest income. The
Company's future capital requirements will depend on many factors, including,
but not limited to, the progress of its research and development programs, the
progress of preclinical and clinical testing, 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, changes in the Company's existing
research relationships, the ability of the Company to establish collaborative
arrangements, the development of commercialization activities and arrangements,
and the acquisition of additional facilities and capital equipment.
The Company plans to finance these cash needs in the near term principally
through its existing cash reserves, together with interest earned thereon,
revenues, payments and reimbursements under the Company's Joint Venture with
Merieux and facilities and equipment financing. The Company believes that its
capital resources will be sufficient to meet the Company's operating expenses
and capital requirements through approximately the third quarter of 1997. The
Company will require additional funds to conduct, if required, a Phase 3 trial
in the United States of its HNK20 product candidate and for HNK20 manufacturing
start up. Moreover, changes in the Company's research and development plans or
other events affecting the Company's operations may result in accelerated or
unexpected expenditures. In addition, the Company will need substantial
additional capital to fund its operations for the manufacturing and marketing of
any of its successful product candidates. The Company intends to seek such
additional funding through public or private financings or collaborative other
arrangements with corporate partners. If additional funds are raised by issuing
equity securities, further dilution to existing stockholders may result and
future investors may be granted rights superior those of existing stockholders.
There can be no assurance, however, that additional financing will be available
from any of these sources, or, if available, can be obtained on terms
satisfactory to the Company. The Company's inability to obtain needed funding on
satisfactory terms may require the Company to delay, curtail or eliminate one or
more of its planned product development programs, scale back its planned
manufacturing operations or enter into collaborative arrangements that may
require the Company to issue additional equity or to relinquish rights to
certain technologies or product candidates that the Company would not otherwise
issue or relinquish.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's future operating results are difficult to predict and may be
affected by a number of factors, including the following, that could cause
actual results to differ materially from those indicated by the forward-looking
statements made herein and presented elsewhere by management from time to time.
EARLY STAGE OF PRODUCT DEVELOPMENT. The products under development by the
Company will require significant additional research and development efforts,
including extensive clinical testing and regulatory approval, prior to
commercial use. The Company's potential products are subject to the risks of
failure inherent in the development of pharmaceutical products based on new
technologies. These risks include the possibilities that the Company's
therapeutic approach will not be successful, that any or all of
12
<PAGE> 13
the Company's potential products will be found to be unsafe, ineffective, toxic
or otherwise fail to meet applicable regulatory standards or receive necessary
regulatory clearances, that the potential products, if safe and effective, will
be difficult to develop into commercially viable products, to manufacture on a
large scale or be uneconomical to market, that proprietary rights of competitors
or other parties will preclude the Company from marketing such products; or that
competitors or other parties will market superior or equivalent products.
FUTURE CAPITAL NEEDS. In addition, the Company will require substantial
additional funds in order to continue its research and development programs,
preclinical and clinical testing of its product candidates and to conduct full
scale manufacturing and marketing of any pharmaceutical products that may be
developed. The Company's capital requirements depend on numerous factors,
including but not limited to the progress of its research and development
programs, the progress of preclinical and clinical testing, 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, changes in the
Company's existing research relationships, the ability of the Company to
establish collaborative arrangements, the development of commercialization
activities and arrangements, and the purchase of additional facilities and
capital equipment. Based upon its current plans, the Company believes that it
has sufficient funds to fund the Company's operating expenses and meet its
capital requirements approximately the third quarter of 1998. There can be no
assurance, however, that changes in the Company's research and development
plans, acquisitions or other events affecting the Company's operations will not
result in accelerated or unexpected expenditures. Thereafter, the Company will
need to raise substantial additional capital to fund its operations. There can
be no assurance, however, that additional financing will be available, or if
available, will be available on acceptable or affordable terms.
MANUFACTURING LIMITATIONS. At present, the Company's ability to manufacture
its products is limited to clinical trial quantities. The Company does not have
the capability to manufacture commercial quantities of products. The Company's
long-term strategy is to develop manufacturing facilities for producing both
pilot-scale and commercial quantities of its products. To ensure compliance with
current Good Manufacturing Practices ("cGMP") imposed by the FDA, OraVax will
need to establish sufficient technical staff to oversee all product operations,
including quality control, quality assurance, technical support and
manufacturing management. The Company may enter into arrangements with contract
manufacturing companies to expand its own production capacity in order to meet
requirements for its product candidates. If the Company chooses to contract for
manufacturing services and encounters delays or difficulties in establishing
relationships with manufacturers to produce, package and distribute its finished
pharmaceutical or other medical products (if any), clinical trials, market
introduction and subsequent sales of such products would be adversely affected.
Moreover, contract manufacturers must operate in compliance with cGMP. The
Company's potential dependence upon third parties for the manufacture of its
products may adversely affect the Company's profit margins and its ability to
develop and deliver such products on a timely and competitive basis.
RISKS ASSOCIATED WITH COLLABORATIVE ARRANGEMENTS. The Company's product
development strategy may require the Company to enter into various additional
arrangements with corporate, government and academic collaborators, licensors,
licensees and others. Therefore, the Company may be dependent upon the
subsequent success of these outside parties in performing their
responsibilities. There can be no assurance that the Company will be able to
establish additional collaborative arrangements or license agreements that the
Company deems necessary or acceptable to develop and commercialize its potential
pharmaceutical products or that such collaborative arrangements or license
agreements will be successful.
PATENT AND PROPRIETARY RIGHTS. The Company seeks to protect its trade
secrets and proprietary know-how, in part, through confidentiality agreements
with its employees, consultants, advisors and collaborators. There can be no
assurance that these agreements will not be violated by the other parties, that
OraVax will have adequate remedies for any breach, or that the Company's trade
secrets will not otherwise become known or be independently developed by
competitors. Certain of the technology
13
<PAGE> 14
that may be used in the products of OraVax is not covered by any patent or
patent application. There can be no assurance that any pending patent
applications relating to the Company's product candidates will result in patents
being issued. Moreover, there can be no assurance that any such patents will
afford protection against competitors with similar technology. There may be
pending or issued third-party patents relating to the product candidates of
OraVax. OraVax may need to acquire licenses to, or to contest validity of, any
such third party patents. It is likely that significant funds would be required
to defend any claim that OraVax infringes a third-party patent, and any such
claim could adversely affect sales of the challenged product of OraVax until the
claim is resolved. There can be no assurance that any license required under any
such patent would be made available.
GOVERNMENT REGULATION. The rigorous preclinical and clinical testing
requirements and regulatory approval process of the FDA and of foreign
regulatory authorities can take a number of years and require the expenditure of
substantial resources. The Company has limited experience in conducting and
managing preclinical and clinical testing necessary to obtain government
approvals. There can be no assurance that the Company will be able to obtain the
necessary approvals for clinical testing or for the manufacturing and marketing
of any products that it develops. Additional government regulation may be
established that could prevent or delay regulatory approval of the Company's
product candidates. Delays in obtaining regulatory approvals would adversely
affect the marketing of any products developed by the Company and the Company's
ability to receive product revenues or royalties. If regulatory approval of a
potential product is granted, such approval may include significant limitations
on the indications for which such product may be marketed. Even if initial
regulatory approvals for the Company's product candidates are obtained, the
Company, its products and its manufacturing facilities are subject to continual
review and periodic inspection. The regulatory standards for manufacturing are
applied stringently by the FDA. Discovery of previously unknown problems with a
product, manufacturer or facility may result in restrictions on such product or
manufacturer or facility, including warning letters, fines, suspensions of
regulatory approvals, product recalls, operating restrictions, delays in
obtaining new product approvals, withdrawal of the product from the market, and
criminal prosecution. Other violations of FDA requirements can result in similar
penalties.
UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT. Government and other third-party
payers are increasingly attempting to contain healthcare costs by limiting both
coverage and the level of reimbursement for new products approved for marketing
by the FDA and by refusing, in some cases, to provide any coverage for uses of
approved products for disease indications for which the FDA has not granted
marketing approval. If adequate coverage and reimbursement levels are not
provided by government and third party payers for uses of the Company's
products, the market acceptance of these products would be adversely affected.
Because of these and other factors, past financial performance should not
be an indicator of future performance. Investors should not use historical
trends to anticipate future results and should be aware that the trading price
of the Company's common stock may be subject to wide fluctuations in response to
quarter-to-quarter variations in operating results, changes in the biotechnology
and pharmaceutical industries and recommendations by analysts or other events.
14
<PAGE> 15
PART II: OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings
Not Applicable
ITEM 2. Changes in Securities
Not Applicable
ITEM 3. Default Upon Senior Securities
Not Applicable
ITEM 4. Submission of Matters to a Vote of Securities Holders
Not Applicable .
ITEM 5. Other Information
Not Applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed during
the quarter ended September 30, 1996.
15
<PAGE> 16
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OraVax, Inc.
Date: November 12, 1996 /s/ Lance K. Gordon
-------------------- ------------------------------------------
Lance K. Gordon
President and Chief Executive Officer
Date: November 12, 1996 /s/ Keith S. Ehrlich
-------------------- ------------------------------------------
Keith S. Ehrlich
Vice President, Finance and Administration
and Chief Financial Officer (Principal
Financial and Accounting Officer)
16
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