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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934 for the fiscal year ended December 31, 1996
Transition Report Pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
Commission File Number: 0-20711
VIRUS RESEARCH INSTITUTE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3098869
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification No.)
61 MOULTON STREET, CAMBRIDGE, MA 02138
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 864-6232
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on
January 31, 1997 as reported on the Nasdaq National Market, was approximately
$33,167,000. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of January 31, 1997, Registrant had outstanding 8,846,227 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's 1997 Annual Meeting of
Stockholders to be held May 1, 1997 are incorporated by reference in Part III of
this Form 10-K.
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FORWARD-LOOKING STATEMENTS:
In addition to historical information, this Form 10-K includes
forward-looking statements. These statements involve risks and uncertainties
that could cause actual results to differ from those reflected in the
forward-looking statements. Certain factors that might cause such a difference
are discussed in the second paragraph of the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
Page 15 of this Form 10-K.
PART I
Item 1. Business
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GENERAL
Virus Research Institute, Inc. (the "Company") is engaged in the
discovery and development of vaccine delivery systems and improved and novel
vaccines for adults and children. The Company is developing a portfolio of
proprietary vaccine delivery systems designed to improve the efficacy, lower the
cost of administration and improve patient compliance for a variety of vaccine
products. As part of the Company's strategy to bring its vaccine delivery
technologies to market, the Company collaborates with corporate partners that
offer substantial market presence, unique antigens and/or complementary
technologies. The Company and its collaborators currently are applying the
Company's vaccine delivery systems to develop vaccines for the prevention of
influenza, Lyme disease and H. pylori infections. The Company has entered into
agreements with Pasteur Merieux Connaught ("PMC"), Pasteur Merieux-OraVax
("PM-O") and CSL Ltd., Australia ("CSL") pursuant to which these companies may
utilize the Company's vaccine delivery systems in developing a number of
vaccines. The Company is also developing its own proprietary vaccines utilizing
antigens licensed exclusively by the Company, including an oral vaccine for
rotavirus infection, a gastrointestinal disease of infants, and a vaccine for
HSV2, the virus that causes genital herpes.
While vaccines have proven to be safe and effective for the prevention
of certain infectious diseases, the Company believes that there is significant
potential for improvement, including: enhancement of the immune response;
reduction in the number of doses required for an effective immune response;
increase in the percentage of the population responding to certain vaccines;
delivery of vaccines through methods other than by injection; and stimulation of
a mucosal immune response. To address these shortcomings, the Company is
developing vaccine delivery systems that may lead to more effective and less
costly vaccines, increased patient compliance and the introduction of new
vaccines.
The Company's strategy is to utilize its expertise in the design and
application of vaccine delivery systems to develop vaccine products for
infectious diseases that have significant and growing market potential. The
Company is developing three vaccine delivery systems. The Adjumer(TM) vaccine
delivery system utilizes a novel polymer, which is a synthetic polyphosphazene
derivative ("PCPP"), as an adjuvant for use with a variety of antigens
administered by injection. The Company believes that Adjumer(TM)-formulated
vaccines will be capable of producing an enhanced and longer-lived immune
response with fewer injections. In preclinical studies, Adjumer(TM)-formulated
vaccines elicited an immune response that was greater than either vaccines
formulated with alum, the only approved adjuvant for a commercial use on humans,
or non-adjuvanted vaccines. The Micromer(TM) vaccine delivery system utilizes a
mixture of PCPP and antigens formed into hydrogel microparticles for the
intranasal and oral delivery of vaccines. Mucosal vaccine delivery has potential
advantages over conventional delivery by injection, including ease of
administration and the generation of immunity at the mucosal surfaces, where
most infectious organisms enter the body, as well as the generation of systemic
(blood and other organs) immunity. The VibrioVec(TM) vaccine delivery system
utilizes a recombinant bacterial vector for the oral delivery of antigens to the
gastrointestinal tract. The Company believes that VibrioVec(TM)-delivered
vaccines will be capable of inducing a systemic and mucosal immune response.
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VACCINE OVERVIEW
THE VACCINE MARKET. Vaccines have long been recognized as a safe and
cost-effective method for preventing infection caused by certain bacteria and
viruses. The Centers for Disease Control and Prevention (the "CDC") have
estimated that every dollar spent on vaccination saves $16 in healthcare costs.
There are currently 16 vaccines in routine use in the United States against such
life-threatening infectious organisms as tetanus, diphtheria, poliovirus,
hepatitis B virus, Haemophilus influenzae B, measles, mumps and rubella. From
1990 to 1995, annual worldwide vaccine sales increased from $1.6 billion to $3.6
billion, a compound annual growth rate of approximately 17.5%. The Company
believes that this growth may be accelerated as a result of advances in vaccine
technologies and formulations that address the shortcomings of existing
vaccines. Areas of potential improvement include enhancement of immune
responses, which could lead to a reduction in the number of doses required for
effective protection as well as effective immunization in a higher percentage of
the population, and delivery of vaccines through methods other than injection.
The vaccine market may also expand due to the introduction of new purified
antigens, produced as a result of advances in molecular biology. The Company
also believes that the growing awareness and incidence of certain infectious
diseases, such as H. pylori, hepatitis C virus, HIV1 and HSV2 infection, could
further expand the vaccine market.
THE IMMUNE SYSTEM AND VACCINES. The function of the human immune
system is to respond to pathogens, including infectious bacteria and viruses,
that enter the body. However, a pathogen may establish an infection and cause
disease before it is eliminated by an immune response. Antibodies are produced
as part of the immune response to antigens, which are components of the
pathogen. These antibodies can continue to circulate in the human body for many
years, providing continued protection against reinfection by the same pathogen.
Protective antibodies can be produced in both the systemic and mucosal
branches of the immune system. The systemic immune system produces IgG
antibodies to protect against infection occurring in blood and deep tissue. The
mucosal immune system produces IgA antibodies that protect against infection
occurring in the mucosal layer lining the digestive, respiratory and
genitourinary tracts. Mucosal immunity may act as a first line of defense, by
attacking pathogens at the point of entry into the body, prior to systemic
penetration, as well as by targeting certain pathogens such as H. pylori,
influenza and rotavirus that propagate exclusively at the mucosal layer.
Vaccines are a pre-emptive means of generating a protective antibody
response. A vaccine consists of either a weakened pathogen or pathogen-specific,
non-replicating antigens which are deliberately administered to induce the
production of antibodies. When weakened pathogens are used as a vaccine, they
replicate in the body, extending presentation to the immune system and inducing
the production of antibodies without causing the underlying disease. When
non-replicating antigens are used as a vaccine, they must be delivered in
sufficient quantity and remain in the body long enough to generate an effective
antibody response. To achieve this goal, many vaccines require multiple
administrations. Of the 16 vaccines currently in routine use, 14 are delivered
by injection and stimulate only systemic immunity. Only polio and typhoid
vaccines can be administered orally and induce both a mucosal and a systemic
immune response. Both of these vaccines are live, weakened pathogens that
localize in the intestines and do not require a separate vaccine delivery
system.
ADJUVANTS. The antigens contained in many injectable vaccines will not
produce an immune response sufficient to confer protection against infection and
require the use of an adjuvant to sustain the presentation of the antigens to
the human immune system. Alum (aluminum hydroxide) is the only adjuvant
currently approved by the FDA for commercial use in humans. While alum has
gained widespread use, it does not sufficiently enhance the immune response to
permit administration of many existing injected vaccines in a single dose. In
the case of certain vaccines, such as influenza, alum is ineffective as an
adjuvant.
The Company believes that alum will not prove to be sufficiently
effective for use with many of the new purified recombinant antigens being
developed. Further, alum cannot be used for mucosal delivery of vaccines.
Accordingly, the Company believes that there is a significant need for a new
adjuvant that is safe, works with a wide variety of antigens, induces a
protective immune response with only one or two injections and can be
administered mucosally. These attributes could result in certain benefits,
including cost savings and improved patient compliance.
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COMPANY VACCINE DELIVERY SYSTEMS
<TABLE>
The Company is developing a portfolio of proprietary vaccine delivery
systems designed to improve the efficacy, lower the cost of administration and
improve patient compliance for a variety of vaccine products. The following
summarizes the Company's three main vaccine delivery systems:
<CAPTION>
Delivery System Composition Delivery Method Potential Benefits1
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<S> <C> <C> <C>
Adjumer(TM) Water Soluble Polymer Injectable Enhanced systemic immune
response; fewer injections
Micromer(TM) Polymer Microparticles Mucosal Systemic and mucosal immune
responses; no injections
VibrioVec(TM) Genetically Engineered Oral Systemic and mucosal immune
Bacterial Vector responses; targeted
delivery; no injection;
single dose
- -----------------------------
<FN>
(1) Based upon preclinical studies conducted by the Company. The Company's vaccine delivery
systems are in various stages of development. The summary information included in the
above table is qualified in its entirety by the detailed discussion of each of the
vaccine delivery systems that follows.
</TABLE>
ADJUMER(TM). The Company is developing Adjumer(TM), a proprietary
vaccine delivery system as an adjuvant to enhance the immune response to
injected vaccines. Adjumer(TM) is a water soluble, synthetic derivative of the
polymer polyphosphazene (PCPP). The water soluble nature of PCPP facilitates a
simple aqueous-based manufacturing process for vaccines, thereby preserving the
integrity of the antigen.
In preclinical studies conducted by the Company, Adjumer(TM)
demonstrated sustained presentation of influenza, hepatitis B, HSV2, HIV1 and
tetanus antigens to the immune system. In those preclinical studies, single
intramuscular injections of Adjumer(TM)-formulated vaccines elicited a higher
immune response than both alum-formulated vaccines and non-adjuvanted vaccines
as measured by resulting IgG antibody levels. In additional preclinical studies,
an Adjumer(TM)-formulated influenza vaccine using lower antigen doses sustained
higher antibody levels over a longer time period than both alum-formulated
vaccines and non-adjuvanted vaccines. In certain other preclinical studies
Adjumer(TM)-formulated vaccines produced an effective immune response in a
higher percentage of animals than in animals receiving existing vaccine
formulations. Furthermore, in these studies, as well as tests conducted using
Adjumer(TM) alone, the Company observed no material adverse reactions when
Adjumer(TM) was administered at effective levels.
Based on these preclinical results, the Company believes that an
Adjumer(TM)-formulated vaccine may provide a number of benefits over existing
injected vaccines. These benefits include reducing the number of doses required
for an effective immune response, thereby improving compliance; providing cost
savings as a result of the reduction in the number of doses and the amount of
antigen required; and increasing the time period over which immune protection
can be sustained. In addition, based on the results of these preclinical
studies, the Company believes that an Adjumer(TM)-formulated vaccine may be able
to induce an immune response in a number of subjects who would not otherwise
respond to existing vaccines. The first human clinical trials of a vaccine using
Adjumer(TM) as a delivery system commenced in 1996. See "Product Development
Programs."
MICROMER(TM). The Company is conducting ongoing research on
Micromer(TM), a proprietary vaccine delivery system designed to facilitate the
mucosal (intranasal or oral) delivery of antigens and stimulate both the
systemic and mucosal branches of the immune system. The focus of the Company's
current efforts are on intranasal delivery. Micromer(TM) is synthesized
utilizing a manufacturing process in which PCPP and an antigen are formulated
into hydrogel microparticles. The Company believes that the physical
characteristics of these microparticles will facilitate absorption by mucosal
surfaces.
In preclinical studies conducted by the Company, several
Micromer(TM)-formulated antigens delivered intranasally elicited both a mucosal
(IgA) immune response and a systemic (IgG) immune response. IgA antibodies
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were detected at all mucosal sites, and the level of IgG antibodies was
comparable to the level obtained through Adjumer(TM)-formulated injections of
the same antigen. A Micromer(TM)-formulated influenza vaccine required only a
single, intranasal dose to provide an immune response sufficient to protect the
animals against subsequent infection by the influenza virus. In addition to
conducting further research on the Micromer(TM) vaccine delivery system, the
Company has commenced research on additional Micromer(TM)-formulated vaccines.
VIBRIOVEC(TM). The Company is developing VibrioVec(TM), a proprietary
vaccine delivery system that uses a bacterial vector for the oral delivery of
antigens. This vector is a live organism that has been genetically altered to
make it non-virulent, incapable of reacquiring virulence and capable of
delivering selected antigens. VibrioVec(TM) is an attenuated form of the
bacterium Vibrio cholerae.
In preclinical studies conducted by the Company, single, oral doses of
VibrioVec(TM) engineered to express genes encoding antigens from selected
bacteria have generated systemic and mucosal immune responses that protected
against infection from the virulent organism. In addition, in 1995 the Company
completed Phase II human clinical studies involving more than 100 subjects
administering VibrioVec(TM) as a potential cholera vaccine. The subjects in this
study showed no clinically significant vaccine-related side effects. Separate
clinical trials will be needed to test each antigen proposed to be delivered by
VibrioVec(TM).
Based on its preclinical studies, the Company believes that
VibrioVec(TM) will be an effective oral delivery system that can deliver
antigens to the gastrointestinal tract where the VibrioVec(TM) vector will grow
and express the antigens for a limited period of time. The Company is currently
inserting the genes which encode certain H. pylori antigens into VibrioVec(TM)
to determine if the vector containing these genes can grow and express the
antigen.
STRATEGY
The Company's strategy is to utilize its expertise to design and
develop vaccine products that have significant and growing market potential; to
establish commercial alliances that permit funding of clinical development and
rapid commercialization; and to retain rights to important market opportunities.
DEVELOP NOVEL VACCINE DELIVERY SYSTEMS. The Company is developing a
portfolio of vaccine delivery systems to address shortcomings in currently
available delivery methods, as well as to provide new methods of vaccine
delivery. The Company's vaccine delivery systems, which are based on a novel
polymer and on bacterial vectors, have the potential to improve existing
injectable vaccines and to permit intranasal and oral delivery of vaccines.
These systems may be applicable to most of the vaccines in routine use and may
enable the introduction of new vaccines to prevent bacterial or viral diseases
for which there is currently no adequate treatment or prevention. The Company
intends to pursue the broad application of its current vaccine delivery systems,
as well as to continue to invest in the development of new vaccine delivery
technologies.
DEVELOP PROPRIETARY VACCINES. The Company is currently developing
several proprietary vaccines believed to have significant near-term commercial
promise. The Company is continuing to seek exclusive licenses for suitable
antigens to be used to develop vaccines with a significant market potential. The
Company believes that the development of its own proprietary vaccines
complements its development of novel vaccine delivery systems. The Company
believes that its ability to combine its vaccine delivery technology with its
own proprietary antigens may lead to the introduction of new vaccines with
competitive advantage.
ESTABLISH COLLABORATIONS FOR PRODUCT DEVELOPMENT AND
COMMERCIALIZATION. The Company has entered into and intends to seek additional
collaborative agreements with established vaccine companies to develop vaccines
utilizing the Company's vaccine delivery systems and its collaborators'
antigens. By entering into these collaborations, the Company believes it will
benefit from the antigen development work already performed by its collaborators
and from access to their extensive clinical testing capabilities, wide
distribution and marketing infrastructure and market presence. This strategy may
permit the Company to take advantage of established markets for its
collaborators' existing vaccines and expedite commercialization of products
incorporating the Company's technologies.
With respect to proprietary vaccines being developed, the Company
generally intends to seek collaborators who will be responsible for completing
the clinical testing and for the manufacturing and marketing of the vaccine.
However, the Company intends to develop such proprietary vaccines to the point
at which it believes it can establish the most commercially favorable
collaborations. The Company believes that this strategy will allow the
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successful market introduction of products incorporating the Company's
technologies without the Company incurring the substantial costs associated with
clinical development.
One of the Company's significant collaborative arrangements is with
PMC. The Company is a party to two license agreements entered into in December
1994 and August 1995 with PMC relating to Adjumer(TM) and
Micromer(TM)-formulated vaccines, respectively, for the prevention of a variety
of infectious diseases. Under the agreements, PMC has been granted the exclusive
right to make, use and sell Adjumer(TM) and Micromer(TM)-formulated vaccines for
prevention of influenza, Lyme disease and diseases caused by meningococcus and
the co-exclusive right (exclusive, except for the right of the Company or one
other person licensed by the Company) to make, use and sell Adjumer(TM) and
Micromer(TM)-formulated vaccines directed against five other pathogens,
including pneumococcus and RSV. The licenses to PMC apply to specified
territories, including North and South America, Europe, Africa, Thailand and the
countries of the former Soviet Union. The Company has retained rights to make,
use, sell and license Adjumer(TM) and Micromer(TM)-formulated vaccines against
the subject infections in most of the Far East, including China and Japan,
subject to certain geographical extension rights available to PMC.
PMC made a $3.0 million equity investment in the Company in December
1994 upon the execution of the agreement relating to Adjumer(TM). In addition,
in connection with this collaboration, in 1996 PMC made milestone payments of
$4.5 million to the Company and an additional equity investment of $1.0 million
in the Company. Contingent upon achieving certain milestones, PMC has agreed to
pay the Company up to an additional $5.4 million in connection with the
development of Adjumer(TM)-formulated vaccines for influenza and Lyme disease.
Contingent upon achieving certain milestones, PMC has also agreed to make
payments, on a product by product basis, if PMC commences clinical development
of Adjumer(TM)-formulated vaccines against certain specified pathogens, or
Micromer(TM)-formulated vaccines directed against influenza and other specified
pathogens. PMC is required to fund all costs associated with the development and
commercialization, including the costs of clinical trials, of any vaccines it
elects to develop utilizing the Company's technology. In addition, the Company
will be entitled to royalties based on net sales of any vaccine products
developed and sold by PMC pursuant thereto.
In connection with its agreement relating to Micromer(TM), the Company
has agreed to conduct research through 1997 to develop Micromer(TM)-formulated
vaccines directed against influenza and PIV. PMC has agreed to pay to the
Company up to a maximum of $2.5 million to fund this research, of which $1.875
million had been paid through December 31, 1996.
Under the agreement relating to Adjumer(TM), the Company was required
to use commercially reasonable efforts to establish a process capable of
yielding quantities of clinical grade PCPP for use by PMC in clinical studies.
The Company has satisfied this requirement. In addition, PMC and the Company
have agreed to enter into a cost-based supply agreement, upon terms to be
negotiated, pursuant to which the Company will be responsible for scaling-up the
process of PCPP production in an efficient, cost-effective cGMP manufacturing
facility according to agreed-upon specifications. However, PMC has reserved the
right to manufacture PCPP for use in Adjumer(TM)-and Micromer(TM)-formulated
vaccines.
The Company also has a collaborative arrangement with Pasteur
Merieux-OraVax, Inc. In November 1995, the Company entered into two option
agreements with PM-O relating to the use of the Company's vaccine delivery
systems to develop vaccines against H. pylori infections utilizing certain
specified antigens other than LPS. Under the agreements, PM-O has agreed to
evaluate, during the option period, the potential effectiveness of applying the
Company's vaccine delivery systems for this use. The Company has agreed that
during the option period it will not grant rights in the field covered by the
option agreements to any third party (which did not affect the Company's ability
to enter into the agreement with CSL described in the following section). The
parties have initiated good faith negotiations with respect to a license
agreement under which the Company would grant rights to PM-O to use the
Company's vaccine delivery systems to develop and commercialize H. pylori
vaccines. The option expires in May 1997. In connection with the execution of
these option agreements, PMC and OraVax, Inc. each made a $250,000 equity
investment in the Company in January 1996.
PRODUCT DEVELOPMENT PROGRAMS
The Company and its collaborators are engaged in research and
development efforts on the vaccine programs using the Company's technologies.
The Company and PMC, the leading worldwide supplier of influenza vaccines, are
currently collaborating on the development of an Adjumer(TM)-formulated vaccine
for influenza. Pursuant to a separate agreement with PMC, the Company is
conducting research on the mucosal administration of an influenza
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vaccine using its Micromer(TM) vaccine delivery system. Influenza accounts for
an average of 20,000 deaths annually in the United States; the greatest number
of fatalities occur among the elderly. In preclinical studies conducted by the
Company and PMC, an Adjumer(TM)-formulated influenza vaccine produced a
significantly enhanced and longer-lived immune response than one of the
influenza vaccines currently on the market. PMC completed preclinical toxicity
studies of this Adjumer(TM)-formulated influenza vaccine candidate and initiated
Phase I human clinical trials of this vaccine in France during 1996. As part of
its collaboration with PMC, the Company will conduct additional toxicology work
with Adjumer(TM) alone and will provide Adjumer(TM) for all the preclinical and
clinical studies to be conducted by PMC. PMC also has the right to develop
Adjumer(TM)-formulated vaccines for prevention of other diseases, including Lyme
disease.
The Company is also conducting research relating to the use of
VibrioVec(TM) for the delivery of vaccines to prevent and treat infections
caused by H. pylori. H. pylori is a bacterium that causes chronic gastritis and
peptic ulcers. Currently, no vaccine or generally effective therapy is approved
for the elimination of H. pylori infection. The Company is conducting research
separately with CSL and with PM-O to determine the utility of the Company's
VibrioVec(TM) system in delivering vaccines against H. pylori.
The Company is also developing novel vaccines against rotavirus and
HSV2 infections. Rotavirus is a major cause of diarrhea and vomiting in infants.
The Company has completed Phase I clinical trials of an orally delivered live
human rotavirus vaccine selected to elicit a broadly protective immune response
to the most prevalent strains of rotavirus. In July 1996 the Company commenced a
Phase I/II clinical trial designed to define the optimal vaccine dose and
optimal age for immunization. Preliminary results are now available and based on
the initial assessment of the safety and immunogenicity of the vaccine, the
Company expects to begin a Phase II efficacy study in 1997. HSV2 is a sexually
transmitted virus with an estimated incidence of 500,000 new cases occurring in
the United States each year. At present, there is no approved vaccine for
prevention of rotavirus or HSV2 infection.
In addition, the Company and PMC are currently conducting animal
studies to assess the dosage and the immune response generated by a
Micromer(TM)-formulated influenza vaccine.
COMPETITION
Competition in the biotechnology and vaccine industries is intense.
The Company faces competition from many companies in the United States and
abroad, including a number of large pharmaceutical companies, firms specialized
in the development and production of vaccines, adjuvants and vaccine delivery
systems and major universities and research institutions. Most of the Company's
competitors have substantially greater resources, more extensive experience in
conducting preclinical studies and clinical testing and obtaining regulatory
approvals for their products, greater operating experience, greater research and
development and marketing capabilities and greater production capabilities than
those of the Company. There can be no assurance that the Company's competitors
will not develop technologies and products that are safer or more effective than
any which are being developed by the Company or which would render the Company's
technology and products obsolete and noncompetitive, and the Company's
competitors may succeed in obtaining FDA approval for products more rapidly than
the Company. There can be no assurance that the vaccines under development by
the Company and its collaborators will be able to compete successfully with
existing products or products under development by other companies, universities
and other institutions or that they will attain regulatory approval in the
United States or elsewhere. The Company believes that the principal competitive
factors in the vaccine market are product quality, measured by efficacy and
safety, ease of administration and price.
The Company's competitive position will also depend upon its ability
to attract and retain qualified personnel, obtain patent protection or otherwise
develop proprietary products or processes and secure sufficient capital
resources for the often lengthy period between technological conception and
commercial sales.
MANUFACTURING
The Company has no manufacturing facilities, no experience in volume
manufacturing and plans to rely upon collaborators or contract manufacturers to
manufacture its proposed products for both clinical and commercial purposes. The
Company believes that there is currently sufficient capacity worldwide for the
production of its potential products by the Company's collaborators or through
contract manufacturers.
To date, the Company has been arranging on a purchase order basis with
contract manufacturers for the manufacture of PCPP and vaccines in quantities
sufficient for preclinical studies and for clinical trials of the
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Company's rotavirus vaccine candidate. The Company has a contract for the
development and initial supply of the starting materials for PCPP but does not
yet have a written agreement with a contract manufacturer for production of PCPP
or for any other components of its vaccine delivery systems or vaccine
candidates. The manufacturing processes for the Company's vaccine delivery
systems and vaccines utilize known technologies. The Company believes that the
vaccine delivery systems and vaccines it currently has under development can be
readily scaled up to permit manufacture in commercial quantities. However, there
can be no assurance that the Company will not encounter difficulties in scaling
up the manufacturing process.
PMC and the Company have agreed to enter into a cost-based supply
agreement, upon terms to be negotiated, pursuant to which the Company will be
responsible for scaling-up the process of PCPP production in an efficient,
cost-effective cGMP manufacturing facility according to agreed-upon
specifications. However, PMC has reserved the right to manufacture PCPP for use
in Adjumer(TM)- and Micromer(TM)-formulated vaccines.
The Company intends to establish manufacturing arrangements with
manufacturers that comply with the FDA's requirements and other regulatory
standards, although there can be no assurance that the Company will be able to
do so. Before commercial distribution can begin, each vaccine manufacturing
facility must be granted an ELA on the basis of inspections of the applicant's
facilities in which the primary focus is on compliance with cGMP. If the FDA
finds the inspection unsatisfactory, it may decline to approve the ELA,
resulting in a delay in production or distribution of products. In the future,
the Company may, if it becomes economically attractive to do so, establish its
own manufacturing facilities to produce any vaccine products that it may
develop. In order for the Company to establish a manufacturing facility, the
Company will require substantial additional funds and will be required to hire
and retain significant additional personnel and comply with the extensive cGMP
regulations of the FDA applicable to such facility. The product manufacturing
facility would also need to be licensed for the production of vaccines under an
ELA.
MARKETING
Under the terms of existing and future collaborative agreements, the
Company relies and expects to continue to rely on the efforts of its
collaborators for the sale and marketing of any vaccine products. There can be
no assurance that the Company's collaborators will market vaccine products
incorporating the Company's technologies, or, if marketed, that such efforts
will be successful. The failure of the Company's collaborators to successfully
market products will have an adverse effect on the Company's business.
The Company has retained, and in the future intends to retain,
marketing rights to certain of its vaccine delivery systems and vaccine
candidates in selected geographic areas. The Company intends to seek marketing
and distribution agreements and/or co-promotion agreements for the distribution
of vaccines in such territories. The Company believes that these arrangements
could enable the Company to generate a higher level of financial return than
might be obtained from early stage licensing and collaboration agreements for
its vaccine candidates. The Company has no marketing and sales staff and limited
experience relating to vaccine marketing. If the Company determines in the
future to engage in direct marketing of vaccine products, it will be required to
recruit an experienced marketing group and incur significant additional
expenditures. There can be no assurance that the Company will be able to
establish a successful marketing force.
PATENTS, LICENSES AND PROPRIETARY RIGHTS
LICENSES
The Company has entered into several significant license agreements
relating to technology which is being developed by the Company or its
collaborators, including licenses from: Massachusetts Institute of Technology
covering certain proprietary technologies for vaccine delivery related to PCPP
microparticles; Penn State Research Foundation covering the use of
polyphosphazene polymer for vaccines; Harvard College relating to proprietary
technology involving genetically altered Vibrio and Salmonella typhi strains;
Cincinnati Children's Hospital involving proprietary rights and technologies
relating to an attenuated rotavirus strain for a rotavirus vaccine; and Harvard
College and the Dana Farber Cancer Institute relating to a genetically-altered
HSV2 virus for herpes virus vaccines. In general, these institutions have
granted the Company an exclusive worldwide license (with right to sublicense) to
certain proprietary technologies (including rights to patents and patent
applications) to make, use and sell products using the licensed technology,
subject to the reservation by the licensor of a non-exclusive right to use the
technologies for non-commercial purposes. Generally, the term of each license is
through the expiration of the last of the patents issued with respect to the
technologies covered by such license. The Company has generally
7
<PAGE> 9
agreed to use its reasonable efforts to develop and commercialize products and
achieve certain milestones and pay license fees, milestone payments and
royalties based on the net sales of the licensed products or to pay a percentage
of sublicense income. If the Company breaches its obligations, the licensor has
the right to terminate the license, and, in some cases, convert the license to a
non-exclusive license.
PATENTS AND PROPRIETARY RIGHTS
The Company's policy is to protect its technology by filing patent
applications. In addition to filing patent applications in the United States,
the Company has filed, and intends to file, patent applications in foreign
countries on a selective basis. The Company also relies on trade secrets,
unpatented know-how and technological innovation to develop and maintain its
competitive position.
The Company owns an issued United States patent which expires on July
12, 2013, and corresponding foreign applications, directed to the use of
vaccines which incorporate the Company's Adjumer(TM) vaccine delivery
technology. In addition, the Company owns an issued United States patent which
expires September 21, 2013, and corresponding foreign applications, directed to
the use of vaccines incorporating the Company's Micromer(TM) vaccine delivery
technology. Further, the Company owns and has licensed other United States
patent applications which are directed to technology which may be useful for the
Company's Micromer(TM) and Adjumer(TM) vaccine delivery systems, and in the case
of Micromer(TM), corresponding foreign applications. The Company has an
exclusive license to a United States patent application, and corresponding
foreign applications, directed to a vector construct which is used in the
Company's VibrioVec(TM) vaccine delivery system. The Company has an exclusive
license to an issued United States patent which expires on December 12, 2012,
directed to a rotavirus antigen which forms a part of the Company's rotavirus
vaccine and to a United States patent application, and corresponding foreign
applications, directed to a defective HSV2 virus for use in the Company's
vaccine directed against genital herpes.
Although a patent has a statutory presumption of validity in the
United States, the issuance of a patent is not conclusive as to such validity or
as to the enforceable scope of the claims of the patent. There can be no
assurance that the Company's issued patents or any patents subsequently issued
to or licensed by the Company will not be successfully challenged in the future.
The validity or enforceability of a patent after its issuance by the patent
office can be challenged in litigation. If the outcome of the litigation is
adverse to the owner of the patent, third parties may then be able to use the
invention covered by the patent without payment. There can be no assurance that
the Company's patents will not be infringed or successfully avoided through
design innovation.
There can be no assurance that patent applications owned by or
licensed to the Company will result in patents being issued or that, if issued,
the patents will afford protection against competitors with similar technology.
It is also possible that third parties may obtain patent or other proprietary
rights that may be necessary or useful to the Company. In cases where third
parties are first to invent a particular product or technology, it is possible
that those parties will obtain patents that will be sufficiently broad so as to
prevent the Company from using certain technology or from further developing or
commercializing certain vaccine delivery systems and vaccine candidates. If
licenses from third parties are necessary but cannot be obtained,
commercialization of the vaccine candidates would be delayed or prevented.
The Company is aware of a domestic patent and a foreign patent which
cover claims that could conflict with the Company's vaccine candidates and
delivery systems. The Company believes that the relevant claim under the
domestic patent is invalid and that the relevant claim under the foreign patent
does not extend to or restrict the Company's activities. There can be no
assurance that the applicable patent office or court would reach the same
conclusions. In addition to the foregoing, there may be other patent
applications and issued patents belonging to competitors that may require the
Company to alter its vaccine candidates and vaccine delivery systems,
pay licensing fees or cease certain activities. If the Company's vaccine
candidates conflict with patents that have been or may be granted to
competitors, universities or others, such other persons could bring legal
actions against the Company claiming damages and seeking to enjoin
manufacturing and marketing of the affected products. If any such actions are
successful, in addition to any potential liability for damages, the Company
could be required to obtain a license in order to continue to manufacture or
market the affected products. There can be no assurance that the Company would
prevail in any such action or that any license required under any such patent
would be made available on acceptable terms or at all. The Company believes
that there may be significant litigation in the industry regarding patent and
other intellectual property rights. If the Company becomes involved in such
litigation, it could consume substantial resources.
8
<PAGE> 10
The enactment of the legislation implementing the General Agreement on
Trade and Tariffs has resulted in certain changes to the United States patent
laws that became effective on June 8, 1995. Most notably, the term of patent
protection for patent applications filed on or after June 8, 1995 is no longer a
period of seventeen years from the date of grant. The new term of United States
patents will commence on the date of issuance and terminate twenty years from
the earliest effective filing date of the application. Because the time from
filing to issuance of patent applications is often more than three years, a
twenty year term from the effective date of filing may result in a substantially
shortened term of patent protection, which may adversely impact the Company's
patent position. If this change results in a shorter period of patent coverage,
the Company's business could be adversely affected to the extent that the
duration and level of the royalties it is entitled to receive from its
collaborators is based on the existence of a valid patent. None of the issued
patents currently owned or licensed by the Company are adversely affected by
these changes in the term of patent protection.
The Company also relies on unpatented technology, trade secrets and
information and no assurance can be given that others will not independently
develop substantially equivalent information and techniques or otherwise gain
access to the Company's technology or disclose such technology, or that the
Company can meaningfully protect its rights in such unpatented technology, trade
secrets and information. The Company requires each of its employees, consultants
and advisors to execute a confidentiality agreement at the commencement of an
employment or consulting relationship with the Company. The agreements generally
provide that all inventions conceived by the individual in the course of
employment or in providing services to the Company and all confidential
information developed by, or made known to, the individual during the term of
the relationship shall be the exclusive property of the Company and shall be
kept confidential and not disclosed to third parties except in limited specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's information in the event of
unauthorized use or disclosure of such confidential information.
GOVERNMENT REGULATION
The Company's activities and products are significantly regulated by a
number of governmental entities, especially by the FDA in the United States and
by comparable authorities in other countries. These entities regulate, among
other things, research and development activities and the testing, manufacture,
safety, effectiveness, labeling, storage, record keeping, approval, advertising,
promotion, distribution and sale of the Company's products. Product development
and approval within this regulatory framework takes a number of years and
involves the expenditure of substantial resources. Many products that initially
appear promising ultimately do not reach the market because they are found to be
unsafe or do not demonstrate effectiveness during the testing required by the
regulatory process. In addition, there can be no assurance that this regulatory
framework will not change or that additional regulation will not arise at any
stage of the Company's product development that may affect approval, delay an
application or require additional expenditure by the Company. Moreover, even if
approval is obtained, failure to comply with present or future regulatory
requirements, or new information adversely reflecting on the safety or
effectiveness of the approved vaccine, can lead to FDA withdrawal of approval to
market the product or other sanctions, including fines, recall or seizure of
products, injunctions and criminal prosecutions.
In the United States, human vaccines are subject to FDA review and
approval as "biologics" under the Public Health Service Act and as "drugs" under
the Federal Food, Drug, and Cosmetic Act. In most cases, the steps required
before a new human vaccine can be produced and marketed include: preclinical
studies; the filing of an investigational new drug ("IND") application with the
FDA summarizing preclinical development work; clinical trials in humans to
determine safety and efficacy; FDA approval of the product for commercial sale
and FDA approval of the product manufacturing facility.
The initial testing of a biologic product before it may be marketed in
the United States is called preclinical testing. Preclinical tests include
laboratory evaluation of product chemistry and other end points and animal
studies to assess the potential safety and efficacy of the product as
formulated. Many preclinical studies are regulated by the FDA under a series of
regulations called the Good Laboratory Practice (GLP) regulations. Violations of
these regulations can, in some cases, lead to invalidation of the studies,
requiring such studies to be replicated.
FDA regulations provide that human clinical trials may begin 30 days
following the submission and receipt of an IND, unless the FDA advises otherwise
or requests additional information, clarification or additional time to review
the IND submission; it is generally considered good practice to obtain
affirmative FDA acquiescence before commencing trials. There is no assurance
that the submission of an IND will eventually allow a company to commence
clinical trials. Once trials have commenced, the FDA may stop the trials, or
particular types of trials, by placing a "clinical hold" on such trials because
of concerns about, for example, the safety of the product being tested
9
<PAGE> 11
or the adequacy of the trial design. Such holds can cause substantial delay and
in some cases may require abandonment of a product. There can be no assurance
that the FDA's acquiescence in an IND constitutes any indication that the FDA
will find the protocol for a clinical trial satisfactory or will accept any data
generated from such clinical trial.
Clinical trials are subject to extensive FDA regulation and are
typically conducted in three sequential phases, although in certain cases, the
phases may overlap. In Phase I, the initial introduction of the vaccine into
healthy human subjects, the vaccine is tested for safety (adverse effects),
optimal dosage, and its ability to induce an immune response (immunogenicity).
Phase II involves studies in a limited target patient population to further
evaluate immunogenicity and optimal dosage, and to identify possible adverse
effects and safety risks. When a product is found to have an acceptable safety
profile in Phase II evaluation, Phase III clinical trials are undertaken to
evaluate clinical efficacy and to further test for safety within an expanded
target patient population at geographically dispersed clinical study sites. The
FDA may order the temporary or permanent discontinuation of a clinical trial at
any time for any reason.
The results of the preclinical studies and human clinical trials are
submitted to the FDA in a product license application ("PLA"), approval of which
must be obtained prior to commencement of commercial sales. The interval between
the filing of the IND and the filing of a PLA application can be lengthy. The
FDA may deny a PLA if, among others reasons, clinical trial protocols are not
adequate or appropriate. The FDA also may deny a PLA or require additional
testing or information to assess the safety of the Company's products if the FDA
does not view the PLA as containing adequate evidence of the safety and efficacy
of the product. Notwithstanding the submission of such data, the FDA may
ultimately decide that the application does not satisfy its regulatory criteria
for approval. Even if the PLA is approved, the product may be required to
undergo post-licensure testing and surveillance to continue to monitor its
safety and effectiveness.
Any product manufacturing facility must be licensed for the production
of vaccines. To accomplish this, an ELA must be filed with the FDA. The ELA
describes the facilities, equipment and personnel involved in the manufacturing
process. An establishment license is granted on the basis of inspections of the
applicant's facilities in which the primary focus is on compliance with cGMP and
the ability to consistently manufacture the product in the facility in
accordance with the PLA. If the FDA finds the inspection unsatisfactory, it may
decline to approve the ELA, resulting in a delay in production of products.
Although reviewed separately, approval of both the PLA and ELA must be received
prior to commercial marketing of a vaccine.
Failure to comply with applicable FDA requirements may result in a
number of consequences, including a "clinical hold," that could materially and
adversely affect the Company. Non-compliance with GLPs and good clinical
practices (GCPs) could have a negative impact on the FDA's evaluation of data
submitted in a PLA. Failure to adhere to cGMP and other applicable requirements
could result in FDA enforcement action including, but not limited to, fines,
seizure of products, injunction, refusal of the FDA to approve an ELA or PLA,
withdrawal of approved PLAs or ELAs, and prosecution.
To market its products abroad, the Company is also subject to numerous
and varying foreign regulatory requirements, implemented by foreign health
authorities, governing, among other things, the design and conduct of human
clinical trials, product pricing and marketing approval criteria. The approval
procedure currently varies among countries and can involve additional testing,
and the time required to obtain approval may differ from that required to obtain
FDA approval. At present, foreign marketing authorizations are applied for at a
national level, although within the European Union (EU) certain registration
procedures are available to companies wishing to market a product in more than
one EU member country. The foreign regulatory approval includes all of the risks
associated with obtaining FDA approval set forth above. Approval by the FDA does
not ensure approval by other countries.
The Advisory Committee on Immunization Practices ("ACIP") of the CDC
has a role in setting the public market in the United States for most, if not
all, of the products the Company intends to develop. The ACIP meets quarterly to
review developing data on licensed vaccines, and those approaching license, as
well as epidemiologic data on the need for these products. The recommendations
of ACIP on the appropriate use of vaccines and related products are published in
the Morbidity and Mortality Weekly Report and reprinted in several journals. The
CDC develops epidemiologic data in support of the need for new vaccines and
monitors vaccine usage and changes in disease incidence. In addition, CDC staff
frequently act as key advisors to the FDA in their review process.
10
<PAGE> 12
Due to the potential for epidemic disease, the availability of certain
pediatric vaccines is considered to be a matter of national importance, both
domestically and internationally. The ten vaccines recommended for pediatric use
are vaccines against diphtheria, tetanus, pertussis, measles, mumps, rubella,
polio, hepatitis B, Haemophilus influenzae B and varicella zoster virus. In
addition to these ten vaccines, the ACIP periodically reviews current
immunization practices and issues it recommendations for additional pediatric
vaccinations.
The Company's collaborators are subject to all of the above-described
regulations in connection with the commercialization of vaccine products
utilizing the Company's technology.
PRODUCT LIABILITY
The testing and marketing of vaccines entail an inherent risk of
product liability attributable to unwanted and potentially serious health
effects. If and when the Company manufactures vaccines which are recommended for
routine administration to children, it is possible that the Company will be
required to participate in the National Vaccine Injury Compensation Program.
This program compensates children having adverse reactions to certain routine
childhood immunizations with funds collected through an excise tax from the
manufacturers of these vaccines.
The Company has clinical trial liability insurance coverage in the
amount of $2 million. However, there can be no assurance that such insurance
coverage is or will continue to be adequate. The Company intends to seek product
liability insurance coverage prior to commercialization of its product
candidates but there can be no assurance that insurance will be available at all
or in sufficient amounts to protect the Company at a reasonable cost.
HUMAN RESOURCES
As of December 31, 1996, the Company had 49 employees, 40 of whom were
engaged in research and development activities, including 14 Ph.D.'s. The
Company's employees are not governed by any collective bargaining agreement and
the Company believes that its relationship with its employees is good.
Item 2. PROPERTIES
----------
The Company currently leases approximately 17,800 square feet of
laboratory and office space in Cambridge, Massachusetts. The lease has a five
year term, which commenced on December 1, 1996, and is extendable at the
Company's option for an additional five years.
Item 3. LEGAL PROCEEDINGS
-----------------
The Company is not a party to any legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 1996.
Executive Officers of the Registrant
<TABLE>
The executive officers of the Company are as follows:
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
J. Barrie Ward, Ph.D. 58 Chief Executive Officer and Chairman of the Board
William A. Packer 62 President, Chief Financial Officer
Bryan E. Roberts, Ph.D. 48 Executive Vice President
Lendon Payne, Ph.D., M.D. 48 Vice President of Research
Dale R. Spriggs, Ph.D. 45 Vice President of Development
Lisa P. McGillis 37 Director of Finance
</TABLE>
11
<PAGE> 13
J. Barrie Ward, Ph.D. has served as Chairman of the Board of Directors
and Chief Executive Officer since joining the Company in July 1994. From 1984 to
June 1994, Dr. Ward served as Director of the Microbiology Division of Glaxo
Research and Development Ltd., a pharmaceutical company, with responsibility for
infectious disease research. Dr. Ward received a Ph.D. in microbial biochemistry
from the University of Bath, England.
William A. Packer joined the Company in 1992 as President and a
Director and was also elected Chief Financial Officer in March 1996. Prior to
joining the Company, Mr. Packer held various senior management positions with
SmithKline Beecham plc, a pharmaceutical company, from 1964 to 1991, most
recently as Senior Vice President, Biologicals, where he was responsible for
the direction of SmithKline Beecham's global vaccine business. Mr. Packer is a
Fellow of the Institute of Chartered Accountants in England and Wales.
Bryan E. Roberts, Ph.D. joined the Company in 1991. Dr. Roberts served
as Research Director from 1991 to 1993 and as Vice President of Research from
1993 until March 1996, when he was appointed Executive Vice President. From 1984
to 1990, Dr. Roberts was the Research Director of Applied BioTechnology, Inc., a
biotechnology company he co-founded. From 1978 to 1986, Dr. Roberts was an
Associate Professor of Biological Chemistry at the Harvard Medical School.
Dr. Roberts received a D.Phil. from the University of Oxford.
Lendon Payne, Ph.D., M.D. joined the Company in 1991 and in January
1997 became an officer of the Company. Dr. Payne served as a Research Director
from 1993 to 1995, and since 1996, has been the Vice President of Research.
Dr. Payne received his Ph.D. in virology and his M.D. from Karolinska Institute
School of Medicine, Stockholm, Sweden.
Dale R. Spriggs, Ph.D. joined the Company in May 1993, and became an
officer of the Company in January 1997. Dr. Spriggs served as the Director of
Clinical Research and Development until May 1995, and as Director of Clinical
and Regulatory Affairs from May 1995 to March 1996, when he was appointed Vice
President of Development. From 1987 to 1993, Dr. Spriggs held several positions
at the National Institute of Allergy and Infectious Diseases. Dr. Spriggs
received a Ph.D. in microbiology from the University of Cincinnati College of
Medicine.
Lisa P. McGillis joined the Company in 1994. In 1996, Ms. McGillis was
appointed Director of Finance. Ms. McGillis became an officer of the Company in
January 1997. Prior to joining the Company, Ms. McGillis served as Controller at
ISI Systems, Inc. and as a Certified Public Accountant at Price Waterhouse. Ms.
McGillis received a B.A. from Williams College and an M.S. in Accounting from
Northeastern University.
SCIENTIFIC ADVISORY BOARD
The Company's Scientific Advisory Board currently consists of seven
individuals who have extensive experience in the field of polymer chemistry,
virology, infectious disease, immunology, microbiology and molecular genetics.
At the Company's request, the scientific advisors review and evaluate the
Company's research programs and advise the Company about technical matters in
the scientific fields in which the Company is involved. The Company's Scientific
Advisory Board generally meets as a group at least once a year to review and
discuss the Company's progress in research and development, and certain members
of the Scientific Advisory Board meet informally in smaller groups or
individually with Company scientists on a more frequent basis. Each member of
the Scientific Advisory Board has entered into a consulting agreement with the
Company. The consulting agreements are for varying terms and provide for each of
the members to render advice to the Company in the area of the Company's
business and such member's expertise. Members of the Scientific Advisory Board
are entitled to receive annual compensation of up to $10,000 for their services
and may receive options to purchase Common Stock under the Plan. In addition,
Drs. Essex and Mekalanos have separate consulting agreements with the Company
pursuant to which they receive additional compensation. It is possible that any
inventions or processes discovered by the scientific advisors will remain the
property of such person or of such persons' employers. In addition, the
institutions with which the scientific advisors are affiliated may make
available the research services of their personnel, including the scientific
advisors, to competitors of the Company pursuant to sponsored research
agreements.
12
<PAGE> 14
<TABLE>
The following table sets forth the name and current position of each
scientific advisor:
<CAPTION>
Name Position
---- --------
<S> <C>
Barry Bloom, M.D............Retired (Former Executive Vice President, Pfizer, Inc.)
Robert Langer, Ph.D.........The Germeshausen Professor, Department of Chemical
Engineering, Massachusetts Institute of Technology
Myron Essex, D.V.M., Ph.D...Chairman, Department of Cancer Biology, Harvard School
of Public Health, Chairman of Harvard AIDS Institute
Brian Mahy, Ph.D., Sc.D.....Director of Viral and Rickettsial Diseases, the Centers for
Disease Control and Prevention
John Mekalanos, Ph.D........Chairman, Department of Microbiology and Molecular
Genetics, Harvard Medical School
Morton Swartz, M.D..........Chief, James Jackson Firm Medical Services & Infectious
Disease Unit of Massachusetts General Hospital, Professor,
Harvard Medical School
Hans Wigzell, Ph.D..........President, Karolinska Institute, Stockholm
</TABLE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The Common Stock of the Company began trading in June 1996 (subsequent
to the initial public offering) on the NASDAQ National Market under the symbol
"VRII". The following table lists the high and low sales prices for each quarter
the Common Stock traded during 1996. Prior to the offering in June 1996, no
established public trading market existed.
1996 Quarter High Low
------------ ---- ---
First N/A N/A
Second 12-1/4 9
Third 9-1/4 5-7/8
Fourth 8-1/4 4-3/4
As of January 31, 1997, the approximate number of common shareholders
of record was 90. This does not include shareholders for whom shares are held in
"street" name.
The Company has not paid a dividend with respect to its Common Stock
nor does the Company anticipate paying dividends in the foreseeable future.
In January 1996, the Company sold an aggregate 118,036 shares of its
Series D Preferred Stock for a purchase price of $4.236 per share to Pasteur
Merieux and OraVax, Inc. In April 1996, the Company sold 236,105 shares of
Series D Convertible Preferred Stock for a purchase price of $4.236 per share
to Pasteur Merieux. These shares automatically converted into an aggregate
118,047 shares of Common Stock of the Company upon consummation of the
Company's Initial Public Offering.
13
<PAGE> 15
Item 6. SELECTED FINANCIAL DATA
-----------------------
<TABLE>
The selected financial information presented below has been derived
from the audited financial statements of the Company, and should be read in
conjunction with the Company's Financial Statements and related Notes thereto.
<CAPTION>
FEBRUARY 11,
1991
STATEMENT OF OPERATIONS DATA: (INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
DECEMBER
31,
1996 1995 1994 1993 1992 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Licensing and option revenue $4,520,000 $ 770,000 $ 700,000 $ -- $ -- $ 5,990,000
Research and development revenue 1,476,449 1,067,480 21,269 -- -- 2,565,198
Interest income 851,082 126,249 163,591 83,610 -- 1,224,532
------------------------------------------------------------------------------------------
TOTAL REVENUE 6,847,531 1,963,729 884,860 83,610 -- 9,779,730
EXPENSES:
Research and development 5,262,507 5,734,427 5,756,042 4,205,781 2,430,785 24,009,480
General and administrative 2,328,204 1,854,732 1,887,512 1,452,344 1,228,679 8,964,359
Depreciation 673,436 583,654 517,756 268,391 68,993 2,117,831
Interest expense 165,320 87,944 52,332 84,315 239,147 653,228
------------------------------------------------------------------------------------------
TOTAL EXPENSES 8,429,467 8,260,757 8,213,642 6,010,831 3,967,604 35,744,898
------------------------------------------------------------------------------------------
NET LOSS ($1,581,936) ($6,297,028) ($7,328,782) ($5,927,221) ($3,967,604) ($25,965,168)
==========================================================================================
Pro forma net loss per common share ($ 0.21) ($ 0.99)
==========================
Shares used in computing pro forma
net loss per common share 7,639,726 6,391,454
</TABLE>
<TABLE>
BALANCE SHEET DATA:
DECEMBER 31,
<CAPTION>
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $15,209,180 $ 1,180,176 $ 5,669,490 $ 954,134 $ 19,814
Total assets 27,437,531 2,727,905 7,667,363 2,742,301 955,098
Notes payable -- 923,315 -- -- 1,031,988
Lease obligation payable, less
current portion 64,351 210,842 46,838 220,028 244,448
Redeemable convertible preferred
stock -- 24,527,073 24,508,053 12,581,906 3,936,231
Total stockholders' equity
(deficit) $25,950,856 ($24,248,340) ($18,043,081) ($10,751,850) ($4,821,027)
</TABLE>
The Company has paid no cash dividends since inception.
14
<PAGE> 16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
The following discussion of the financial condition and results of
operations of the Company for the years ended December 31, 1996, 1995 and 1994
should be read in conjunction with the accompanying audited financial statements
and the related notes thereto.
This report may contain certain forward looking statements which
involve risks and uncertainties. Such statements are subject to certain factors
which may cause the Company's plans and results to differ significantly from the
plans and results discussed in forward looking statements. Factors that may
cause such differences include, but are not limited to, the progress of the
Company's research and development programs, the Company's ability to compete
successfully with larger companies, risks of failure inherent in product
development based on new technologies and novel delivery systems, the Company's
ability to attract and retain qualified personnel, the Company's ability to
enter into and maintain collaborations with third parties, the Company's ability
to enter into and progress in clinical trials, the time and costs involved in
obtaining regulatory approvals, the costs involved in obtaining and enforcing
patents, proprietary rights and any necessary licenses, the ability of the
Company to establish development and commercialization capacities or
relationships, the costs of manufacturing, the Company's ability to obtain
additional funds, and those other risks discussed under the heading "Risk
Factors" in the Prospectus dated June 5, 1996 included in the Company's
Registration Statement on Form S-1, as amended (File No. 333-3378).
OVERVIEW
Virus Research Institute, Inc. (the "Company") is engaged in the
discovery and development of vaccine delivery systems and improved and novel
vaccines for adults and children. The Company is developing a portfolio of
proprietary vaccine delivery systems designed to improve the efficacy, lower the
cost of administration and improve patient compliance for a variety of vaccine
products. The Company and its collaborators currently are applying the Company's
vaccine delivery systems to develop vaccines for the prevention of influenza,
Lyme disease, and H. pylori infections. The Company has entered into long-term
collaboration agreements with Pasteur Merieux Connaught (PMC), Pasteur
Merieux-OraVax and CSL, Ltd. pursuant to which they may utilize the Company's
vaccine delivery systems in developing a number of vaccines. The Company is also
developing its own proprietary vaccines utilizing antigens licensed exclusively
by the Company. These vaccines include an oral vaccine for rotavirus infection,
which is a gastrointestinal disease of infants, and a vaccine for the virus
causing genital herpes, HSV2.
The Company is in the development stage and has devoted substantially
all of its resources to the research and development of its vaccine delivery
systems and vaccine candidates and general and administrative expenses. Through
December 31, 1996 the Company has not generated any revenue from product sales,
but has received an aggregate of $9,780,000 in revenues from licensing and
option agreements, research and development agreements and grants, and interest
income. There can be no assurance that the Company will receive such revenue in
the future.
The Company has realized losses in every year since inception
principally as a result of expenditures incurred in its research and development
programs. The Company expects to continue to incur significant operating losses
over the next several years due primarily to expanded research and development
efforts, preclinical and clinical testing of its product candidates, investment
in new technologies, investment in production capabilities for certain product
candidates and expenditures for commercialization activities. The Company's
results of operations may vary significantly from quarter to quarter due to the
timing of license and milestone payments, development expenditures and other
factors.
NEW DEVELOPMENTS
The Company completed its initial public offering on June 11, 1996 in
which it sold 2,300,000 shares of Common Stock at a price of $12.00 per share.
The net proceeds to the Company from such sale totaled approximately $24.7
million, a portion of which was used to repay indebtedness and the balance of
which is being devoted to research and development activities and for working
capital and other general corporate purposes.
In July 1996, the Company commenced a Phase I/II clinical trial of its
rotavirus vaccine candidate. The clinical trial was a double-blinded, placebo
controlled study designed to define the optimal vaccine dose and optimal
15
<PAGE> 17
age for immunization. The enrollment of infants for this study, which was
conducted at Children's Hospital in Cincinnati, Ohio and Johns Hopkins
University in Baltimore, Maryland, was completed in November 1996. Preliminary
results from this study are now available and the Company expects to begin a
Phase II efficacy study in 1997.
In September 1996, the Company's collaborator, PMC, initiated a Phase
I clinical trial of an Adjumer(TM)-formulated influenza vaccine in France. The
study, which is designed to evaluate the safety of the vaccine, is the first
occasion in which Adjumer(TM) has been administered to human volunteers. The
completion of toxicology studies, polyphosphazene process development and the
initiation of the Phase I study resulted in the receipt of $4.5 million in
milestone payments from PMC during 1996.
RESULTS OF OPERATIONS
<TABLE>
REVENUE
<CAPTION>
($000)
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Licensing and option $4,520 $ 770 $700
Research and development 1,477 1,068 21
Interest income 851 126 164
------ ------ ----
Total revenue $6,848 $1,964 $885
------ ------ ----
</TABLE>
Total revenue increased by $4,884,000 to $6,848,000 in 1996 from
$1,964,000 in 1995 and increased by $1,079,000 in 1995 from $885,000 in 1994.
Licensing and option revenue increased by $3,750,000 to $4,520,000 in 1996 from
$770,000 in 1995. During 1996, the Company received $4,500,000 for the
achievement of milestones pursuant to the agreement with PMC. Revenue from
licensing and option payments in 1995 consisted principally of $750,000 received
under a collaboration agreement with Chiron Corporation. In 1994, revenue from
licensing and option payments consisted of $500,000 from PMC and $200,000 from
Merck, respectively. Research and development revenue increased by $409,000 to
$1,477,000 in 1996 from $1,068,000 in 1995 and increased by $1,047,000 in 1995
from $21,000 in 1994. During 1996, the Company received $1,250,000 from PMC and
$137,000 from SmithKline Beecham plc. Research and development revenue in 1995
consisted primarily of payments of $625,000 and $413,000 received under the PMC
and SmithKline agreements, respectively. Research and development revenue was
minimal during 1994 and consisted primarily of revenue from government grants.
Interest income increased by $725,000 to $851,000 in 1996 from $126,000 in 1995.
The increase is due to an increase in cash, cash equivalents and investments
derived principally from the proceeds of the Company's initial public offering.
<TABLE>
EXPENSES
<CAPTION>
($000)
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Research and development $5,263 $5,734 $5,756
General and administrative 2,328 1,855 1,888
Depreciation 673 584 518
Interest 165 88 52
------ ------ ------
Total expenses $8,429 $8,261 $8,214
------ ------ ------
</TABLE>
The Company's total expenses increased by $168,000 to $8,429,000 in
1996 from $8,261,000 in 1995 and increased by $47,000 in 1995 from $8,214,000 in
1994. Research and development expenses decreased by $471,000 to $5,263,000 in
1996 principally due to a reduction in outside consulting costs, the conclusion
of certain sponsored
16
<PAGE> 18
research agreements and a savings in polymer manufacturing costs. Research and
development expenses declined slightly from 1994 to 1995. General and
administrative expenses increased by $473,000 to $2,328,000 in 1996 from
$1,855,000 in 1995 principally due to an increase in compensation and recruiting
costs, and the payment of $250,000 in foreign withholding taxes associated with
milestone payments from PMC. These increases were partially offset by reductions
in consulting and legal costs. General and administrative costs declined by
$33,000 from 1994 to 1995 primarily as a result of a reduction in recruiting
costs offset by increases in legal and consulting costs associated with the
negotiation of collaboration agreements in connection with the Company's
programs. Depreciation expense increased $89,000 to $673,000 in 1996 from
$584,000 in 1995 and increased by $66,000 in 1995 from $518,000 in 1994 due to
the Company's increased investment in laboratory equipment and leasehold
improvements. Interest expense increased by $77,000 to $165,000 in 1996 from
$88,000 in 1995 and increased in 1995 by $36,000 from $52,000 in 1994 primarily
due to increased interest costs associated with certain equipment leases entered
into in 1995 and short term loans entered into in 1995 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
From inception (February 11, 1991) through December 31, 1996, the
Company's cash expenditures have exceeded revenues. The Company's operations
have been funded principally through the sale of equity, loans from
stockholders, equipment lease financing and payments under licensing, option and
research and development agreements. Net cash used by the Company's operations
since inception was $22,863,000, primarily to fund research and development
efforts and general and administrative expenses. Since inception the Company has
incurred $2,914,000 in capital expenditures, primarily for leasehold
improvements and equipment for the Company's laboratories. During the year ended
December 31, 1996 the Company incurred $349,000 in capital expenditures
primarily for improvements to its polymer chemistry and other laboratory
facilities. The Company anticipates incurring approximately $500,000 in capital
expenditures during 1997, primarily on equipment necessary for the scale up of
polyphosphazene manufacturing.
From inception through December 31, 1996, the Company raised net
proceeds of approximately $51,806,000 through the sale of equity securities.
Included in this amount are net proceeds of $24,743,000 from the Company's
initial public offering in 1996 and the conversion to common stock of an
aggregate of $7,974,000 in notes payable to certain stockholders. In addition,
from inception the Company has funded $751,000 of capital expenditures through
sale and leaseback transactions and has made $684,000 in principal payments on
lease obligations. In April 1996, the Company entered into a loan agreement with
a bank pursuant to which it borrowed $1,000,000. The principal plus accrued
interest on the loan was repaid from the proceeds of the Company's initial
public offering.
In December 1994, PMC made a $3,000,000 equity investment in the
Company in connection with the execution of a collaboration agreement relating
to Adjumer(TM). In January 1996, PMC and OraVax, Inc. each made an equity
investment of $250,000 in connection with the execution of an option agreement
relating to VibrioVec(TM). PMC made an additional equity investment of
$1,000,000 in April 1996 associated with the Adjumer(TM) collaboration
agreement. These amounts are included in the $51,806,000 referenced above.
As of December 31, 1996 the Company's federal net operating loss
carryforwards were approximately $7,900,000. If not used, the tax loss
carryforwards will expire at various dates through 2011. The Company's ability
to use these carryforwards is subject to limitations resulting from an ownership
change as defined in Internal Revenue Code Section 382 and 383. See Note H of
Notes to Financial Statements.
The Company expects to incur substantial additional costs, including
those related to research and development activities, preclinical studies,
clinical trials, obtaining regulatory approvals, process scale up and
manufacture, and the expansion of its facilities. The Company anticipates that
its existing funds, which include the proceeds from its initial public offering
and interest earned thereon, should be sufficient to fund its operating and
capital requirements as currently planned for the next twenty four months.
However, the Company's cash requirements may vary materially from those now
planned, due to many factors, including, but not limited to, the progress of the
Company's research and development programs, the scope and results of
preclinical and clinical testing, changes in existing and potential
relationships with corporate collaborators, the time and cost in obtaining
regulatory approvals, the costs involved in obtaining and enforcing patents,
proprietary rights and any necessary licenses, the ability of the Company to
establish development and commercialization capacities or relationships, the
costs of manufacturing and other factors. In the future, the Company may need to
raise substantial additional funds through additional financing, including
public or private equity offerings and collaborations with corporate partners.
There can be no assurance that funds will be available on terms acceptable to
the Company, if at all. If adequate
17
<PAGE> 19
funds are not available, the Company may be required to delay, scale back, or
eliminate certain of its product development programs or to license to others
the right to commercialize products or technologies the Company would otherwise
seek to develop and commercialize itself, any of which could have a material
adverse effect on the Company.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The response to this item is submitted as a separate section of this
Form 10-K. See Item 14.
Item 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
--------------------------------------------------------------
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information regarding Directors required by this Item is
incorporated by reference to the Section entitled "Proposal 1: Election of
Directors" of the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders (the "Proxy Statement"). The information regarding Executive
Officers is included in Part I of this Form 10-K.
The information regarding Compliance with Section 16(a) of the
Exchange Act required by this Item is incorporated by reference to the Section
entitled "Section 16(a) Beneficial Ownership Reporting Compliance" of the
Company's Proxy Statement.
Item 11. EXECUTIVE COMPENSATION
----------------------
The information required by this Item is incorporated by reference to
the Section entitled "Compensation of Executive Officers" of the Company's Proxy
Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this Item is incorporated by reference to
the Section entitled "Security Ownership of Management and Certain Beneficial
Owners" of the Company's Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by this Item is incorporated by reference to
the Section entitled "Certain Relationships and Related Transactions" of the
Company's Proxy Statement.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
-----------------------------------------------------------------
(a) 1. Financial Statements
The following financial statements are filed as part of this
Form 10-K.
Page
----
Report of Independent Auditors 22
Balance Sheets as of December 31, 1996 and 1995 23
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994, and for the period
February 11, 1991 (Inception) through December 31, 1996 24
18
<PAGE> 20
Page
----
Statement of Changes in Stockholders' Equity (Deficit) for
the period February 11, 1991 (Inception) through
December 31, 1996 25
Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994, and for the period February 11, 1991
(Inception) through December 31, 1996 26
Notes to Financial Statements 27
2. Financial Statement Schedule and Auditors' Report
Schedules are omitted since the required information is inapplicable
or because the information required is shown in the Financial
Statements or Notes thereto.
3. Exhibits
The following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the Commission.
Exhibit No. Description
----------- -----------
3.1 (2) Amended and Restated Certificate of Incorporation of
Virus Research Institute, Inc.
3.2 (2) Amended and Restated By-Laws of Virus Research
Institute, Inc.
10.1 (1) Virus Research Institute, Inc. 1992 Equity Incentive
Plan, as amended and restated.
10.2 (1) Form of Stock Option Agreement.
10.3 Lease dated December 1, 1996, between the Registrant
and Moulton Realty Company.
10.4 (1) Series D Convertible Preferred Stock Purchase
Agreement dated December 20, 1994.
10.5 (1) Series D Convertible Preferred Stock Purchase
Agreement dated January 5, 1996.
10.6 (1) Second Amended and Restated Stockholders Agreement
dated April 8, 1994 and amendments.
10.7 (1) Form of Warrant Agreement dated as of
February 10, 1994.
10.8 (1) Form of Warrant to purchase shares of Common Stock
dated February 10, 1994 issued pursuant to
Exhibit 10.7.
10.9 (1) Loan Agreement dated as of September 14, 1995
between the Registrant and certain stockholders,
with forms of Convertible Promissory Note and
Warrant Agreement attached.
10.10 (1) Form of Warrant to purchase shares of Common Stock
dated December 14, 1995 issued pursuant to Exhibit
10.9.
10.11 (1) Warrants issued to Comdisco, Inc. ("Comdisco") to
purchase shares of Series A Preferred Stock and
Series C Preferred Stock.
10.12 (1) Master Lease Agreement dated as of August 31, 1992,
between the Registrant and Comdisco.
19
<PAGE> 21
10.13 (1) License Agreement, dated as of May 1, 1992, between
the Registrant and the President and Fellows of
Harvard College ("Harvard") as amended.
10.14 (1) License and Clinical Trials Agreement, dated as of
February 27, 1995, between the Registrant and The
James N. Gamble Institute of Medical Research
(assigned to Children's Hospital of Cincinnati).
10.15 (1) License Agreement, dated as of March 12, 1995,
between the Registrant, Harvard and Dana-Farber
Cancer Institute.
10.16 (1) License Agreement, dated December 6, 1991, between
the Registrant and Massachusetts Institute of
Technology.
10.17 (1) License Agreement, dated March 8, 1995, between the
Registrant and The Penn State Research Foundation.
10.18 (1) License Agreement, dated as of December 13, 1994,
between the Registrant and Pasteur Merieux Serums &
Vaccins S.A. ("Pasteur Merieux").
10.19 (1) License Agreement, dated as of August 2, 1995,
between the Registrant and Pasteur Merieux.
10.20 (1) Option Agreement, dated as of November 22, 1995,
among the Registrant, Pasteur Merieux, OraVax, Inc.,
OraVax Merieux Co. and Merieux OraVax S.N.C.
relating to PCPP.
10.21 (1) Option Agreement dated as of November 22, 1995,
among the Registrant, Pasteur Merieux, OraVax, Inc.,
OraVax Merieux Co. and Merieux OraVax S.N.C.
relating to VibrioVec(TM).
10.22 (1) Research Agreement, dated January 10, 1996, between
the Registrant and CSL Limited.
10.23 (1) Collaborative Research and License Agreement, dated
as of June 22, 1995, between the Registrant and
SmithKline Beecham plc.
10.24 (1) Research and Development License and Option for
Commercial License Agreement, dated as of December
28, 1995, between the Registrant and Chiron
Corporation.
11.1 Computation of Pro Forma Loss Per Share.
23.1 Consent of Richard A. Eisner & Company, LLP
27.1 Financial Data Schedule.
---------------
(1) Incorporated by reference to the relevant exhibit to Virus
Research Institute, Inc.'s Registration Statement on Form S-1
(File No. 333-3378) as filed with the SEC on June 6, 1996.
(2) Incorporated by reference to the relevant exhibit to Virus
Research Institute, Inc.'s Form 10-Q for the quarter ended June
30, 1996 as filed with the SEC on August 8, 1996.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the fourth
quarter of fiscal 1996.
20
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Cambridge, Commonwealth of Massachusetts on the 17th day of March, 1997.
VIRUS RESEARCH INSTITUTE, INC.
By: /s/ J. BARRIE WARD, PH.D.
--------------------------
J. Barrie Ward, Ph.D.
SIGNATURE
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ J. BARRIE WARD, PH.D. Chief Executive Officer and March 17, 1997
- ---------------------------------- Chairman of the Board (principal
J. Barrie Ward, Ph.D. executive officer)
/s/ WILLIAM A. PACKER President, Chief Financial Officer March 17, 1997
- ---------------------------------- and Director (principal financial
William A. Packer officer)
/s/ LISA P. MCGILLIS Director of Finance (principal March 17, 1997
- ---------------------------------- accounting officer)
Lisa P. McGillis
Director March , 1997
- ----------------------------------
Costas E. Anagnostopoulos
/s/ JOHN W. LITTLECHILD Director March 17, 1997
- ----------------------------------
John W. Littlechild
/s/ ALAN M. MENDELSON Director March 17, 1997
- ----------------------------------
Alan M. Mendelson
/s/ FREDERICK W. KYLE Director March 17, 1997
- ----------------------------------
Frederick W. Kyle
/s/ ROBERT J. HENNESSEY Director March 17, 1997
- ----------------------------------
Robert J. Hennessey
</TABLE>
21
<PAGE> 23
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Virus Research Institute, Inc.
Cambridge, Massachusetts
We have audited the accompanying balance sheets of Virus Research
Institute, Inc. (a development stage company) as at December 31, 1996 and
December 31, 1995, and the related statements of operations, changes in
stockholders' equity (deficit) and cash flows for each of the years in the
three-year period ended December 31, 1996, and for the period from February 11,
1991 (inception) through December 31, 1996. 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 generally accepted auditing
standards. 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 enumerated above present fairly,
in all material respects, the financial position of Virus Research Institute,
Inc. at December 31, 1996 and December 31, 1995, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1996, and the period from February 11, 1991 (inception)
through December 31, 1996 in conformity with generally accepted accounting
principles.
Cambridge, Massachusetts
January 24, 1997
/s/ RICHARD A. EISNER & COMPANY, LLP
22
<PAGE> 24
<TABLE>
VIRUS RESEARCH INSTITUTE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note E) $ 15,209,180 $ 1,180,176
Marketable securities (Note E) 10,339,985 --
Interest receivable 218,285 --
Prepaid expenses 220,534 199,097
Other current assets 659 34,845
------------ ------------
Total current assets 25,988,643 1,414,118
Noncurrent assets:
Marketable securities (Note E) 499,891 --
Leasehold improvements and equipment (net
of accumulated depreciation and amortization
of $2,015,483 at December 31, 1996 and
$1,342,046 at December 31, 1995) (Note D) 881,363 1,205,487
Other assets 67,634 108,300
------------ ------------
Total noncurrent assets 1,448,888 1,313,787
------------ ------------
Total assets $ 27,437,531 $ 2,727,905
============ ============
Current liabilities:
Notes payable (Note G (3)) $ -- $ 923,315
Accounts payable 43,809 372,577
Accrued rent -- 50,417
Accrued consulting and research fees 810,677 457,712
Other accrued expenses 412,759 259,219
Current portion of lease obligation payable (Note F(2)) 155,079 175,090
------------ ------------
Total current liabilities 1,422,324 2,238,330
Lease obligation payable, less current portion (Note F(2)) 64,351 210,842
Commitments (Notes C and F)
Redeemable convertible preferred stock (Note G) -- 24,527,073
Stockholders' equity (deficit) (Notes A, F and G):
Preferred stock -- $.001 par value; 5,000,000 shares
authorized, none issued -- --
Common stock -- $.001 par value; 30,000,000 shares
authorized; 8,845,027 shares issued at December 31,
1996 and 690,004 shares issued at December 31, 1995 8,845 690
Additional paid-in capital 51,907,179 134,202
Deficit accumulated during the development stage (25,965,168) (24,383,232)
------------ ------------
Total stockholders' equity (deficit) 25,950,856 (24,248,340)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 27,437,531 $ 2,727,905
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
23
<PAGE> 25
<TABLE>
VIRUS RESEARCH INSTITUTE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<CAPTION>
FEBRUARY 11,
1991
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
DECEMBER 31,
1996 1995 1994 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE (NOTE B(1)):
Licensing & option revenue $4,520,000 $ 770,000 $ 700,000 $ 5,990,000
Research & development revenue 1,476,449 1,067,480 21,269 2,565,198
Interest income 851,082 126,249 163,591 1,224,532
----------------------------------------------------------
TOTAL REVENUE 6,847,531 1,963,729 884,860 9,779,730
EXPENSES:
Research and development (Note C) 5,262,507 5,734,427 5,756,042 24,009,480
General and administrative 2,328,204 1,854,732 1,887,512 8,964,359
Depreciation 673,436 583,654 517,756 2,117,831
Interest expense 165,320 87,944 52,332 653,228
----------------------------------------------------------
TOTAL EXPENSES 8,429,467 8,260,757 8,213,642 35,744,898
----------------------------------------------------------
NET LOSS ($1,581,936) ($6,297,028) ($7,328,782) ($25,965,168)
==========================================================
Pro forma net loss per common share ($ 0.21) ($ 0.99)
==========================
Shares used in computing pro forma
net loss per common share 7,639,726 6,391,454
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
24
<PAGE> 26
<TABLE>
VIRUS RESEARCH INSTITUTE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<CAPTION>
Common Stock Deficit
-------------------------- Accumulated
Additional During
Par Paid-in Development
Shares Value Capital Stage Total
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sale of common stock (restated to reflect change in
par value to $.001 from $.01 per share) 1,667 $ 2 $ 498 $ 0 $ 500
Net loss -- February 11, 1991 (inception)
through December 31, 1991 (862,597) (862,597)
-------------------------------------------------------------------------
Balance December 31, 1991 1,667 2 498 (862,597) (862,097)
Sale of common stock -- August 1992 607 1 1,819 1,820
Recapitalization, October 1992:
1,000 for 1 stock split 2,271,060 2,271 (2,271) --
Surrender of common stock by HCV II (1,291,667) (1,292) 905 (387)
Sale of common stock -- November 1992 48,275 48 7,193 7,241
Net loss for the year (3,967,604) (3,967,604)
-------------------------------------------------------------------------
Balance December 31, 1992 1,029,942 1,030 8,144 (4,830,201) (4,821,027)
Cancellation of shares pursuant to founders'
plan amendment (282,000) (282) (564) (846)
Purchase and cancellation of treasury shares (105,917) (106) (2,662) (2,768)
Stock options exercised 83 -- 12 12
Net loss for the year (5,927,221) (5,927,221)
-------------------------------------------------------------------------
Balance December 31, 1993 642,108 642 4,930 (10,757,422) (10,751,850)
Stock options exercised 1,475 2 321 323
Founder option exercised 43,333 43 37,007 37,050
Stock warrants exercised 185 -- 178 178
Net loss for the year (7,328,782) (7,328,782)
-------------------------------------------------------------------------
Balance December 31, 1994 687,101 687 42,436 (18,086,204) (18,043,081)
Stock options exercised 2,903 3 1,766 1,769
Common stock warrants issued in conjunction
with notes payable 90,000 90,000
Net loss for the year (6,297,028) (6,297,028)
-------------------------------------------------------------------------
Balance December 31, 1995 690,004 690 134,202 (24,383,232) (24,248,340)
Conversion of notes payable to investors 217,927 218 987,874 988,092
Cashless exercise of stock warrants 17,363 17 (17) --
Conversion of redeemable convertible
preferred stock 5,553,579 5,554 26,003,825 26,009,379
Stock options exercised 66,154 66 40,900 40,966
Shares issued at Initial Public Offering 2,300,000 2,300 27,597,700 27,600,000
Costs of offering (2,857,305) (2,857,305)
Net loss for the year (1,581,936) (1,581,936)
-------------------------------------------------------------------------
Balance December 31, 1996 8,845,027 $ 8,845 $51,907,179 ($25,965,168) $ 25,950,856
=========================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
25
<PAGE> 27
<TABLE>
<CAPTION>
VIRUS RESEARCH INSTITUTE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FEBRUARY 11,
1991
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
DECEMBER 31,
1996 1995 1994 1996
------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ($ 1,581,936) ($ 6,297,028) ($ 7,328,782) ($ 25,965,168)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation & amortization 700,188 599,435 517,756 2,160,365
Conversion of accrued interest to preferred stock 46,026 -- 12,347 58,373
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses
and other assets (164,869) 112,784 (199,379) (383,985)
Increase in accounts payable and accrued expenses 127,320 157,611 463,317 1,267,244
------------------------------------------------------------
Net cash used in operating activities (873,271) (5,427,198) (6,534,741) (22,863,171)
Cash flows from investing activities:
Purchases of marketable securities, net of redemptions (10,839,876) -- -- (10,839,876)
Capital expenditures (349,312) (129,561) (528,084) (2,914,292)
Other -- -- -- (46,182)
------------------------------------------------------------
Net cash used in investing activities (11,189,188) (129,561) (528,084) (13,800,350)
Cash flows from financing activities:
Proceeds from notes payable -- 1,000,000 1,000,000 7,973,668
Sale & leaseback related to capital acquisitions -- 250,000 -- 751,311
Principal payments on lease obligations (174,503) (183,344) (173,171) (684,195)
Sale of common stock 27,640,966 1,769 37,551 27,689,859
Sale of preferred stock 1,500,140 -- 10,982,528 19,258,613
Offering costs (2,875,140) (980) (68,727) (3,112,941)
Founders' shares reacquired -- -- -- (846)
Purchase of treasury stock -- -- -- (2,768)
------------------------------------------------------------
Net cash provided by financing activities 26,091,463 1,067,445 11,778,181 51,872,701
Net increase (decrease) in cash and cash equivalents 14,029,004 (4,489,314) 4,715,356 15,209,180
Cash and cash equivalents, beginning of period 1,180,176 5,669,490 954,134 --
------------------------------------------------------------
Cash and cash equivalents, end of period $ 15,209,180 $ 1,180,176 $ 5,669,490 $ 15,209,180
============================================================
Supplemental disclosure of cash flow information:
Interest paid during the period $ 63,473 $ 61,915 $ 52,330 $ 230,663
</TABLE>
See Notes E, F and G with respect to noncash financing and leasing transactions.
SEE NOTES TO FINANCIAL STATEMENTS
26
<PAGE> 28
VIRUS RESEARCH INSTITUTE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(NOTE A) -- THE COMPANY:
Virus Research Institute, Inc. (the "Company") is a development stage
company engaged in the discovery and development of vaccine delivery systems and
improved and novel vaccines for adults and children.
In May 1996, the stockholders approved a one-for-three reverse split of the
outstanding shares of the Company's common stock. All references to common
stock, options, warrants, per share data and the conversion rates of the
convertible preferred stock have been restated to give effect to the reverse
split.
The Company has incurred substantial losses since inception while it has
been in the development stage and such losses are expected to continue. In June
1996, the Company completed an initial public offering of 2,300,000 shares of
common stock for $12.00 per share, resulting in net proceeds of approximately
$24,743,000. (See Note G(1)). The Company anticipates that the proceeds from the
initial public offering in conjunction with payments received from collaborative
partners will allow the Company to meet its obligations through December 31,
1998.
(NOTE B) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(1) REVENUE RECOGNITION:
Nonrefundable, noncreditable licensing and option fees and milestone
payments are recognized when they are earned in accordance with the performance
requirements and contractual terms. Research and development revenues and grants
are recognized over the period of performance under the terms of the related
agreements.
Licensing revenue represents amounts paid by companies for the use of or
access to the Company's proprietary technology. Option revenue represents
payments for the right to evaluate the Company's proprietary technology which
may or may not result in a licensing or collaborative development agreement.
Research and development revenue represents amounts earned by the Company from
collaborative partners for sponsored research activities.
(2) DEPRECIATION AND AMORTIZATION:
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized using the
straight-line method over the life of the lease.
(3) PATENT AND LICENSING COSTS:
As a result of research and development efforts conducted by the Company,
it has received and applied for, and is in the process of applying for, a number
of patents to protect proprietary inventions and licenses to use certain
intellectual property. Costs
27
<PAGE> 29
incurred in connection with patent applications and licenses have been expensed
as incurred and are reflected as general and administrative expenses.
(4) CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments with maturities of
three months or less, when acquired, to be cash equivalents. Cash equivalents
are recorded at cost, which approximates fair value.
(5) INVESTMENTS IN MARKETABLE SECURITIES:
In addition to cash equivalents, the Company has investments in corporate
and municipal debt securities that are classified in the balance sheet as
held-to-maturity in accordance with the provisions of Statement of Financial
Accounting Standard No. 115 (SFAS No. 115), "Accounting for Certain Instruments
in Debt and Equity Securities." Held-to-maturity investments are securities the
Company has the positive intent and ability to hold to maturity. These
securities are accounted for at amortized cost, which approximates fair value.
(6) INCOME TAXES:
Deferred income taxes are recognized for the tax consequences in future
years for differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
(7) 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. Estimates
are used when accounting for depreciation and amortization, taxes and
contingencies.
(8) STOCK-BASED COMPENSATION:
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation." The Company adopted this standard in 1996 by making the required
note disclosures only. Therefore, the adoption of this standard did not have an
effect on the Company's financial position or results of operations.
(9) PRO FORMA NET LOSS PER SHARE:
Pro forma net loss per common share is based on the pro forma weighted
average number of common shares outstanding during the periods presented as
adjusted to reflect the conversion of all preferred stock on a retroactive basis
as of January 1, 1995 or date of issuance, if later. Pursuant to the
requirements of the SEC, common stock or other potentially dilutive instruments
issued by the Company during the twelve months immediately preceding the initial
public offering at prices below the public offering price
28
<PAGE> 30
have been included in the calculation of weighted average common shares
outstanding for the years prior to the year ended December 31, 1996 using the
treasury stock method.
(NOTE C) -- RESEARCH, LICENSE AND CONSULTING AGREEMENTS:
The Company has entered into various research, license and consulting
agreements to support its research and development activities. These agreements
generally expire over several future years although some are automatically
renewable on an annual basis unless cancelled by either party. Amounts charged
to operations in connection with these agreements for the years ended December
31, 1996, 1995 and 1994 amounted to approximately $650,000, $1,255,000 and
$1,565,000, respectively. The Company expects to incur similar expenses in
future years. Some of the above agreements contain provisions for future
royalties to be paid on sales of products developed under the agreements.
(NOTE D) -- LEASEHOLD IMPROVEMENTS AND EQUIPMENT:
<TABLE>
Leasehold improvements and equipment, including approximately $533,000
acquired under capital leases, are stated at cost and are summarized as follows:
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Laboratory furniture, fixtures and equipment $1,366,074 $1,160,891
Office furniture, fixtures and equipment 246,800 230,405
Leasehold improvements 1,283,972 1,156,237
---------- ----------
Total 2,896,846 2,547,533
Less accumulated depreciation and amortization 2,015,483 1,342,046
---------- ----------
Balance $ 881,363 $1,205,487
---------- ----------
</TABLE>
(NOTE E) -- INVESTMENTS IN DEBT SECURITIES:
As of December 31, 1996, the aggregate fair value of the held-to-maturity
securities was $16,866,045, of which $1,000,000 are municipal securities and
$15,866,045 are taxable securities. These amounts include an unrealized gain of
$26,056.
<TABLE>
In the accompanying balance sheet $6,000,113 of the above securites are
included in cash and cash equivalents. The remainder of the securities are
reflected as follows:
<S> <C>
Marketable securities $10,339,985
Marketable securities, long term $ 499,891
</TABLE>
<TABLE>
The contractual maturities of the above securities are as follows:
<S> <C>
Within one year $16,340,098
One to five years $ 499,891
</TABLE>
29
<PAGE> 31
(NOTE F) -- COMMITMENTS:
(1) Operating lease:
In December 1996, the Company renewed its operating lease for office and
research facilities for a period of five years. The Company has the option to
renew the lease for an additional five years. The lease also provides that the
Company pay all real estate taxes levied against the premises. The lease
requires minimum annual rentals in 1997 through 2001 of $294,000.
Rent expense for 1996, 1995 and 1994 amounted to approximately $267,000,
$269,000 and $267,000, respectively.
(2) Capital lease:
<TABLE>
The Company has entered into several capital leases for equipment,
including sale and leaseback transactions. Future minimum payments under these
leases at December 31, 1996 are as follows:
<CAPTION>
Year Ended December 31,
-----------------------
<S> <C>
1997 $162,609
1998 74,588
--------
Total 237,197
Less amount representing interest 17,767
--------
Present value of future lease payments 219,430
Less amounts due within one year 155,079
--------
Amount due after one year $ 64,351
--------
</TABLE>
During 1996, a lessor converted warrants issued during leasing arrangements
originating in 1992 and 1995 into 17,363 shares of the Company's common stock.
(See Note G).
(NOTE G) -- CAPITALIZATION:
(1) Initial Public Offering:
In June 1996, the Company completed an initial public offering of 2,300,000
shares of common stock for $12.00 per share, resulting in net proceeds of
approximately $24,743,000.
(2) Preferred stock:
Prior to the initial public offering, the Company had been primarily
financed through the sale of various series of preferred stock in exchange for
cash and the conversion of indebtedness. All preferred shares then outstanding
were converted into 5,553,579 shares of common stock upon the closing of the
initial public offering.
30
<PAGE> 32
(3) Conversion of notes payable:
During June 1996, the Company converted the principal amount of $1,000,000
and $46,026 of accrued interest into 653,770 shares of Series C redeemable
convertible preferred stock which automatically converted into 217,927 shares of
common stock upon the closing of the initial public offering.
(4) Warrants:
The Company has issued warrants to purchase common and preferred stock in
connection with the issuance of notes payable and the establishment of capital
leases. During June 1996, under the terms of a leasing agreement, a lessor
exercised its warrants to purchase Series A and Series C convertible preferred
stock. These preferred shares converted into 17,363 shares of common stock upon
the closing of the initial public offering pursuant to a cashless exercise.
<TABLE>
Warrants outstanding at December 31, 1996 are as follows:
<CAPTION>
Exercise
Number of Price
Security Shares Per Share Expiration Date
-------- ------ --------- ---------------
<S> <C> <C> <C>
Common stock 33,570 $ .96 February 9, 2004
Common stock 66,670 1.95 December 14, 2005
Common stock 11,000 9.60 April 12, 2001
</TABLE>
The warrant agreements contain antidilution provisions related to future
issuances of stock.
(5) Common stock options:
<TABLE>
The Company has adopted an equity incentive plan providing for the issuance
of restricted stock and the granting of options to purchase up to a combined
total of 1,751,176 shares of common stock. The plan provides for the granting of
both incentive stock options and nonstatutory stock options. The exercise price
for any incentive stock options cannot be less than the fair market value on the
date of grant, while the exercise price for nonstatutory options will be
determined by the Board of Directors. The vesting periods for all options are
determined by the Board of Directors. The Company had the following option
activity during 1994, 1995 and 1996:
<CAPTION>
Number of Option Price
Shares Per Share
------ ---------
<S> <C> <C>
Balance -- December 31, 1993 210,548 $ .15 to $ .93
Granted 542,806 $1.80 to $1.485
Exercised (1,474) $ .15 to $ .96
Cancelled (1,660) $ .15 to $1.485
-------
Balance -- December 31, 1994 750,220 $ .15 to $1.485
Granted 12,142 $1.485 to $3.75
Exercised (2,903) $. 15 to $1.47
Cancelled (11,584) $ .15 to $1.485
-------
Balance December 31, 1995 747,875 $ .15 to $3.75
</TABLE>
31
<PAGE> 33
<TABLE>
<S> <C> <C>
Granted 325,172 $3.90 to $10.80
Exercised (66,154) $ .15 to $3.90
Cancelled (14,515) $ .795 to $10.80
------
Balance December 31, 1996 992,378 $ .15 to $10.80
-------
</TABLE>
Options for 398,168 shares are exercisable at December 31, 1996 at an
average price of $1.13. At December 31, 1996, there were 688,192 shares
available for future grant.
(6) Stock-based compensation:
<TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" but applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its plan.
There was no compensation expense recognized in 1996 or 1995. If the Company had
elected to recognize compensation cost for the plan based on the fair value at
the grant date for awards under the plan, consistent with the method prescribed
by SFAS No. 123, net loss per share would have been changed to the pro forma
amounts indicated below:
<CAPTION>
Year ended December 31,
1996 1995
---- ----
<S> <C> <C> <C>
Net loss As reported $(1,581,936) $(6,297,028)
Pro forma (1,729,019) (6,297,309)
Net loss per share As reported $ ( .21) $ (. 99)
Pro forma ( .23) ( .99)
</TABLE>
The fair value of the Company's stock options used to compute pro forma net
loss and net loss per share disclosures is the estimated present value at grant
date using the Black-Scholes option-pricing model with the following weighted
average assumptions for 1996 and 1995: dividend yield of 2.5%; expected
volatility of 50%; a risk free interest rate of 7.5%; and an expected holding
period of ten years.
(NOTE H) -- INCOME TAXES:
Through December 31, 1993, pursuant to provisions of the Internal Revenue
Code, the Company was deferring all start-up costs because operations, as
defined by the Internal Revenue Code, had not commenced. In addition, the
Company elected to defer all research and development costs until revenues were
generated. Effective January 1994, the Company began generating revenues and
commenced operations for tax purposes and is amortizing all costs deferred
through December 31, 1993 over 60 months. From January 1994 forward, the Company
continues to defer research and development costs and amortizes such costs over
60 months for tax purposes.
At December 31, 1996 and 1995, the Company had no current or deferred tax
liability.
32
<PAGE> 34
<TABLE>
The components of the Company's net deferred tax asset and the tax effects
of the primary differences giving rise to the Company's deferred tax asset are
as follows:
<CAPTION>
Year ended December 31,
1996 1995
---- ----
<S> <C> <C>
Net operating loss carryforwards $ 3,100,000 $ 3,000,000
Deferred start-up costs for tax purposes 380,000 550,000
Deferred research and development costs for tax purposes 5,595,000 5,250,000
Depreciation 250,000 164,000
Patent costs 349,000 165,000
Other 36,000 171,000
----------- ----------
Deferred tax asset 9,710,000 9,300,000
Valuation allowance (9,710, 000) (9,300,000)
----------- -----------
Net deferred tax asset $ -- $ --
----------- ----------
</TABLE>
At December 31, 1996, the Company's net operating loss carryovers for
federal income tax purposes amount to approximately $7,900,000 and expire
through 2011. The Company's ability to use these carryforwards is subject to
limitations resulting from an ownership change as defined in Internal Revenue
Code Sections 382 and 383.
During 1996, the Company adjusted its deferred tax assets to reflect the
amounts reported in its tax return. Accordingly, although in total the deferred
tax asset remains unchanged, the amounts shown in the above table reflect
reclassifications between net operating loss carryforwards and deferred research
and development costs from those presented in the prior financial statements.
33
<PAGE> 1
Exhibit 10.3
AMENDMENT TO LEASE
BETWEEN
MOULTON REALTY COMPANY
AND
VIRUS RESEARCH INSTITUTE, INC.
The lease ("Lease") dated December 9, 1991 between Michael J. Spinelli,
Trustee of M.R.C. Realty Trust; Carol A. Hickey; Peter A. Spinelli, General
Partner; and Spinelli Family Associates all doing business as Moulton Realty
Company, as Landlord and Lessor, and Virus Research Institute, Inc., as Tenant
and Lessee, demising the premises located at 61 Moulton Street, Cambridge,
notice of which is recorded in the Middlesex South Registry of Deeds in Book
21695, Page 407, is hereby amended as follows:
1. The number of parking spaces demised to Tenant for its exclusive use
is to be increased from 30 spaces to 43 spaces, effective December 1, 1996. The
parking spaces demised to the Tenant effective December 1, 1996 are shown on the
new Schedule A annexed hereto, which the parties agree will substitute for the
current Schedule A to the Lease, effective December 1, 1996,
2. The parties acknowledge that Tenant has exercised validly and
effectively its right and option to extend the term of the Lease, as set forth
in Article III(b) of the Lease, and that the term of the Lease now expires on
November 30, 2001; provided however, that the base rent due during the five (5)
year period commencing on December 1, 1996 to November 30, 2001 shall be
$293,700.00 per year in monthly installments of $24,475.00.
3. Article III(b) of the Lease is amended to read as follows:
OPTION
------
"OPTION The Landlord hereby grants to the Tenant and its successors
and assigns the right and option to extend the term of the Lease for a
five-year period commencing on December 1, 2001 and ending on November 30,
2006, in accordance with the following terms and conditions:
If this Lease shall be in full force and effect at the expiration of
the first extension term on November 30, 2001, then the Tenant shall have
the right to extend this Lease for an additional period of five (5) years,
beginning on December 1, 2001 and expiring November 30, 2006, as
hereinafter sat forth, providing that the Tenant shall give written notice
to the landlord at least six (6) months prior ro expiration of said first
extension term of this Lease of its election to exercise the aforesaid
option. If the aforesaid option is exercised, the terms of this Lease shall
be the same, except that the base rent hereunder shill be adjusted to equal
the fair market rental of the demised premises, but in no event less than
the base rent due in the fifth year of the first extension term of the
Lease. If the parties are unable to agree on the fair market rental
<PAGE> 2
then each shall appoint an arbitrator who shall be licensed real estate
broker or appraiser. If the two arbitrators are unable to agree on a fair
market rental then the two arbitrators shall appoint a third arbitrator and
a decision of the majority of the arbitrators shall be binding. In
computing fair market rental for the purposes of this section, any portion
of the Building which on September 1, 1996 is used and improved as office
space and subsequently is converted to laboratory or similar use will,
notwithstanding any such conversion, be treated and valued as office space
in the condition it was in immediately prior to its conversion to
laboratory or similar use. Both landlord and Tenant shall have the right,
prior to conversion, to photograph or otherwise document and memorialize
the condition of any office space intended to be converted to laboratory or
similar use."
4. Landlord agrees to defend, indemnify and hold harmless Tenant, its
officers, employees, agents, successors, and assigns (the "Indemnitees"),
against and in respect of, any and all damages, losses, liabilities, expenses,
costs, claims, actions, suits, proceedings, assessments, orders, judgements,
fines, and penalties (including without limitation, reasonable legal,
accounting, consulting, engineering, and other expenses), which may be incurred
by any of the Indemnitees, or imposed upon or asserted against any of the
Indemnitees by any other party or parties (including, without limitation, a
governmental entity), arising out of, in connection with, or relating to the
subject matter of (a) any actual or alleged violation of any environmental or
health and safety-related law, regulation, rule, ordinance or by-law, whether at
the federal, state, or local level, with respect to the demised premises or any
facility or improvement or any operation or activity thereon, occurring or
existing as of and/or prior to December 1, 1991, even if not discovered until
after such date; or (b) the actual or alleged presence of any Hazardous
Material, as defined below, on, in, under, adjacent to, or affecting the
premises, occurring or existing as of and/or prior to December 1, 1992, even if
not discovered until after such date. For purposes of this provision, Hazardous
Material" shall mean any pollutant, contaminant, toxlc substance, hazardous
waste, hazardous material, or hazardous substance, or any oil, petroleum, or
petroleum product, as defined in or pursuant to the Resource Conservation and
Recovery Act, as amended, the Comprehensive Environmental Response,
Compensation, and Liability Act, as amended, the Federal Clean Water Act, as
amended, the Massachusetts Hazardous Waste Management Act, as amended, the
Massachusetts Oil and Hazardous Material Release Prevention and Response Act, as
amended, or any other federal, state, or local environmental law, regulation,
ordinance, rule, or by-law.
<PAGE> 3
Except as expressly amended by this Amendment, the Lease dated December 9,
1991 continues unmodified and in full force and effect.
Signed and sealed this 6th day of October, 1996.
MOULTON REALTY COMPANY
/s/ Michael J. Spinelli
--------------------------------------
Michael J. Spinelli
Trustee of M.R.C. Realty Trust
/s/ Carol A. Hickey
--------------------------------------
Carol A. Hickey
/s/ Peter A. Spinelli
--------------------------------------
Peter A. Spinelli, General Partner
Spinelli Family Associates
VIRUS RESEARCH INSTITUTE, INC.
By: /s/ William A. Packer
-----------------------------------
William A. Packer
President and Chief Financial
Officer
<PAGE> 1
Exhibit 11.1
Statement Regarding Computation of Earnings Per Share
VIRUS RESEARCH INSTITUTE, INC.
(a development stage company)
COMPUTATION OF PRO FORMA NET LOSS PER COMMON SHARE
Year Ended December 31,
1996 1995
----------------------------
Net loss ($1,581,936) ($6,297,028)
Shares used in computing net
loss per common share:
Weighted average common stock
outstanding during the period 2,120,604 688,720
Conversion of redeemable
convertible preferred stock (1) 5,519,122 5,415,951
Dilutive effect of common
equivalent shares -- "cheap stock" (2) N/A 286,783
Common stock equivalents (3) N/A N/A
-------------------------
Weighted average common shares
outstanding 7,639,726 6,391,454
Pro forma net loss per common share ($ 0.21) ($ 0.99)
=========================
[FN]
(1) Effective with the closing of the Company's initial public offering of
common stock, redeemable convertible preferred stock converted into shares
of common stock. Accordingly, the equivalent number of weighted average
common shares that would have been outstanding during each period presented
have been included as outstanding.
(2) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, common stock, preferred stock, stock options and warrants issued at
prices below the initial public offering price per share ("cheap stock")
during the twelve month period immediately preceding the filing of the
Company's Registration Statement for its initial public offering have been
included as common equivalents for periods prior to the initial public
offering.
(3) No common stock equivalents have been included in the year ended December
31, 1996 as their effect would be antidilutive.
1
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
No. 333-13245 of Virus Research Institute, Inc. (the "Company") on Form S-8 of
our report dated January 24, 1997 on the financial statements of the Company for
the years ended December 31, 1996 and December 31, 1995 and for each of the
years in the three-year period ended December 31, 1996 and the period from
February 11, 1991 (inception) through December 31, 1996 appearing in this annual
report on Form 10-K of the Company.
/s/ Richard A. Eisner & Company, LLP
Cambridge, Massachusetts
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
DECEMBER 31, 1996 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH PROSPECTUS FILED ON FORM S-1 DATED JUNE 5, 1996.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 15,209,180
<SECURITIES> 10,839,876
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 25,988,643
<PP&E> 2,896,846
<DEPRECIATION> 2,015,483
<TOTAL-ASSETS> 27,437,531
<CURRENT-LIABILITIES> 1,422,324
<BONDS> 0
0
0
<COMMON> 8,845
<OTHER-SE> 25,942,011
<TOTAL-LIABILITY-AND-EQUITY> 27,437,531
<SALES> 0
<TOTAL-REVENUES> 6,847,531
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,429,467
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,581,936)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,581,936)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,581,936)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
