<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ------
Exchange Act of 1934. For the quarterly period ended March 31, 1999.
_________ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from __________________ to
_______________________________
Commission File Number _______________
VALENTIS, INC.
(formerly known as Megabios Corp.)
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-3156660
- ------------------------------------------------ ---------------------------------
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
863A Mitten Rd., Burlingame, CA 94010
- ------------------------------------------------ ---------------------------------
(Address of principal offices) (Zip Code)
</TABLE>
650-697-1900
-------------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
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
----- ----
The number of outstanding shares of the registrant's Common Stock, $.001 par
value, was 22,070,803 as of April 30, 1999.
Page 1 of 19
<PAGE>
VALENTIS, INC.
(formerly known as Megabios Corp.)
INDEX
PART I: FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1: FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II: OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS 15
Item 2: CHANGES IN SECURITIES AND USE OF PROCEEDS 15
Item 3: DEFAULTS UPON SENIOR SECURITIES 15
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
Item 5: OTHER INFORMATION 15
Item 6: EXHIBITS AND REPORTS ON FORM 8-K 15
Signatures 16
Exhibit Index 17
</TABLE>
Page 2 of 19
<PAGE>
PART 1 Financial Information
ITEM 1 FINANCIAL STATEMENTS AND NOTES
VALENTIS, INC.
(formerly known as Megabios Corp.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
---- ----
(unaudited) (Note 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,090 $ 15,172
Short-term investments 23,886 7,794
Other receivables 1,235 616
Prepaid expenses and other current assets 697 539
--------- --------
Total current assets 38,908 24,121
Property and equipment, net 11,987 6,151
Long-term investments 10,250 25,460
Other receivables 130 130
Deposits and other assets 55 39
Goodwill and other intangible assets 9,831 --
--------- --------
$ 71,161 $ 55,901
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,891 $ 898
Accrued compensation 608 595
Accrued construction-in-progress 243 589
Other accrued liabilities 314 56
Deferred revenue 4,487 --
Current portion of long-term debt 2,246 1,017
--------- --------
Total current liabilities 10,789 3,155
Long-term debt 5,926 2,464
Commitments
Stockholders' equity:
Common stock 13 13
Additional paid-in capital 119,619 79,838
Deferred compensation (555) (976)
Accumulated other comprehensive income (loss) 41 (7)
Accumulated deficit (64,672) (28,586)
--------- --------
Total stockholders' equity 54,446 50,282
--------- --------
$ 71,161 $ 55,901
========= ========
</TABLE>
See accompanying notes
Page 3 of 19
<PAGE>
VALENTIS, INC.
(formerly known as Megabios Corp.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
--------- ---------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Collaborative research and development revenue $ 790 $ 1,862 $ 2,176 $ 6,615
Operating expenses:
Research and development 3,501 4,826 10,287 10,741
General and administrative 1,286 1,002 3,380 2,429
Acquired in-process research and development 25,870 -- 25,870 --
--------- --------- --------- ----------
Total operating expenses 30,657 5,828 39,537 13,170
--------- --------- --------- ----------
Loss from operations (29,867) (3,966) (37,361) (6,555)
Interest income 592 757 1,893 1,931
Interest and other expense (274) (112) (618) (320)
--------- --------- --------- ----------
Net loss $ (29,549) $ (3,321) $ (36,086) $ (4,944)
========= ========= ========== ==========
Basic and diluted net loss per share $ (2.09) $ (0.27) $ (2.73) $ (0.54)
========= ========= ========= ==========
Shares used in computing basic and diluted net 14,175 12,469 13,236 9,208
loss per share ========= ========= ========= ==========
</TABLE>
See accompanying notes
Page 4 of 19
<PAGE>
VALENTIS, INC.
(formerly known as Megabios Corp.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended March 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (36,086) $ (4,944)
Adjustments to reconcile net loss to net cash used in operations
Depreciation 1,570 1,355
Amortization of deferred compensation 422 309
Acquired in-process research and development 25,870 1,500
Changes in operating assets and liabilities:
Other receivables (590) (890)
Prepaid expenses and other (1,772) (54)
Deferred revenue 317 (254)
Accounts payable (2,621) 159
Other accrued liabilities 273 355
--------- ---------
Net cash used in operations (12,617) (2,464)
Cash flows from investing activities
Cash acquired in GeneMedicine merger 11,844 --
Purchase of property and equipment (5,312) (2,113)
Deposits and other assets (16) 282
Purchase of available-for-sale investments (9,568) (35,324)
Maturities of available-for-sale investments 8,735 11,200
--------- ---------
Net cash provided by (used in) investing activities 5,683 (25,955)
Cash flows from financing activities
Proceeds from issuance of long-term debt 5,847 681
Payments on long-term debt (1,174) (636)
Proceeds from issuance of common stock, net 179 31,509
--------- ---------
Net cash provided by financing activities 4,852 31,554
--------- ---------
Net increase (decrease) in cash and cash equivalents (2,082) 3,135
Cash and cash equivalents, beginning of period 15,172 9,044
--------- ---------
Cash and cash equivalents, end of period $ 13,090 $12,179
========= =========
Supplemental disclosure of cash flow information
Interest paid 560 317
========= =========
Schedule of non-cash transactions:
Accrued construction-in-progress (346) --
========= ==========
Assets acquired for shares of common stock, net of cash acquired and
liabilities assumed 3,596 --
========= ==========
Common stock issued and options assumed in business acquisition
39,603 --
========= ==========
</TABLE>
See accompanying notes
Page 5 of 19
<PAGE>
VALENTIS, INC.
(formerly known as Megabios Corp.)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and
have been prepared by Valentis, Inc. (the "Company") in accordance with the
rules and regulations of the Securities and Exchange Commission for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Certain information and footnote disclosures
normally included in the Company's annual financial statements as required by
generally accepted accounting principles have been condensed or omitted. The
interim financial statements, in the opinion of management, reflect all
adjustments (consisting of normal recurring accruals) necessary for a fair
statement of the results for the interim periods ended March 31, 1999 and 1998.
The balance sheet at June 30, 1998 is derived from the audited financial
statements at that date but does not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
For purposes of the quarter ended and nine months ended March 31, 1999, the
balance sheet, statement of operations, and statement of cash flows presented
are consolidated financial statements, reflecting the operations of GeneMedicine
commencing March 18, 1999.
The results of operations for the three and nine months ended March 31, 1999 are
not necessarily indicative of the results of operations to be expected for the
fiscal year, although the Company expects to incur a substantial loss for the
year ended June 30, 1999. These interim financial statements should be read in
conjunction with the audited financial statements for the year ended June 30,
1998, which are contained in the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission.
2. Revenue Recognition
Revenue related to collaborative research agreements with the Company's
corporate partners is recognized over the related funding periods for each
contract. The Company is required to perform research and development activities
as specified in each respective agreement on a best-efforts basis. The payments
received under each respective agreement are not refundable. The Company is
reimbursed based on the costs associated with the number of full time equivalent
employees working on each specific contract over the term of the agreement.
Research and development expenses under the collaborative research agreements
approximate or exceed the revenue recognized under such agreements over the term
of the respective agreements. Deferred revenue may result when the Company does
not incur the required level of effort during a specific period in comparison to
funds received under the respective contracts. In addition, as a result of the
GeneMedicine merger, deferred revenues at March 31, 1999, include an obligation
related to a research agreement with Roche Holdings Ltd. ("Roche"). Under a
corporate partnership with Roche, the Company may be obligated, upon certain
circumstances, to conduct research and development in an amount not to exceed $5
million at the end of the five year agreement. The Company has therefore
deferred a portion of research funding received from Roche under this agreement
to provide for this obligation.
Page 6 of 19
<PAGE>
VALENTIS, INC.
(formerly known as Megabios Corp.)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Milestone payments are recognized pursuant to collaborative agreements upon the
achievement of specified milestones, such as the filing of Investigational New
Drug Applications, commencement of clinical trials or receipt of regulatory
approvals. In the three months ended March 31, 1999, a milestone payment of
$250,000 was recognized from the Company's manufacturing partnership with DSM
Biologics ("DSM") upon the successful technology transfer of the Company's
plasmid DNA manufacturing technology to DSM following a successful 3,500 liter
production run at DSM's facility in Montreal, Quebec, Canada.
3. Net Loss Per Share
Basic earnings per share is computed by dividing income or loss applicable to
common stockholders by the weighted-average number of common shares outstanding
for the period net of certain common shares outstanding which are subject to
continued vesting and the Company's right of repurchase. Basic earnings per
share excludes any dilutive effects of options.
Diluted net loss per share has not been presented separately as, given the
Company's net loss position, the result would be anti-dilutive.
The following have been excluded from the calculation of loss per share because
the effect of inclusion would be antidilutive: approximately 70,965 common
shares which are outstanding but are subject to the Company's right of
repurchase which expires ratably over 4 years, and options to purchase
approximately 2,704,709 shares of common stock at a weighted average price of
$7.02 per share. The repurchasable shares and options will be included in the
calculation at such time as the effect is no longer antidilutive, as calculated
using the treasury stock method.
A reconciliation of shares used in the calculation of basic and diluted
net loss per share follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
--------- ---------
1999 1998 1999 1998
---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net loss $ (29,549) $ (3,321) $ (36,086) $ (4,944)
============== =============== =============== ===============
Basic and Diluted
Weighted average shares of common stock outstanding
14,246 12,743 13,339 9,513
Common shares subject to repurchase (71) (274) (103) (305)
-------------- --------------- --------------- ---------------
Weighted average shares of common stock used in
computing net loss per share 14,175 12,469 13,236 9,208
============== =============== =============== ===============
Basic and diluted net loss per share $ (2.09) $ (0.27) $ (2.73) $ (0.54)
============== =============== =============== ===============
</TABLE>
Page 7 of 19
<PAGE>
VALENTIS, INC.
(formerly known as Megabios Corp.)
4. Merger with GeneMedicine, Inc.
On March 18, 1999, the Company completed its merger with GeneMedicine, Inc.
("GeneMedicine"). On April 29, 1999, the combined company was renamed Valentis,
Inc. Under the terms of the merger agreement, each outstanding share of
GeneMedicine common stock was converted into 0.5710 of a share of the Company's
common stock. This resulted in the issuance of approximately 9.1 million shares
of the Company's common stock, valued at $38.7 million. The purchase price also
included approximately $850,000 related to GeneMedicine's stock options and
outstanding warrants assumed by the Company and $1.7 million of transaction
costs, for an aggregate purchase price of $41.3 million.
The merger transaction was accounted for as a purchase. As a result of the
purchase, $25.9 million of the purchase price was charged to in-process
research and development in the Company's Condensed Consolidated Statement of
Operations for the quarter ended March 31, 1999.
The following is a summary of the purchase price allocation (in thousands):
<TABLE>
<S> <C>
Tangible assets acquired.................................................. $14,410
In-process research and development....................................... 25,870
Intangible assets-assembled workforce and goodwill........................ 9,831
Liabilities assumed (including GeneMedicine transaction costs and other
obligations due upon the close of the merger).......................... (8,801)
----------
$41,310
==========
</TABLE>
The intangible assets - assembled workforce and goodwill will be amortized over
their estimated useful lives of three years.
The Board of Directors of the combined company consists of eight directors,
three of whom were directors of GeneMedicine. Benjamin F. McGraw III remains as
chairman, president and CEO of the combined entity.
5. Credit Facility
In June 1998, the Company obtained an $8.0 million line of credit from a
commercial bank. As of June 30, 1998, the Company had drawn and converted $1.0
million of this line of credit into a term loan bearing interest at the prime
rate plus 0.5%. The loan is payable in 42 equal monthly installments beginning
July 31, 1998. An additional $5.9 million was drawn from the line of credit in
the nine months ended March 31, 1999. Interest on $4.6 million of this amount is
accrued and paid monthly and was converted into a term loan bearing interest at
the prime rate plus 0.5% on December 31, 1998, payable in 42 monthly
installments beginning January 31, 1999. On January 28, 1999, the Company
amended the terms of the line of credit. Under the amended terms, the Company
extended its remaining credit facility draws to March 31, 1999, from the
original date of December 31, 1998, making the remaining $2.4 million of credit
available through March 31, 1999. Draws of $1.3 million made after December 31,
1998 are payable in 39 monthly installments beginning March 31, 1999. The
Company fully utilized its line of credit with a final draw of $1.1 million in
April 1999.
Page 8 of 19
<PAGE>
VALENTIS, INC.
(formerly known as Megabios Corp.)
6. Comprehensive Income (Loss)
As of July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No.130, "Reporting of Comprehensive Income" ("SFAS 130"). SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however the adoption of SFAS 130 had no impact on the Company's
net loss or stockholders' equity. SFAS 130 requires unrealized gains or losses
on the Company's available-for-sale securities which, prior to adoption, were
reported separately in stockholders' equity, to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of SFAS 130. For the quarters ended March 31, 1999
and 1998, total comprehensive loss amounted to $29.5 million and $3.4 million,
respectively. For the nine-month periods ended March 31, 1999 and 1998, total
comprehensive losses were $36.1 million and $5.0 million, respectively.
7. New Accounting Standards
Effective July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 superceded SFAS 14, "Financial Reporting for
Segments of a Business Enterprise". SFAS 131 establishes standards for the way
that public business enterprises report selected financial information about
operating segments in annual financial statements. SFAS 131 also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The adoption of SFAS 131 will have no impact on the
Company's results of operations, or financial position.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" in the Company's Annual Report on
Form 10-K for the year ended June 30, 1998, filed with the Securities and
Exchange Commission.
On March 18, 1999, the Company completed its merger with GeneMedicine. Each
outstanding share of GeneMedicine common stock is being converted into 0.5710 of
a share of the Company's, common stock of Valentis, Inc. The merger resulted in
the issuance of approximately 9.1 million shares of the Company's common stock,
valued at $38.7 million. The purchase price also included approximately $850,000
related to GeneMedicine's stock options and outstanding warrants assumed by the
Company and $1.7 million of transaction costs, for an aggregate purchase price
of $41.3 million.
The merger transaction was accounted for as a purchase. A write-off of $25.9
million for in-process research and development acquired from GeneMedicine has
been included in the Company's statement of operations this quarter (see
detailed discussion of "Acquisition of GeneMedicine Research and Development
Programs" below). The intangible assets acquired will be amortized over their
estimated useful lives of 3 years.
For purposes of the quarter ended and nine months ended March 31, 1999, the
balance sheet, statement of operations, and statement of cash flows presented
are consolidated financial statements, reflecting the operations of GeneMedicine
commencing March 18, 1999.
The Company is conducting operations in both California and Texas. The Company
expects an increase in both research and administrative expenditures in future
periods.
The Company develops proprietary gene delivery systems and provides
preclinical development expertise to create gene-based therapeutics designed
for the treatment or prevention of genetic and acquired diseases. The Company
has developed several in vivo, non-viral gene delivery systems to address a
number of potential therapeutic applications using a variety of therapeutic
genes. The Company's clinical development and commercialization strategy is
to enter into corporate partnerships with pharmaceutical and biotechnology
companies. The Company has established corporate partnerships with Glaxo
Wellcome plc ("Glaxo"), Pfizer Inc. ("Pfizer"), Eli Lilly & Co. ("Lilly") and
Roche. In December 1997, Pfizer decided to discontinue its research and
development program to develop gene-based therapeutics to treat cancer via
angiogenesis inhibition. Under the terms of the agreement with Pfizer, Pfizer
continued funding the program through May 31, 1998. The Company has continued
to advance the angiogenesis inhibition program and is actively seeking a new
corporate partner. The corporate partnerships with Glaxo and Lilly are
ongoing. Following its merger with GeneMedicine, the Company also has
maintained the corporate partnership GeneMedicine had with Roche. This
collaboration, formed in 1995, originally was a five-year agreement to
develop gene-based therapeutics to treat head and neck cancer, with a
three-year option to extend to other cancer indications. In August 1998, the
agreement was extended two more years to February 2002.
Page 9 of 19
<PAGE>
To date, a significant portion of revenue has been generated by collaborative
research and development agreements with corporate partners. Under the terms of
its corporate collaborations, the Company receives research and development
funding on a quarterly basis in advance of associated research and development
costs. In March 1999, the Company also recognized its first milestone payment
from its manufacturing partnership with DSM. The milestone payment was
recognized upon the completion of a large scale manufacturing run at DSM's
facility in Montreal. The Company expects that future revenue will be derived in
the short-term from research and development agreements and milestone payments,
and in the long-term from royalties on product sales.
The Company has incurred significant losses since inception and expects to incur
substantial losses for the foreseeable future, primarily due to the expansion of
its research and development programs and because the Company does not expect to
generate revenue from the sale of products in the foreseeable future, if at all.
The Company expects that operating results will fluctuate from quarter to
quarter and that such fluctuations may be substantial. As of March 31, 1999, the
Company's accumulated deficit was approximately $64.7 million.
Results of Operations
The Company's collaborative research and development revenue for the three and
nine months ended March 31, 1999 totaled approximately $790,000 and $2.2
million, respectively, compared to $1.9 million and $6.6 million for the
corresponding periods in 1998. The 1999 revenue was attributable to amounts
earned for research and development performed under the Company's corporate
collaboration with Lilly and a milestone payment of $250,000 from its DSM
manufacturing partnership recognized in the third quarter of 1999. The 1998
revenue was primarily attributable to amounts earned for research and
development performed under the Company's corporate collaborations with Pfizer
and Lilly. For the three and nine months ending March 31, 1998, revenues from
Pfizer were approximately $900,000 and $3.4 million, respectively. Revenues from
Lilly were approximately $900,000 and $3.2 million for the same periods. No
revenue from royalties from product sales has been earned under any corporate
collaboration to date.
Research and development expenses for the three and nine months ended March 31,
1999 decreased to $3.5 million and $10.3 million, respectively, compared to $4.8
million and $10.7 million for the same periods in 1998. The decrease for the
third quarter was primarily attributable to an expenditure in March 1998 of $1.5
million for a license and collaboration agreement with the University of
Pittsburgh related to the gene therapy of joint diseases. The Company expects
research and development expenses to increase as the Company continues to expand
its independent and collaborative research and development programs.
General and administrative expenses for the three and nine months ended March
31, 1999 increased to $1.3 million and $3.4 million, respectively, compared to
$1.0 million and $2.4 million in the corresponding periods of 1998. The increase
in the third quarter relates primarily to expenses incurred in the operation of
facilities in both California and Texas. The increase in the nine months ended
March 31, 1999 compared to 1998 was primarily attributable to increased
administrative headcount, consulting fees and costs related to the Company's
1998 Annual Report and expenses incurred in operating facilities in California
and Texas. The Company expects general and administrative expenses to increase
due to business development activities and support of expanded research and
development activities.
Interest income decreased to $592,000 for the three months ended March 31, 1999
from $757,000 for the same period in 1998. Interest income for the nine months
ended March 31, 1999 and 1998 remained comparable at $1.9 million. The decrease
in interest income for the three months ended March 31, 1999 resulted primarily
from the decrease in average cash and investment balances resulting from the use
of cash to fund operations and capital expenditures and lower interest rates.
Interest and other expense for the three and nine months ended March 31, 1999
increased to $274,000 and $618,000, respectively, compared to $112,000 and
$320,000 for the same periods in 1998. The increase was due to interest expense
on higher outstanding balances under the Company's equipment financing lines of
credit.
Liquidity and Capital Resources
As of March 31, 1999, the Company had $47.2 million in cash, cash equivalents
and investments, compared to $48.4 million at June 30, 1998.
Page 10 of 19
<PAGE>
Net cash used in the Company's operations was $12.6 million for the nine months
ended March 31, 1999, compared to $2.5 million for the same period in 1998. This
cash was used primarily to fund increasing levels of research and development,
general and administrative activities and costs related to the merger with
GeneMedicine. The Company's capital expenditures were $5.3 million in the nine
months ended March 31, 1999, compared to $2.1 million in the same period of
1998. The majority of the expenditures made as of March 31, 1999 relate to
construction of the Company's pilot manufacturing facility. The facility was
completed in January 1999.
In June 1998, the Company obtained an $8.0 million line of credit from a
commercial bank. As of June 30, 1998, the Company had drawn and converted $1.0
million of this line of credit into a term loan bearing interest at the prime
rate plus 0.5%. The loan is payable in 42 equal monthly installments beginning
July 31, 1998. An additional $5.9 million was drawn from the line of credit in
the nine months ended March 31, 1999. Interest on $4.6 million of this amount is
accrued and paid monthly and was converted into a term loan bearing interest at
the prime rate plus 0.5% on December 31, 1998, payable in 42 monthly
installments beginning January 31, 1999. On January 28, 1999, the Company
amended the terms of the line of credit. Under the amended terms, the Company
extended its remaining credit facility draws to March 31, 1999, from the
original date of December 31, 1998, making the remaining $2.4 million of credit
available through March 31, 1999. Draws of $1.3 million made after December 31,
1998 will be payable in 39 monthly installments beginning March 31, 1999. The
Company fully utilized its line of credit with a final draw of $1.1 million in
April 1999.
The Company anticipates that its cash and cash equivalents, committed funding
from existing corporate collaborations and interest income will enable the
Company to maintain its current and planned operations through calendar 2000.
However, there can be no assurance that the Company will not require additional
funding prior to such time.
The Company's future capital requirements will depend on many factors, including
scientific progress in its research and development programs, the size and
complexity of such programs, the scope and results of preclinical studies and
clinical trials, the ability of the Company to establish and maintain corporate
collaborations, the time and costs involved in obtaining regulatory approvals,
the time and costs involved in filing, prosecuting and enforcing patent claims,
competing technological and market developments, the cost of manufacturing
preclinical and clinical materials and other factors not within the Company's
control. The Company is seeking additional collaborative agreements with
corporate partners and may seek additional funding through public or private
equity or debt financing. There can be no assurance, however, that any such
agreements may be entered into or that they will reduce the Company's funding
requirements or that additional funding will be available.
If additional funds are raised by issuing equity securities, substantial
dilution to existing stockholders may result. Insufficient funds may require the
Company to delay, scale back or eliminate some or all of its research or
development programs or to relinquish greater or all rights to products at an
earlier stage of development or on less favorable terms than the Company would
otherwise seek to obtain, which could materially adversely affect the Company's
business, financial condition and results of operations.
Acquisition of GeneMedicine Research and Development Programs
There are seven primary GeneMedicine R&D programs that the Company acquired. The
Company's management is primarily responsible for estimating the fair value of
the purchased in-process research and development. Each of the programs have
been valued based on a discounted probable future cash flow analysis using a
discount rate of 40%, which management believes adequately reflects the
substantial risk of gene therapy research and development. In the valuation
model, it is assumed that for each program preclinical studies and clinical
trials are successfully completed, regulatory approval to market the product is
obtained, a marketing partner is secured and the Company is able to manufacture
the product in commercial quantities. Each of these activities is subject to
significant risks and uncertainties.
The seven primary R&D programs that the Company acquired are valued as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Cancer gene medicines (IL-2, IFN-(alpha), IL-12);....................... $ 8,100
Hemophilia gene medicines (Factor VIII and IX);......................... 1,240
Growth Factor gene medicines (IGF-I);................................... 5,180
Pulmonary gene medicines (AAT GM);...................................... 1,730
Vascular Growth Factor gene medicines (VEGF);........................... 4,620
Drug-controlled GeneSwitch(TM) technology;.............................. 3,930
Nucleic Acid Programs/(APC);............................................ 1,070
--------
$25,870
========
</TABLE>
Page 11 of 19
<PAGE>
Cancer gene medicines. The Company is currently working on three cancer
gene medicines with Roche including IL-2, IFN-(alpha), and IL-12.
The Company recently completed Phase I clinical trials for IL-2, and
expects to begin Phase II trials in mid-1999. The Company recently announced the
commencement of a Phase I/II trial on its IFN-(alpha) formulation for the
treatment of head and neck cancer. An IND Application (Investigational New Drug)
on its IL-12 product was filed in April 1999.
Before a product can be successfully marketed, the Company's corporate
partners must fund clinical studies and, if successfully completed, the market
introduction of the cancer gene medicines. Product efficacy and dose
responsiveness must be proven in Phase II and Phase III human clinical trials
and FDA approval is required before market introduction. The Company currently
estimates, and the valuation reflects, that these activities could be completed
and revenues could begin to accrue to the Company with the projected
introduction of a product in 2004.
Management estimates that before the merger, GeneMedicine incurred
approximately $17 million in research and development expenses directly related
to this program, and expects that the remaining R&D efforts will total more than
$8 million over the next five years.
Hemophilia gene medicines (Factor VIII & IX). Management estimates that
before the merger, GeneMedicine incurred approximately $10 million in research
and development expenses directly related to this program, and expects that the
remaining R&D efforts will total more than $5 million over the next four years.
Before a product can be successfully marketed, the Company needs to
attract a corporate partner to fund product development, clinical studies and
market introduction. The Company needs to complete preclinical animal studies
and human Phase I safety studies. Product efficacy and dose responsiveness must
be proven in Phase II and Phase III human clinical trials and FDA approval is
required before market introduction. The Company currently estimates, and the
valuation reflects, that these activities could be completed and revenues could
begin to accrue to the Company with the projected introduction of a product in
2005.
Growth Factor gene medicines (IGF-I). The Company is developing the IGF-I
gene medicine for the treatment of post-menopausal female incontinence.
Before a product can be successfully marketed, the Company needs to
attract a corporate partner to fund product development, clinical studies and
market introduction. The Company needs to complete human Phase I safety studies.
Product efficacy and dose responsiveness must be proven in Phase II and Phase
lll human clinical trials and FDA approval is required before market
introduction. The Company currently estimates, and the valuation reflects, that
these activities could be completed and revenues could begin to accrue to the
Company with the projected introduction of a product in 2007.
Management estimates that before the merger, GeneMedicine incurred
approximately $10 million in research and development expenses directly related
to this program, and expects that the remaining R&D efforts related to the IGF-I
program will total approximately $12 million over the next six years.
Pulmonary gene medicines (AAT GM). The Company is working on the
development of a gene medicine intended to treat alpha-1-antitrypsin ("AAT")
deficiency, a significant contributor to the development of emphysema.
Before a product can be successfully marketed, the Company needs to
attract a corporate partner to fund product development, clinical studies and
market introduction. Product efficacy and dose responsiveness must be proven in
Phase II and Phase III human clinical trials and FDA approval is required before
market introduction. The Company currently estimates, and the valuation
reflects, that these activities could be completed and revenues could begin to
accrue to the Company with the projected introduction of a product in 2007.
Page 12 of 19
<PAGE>
Management estimates that before the merger, GeneMedicine incurred
approximately $1 million in research and development expenses directly related
to this program, and expects that the remaining R&D efforts related to the (AAT
GM) program will total approximately $16 million over the next seven years.
Vascular Growth Factor gene medicines (VEGF). The Company is developing a
vascular endothelium growth factor ("VEGF") gene medicine to prevent
proliferation of smooth muscle cells and reclosure of the vessels in patients
who are undergoing either coronary angioplasty or peripheral angioplasty.
Before a product can be successfully marketed, the Company needs to
attract a corporate partner to fund product development, clinical studies and
market introduction. Product efficacy and dose responsiveness must be proven in
Phase II and Phase III human clinical trials and FDA approval is required before
market introduction. The Company currently estimates, and the valuation
reflects, that these activities could be completed and revenues could begin to
accrue to the Company with the projected introduction of a product in 2007.
Management estimates that before the merger, GeneMedicine incurred
approximately $6 million in research and development expenses directly related
to this program, and expects that the remaining R&D efforts related to the
angiogenesis program will total approximately $11 million over the next seven
years.
Drug-controlled GeneSwitch(TM) Technology. The Company is developing
proprietary systems designed to control the level, duration, fidelity and
reproducibility of expression of administered genes.
Before a product can be successfully marketed, the Company needs to
attract a corporate partner to fund product development, clinical studies and
market introduction. The Company needs to complete Phase I human safety studies.
Product efficacy and dose responsiveness must be proven in Phase II and Phase
lll human clinical trials and FDA approval is required before market
introduction. The Company currently estimates, and the valuation reflects, that
these activities could be completed and revenues could begin to accrue to the
Company with the projected introduction of a product in 2008.
Management estimates that before the merger, GeneMedicine incurred
approximately $2 million in research and development expenses directly related
to this program, and expects that the remaining R&D efforts related to the
GeneSwitch technology development program will total approximately $10 million
over the next seven years.
Nucleic Acid Programs (APC). The Company is performing research related
to opportunities in the field of nucleic acid vaccines.
Before a product can be successfully marketed, the Company needs to
attract a corporate partner to fund product development, clinical studies and
market introduction. The Company needs to complete preclinical animal studies
and Phase I human safety studies. Product efficacy and dose responsiveness must
be proven in Phase II and Phase III human clinical trials and FDA approval is
required before market introduction. The Company currently estimates, and the
valuation reflects, that these activities could be completed and revenues could
begin to accrue to the Company with the projected introduction of a product in
2008.
Management estimates that before the merger, GeneMedicine incurred
approximately $4 million in research and development expenses directly related
to this program. Management expects that the remaining R&D efforts related to
the APC vaccine/immunotherapeutic technology development program will total
approximately $13 million over the next eight years.
Summary. Before the merger, over the past five years, GeneMedicine
incurred approximately $50 million of R&D expenses in the development of its
current R&D programs. Costs to complete these projects could aggregate to
approximately $75 million over the next five to seven years. The Company expects
that gene medicines (which utilize its proprietary developmental-stage
technologies) will obtain FDA approval beginning at various times beginning in
2005 through 2008. If such gene medicines are successfully completed, the
Company will receive a royalty on the product sales.
The nature of the efforts required to develop the acquired in-process R&D
into technologically feasible and commercially viable products principally
relate to the successful performance of additional preclinical studies and
clinical trials. Though the Company expects that the acquired in-process
technology will be successfully developed, there can be no
Page 13 of 19
<PAGE>
assurance that commercial or technical viability of these products will be
achieved. While the expectations and promise of gene therapy are great, clinical
efficacy has not yet been demonstrated. Many approaches to gene therapy are
being pursued by pharmaceutical and biotechnology companies, but there are
currently no marketed gene therapy products and none are expected for the next
several years.
Other Acquired Technology
On April 27, 1999, the Company announced the acquisition of rights and
intellectual property related to the del-1 gene and protein from Progenitor,
Inc. Del-1 is a novel extracellular matrix protein involved in early growth and
development of blood vessels and bone that has been demonstrated to have
potential application in the treatment of certain vascular diseases by
stimulating angiogenesis. The acquisition of del-1 substantially strengthens the
Company's product development in the area of cardiovascular disease.
Impact of the Year 2000
A major issue currently faced by all industries is the Year 2000 ("Y2K")
computer issue. The problem arises from the use in computer hardware and
software of the last two digits rather than four digits to define the year. As a
result, computer programs are unable to distinguish a year which begins with
"20" or "19". This, can then cause failures in computer systems and
applications, or create erroneous results unless steps are taken to prevent such
failures and errors. The Y2K problem is also compounded by the fact that many
computer and telecommunication systems are interdependent, both within the
United States and throughout the world. Thus, due to interdependence, the
failure of one system may lead other systems to fail, even if these systems are
themselves Y2K compliant.
In order to address this issue, the Company has put a Y2K plan in place to
identify, evaluate and modify its current systems or replace and implement new
systems. Identification includes reviewing and assessing the potential systems
within the Company and at key third party vendors that would be affected by the
Y2K issue. A Y2K Committee, comprised of members of all the Company's
departments and senior management, has been established to evaluate, assess and
prioritize the Company's internal systems and key vendors' systems.
In its evaluation stage, the Company determined that it would be required to
upgrade or replace a portion of its accounting software to a Y2K compliant
version. The accounting software upgrade was completed in February 1999.
In addition to the accounting system upgrade, the Company has reviewed its key
informational, operational and manufacturing systems and has determined the Y2K
issue will not pose significant operational problems for its business
activities.
The Company has also substantially completed communications with its significant
suppliers to determine the extent to which the Company's operations are
vulnerable to those third parties' failure to solve their own Y2K issues. The
Company has determined, as of March 31, 1999, that no significant issues exist
that would cause it to believe that it cannot continue to use the services of
these third parties. However, if such suppliers or other third parties with
which the Company transacts business experience failures in their computer
systems or equipment due to Y2K non-compliance, it could affect the Company's
ability to process transactions or engage in ordinary business activities.
The financial impact of the required upgrades and conversion of computer
software relating to the Y2K issue was less than $20,000. All costs to date,
have been expensed as they are incurred. However, the costs incurred to date, do
not take into account the costs, if any, that might be incurred as a result of
Y2K related failures that occur despite the Company's implementation of its Y2K
plan.
Although the Company is not aware of any material operational issues associated
with preparing its internal systems for the Year 2000, or material issues with
respect to the adequacy of third party systems, the Company could experience
material unanticipated negative consequences and/or material costs caused by
undetected errors or defects in such systems or by the Company's failure to
adequately prepare for the results of such errors or defects, including the
costs of related litigation, if any. The impact of such consequences could have
a material adverse effect on the Company's business, financial condition or
results of operations.
Page 14 of 19
<PAGE>
PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
None
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On March 18, 1999, in connection with the Company's Special
Meeting of Stockholders, the following proposal was voted on as
follows:
PROPOSAL 1: Proposal to approve the issuance of shares of common
stock, $0.001 par value per share, of the Registrant, pursuant
to the Agreement and Plan of Merger and Reorganization, dated as
of October 24, 1998, as amended, by and among the Registrant,
GeneMedicine, Inc., a Delaware corporation ("GeneMedicine"), and
Montana Acquisition Sub, Inc., a Delaware corporation and
wholly-owned subsidiary of the Registrant ("Merger Sub"), which
provides for the merger of Merger Sub with and into GeneMedicine
pursuant to which GeneMedicine will become a wholly-owned
subsidiary of the Registrant.
The voting of stockholders was as follows:
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST VOTES ABSTAINED
--------- ------------- ---------------
<S> <C> <C>
7,740,588 10,964 6,200
</TABLE>
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
a. Exhibits
27 Financial Data Schedule (Exhibit 27 is submitted as an
exhibit only in the electronic format of this Quarterly Report
on Form 10-Q submitted to the Securities and Exchange
Commission).
b. Reports on Form 8-K
On February 10, 1999, the Registrant filed a current report on
Form 8-K to report that the Boards of Directors of the
Registrant and GeneMedicine approved and executed Amendment No.
2 to Agreement and Plan of Merger and Reorganization, dated
February 8, 1999 ("Amendment No. 2"). Amendment No. 2 provided
that the Agreement and Plan of Merger and Reorganization (the
"Reorganization Agreement"), may be terminated prior to the
Effective Time (as defined in the Reorganization Agreement),
whether before or after approval of the Merger by the
stockholders of GeneMedicine, by either the Registrant or
GeneMedicine if the Merger shall not have been consummated by
March 31, 1999.
On March 24, 1999, the Registrant filed a current report on Form
8-K to report that it had closed its merger with GeneMedicine on
March 18, 1999.
Page 15 of 19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Valentis, Inc.
---------------
(registrant)
Date: May 15, 1999 /s/ Benjamin F. McGraw III
--------------------------
Benjamin F. McGraw III
President, Chief Executive Officer, and
Chairman of the Board of Directors
Date: May 15, 1999 /s/ Bennet Weintraub
----------------------
Bennet Weintraub
Chief Financial Officer and Vice President Finance
(Principal Financial and Accounting Officer)
Page 16 of 19
<PAGE>
VALENTIS, INC.
EXHIBIT INDEX
27 Financial Data Schedule (Exhibit 27 is submitted as an exhibit only in
the electronic format of this Quarterly Report on Form 10-Q submitted
to the Securities and Exchange Commission).
Page 17 of 19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUN-30-1998
<PERIOD-END> MAR-31-1999
<CASH> 13,090
<SECURITIES> 23,886
<RECEIVABLES> 1,235
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 38,908
<PP&E> 18,599
<DEPRECIATION> 6,612
<TOTAL-ASSETS> 71,161
<CURRENT-LIABILITIES> 10,789
<BONDS> 0
0
0
<COMMON> 119,632
<OTHER-SE> (65,186)
<TOTAL-LIABILITY-AND-EQUITY> 71,161
<SALES> 2,176
<TOTAL-REVENUES> 2,176
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 39,537
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 618
<INCOME-PRETAX> (36,086)
<INCOME-TAX> 0
<INCOME-CONTINUING> (36,086)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (36,086)
<NET-INCOME> 0
<EPS-PRIMARY> (2.73)
<EPS-DILUTED> (2.73)
</TABLE>
