<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 5, 2000
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
GENVEC, INC.
(Exact name of Registrant as specified in its charter)
--------------------------
<TABLE>
<S> <C> <C>
DELAWARE 2834 23-2705690
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification Number)
incorporation or organization) Classification Code Number)
</TABLE>
65 WEST WATKINS MILL ROAD
GAITHERSBURG, MARYLAND 20878
(240) 632-0740
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------------------
DR. PAUL H. FISCHER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
GENVEC, INC.
65 WEST WATKINS MILL ROAD
GAITHERSBURG, MARYLAND 20878
(240) 632-0740
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
STEVEN KAPLAN, ESQ. JEFFREY SMALL, ESQ.
ARNOLD & PORTER DAVIS POLK & WARDWELL
555 TWELFTH STREET, NW 450 LEXINGTON AVENUE
WASHINGTON, DC 20004 NEW YORK, NEW YORK 10017
(202) 942-5000 (212) 450-4000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. / /
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434, check
the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM AMOUNT OF
AGGREGATE REGISTRATION
TITLE OF SECURITIES TO BE REGISTERED OFFERING PRICE FEE(1)
<S> <C> <C>
Common Stock, $0.001 par value.............................. $50,000,000 $13,200
</TABLE>
(1) Estimated solely for the purposes of calculating the amount of the
registration statement fee in accordance with Rule 457(o) under the
Securities Act of 1933.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY JURISIDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
Subject to Completion
Dated October 5, 2000
Prospectus
SHARES
[LOGO]
GENVEC, INC.
COMMON STOCK
GenVec, Inc. is selling all of the shares of common stock in this offering. This
is our initial public offering. We estimate that the initial offering price will
be between $ and $ per share.
We have applied to have our shares of common stock listed on the Nasdaq National
Market under the symbol "GNVC."
Investing in our common stock involves risks. Please read "Risk Factors"
beginning on page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Price to Underwriting Proceeds to
Public Discount GenVec
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
-------------------------------------------------------------------------------------------------------
Total $ $ $
-------------------------------------------------------------------------------------------------------
</TABLE>
We have granted the underwriters the right to purchase up to an additional
shares of common stock to cover over-allotments.
J.P. Morgan & Co.
UBS Warburg LLC
A.G. Edwards & Sons, Inc.
<PAGE>
, 2000
<PAGE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 6
Special Note Regarding Forward-Looking
Statements.......................... 18
Use of Proceeds....................... 19
Dividend Policy....................... 19
Concurrent Private Transaction........ 19
Capitalization........................ 20
Dilution.............................. 21
Selected Financial Data............... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
</TABLE>
<TABLE>
Business.............................. 28
<CAPTION>
PAGE
<S> <C>
Management............................ 44
Related Party Transactions............ 54
Principal Stockholders................ 55
Description of Capital Stock.......... 57
Shares Eligible for Future Sale....... 60
Underwriting.......................... 61
Legal Matters......................... 64
Experts............................... 64
Where You Can Find More Information... 64
Index to Financial Statements......... F-1
</TABLE>
-------------------
Until , 2000, all dealers that effect transactions in our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS
SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD CONSIDER BEFORE
BUYING SHARES OF OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS
CAREFULLY.
GENVEC, INC.
We develop gene-based products that cause the production of therapeutic proteins
at the site of disease. Our current areas of focus are cardiovascular disease,
particularly coronary artery disease and peripheral vascular disease, oncology
and ophthalmology. Our product candidates are comprised of genes and gene
transfer systems that transport those genes into cells at the site of the
disease. Our lead product candidate, BIOBYPASS angiogen, is currently in Phase
II clinical trials for the treatment of coronary artery disease and peripheral
vascular disease. Our technology focuses on the use and improvement of gene
transfer systems, commonly called vectors. We believe that our technology
platform allows us to rapidly and cost effectively test the therapeutic benefit
of genes in a broad array of preclinical models of human disease. It also
generally allows us to advance our product candidates into clinical testing in
less time than traditional drug discovery methods.
OUR PRODUCT CANDIDATES
We are using our technology to convert knowledge about genes and gene function
into therapeutic product candidates. We currently have four product development
programs:
- BIOBYPASS angiogen, our lead product candidate, produces vascular endothelial
growth factor, or VEGF, in diseased tissues. VEGF is a protein that stimulates
the formation of new blood vessels and improves blood flow. We use localized
delivery to minimize the toxicity associated with systemic delivery of VEGF.
We have completed Phase Ib studies in 31 patients with coronary artery disease
and 35 patients with peripheral vascular disease. Based upon the results of
the Phase Ib studies we, in collaboration with Warner-Lambert, have initiated
Phase II clinical trials for the treatment of two major disease indications:
-- coronary artery disease, which affects approximately 12 million people in
the United States; and
-- peripheral vascular disease, which affects approximately 8 million people
in the United States.
- TNFerade is being developed to treat cancer in combination with radiation
therapy. Cancer is the second leading cause of death in the United States, and
approximately 60% of all cancer patients in the U.S. receive radiation therapy
as part of their treatment. This product candidate is intended to produce the
protein tumor necrosis factor-alpha, or TNFa, in the tumor to cause a
reduction in tumor size while minimizing overall toxicity. TNFerade is
designed so that the maximum TNFa production takes place in conjunction with
traditional radiation treatment. We have completed preclinical testing of
TNFerade.
- PEDF product candidates are being developed to treat macular degeneration and
diabetic retinopathy. Excessive growth of blood vessels in the eye is the
primary contributor to the loss of vision in these diseases. These product
candidates are intended to cause the production in the eye of pigment
epithelium-derived factor, or PEDF, which inhibits new blood vessel formation.
Each year, there are approximately 300,000 new cases in the United States of
"wet" age-related macular degeneration. In addition, diabetic retinopathy is
the leading cause of blindness and visual disability in the United States and
Europe. These product candidates are undergoing preclinical testing.
- GENSTENT is being developed to prevent the narrowing of blood vessels
resulting from vascular damage caused by medical procedures such as
angioplasty and vascular grafts. This product candidate contains the inducible
nitric oxide synthase, or iNOS, gene, which is intended to cause the local
production of nitric oxide at the site of vessel injury to promote healing and
to prevent the narrowing of damaged blood vessels. The American Heart
Association estimates that in 1997, the last year for which data is available,
450,000 angioplasty procedures were performed in the United States, and more
than 200,000 patients with end-stage kidney disease received dialysis, which
often requires placement of a blood vessel graft. GENSTENT is undergoing
preclinical testing.
1
<PAGE>
OUR DRUG DISCOVERY AND DEVELOPMENT TECHNOLOGY
Our core technology is based on the use of modified adenoviruses, commonly
called adenovectors. To create our product candidates, we incorporate into our
adenovectors genes that provide the blueprint for the production of desired
therapeutic proteins. We administer our product candidates directly to the site
of disease using devices such as catheters and syringes to localize the
production of therapeutic proteins.
We have developed proprietary techniques to enhance the delivery of genes for
the production of proteins at the site of disease. Our technology enables us to
design product candidates that bind to essentially all cells or only to selected
cell types. Our technology also allows us to control the level and duration of
gene expression.
Our technology portfolio also includes state-of-the-art production,
purification, purity assessment, formulation and storage technologies which are
adaptable to multiple products for preclinical, clinical and commercial
purposes.
STRATEGIC ALLIANCES
We establish collaborations with pharmaceutical companies and other
organizations to enhance our ability to discover, evaluate, develop and
commercialize multiple product opportunities.
OUR COLLABORATION WITH THE WARNER-LAMBERT COMPANY
In July 1997, we entered into a collaboration agreement with Warner-Lambert to
research, develop and commercialize gene-based products incorporating the VEGF
gene for the treatment of coronary artery disease and peripheral vascular
disease. In June 2000, Pfizer, Inc. acquired Warner-Lambert and Warner-Lambert
became a wholly-owned subsidiary of Pfizer. Warner-Lambert has the primary
responsibility for clinical development, regulatory approval, manufacturing and
commercialization of products that we develop under this collaboration,
including BIOBYPASS angiogen. Under the terms of the collaboration, we may
receive more than $100 million, excluding royalties, in research and development
funding, milestone payments, equity purchases and license fees. As of June 30,
2000, Warner-Lambert had paid us a total of $49.5 million in research and
development funding, milestone payments, equity purchases and license fees.
OUR STRATEGY
Our goal is to lead in the discovery, development and commercialization of
innovative gene-based products that address major medical needs. To achieve this
goal, we intend to:
- develop and commercialize a broad portfolio of products through collaborations
with others and our internal efforts;
- use genomics information to identify and create new therapeutic product
candidates; and
- sustain and extend our technology position in safe, efficient and targeted
gene delivery.
CORPORATE INFORMATION
We were incorporated in Delaware in December 1992. Our corporate headquarters is
located at 65 West Watkins Mill Road, Gaithersburg, Maryland 20878, and our
telephone number is (240) 632-0740. Our corporate website is located at
www.genvec.com. We do not intend for information found on our website to be part
of this prospectus.
We own or have rights to various copyrights, trademarks and trade names used in
our business. BIOBYPASS-Registered Trademark- is a registered trademark of
GenVec, and the term angiogen is used to refer to an angiogenic agent. "GenVec,"
the GenVec logo, GENSTENT-TM- biologic, AdFAST-TM- system, AdACE-TM- system,
AdLIBRARY-TM-system, UTV-TM- technology and DART-TM- vectors are some of our
trademarks. Other copyrights, trademarks and trade names referred to in this
prospectus are the property of their respective owners.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
COMMON STOCK OFFERED................................ shares
COMMON STOCK TO BE OUTSTANDING AFTER THIS shares
OFFERING..........................................
USE OF PROCEEDS..................................... We expect to use the net proceeds to fund:
- research and development activities;
- clinical trials, capital expenditures,
working capital; and
- other corporate purposes, including
possible acquisitions.
Please read "Use of Proceeds."
PROPOSED NASDAQ NATIONAL MARKET SYMBOL.............. "GNVC"
</TABLE>
The information in the above table:
- reflects 1,283,445 shares of common stock outstanding as of September 15,
2000;
- reflects the conversion of all our outstanding convertible preferred stock
into 7,695,402 shares of common stock upon the closing of this offering; and
- assumes the sale of shares of our common stock to Warner-Lambert in a
private transaction concurrent with the closing of this offering at a price of
$ per share.
The number of outstanding shares of common stock does not include:
- 2,293,302 shares of common stock issuable on the exercise of stock options
outstanding as of September 15, 2000 at a weighted average exercise price of
$4.25 per share;
- 388,212 shares of common stock issuable upon exercise of warrants outstanding
as of September 15, 2000 at a weighted average exercise price of $13.53 per
share; or
- 939,669 additional shares of common stock that we could issue under our stock
option and stock purchase plans.
Unless otherwise indicated, information in this prospectus assumes the
following:
- the filing of our amended and restated certificate of incorporation and the
adoption of amended and restated bylaws immediately prior to the closing of
this offering;
- no exercise of the underwriters' over-allotment option; and
- an initial public offering price of $ per share, the midpoint of the range
shown on the cover of this prospectus.
3
<PAGE>
SUMMARY FINANCIAL DATA
The following table summarizes our statements of operations data for the years
ended December 31, 1995, 1996, 1997, 1998 and 1999 and the six month periods
ended June 30, 1999 and 2000 and our balance sheet data as of June 30, 2000. The
pro forma net loss per common share data reflect the conversion of our
outstanding convertible preferred stock upon the closing of this offering. The
pro forma as adjusted balance sheet data reflect that conversion and also
reflect the sale of shares of common stock in this offering at an
assumed initial public offering price of $ per share, the sale of
shares of common stock in the direct offering to Warner-Lambert in a private
transaction concurrent with the closing of this offering at a price of $ per
share, and our receipt of the net proceeds therefrom after deducting
underwriting discounts and estimated offering expenses. The following data
should be read with our financial statements, including the accompanying notes,
and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
----------------------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
IN THOUSANDS, EXCEPT PER SHARE DATA
STATEMENTS OF OPERATIONS DATA:
Revenues:
Ongoing research and development
support......................... $ 1,005 $ 698 $ 3,188 $ 6,750 $14,075 $ 7,660 $ 5,050
Contract, license and milestone
payments........................ -- -- 2,500 3,000 2,875 1,438 3,487
------- ------- ------- ------- ------- ------- -------
Total revenues.................. 1,005 698 5,688 9,750 16,950 9,098 8,537
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development.......... 6,460 5,896 8,085 10,592 14,018 7,206 7,115
General and administrative........ 2,266 3,915 4,031 5,903 5,428 2,642 3,801
Purchase of in-process
technology...................... 592 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total operating expenses........ 9,318 9,811 12,116 16,495 19,446 9,848 10,916
------- ------- ------- ------- ------- ------- -------
Loss from operations................ (8,313) (9,113) (6,428) (6,745) (2,496) (750) (2,379)
Interest income, net................ 413 496 263 398 577 255 263
------- ------- ------- ------- ------- ------- -------
Net loss............................ $(7,900) $(8,617) $(6,165) $(6,347) $(1,919) $ (495) $(2,116)
======= ======= ======= ======= ======= ======= =======
Net loss per common share, basic and
diluted........................... $(14.08) $(10.74) $ (6.44) $ (6.15) $ (1.83) $ (0.48) $ (1.78)
======= ======= ======= ======= ======= ======= =======
Shares used in computing net loss
per common share, basic and
diluted........................... 561 802 957 1,032 1,051 1,037 1,185
Pro forma net loss per common share,
basic and diluted................. $ (0.22) $ (0.24)
======= =======
Shares used in computing pro forma
net loss per common share, basic
and diluted....................... 8,746 8,881
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
----------------------
AS OF JUNE 30, 2000
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
<S> <C> <C>
IN THOUSANDS
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 11,534
Working capital............................................. 7,418
Total assets................................................ 25,457
Long-term obligations, less current portion................. 6,680
Deferred compensation....................................... (1,691)
Accumulated deficit......................................... (45,012)
Total stockholders' equity.................................. 10,209
</TABLE>
5
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR COMMON STOCK.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IF ANY OF THE
FOLLOWING RISKS ACTUALLY OCCURS, WE MAY NOT BE ABLE TO CONDUCT OUR BUSINESS AS
CURRENTLY PLANNED AND OUR FINANCIAL CONDITION AND OPERATING RESULTS COULD BE
SERIOUSLY HARMED. IN ADDITION, THE TRADING PRICE OF OUR COMMON STOCK COULD
DECLINE DUE TO THE OCCURRENCE OF ANY OF THESE RISKS, AND YOU MAY LOSE ALL OR
PART OF YOUR INVESTMENT. PLEASE READ "SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS."
RISKS RELATED TO OUR BUSINESS
WE ARE AN EARLY STAGE COMPANY DEPLOYING UNPROVEN TECHNOLOGIES
You must evaluate us in light of the uncertainties and complexities affecting an
early stage biotechnology company. Gene-based therapy is a new and rapidly
evolving medical approach which has not been demonstrated to be effective on a
widespread basis. Biotechnology and pharmaceutical companies have successfully
developed and commercialized only a limited number of gene-based products to
date. Furthermore, no gene therapy product has received regulatory approval in
the United States or internationally. We also have only limited data relating to
the safety and effectiveness of our product candidates or delivery systems. To
date, none of our product candidates has been approved for sale in the United
States or elsewhere. Our lead product candidate, BIOBYPASS angiogen, has
recently begun Phase II clinical trials. We may be unable to develop products or
delivery systems that:
- prove to be safe and effective;
- meet applicable regulatory standards;
- are capable of being manufactured at reasonable costs;
- do not infringe the intellectual property rights of third parties;
- are superior to products offered by third parties; or
- can be marketed successfully.
Gene-based products may be susceptible to various risks, including undesirable
and unintended side effects from genes or the delivery systems, unintended
immune responses, inadequate therapeutic efficacy or other characteristics that
may prevent or limit their approval or commercial use. Successful products
require significant development and investment, including a lengthy and
uncertain period of testing to demonstrate their safety and effectiveness prior
to their regulatory approval or commercialization. We have not proven our
ability to develop, obtain regulatory approval of or commercialize gene-based
products. We may be unable to successfully select those genes with the most
potential for commercial development.
WE ARE RELYING ON OUR COLLABORATIVE RELATIONSHIP WITH WARNER-LAMBERT TO DEVELOP
AND COMMERCIALIZE OUR BIOBYPASS ANGIOGEN; IF WARNER-LAMBERT TERMINATES ITS
AGREEMENT WITH US, WE MAY NOT BE ABLE TO CONTINUE TESTING AND DEVELOPING
BIOBYPASS ANGIOGEN
We entered into a corporate collaboration with Warner-Lambert to conduct
research, development, marketing, commercialization and some manufacturing
activities relating to gene-based product candidates incorporating the VEGF gene
for use in therapeutic angiogenesis to treat coronary artery disease and
peripheral vascular disease. Accordingly, we are substantially dependent on
Warner-Lambert for the continued development, funding, and commercial success of
any of our therapeutic angiogenesis product candidates, including BIOBYPASS
angiogen. In June 2000, Pfizer acquired Warner-Lambert, and Warner-Lambert
became a wholly-owned subsidiary of Pfizer. Warner-Lambert is currently
continuing under the agreement and has carried out its obligations since the
acquisition. However, we cannot assure you that our relationship with the new
combined company will be as strong as our relationship with Warner-Lambert in
the past or that Pfizer will cause Warner-Lambert to devote sufficient resources
to the research, development, manufacturing and commercialization of the product
candidates that are the subject of our collaboration.
6
<PAGE>
In addition, Warner-Lambert may terminate the agreement for breach. It also may
terminate the research and development funding program under the agreement on
six months prior written notice, in which event Warner-Lambert would have no
further research and development funding obligation to us. We cannot assure you
that Warner-Lambert will not terminate the research and development funding
program. In addition, Warner-Lambert may also terminate the development of a
collaboration product for safety or efficacy concerns.
This collaboration accounted for approximately 96% of our revenues in 1999. In
addition, payments from Warner-Lambert are expected to constitute a substantial
portion of our revenues for the next several years. If Warner-Lambert were to
terminate its agreement with us or otherwise fail to conduct its collaborative
activities successfully and in a timely manner, the clinical development or
commercialization of BIOBYPASS angiogen, or any other potential therapeutic
angiogenesis product candidates being developed in collaboration with Warner-
Lambert, could be delayed or terminated.
WE MAY ENCOUNTER DELAYS OR DIFFICULTIES IN OUR BIOBYPASS ANGIOGEN CLINICAL
TRIALS, WHICH MAY DELAY OR PRECLUDE THE COMMERCIAL USE OF BIOBYPASS ANGIOGEN
We have recently begun Phase II clinical trials of BIOBYPASS angiogen for the
treatment of coronary artery disease and peripheral vascular disease. BIOBYPASS
angiogen is our only product candidate in clinical trials. In order to
commercialize BIOBYPASS angiogen for coronary artery disease and peripheral
vascular disease or other indications, we must obtain regulatory approvals for
each indication. To obtain regulatory approvals, we must, among other
requirements, complete clinical trials demonstrating that BIOBYPASS angiogen is
safe and effective for a particular indication. Current or future clinical
trials may demonstrate that BIOBYPASS angiogen is not safe or effective. We have
encountered some delays to date in enrolling patient candidates for clinical
trials. Any future delays or difficulties we encounter in our BIOBYPASS angiogen
clinical trials may delay or preclude the commercialization of BIOBYPASS
angiogen, which may negatively affect our operations and cause our stock price
to decline, perhaps significantly. In addition, we or the FDA might delay or
halt any of our clinical trials of BIOBYPASS angiogen at any time for various
reasons, including:
- presence of unforeseen adverse side effects of BIOBYPASS angiogen or its
delivery system;
- death of patients during a clinical trial, even though those deaths may not
have been caused by BIOBYPASS angiogen;
- BIOBYPASS angiogen's failure to be more effective than current therapies;
- BIOBYPASS angiogen's failure to be effective at all;
- longer than expected time required to determine whether BIOBYPASS angiogen is
effective;
- failure to enroll a sufficient number of patients in our clinical trials; or
- our failure to produce sufficient quantities of BIOBYPASS angiogen to complete
the trials.
WE HAVE NOT INITIATED CLINICAL TRIALS FOR ANY OF OUR PRODUCT CANDIDATES OTHER
THAN BIOBYPASS ANGIOGEN, AND IF WE FAIL TO ADEQUATELY DEMONSTRATE THE SAFETY AND
EFFICACY OF OUR PRODUCT CANDIDATES WE WILL NOT BE ABLE TO OBTAIN FDA APPROVAL
AND COMMERCIALIZE OUR PRODUCT CANDIDATES
We have not initiated clinical trials for any of our product candidates, other
than BIOBYPASS angiogen, because they are at an earlier stage of development. We
face the risks of failure inherent in developing therapies based on new
technologies. We will need to conduct significant additional research and animal
testing, referred to as preclinical testing, before any of these product
candidates can advance to clinical trials. It may take us many years to complete
preclinical testing and clinical trials, and failure could occur at any stage of
testing. Acceptable results in early testing or trials may not be repeated
later. Moreover, not all products in preclinical testing or early stage clinical
trials will become approved products. Before we can file applications with the
FDA for product approval, our clinical trials must demonstrate that a particular
product candidate is safe and effective. Our failure to adequately demonstrate
the safety and efficacy of our product candidates would prevent FDA approval and
commercialization of our product candidates. Our product development costs will
increase if we
7
<PAGE>
experience delays in testing or regulatory approvals or if we need to perform
more or larger clinical trials than planned. If the delays are significant, they
could negatively affect our financial results and the commercial prospects for
our product candidates.
WE HAVE A HISTORY OF NET LOSSES, AND WE EXPECT TO CONTINUE TO INCUR NET LOSSES
AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY
We have incurred net losses in each year since our inception in December 1992
including a net loss of $1.9 million for the year ended December 31, 1999 and a
net loss of $2.1 million for the six months ended June 30, 2000. As of June 30,
2000, we had an accumulated deficit of approximately $45.0 million. We are
unsure if or when we will become profitable. The size of our net losses will
depend, in part, on the growth rate of our revenues and the level of our
expenses.
We derive substantially all of our revenues from payments from corporate
collaborations, and will continue to do so for the foreseeable future. We expect
that it will be several years, if ever, before we will recognize revenue from
product candidate sales or royalties. A large portion of our expenses are fixed,
including expenses related to facilities, equipment and personnel. In addition,
we expect to spend significant amounts to fund research and development and to
enhance our core technologies. As a result, we expect that our operating
expenses will increase significantly over the next several years and,
consequently, we will need to generate significant additional revenue to achieve
profitability. Even if we do achieve profitability, we may not be able to
sustain or increase profitability on a consistent basis.
OUR QUARTERLY REVENUES AND RESULTS OF OPERATIONS FLUCTUATE AND ARE DIFFICULT TO
PREDICT, AND, IF OUR RESULTS ARE BELOW THE EXPECTATIONS OF PUBLIC MARKET
ANALYSTS AND INVESTORS, THE PRICE OF OUR COMMON STOCK MAY DECLINE
Our quarterly revenues and operating results have fluctuated significantly in
the past and are likely to do so in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a discussion of
factors that could cause our operating results to fluctuate. These fluctuations
could cause our stock price to fluctuate significantly or decline. If revenue in
a particular period does not meet expectations, we may not be able to adjust
significantly our level of expenditures in such period, which would have an
adverse effect on our operating results. We believe that quarterly comparisons
of our financial results will not necessarily be a meaningful indication of
future performance. Given these factors, in some future quarter or quarters our
operating results may be below the expectations of public market analysts and
investors. In such event, the price of our common stock could be materially and
adversely affected.
WE WILL LIKELY NEED TO RAISE ADDITIONAL FUNDS IN THE FUTURE. IF WE ARE UNABLE TO
OBTAIN THE FUNDS NECESSARY TO CONTINUE OUR OPERATIONS, WE MAY BE REQUIRED TO
DELAY, SCALE BACK OR ELIMINATE ONE OR MORE OF OUR PRODUCT DEVELOPMENT OR
RESEARCH PROGRAMS
Our future capital requirements will be substantial. We believe that the net
proceeds from this offering and the sale of the shares to Warner-Lambert,
existing cash and short-term investments and anticipated cash flow from our
current corporate collaborators will be sufficient to support our operations for
at least the next 18 months. We expect that significant additional financing
will be required in the future, which we may seek to raise through public or
private equity offerings, debt financing, additional strategic alliances and
licensing arrangements or some combination of these financing alternatives. We
cannot assure you that this additional financing will be available when needed,
if at all, or that it will be obtained on terms favorable to us. To the extent
that we raise additional capital by issuing equity or convertible securities,
your ownership would be diluted. If we cannot find adequate financing when
needed, we may be required to significantly curtail one or more of our research
and development programs or to obtain funds through agreements with corporate
collaborations or others that may require us to surrender rights to some of our
technologies or potential product opportunities, or to grant licenses on terms
that are not favorable to us, any of which could negatively impact our
operations and prevent us from achieving our business objectives.
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OUR ABILITY TO DEVELOP, OBTAIN REGULATORY APPROVAL OF AND COMMERCIALIZE OUR
POTENTIAL PRODUCTS DEPENDS ON COLLABORATIONS WITH OTHER COMPANIES. IF WE ARE
UNABLE TO RENEW EXISTING COLLABORATIONS AND FIND NEW COLLABORATORS IN THE
FUTURE, WE MAY NOT BE ABLE TO DEVELOP OUR TECHNOLOGIES OR PRODUCTS
Since we do not currently have the resources necessary to develop and
commercialize potential products that may result from our technologies, or the
resources to complete any approval processes which may be required for these
products, we enter into collaborative agreements to develop, obtain regulatory
approval and commercialize products. We have entered into collaborative
agreements with other companies to fund the development of certain products for
specific purposes. These contracts will expire after a fixed period of time. If
they are not renewed or if we do not enter into new collaborative agreements, we
may not be able to develop our technologies and we may be unable to
commercialize our products.
We cannot control the resources that any collaborator may devote to our
products. Our present or future collaborators may not perform their obligations
as expected. These collaborators may breach or terminate their agreements with
us or otherwise fail to conduct their collaborative activities successfully and
in a timely manner. In addition, our collaborators may elect not to develop
products arising out of our collaborative arrangements or to devote sufficient
resources to the development, regulatory approval, manufacture, marketing or
sale of these products. If any of these events occur, we may not be able to
develop our technologies or commercialize our products.
An important part of our strategy involves conducting multiple product
development programs. We may pursue opportunities in fields that conflict with
those of our collaborators. Moreover, disagreements with our collaborators could
develop over rights to our intellectual property. Any conflict with our
collaborators could reduce our ability to obtain future collaboration agreements
and negatively impact our relationship with existing collaborators. A conflict
could also lead to delays in collaborative research, development, regulatory
approval or commercialization of various products or could require or result in
litigation or arbitration, which would be time consuming and expensive and could
have a significant negative impact on our business, financial condition and
results of operations.
OUR COLLABORATION AGREEMENTS MAY HAVE THE EFFECT OF LIMITING OUR RESEARCH IN
SOME AREAS
Some of our corporate or academic collaborators are conducting multiple product
development efforts within each disease area that is the subject of the
collaboration with us. Generally, we have agreed not to conduct independently,
or with any third party, any research that is competitive with the research
conducted under our collaborations. Therefore, our collaborations may have the
effect of limiting the areas of research that we may pursue, either alone or
with others. Our collaborators, however, may develop, either alone or with
others, products in related fields that are competitive with the products or
potential products that are the subject of their collaborations with us.
Competing products, either developed by the collaborators or to which the
collaborators have rights, may result in their withdrawal of support for our
product candidates.
BECAUSE WE OR OUR COLLABORATORS MUST OBTAIN REGULATORY APPROVAL TO MARKET OUR
PRODUCTS IN THE UNITED STATES AND NON-U.S. JURISDICTIONS, WE CANNOT PREDICT
WHETHER OR WHEN WE WILL BE PERMITTED TO COMMERCIALIZE OUR PRODUCTS
The pharmaceutical industry is subject to stringent regulation by a wide range
of authorities. We cannot predict whether we or our collaborators will obtain
regulatory approval for any product we develop. A pharmaceutical product cannot
be marketed in the United States until it has completed rigorous preclinical
testing and clinical trials and an extensive regulatory approval process
implemented by the FDA. To date, no gene therapy product has been approved for
sale in the United States or internationally. Satisfaction of regulatory
requirements typically takes many years, is dependent upon the type, complexity
and novelty of the product and requires the expenditure of substantial
resources. Of particular significance are the requirements covering research and
development, testing, manufacturing, quality control, labeling and promotion of
drugs for human use. Before commencing clinical trials, we must submit to and
receive approval from the FDA of an Investigational New Drug
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application. Clinical trials are subject to oversight by Institutional Review
Boards and the FDA. Clinical trials are also subject to:
- informed consent;
- good clinical practices;
- continuing FDA oversight;
- potentially large numbers of test subjects; and
- potential suspension by us, our collaborators or the FDA at any time if it is
believed that the subjects participating in these trials are being exposed to
unacceptable health risks or if the FDA finds deficiencies in the
Investigational New Drug application or the conduct of these trials.
We may encounter delays or rejections in the regulatory approval process because
of additional government regulation from future legislation or administrative
action or changes in FDA policy during the period of product development,
clinical trials and FDA regulatory review. Failure to comply with applicable FDA
or other applicable regulatory requirements may result in criminal prosecution,
civil penalties, recall or seizure of products, total or partial suspension of
production or injunction, as well as other regulatory action against our product
candidates or us. If regulatory approval of a product is granted, this approval
will be limited to those disease indications for which the product has
demonstrated through clinical trials to be safe and effective. The FDA also
strictly regulates promotion and labeling after approval. Outside the United
States, our ability to market a product is contingent upon receiving clearances
from the appropriate regulatory authorities. This non-U.S. regulatory approval
process includes all of the risks associated with FDA clearance described above.
IF WE OR OUR COLLABORATORS ARE UNABLE TO MANUFACTURE OUR PRODUCTS IN SUFFICIENT
QUANTITIES OR ARE UNABLE TO OBTAIN REGULATORY APPROVALS FOR OUR MANUFACTURING
FACILITY, WE MAY BE UNABLE TO MEET DEMAND AND LOSE POTENTIAL REVENUES
Completion of our clinical trials and commercialization of our product
candidates require access to, or development of, facilities to manufacture a
sufficient supply of our product candidates. We have limited experience
manufacturing any of our proposed products in the volumes that will be necessary
to support large-scale clinical trials or commercial sales. Furthermore, we
intend to transfer our production and assay technology to Warner-Lambert's newly
constructed pilot manufacturing facility in Dublin, Ireland by the end of this
year, in connection with Warner-Lambert's obligation to manufacture BIOBYPASS
angiogen. If we or our collaborators are unable to manufacture our product
candidates in clinical or, when necessary, commercial quantities, then we will
need to rely on third party manufacturers to manufacture compounds for clinical
and commercial purposes. These third party manufacturers must receive FDA
approval before they can produce clinical material or commercial product. Our
products may be in competition with other products for access to these
facilities and may be subject to delays in manufacture if third parties give
other products greater priority than ours. In addition, we may not be able to
enter into any necessary third-party manufacturing arrangements on acceptable
terms, or on a timely basis. There are very few contract manufacturers who
currently have the capability to produce our proposed products, and the
inability of any of these contract manufacturers to deliver our required
quantities of product candidates timely and at commercially reasonable prices
would negatively affect our operations.
Before we or our collaborators can begin commercially manufacturing any of our
product candidates, we or our collaborators must obtain regulatory approval of
our manufacturing facility and process. Manufacturing of our proposed products
must comply with the FDA's current Good Manufacturing Practices requirements,
commonly known as cGMP, and non-U.S. regulatory requirements. The cGMP
requirements govern quality control and documentation policies and procedures.
In complying with cGMP and non-U.S. regulatory requirements, we will be
obligated to expend time, money and effort in production, recordkeeping and
quality control to assure that the product meets applicable specifications and
other requirements. We or our collaborators must also pass a pre-approval
inspection prior to FDA approval. If we or our collaborators fail to comply with
these requirements, our product candidates would not be approved. If we or our
collaborators failed to comply with these requirements after approval, we would
be subject to possible regulatory action and may be limited in the jurisdictions
in which we are permitted to sell our products. Further, the FDA and non-U.S.
regulatory authorities have the authority to
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perform unannounced periodic inspections of our manufacturing facility to ensure
compliance with cGMP and non-U.S. regulatory requirements.
We intend to develop our own manufacturing capability, which will require
significant resources and will be subject to ongoing government approval and
oversight. We cannot assure you that our efforts in this regard will be
successful.
WE ARE UNCERTAIN IF SUCCESSFUL LARGE-SCALE MANUFACTURING OF GENE-BASED THERAPIES
IS POSSIBLE
Successful large-scale manufacturing of gene-based therapy products has been
demonstrated by very few companies, and it is anticipated that significant
process development changes will be necessary for the commercial process. We may
be unable to manufacture commercial-scale quantities of gene-based therapy
products, or receive appropriate governmental approvals on a timely basis or at
all. Failure to successfully manufacture or obtain appropriate government
approvals on a timely basis would prevent us from achieving our business
objectives.
WE MAY EXPERIENCE DIFFICULTIES OR DELAYS IN PRODUCT MANUFACTURING WHICH ARE
BEYOND OUR CONTROL AND COULD HARM OUR BUSINESS, BECAUSE WE RELY ON THIRD-PARTY
MANUFACTURERS
We currently expect to produce our product candidates through third-party
manufacturers. Problems with any manufacturing processes could result in product
defects, which could require us to delay shipment of products or recall products
previously shipped. In addition, any prolonged interruption in the operations of
our or a third party's manufacturing facilities could result in the cancellation
of shipments. A number of factors could cause interruptions, including equipment
malfunctions or failures, or damage to a facility due to natural disasters or
otherwise. Because our manufacturing processes are or are expected to be highly
complex and subject to a lengthy FDA approval process, we cannot assure you that
alternative qualified production capacity would be available on a timely basis
or at all. Difficulties or delays in our manufacturing could increase our costs
and damage our reputation.
The manufacture of pharmaceutical products can be an expensive, time-consuming,
and complex process. Manufacturers often encounter difficulties in scaling-up
production of new products, including problems involving the transfer of
manufacturing technology, production yields, quality control and assurance, and
shortages of personnel. Delays in formulation and scale-up to commercial
quantities could result in additional expense and delays in our clinical trials,
regulatory submissions and commercialization.
WE RELY ON ONLY ONE SUPPLIER FOR SOME OF OUR MANUFACTURING MATERIALS. ANY
PROBLEMS EXPERIENCED BY ANY SUCH SUPPLIER COULD NEGATIVELY AFFECT OUR OPERATIONS
We rely on third-party suppliers and vendors for some of the materials used in
the manufacture of our product candidates. Some of these materials are available
from only one supplier or vendor. Any significant problem experienced by one of
our sole-source suppliers could result in a delay or interruption in the supply
of materials to us until such supplier resolves the problem or an alternative
source of supply is located. Any delay or interruption would likely lead to a
delay or interruption of manufacturing operations, which could negatively affect
our operations.
WE FACE SUBSTANTIAL COMPETITION FROM OTHER COMPANIES AND RESEARCH INSTITUTIONS
THAT ARE DEVELOPING PRODUCTS TO TREAT THE SAME DISEASES THAT OUR PRODUCT
CANDIDATES TARGET
We compete with pharmaceutical and biotechnology companies which are pursuing
other forms of treatment for the diseases BIOBYPASS angiogen and our other
product candidates target. We may also face competition from companies that may
develop internally or acquire competing technology from universities and other
research institutions. As these companies develop their technologies, they may
develop proprietary positions which may prevent or limit our product
commercialization efforts.
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Some of our competitors are established companies with greater financial and
other resources than we have. We expect that competition in our business will
intensify. Our competitors may succeed in:
- identifying important genes or delivery mechanisms before us;
- developing products or product candidates earlier than we do;
- forming collaborations before we do, or precluding us from forming
collaborations with others;
- obtaining approvals from the U.S. Food and Drug Administration, or FDA, or
other regulatory agencies for such products more rapidly than we do;
- developing and validating manufacturing processes more rapidly than we do;
- obtaining patent protection or other intellectual property rights that would
limit our ability to use our technologies or develop products; or
- developing products that are safer or more effective than those we develop or
propose to develop.
While we seek to expand our technological capabilities to remain competitive,
research and development by others may render our technology or product
candidates obsolete or noncompetitive or result in treatments or cures superior
to any therapy developed by us.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, WE MAY BE UNABLE TO PURSUE COLLABORATIONS OR DEVELOP OUR OWN PRODUCTS
We are highly dependent on our scientific and management employees. We also rely
heavily on consultants to assist us in our research and development programs.
The loss of the services from any of these individuals could have a significant
impact on our ability to achieve our business objectives.
We will need to hire additional executive management and scientific personnel to
achieve our business objectives. There is currently a shortage of skilled
executives in our industry, which is likely to continue and intensify. In
addition, recruiting and retaining qualified scientific personnel to perform
future research and development work will be critical to our success.
Competition for experienced scientists is high. Failure to recruit and retain
executive management and scientific personnel on acceptable terms would prevent
us from achieving our business objectives.
A significant portion of our research and development is conducted under
sponsored research programs with several universities and research institutions.
We depend on the availability of scientific advisors for such programs, and we
cannot assure you that any of these individuals or their research staffs will be
available to conduct research and development for us. In addition, we will need
to hire additional personnel and develop additional academic collaborations as
we continue to expand our research and development activities. We do not know if
we will be able to attract, retain or motivate the personnel or develop the
academic collaborations necessary to achieve our business objectives.
RISKS RELATED TO OUR INDUSTRY
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR
COMPETITORS MAY BE ABLE TO TAKE ADVANTAGE OF OUR RESEARCH AND DEVELOPMENT
EFFORTS TO COMPETE WITH US
PATENT LAWS AND THEIR INTERPRETATION ARE HIGHLY UNCERTAIN. Our commercial
success will depend in part on obtaining patent protection for our products and
other technologies and successfully defending these patents against third party
challenges. Our patent position, like that of other biotechnology firms, is
highly uncertain and involves complex legal and factual questions. No clear
policy has emerged regarding the breadth of claims covered in biotechnology
patents in the United States. The biotechnology patent situation outside the
United States is even more uncertain and is currently undergoing review and
revision in many countries. Changes in, or different interpretations of, patent
laws in the United States and other countries might allow others to use our
discoveries or to develop and commercialize our products without any
compensation to us.
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OUR PATENT APPLICATIONS MAY NOT RESULT IN ENFORCEABLE PATENTS. Our ability to
develop and protect a proprietary position based on biotechnological innovations
and technologies involving genes and gene-based therapy, delivery systems,
production, formulations and the like, is particularly uncertain. The U.S.
Patent and Trademark Office, as well as patent offices in other countries, have
often required that patent applications concerning biotechnology-related
inventions be limited or narrowed substantially. Our disclosures in our patent
applications may not be sufficient to meet the statutory requirements for
patentability in all cases. In addition, other companies or institutions possess
issued patents and have filed and will file patent applications that attempt to
patent genes, vectors, cell lines, and methods of making and using gene-based
therapy products, that may be similar to our patent applications. For example,
while we have pending patent applications pertaining to types of replication
deficient adenovectors, adenovectors modified to alter receptor binding
characteristics and special cell lines used to propagate adenovectors, we are
aware of issued patents and pending patent applications of other companies and
institutions pertaining to the same subject matter. Patents and patent
applications of third parties may have priority over patent applications we have
filed or may file in the future. In some instances, the U.S. Patent and
Trademark Office may decide competing patent claims in an interference
proceeding. Any such proceeding would be costly and time consuming, and would
provide no assurance that we would prevail.
WE ARE UNABLE TO ASSESS THE PATENT PORTFOLIOS OF COMPETITORS AND THIRD PARTIES
WITH ANY DEGREE OF CERTAINTY. Patent applications in the United States, as well
as their processing through the U.S. Patent and Trademark Office, are, in most
cases, maintained in secrecy until patent issuance. Furthermore, patent
applications outside the United States generally are not published or otherwise
made available to the public until 18 months after the filing of the patent
applications. In addition, publication of discoveries in the scientific or
patent literature frequently occurs significantly later than the date on which
the underlying discoveries were made. Many companies choose not to publish their
scientific discoveries at all. Consequently, we cannot be certain that our
patent applications lay claim to the first made inventions or that they were the
first filed patent applications for such inventions.
ISSUED PATENTS MAY NOT PROVIDE COMMERCIALLY MEANINGFUL PROTECTION AGAINST
COMPETITORS. Other companies or institutions may challenge our or our
collaborators' patents in the United States and other countries. In the event a
company, institution or researcher infringes upon our or our collaborators'
patent rights, enforcing these rights may be difficult and can be expensive and
time consuming, with no assurance that our or our collaborators' patent rights
will be upheld. Others may be able to design around these patents or develop
unique products providing effects similar to our products. Thus, for example,
although we have an issued U.S. patent broadly covering stocks of
replication-deficient adenovectors that are free of undesirable
replication-competent adenovirus, this patent may be commercially circumvented
by our competitors or legally challenged and held to be invalid. In addition,
various components used in developing gene-based therapy products, such as
particular genes, vectors, promoters, cell lines and construction methods, used
by others and us are in the public domain. As a result, we are unable to obtain
patent protection with respect to such components, and third parties can freely
use such components. We cannot assure you that third parties will not develop
products using such components that compete with our potential products.
Moreover, with respect to some of our patentable inventions, we or our
collaborators have decided not to pursue patent protection outside the United
States. Accordingly, our competitors could develop, and receive non-U.S. patent
protection for gene-based therapies or technologies for which we or our
collaborators have or are seeking U.S. patent protection. Our competitors may be
free to use these gene-based therapies or technologies outside the United States
in the absence of patent protection.
IF WE ARE UNABLE TO PROTECT OUR TRADE SECRETS, COMPETITORS MAY BE ABLE TO
DEVELOP SUBSTANTIALLY SIMILAR PRODUCTS, WHICH COULD HARM OUR COMPETITIVE
POSITION. We rely to a limited extent on trade secrets to protect our
technology where we believe patent protection is not appropriate or obtainable.
However, trade secrets are difficult to protect. While we have entered into
confidentiality agreements with employees and collaborators, we may not be able
to prevent the disclosure of our trade secrets. In addition, other companies or
institutions may independently develop substantially equivalent information and
techniques.
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IF OUR POTENTIAL PRODUCTS CONFLICT WITH INTELLECTUAL PROPERTY RIGHTS OF
COMPETITORS, UNIVERSITIES OR OTHERS, THEN WE MAY BE UNABLE TO DEVELOP AND
COMMERCIALIZE THOSE PRODUCT CANDIDATES
OUR POTENTIAL PRODUCTS AND THOSE OF OUR COLLABORATORS MAY GIVE RISE TO CLAIMS
THAT THEY INFRINGE THE ISSUED PATENTS OF OTHERS. While we have not conducted
freedom to use patent searches on aspects of our product candidates or potential
product candidates, and may therefore be unaware of relevant patent and patent
applications of third parties, we are aware of issued patents that relate to
gene-based therapies and technologies similar to our product candidates and
technologies. For example, we are aware of issued patents relating to the use of
adenovectors to deliver therapeutic proteins to the heart, similar to our
BIOBYPASS angiogen, and special cell lines required for the production of
certain adenovectors, including a cell line we use in the production of our
BIOBYPASS angiogen. It could be alleged that our BIOBYPASS angiogen conflicts
with these patents. We are aware of other issued patents that pertain to various
aspects of our product candidates, and it could be alleged that our product
candidates conflict with these patents. An issued patent gives rise to a
rebuttable presumption of validity under U.S. law and the laws of some other
countries. The holders of these or other patents could bring legal actions
against us or our collaborators for damages or to stop us or our collaborators
from using the affected technology, which could limit our ability to develop and
commercialize our product candidates.
THE PATENT APPLICATIONS OF OTHERS MAY ISSUE INTO PATENTS THAT GIVE RISE TO
CLAIMS THAT OUR POTENTIAL PRODUCTS AND THOSE OF OUR COLLABORATORS INFRINGE THOSE
PATENTS. Other companies or institutions have filed and will file patent
applications that attempt to patent genes, vectors, cell lines and methods of
making and using gene-based therapy products, that may be similar to our product
candidates and technologies. As we discussed in "We are unable to assess the
patent portfolios of competitors and third parties with any degree of
certainty," patent applications are generally maintained in secrecy, and
publication of discoveries are delayed if they are published at all.
Consequently, we are unable to assess the patent application portfolios of
competitors and third parties with any degree of certainty. Nevertheless, those
patent applications could issue into patents in the United States and/or other
countries, which could limit our ability to develop and commercialize our
product candidates.
IF ANY OF OUR POTENTIAL PRODUCTS ARE FOUND TO INFRINGE A PATENT OF A COMPETITOR
OR THIRD PARTY, WE OR OUR COLLABORATORS MAY BE REQUIRED TO PAY DAMAGES AND
OBTAIN A LICENSE IN ORDER TO CONTINUE TO USE THE AFFECTED TECHNOLOGY. If
required, necessary licenses may not be available on acceptable terms or at all.
Adverse determinations in judicial or administrative proceedings or failure to
obtain necessary licenses could force us to stop using the affected technology,
which could limit our ability to develop and commercialize our product
candidates. We believe that there will continue to be significant litigation in
our industry regarding patent and other intellectual property rights and the
risk of litigation will increase with the increase in information regarding
genes and gene function and the development of new gene-based technologies and
therapies. Many of our competitors have and are continuing to expend significant
amounts of time, money, and management resources on intellectual property
litigation. If we become involved in litigation, it could consume a substantial
portion of our resources and could adversely affect our business, financial
condition and results of operations.
IF OUR RIGHT TO USE INTELLECTUAL PROPERTY WE LICENSE FROM OTHERS IS AFFECTED,
OUR ABILITY TO DEVELOP AND COMMERCIALIZE OUR PRODUCT CANDIDATES MAY BE HARMED
We rely, in part, on licenses to use some technologies, which are material to
our business. For example, to create our product candidates, we combine our
vectors with genes intended to produce proteins with therapeutic potential. For
our current product candidates, we have secured licenses to use the VEGF(121),
iNOS, TNFa, and PEDF genes. We do not own the patents that underlie these
licenses. In many cases, we do not control the prosecution or filing of patent
applications, nor control the enforcement of patents, to which we hold licenses.
We rely upon our licensors to properly prosecute and file those patent
applications and to prevent infringement of those patents.
While many of the licenses under which we have rights provide us with exclusive
rights in specified fields, we cannot assure you that the scope of our rights
under these and other licenses will not be subject to dispute by our licensors
or third parties. In addition, our rights to use these technologies and practice
the inventions claimed
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in the licensed patents and patent applications are subject to our licensors
abiding by the terms of those licenses and not terminating them.
Any of our licenses may be terminated by the licensor if we are in breach of a
term or condition of the license agreement, or if we become insolvent. In
addition, some of our licenses require us to achieve specific milestones.
Our product candidates and potential product candidates will require several
components that may each be the subject of a license agreement. The cumulative
license fees and royalties for these components may make the commercialization
of these product candidates uneconomical.
ADVERSE EVENTS IN THE FIELD OF GENE THERAPY MAY NEGATIVELY AFFECT REGULATORY
APPROVAL OR PUBLIC PERCEPTION OF OUR PRODUCTS OR PRODUCT CANDIDATES
The September 1999 death of a patient undergoing gene therapy using an
adenoviral vector to deliver a therapeutic gene and the resulting lawsuit filed
by his family against his doctors and the University of Pennsylvania, as well as
the more recent death of a patient enrolled in a study involving an
investigational drug that is similar in some respects to BIOBYPASS angiogen,
have been widely publicized. These deaths and any other adverse events in the
field of gene therapy that may occur in the future may result in greater
governmental regulation of our product candidates and potential regulatory
delays relating to the testing or approval of our product candidates. As a
result of the incident in September 1999, the United States Senate has commenced
hearings to determine whether additional legislation is required to protect
volunteers and patients who participate in gene therapy clinical trials.
Additionally, the Recombinant DNA Advisory Committee, which acts as an advisory
body to the NIH, has extensively discussed the use of adenoviral vectors in gene
therapy clinical trials and intends to issue a report on the adverse events
reported by investigators using adenoviral vectors. Any increased scrutiny could
delay or increase the costs of our product development efforts or clinical
trials.
The commercial success of our product candidates will depend in part on public
acceptance of the use of gene therapies for the prevention or treatment of human
disease. Public attitudes may be influenced by claims that gene therapy is
unsafe, and gene therapy may not gain the acceptance of the public or the
medical community. Negative public reaction to gene therapy could result in
greater government regulation and stricter clinical trial oversight and
commercial product labeling requirements of gene therapies and could cause a
decrease in the demand for any products we may develop.
PUBLIC PERCEPTION OF ETHICAL AND SOCIAL ISSUES MAY LIMIT THE USE OF OUR
TECHNOLOGIES, WHICH COULD REDUCE OUR REVENUES
Our success will depend in large part upon our ability to develop products
discovered using our gene therapy technology. Government authorities could, for
social or other purposes, limit the use of genetic processes or prohibit the
practice and use of our gene therapy technologies. Ethical and other concerns
about our gene therapy technologies, particularly the use of genes for
commercial purposes, and products resulting therefrom could adversely affect
their market acceptance.
WE MAY BE SUED FOR PRODUCT LIABILITY
We, alone or with our collaborators, may be held liable if any product we or our
collaborators develop, or any product which is made with the use or
incorporation of any of our technologies, causes injury or is found otherwise
unsuitable during product testing, manufacturing, marketing or sale. Regardless
of the merit or eventual outcome, product liability claims may result in:
- withdrawal of product candidates from our clinical trials;
- damage to our reputation;
- costs of litigation;
- substantial monetary awards to plaintiffs; and
- decreased demand for our products or product candidates.
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Although we currently have and intend to maintain product liability insurance,
this insurance may become prohibitively expensive, or may not fully cover our
potential liabilities. Inability to obtain sufficient insurance coverage at an
acceptable cost or otherwise to protect against potential product liability
claims could prevent or inhibit the commercialization of products developed by
us or in collaboration with others. If we are sued for any injury caused by our
products or our products made in collaboration with others, our liability could
exceed our total resources.
HEALTHCARE REFORM AND RESTRICTIONS ON REIMBURSEMENTS MAY LIMIT OUR FINANCIAL
RETURNS ON PRODUCT CANDIDATES
Our ability and that of our collaborators to commercialize drugs and diagnostic
products may depend in part on the extent to which reimbursement for the cost of
these products will be available from government health administration
authorities, private health insurers and other organizations. If purchasers of
our products are not able to obtain adequate reimbursement for the cost of using
our products, they may forego their use. These third parties are increasingly
challenging the price of medical products and services. We expect that there
will continue to be significant uncertainty as to the reimbursement status of
newly approved pharmaceutical products. We cannot assure you that adequate third
party coverage will be available for any product to enable us to establish price
levels sufficient to realize an appropriate return on our investment in research
and product development.
WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR
BUSINESS; ANY DISPUTES RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF
THESE MATERIALS COULD BE TIME CONSUMING AND COSTLY
Our research and development processes involve the use of hazardous materials,
including chemicals and radioactive and biological materials. Some of these
materials may be novel, including viruses with novel properties and animal
models for the study of viruses. Our operations also produce hazardous waste
products, including novel viruses and viral animal models. We cannot eliminate
the risk of accidental contamination or discharge or any resultant injury from
these materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of these materials. We could be
subject to civil damages in the event of an improper or unauthorized release of,
or exposure of individuals to, these hazardous materials. In addition, claimants
may sue us for injury or contamination that results from our use or the use by
third parties of these materials, and our liability may exceed our total assets.
Compliance with environmental laws and regulations may be expensive, and current
or future environmental regulations may impair our research, development or
production efforts.
RISKS RELATED TO THIS OFFERING
MANAGEMENT MAY INVEST OR SPEND THE PROCEEDS OF THIS OFFERING IN WAYS WHICH YOU
MAY NOT AGREE AND IN WAYS THAT MAY NOT YIELD A RETURN
Management will retain broad discretion with respect to the use of proceeds from
this offering. Stockholders may not deem such uses desirable, and our use of the
proceeds may not yield a significant return or any return at all. Management
intends to use a majority of the proceeds from this offering for research and
development, working capital and other general corporate purposes and to finance
potential acquisitions or investments. Because of the number and variability of
factors that determine our use of the net proceeds from this offering, we cannot
assure you that these uses will not vary substantially from our currently
planned uses.
OUR STOCK PRICE COULD BE EXTREMELY VOLATILE AND YOU MAY NOT BE ABLE TO RESELL
YOUR SHARES AT OR ABOVE THE INITIAL OFFERING PRICE
Prior to this offering, there has been no public market for shares of our common
stock. An active trading market may not develop for our common stock following
completion of this offering, or if developed, may not be maintained. The initial
public offering price for the shares will be determined by negotiations between
16
<PAGE>
representatives of the underwriters and us. This price may not be indicative of
prices that will prevail later in the market. You may not be able to resell your
shares at or above the initial public offering price.
The market prices for securities of biotechnology companies in general have been
highly volatile, and the market has experienced significant price and volume
fluctuations that are often unrelated to the operating performance of particular
companies. Announcements of technological innovations or new commercial products
by us or our competitors, disputes or other developments concerning proprietary
rights, including patents and litigation matters, developments concerning our
strategic alliances, publicity regarding actual or potential medical results
with respect to our products or technology under development, its corporate
collaborators or its competitors, regulatory developments in both the United
States and foreign countries, public concern as to the efficacy of new
technologies, period-to-period fluctuations in financial results, future sales
of substantial amounts of our common stock by existing stockholders and comments
by securities analysts, as well as general market conditions and other factors,
may have a significant impact on the market price of our common stock. In
particular, the realization of any of the risks described in these "Risk
Factors" could have a material adverse impact on such market price.
SOME OF OUR EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER US, AND MAY NOT MAKE
DECISIONS THAT ARE IN THE BEST INTERESTS OF ALL STOCKHOLDERS
After this offering, our directors, executive officers and principal
stockholders (greater than 5% stockholders) will together control approximately
% of our common stock ( % if the underwriters' over-allotment option is
exercised in full). Accordingly, they collectively will have the ability to
determine the outcome of most corporate actions requiring stockholder approval,
including the election of directors, amendments to our certificate of
incorporation and significant corporate transactions. The concentration of
ownership may delay or prevent a change in control and might affect the market
price of our common stock, even when a change may be in the best interests of
all stockholders. They may exercise this ability in a manner that advances their
best interests and not necessarily those of other stockholders.
SOME OF OUR CHARTER AND BY-LAW PROVISIONS AND DELAWARE LAW MAY DETER A THIRD
PARTY FROM ACQUIRING US, WHICH MAY NEGATIVELY AFFECT OUR STOCK PRICE
Provisions in our amended and restated certificate of incorporation and bylaws
and applicable provisions of the Delaware General Corporation Law may make it
more difficult for a third party to acquire control of us without the approval
of our board of directors. These provisions may make it more difficult or
expensive for a third party to acquire a majority of our outstanding voting
common stock or delay, prevent, or deter a merger, acquisition, tender offer or
proxy contest, which may negatively affect our stock price.
THERE IS A LARGE NUMBER OF SHARES THAT MAY BE SOLD IN THE MARKET FOLLOWING THIS
OFFERING, WHICH MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, the market
price of our common stock may decline. These sales also might make it more
difficult for us to sell equity or equity-related securities in the future.
After completion of this offering, we will have outstanding shares of
common stock, assuming no exercise of outstanding options or warrants and no
exercise of the underwriters' over-allotment options. Of these shares, the
shares sold in this offering (plus any additional shares sold upon
exercise of the underwriters' over-allotment option) will be freely transferable
without restriction under the Securities Act of 1933, or the Securities Exchange
Act of 1934, unless these shares are purchased by affiliates of the company. Of
the remaining shares of common stock held by existing stockholders,
will be freely tradeable 90 days after the offering, subject to the
underwriters' "lock-up" agreement, and will be freely tradeable 180 days
after the offering. Please refer to "Shares Eligible for Future Sale" for
additional information regarding shares that may be sold in the market after the
offering.
17
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements relate to
future events or our future financial performance. We have attempted to identify
forward-looking statements by terminology including "may," "will," "should,"
"expect," "plan," "anticipate," "believe," "estimate," "project," "predict,"
"intend," "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks and
uncertainties outlined under "Risk Factors," that may cause our or our
industry's actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are not under any duty to update any
of the forward-looking statements after the date of this prospectus to conform
these statements to actual results, unless required by law.
18
<PAGE>
USE OF PROCEEDS
We estimate that net proceeds from the sale of the shares of common
stock we are offering, at an assumed initial public offering price of $ per
share, will be approximately $ after deducting the underwriting discounts
and estimated offering expenses payable by us. We expect to use the net proceeds
as follows:
- approximately $ million for research and development activities, including
support of clinical trials;
- approximately $ million for capital expenditures related to equipment
purchases and facility expansion; and
- the balance for other general corporate purposes, including possible
acquisitions of complementary technology, products or businesses.
The amount and timing of our actual expenditures will depend upon numerous
factors, including progress of our product development programs, the number and
breadth of these programs, future revenue growth, if any, achievement of
milestones under corporate collaborations and licensing arrangements, our
ability to establish and maintain corporate collaborations and other
arrangements, the progress of the development efforts of our corporate
collaborators and the amount of cash, if any, generated by our operations. We
have no present understandings, commitments or agreements to enter into any
potential acquisitions or investments. Further, the amounts above are only broad
estimates and we have not determined with any certainty the amounts we plan to
spend on any of the areas listed above or the timing of these expenditures. As a
result, our management will have broad discretion to allocate the net proceeds
from this offering. Pending application of the net proceeds as described above,
we intend to invest the net proceeds of the offering in short-term
investment-grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid cash dividends on our common stock or any other securities.
We anticipate that we will retain all of our future earnings, if any, for use in
the expansion and operation of our business and do not anticipate paying cash
dividends in the foreseeable future.
CONCURRENT PRIVATE TRANSACTION
Concurrent with the closing of this offering, we plan to sell $5.0 million of
our common stock, or shares, to Warner-Lambert in a private transaction
at a price per share equal to $ .
We entered into a stock purchase agreement with Warner-Lambert in July 1997 as
part of our research, development and collaboration agreement. Pursuant to this
agreement Warner-Lambert will purchase $5.0 million of our common stock
simultaneously with or within one day of the closing of our initial public
offering, at a per-share price equal to 125% of the initial public offering
price.
19
<PAGE>
CAPITALIZATION
The following table summarizes as of June 30, 2000:
- our actual capitalization; and
- our pro forma as adjusted capitalization after giving effect to:
-- the conversion of all outstanding shares of convertible preferred stock
into 7,695,402 shares of common stock upon the closing of this offering;
-- the sale of shares of common stock offered hereby at an assumed
initial public offering price of $ per share, after deducting
underwriting discounts and estimated offering expenses; and
-- the sale of shares of our common stock to Warner-Lambert at an
assumed price of $ per share.
<TABLE>
<CAPTION>
---------------------
JUNE 30, 2000
---------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Current portion of notes payable............................ $ 423
-------
Long-term obligations less current portion.................. $ 6,680
-------
Stockholders' equity:
Convertible preferred stock, $0.001 par value; 7,736,158
shares authorized, 7,695,402 shares issued and
outstanding, actual; no shares authorized, issued and
outstanding, pro forma as adjusted...................... 8 --
Preferred stock, $0.001 par value; 4,346,861 shares
authorized, no shares issued and outstanding, actual;
5,000,000 shares authorized, no shares issued and
outstanding pro forma as adjusted....................... -- --
Common stock, $0.001 par value; 50,000,000 shares
authorized, 1,324,626 shares issued and 1,277,326 shares
outstanding, actual; 60,000,000 shares authorized,
shares issued and outstanding, pro forma as
adjusted................................................ 1
Additional paid-in capital................................ 56,931
Accumulated deficit....................................... (45,012)
Deferred compensation..................................... (1,691)
Accumulated other comprehensive income.................... (28)
Treasury stock, at cost, 47,300 common shares............. --
-------
Total stockholders' equity.............................. 10,209
-------
Total capitalization...................................... $17,312
=======
</TABLE>
This table does not include:
- 2,094,139 shares issuable on the exercise of stock options outstanding as of
June 30, 2000, at a weighted average exercise price of $3.97 per share;
- 388,212 shares issuable upon the exercise of warrants outstanding as of
June 30, 2000, at a weighted average exercise price of $13.53 per share; and
- 1,144,845 additional shares of common stock that we could issue under our
stock option and stock purchase plans as of such date.
This table should be read with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
accompanying notes appearing elsewhere in this prospectus.
20
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock as of June 30, 2000,
was approximately $10.2 million, or $1.14 per share of common stock, after
giving effect to the conversion of all outstanding shares of our convertible
preferred stock into 7,695,402 shares of our common stock, which will occur upon
the closing of this offering. After giving effect to the sale of the common
stock in this offering at an assumed initial public offering price of $ per
share, after deducting the estimated underwriting discounts and estimated
offering expenses and the sale of common stock to Warner-Lambert at an assumed
offering price of $ per share, the adjusted pro forma net tangible book value
at June 30, 2000, would have been $ million, or $ per share.
Pro forma net tangible book value per share before the offerings has been
determined by dividing pro forma net tangible book value (total tangible assets
less total liabilities) by the pro forma number of shares of common stock
outstanding at June 30, 2000. The offerings will result in an immediate increase
in pro forma net tangible book value per share of $ to existing stockholders
and an immediate dilution in pro forma net tangible book value per share of
$ to new investors who purchase shares of common stock in this offering.
Dilution is determined by subtracting pro forma net tangible book value per
share after the public offering and the direct offering to Warner-Lambert from
the assumed initial public offering price of $ per share and $ per share,
respectively. The following table illustrates this dilution on a per share
basis:
<TABLE>
<CAPTION>
-------------------
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share at June 30,
2000.................................................... $ 1.14
Increase per share attributable to Warner-Lambert
transaction.............................................
Increase per share attributable to new investors..........
--------
Pro forma net tangible book value per share after this
offering and the direct offering to Warner-Lambert........
--------
Dilution in net tangible book value per share to new
investors................................................. $
========
</TABLE>
If the underwriters' over-allotment options are exercised in full, the pro forma
net tangible book value per share after the offerings would be $ per share,
the increase in net tangible book value per share to existing stockholders would
be $ per share and the dilution in net tangible book value per share to new
investors would be $ per share and to Warner-Lambert would be $ per share.
The following table summarizes, on a pro forma basis, as of June 30, 2000, the
differences between the number of shares of common stock purchased from us, the
total consideration paid and the average price per share paid by the existing
stockholders, by the new investors purchasing shares in this offering and by
Warner-Lambert purchasing shares in the direct offering. We have assumed an
initial public offering price of $ per share, and we have not deducted
estimated underwriting discounts and estimated offering expenses in our
calculations.
<TABLE>
<CAPTION>
-------------------------------------------------------------
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- -------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............................. 8,972,728 % $52,723,641 % $ 5.88
New investors......................................
Warner-Lambert..................................... 5,000,000
--------- -------- ----------- --------
Total.............................................. 100.0% $ 100.0%
========= ======== =========== ========
</TABLE>
If the underwriters' over-allotment option is exercised in full, the number of
shares held by new investors will increase to shares, or %, of the
total number of shares of common stock outstanding after this offering.
The calculation of net tangible book value and other computations above do not
assume exercise of options and warrants outstanding at June 30, 2000. As of
June 30, 2000, there were 2,094,139 shares of common stock issuable upon
exercise of outstanding stock options at a weighted average exercise price of
$3.97 per share and 388,212 shares of common stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $13.53 per share.
If any of these options or warrants are exercised, there will be further
dilution to new investors.
21
<PAGE>
SELECTED FINANCIAL DATA
The statements of operations data for each of the years ended December 31, 1997,
1998 and 1999 and the balance sheet data as of December 31, 1998 and 1999, have
been derived from our audited financial statements included elsewhere in this
prospectus that have been audited by KPMG LLP, independent public accountants.
The statement of operations data for the years ended December 31, 1995 and 1996
and the balance sheet data as of December 31, 1995, 1996 and 1997 have been
derived from our audited financial statements not included in this prospectus.
The pro forma net loss per common share data reflects the automatic conversion
of our outstanding convertible preferred stock upon closing of this offering.
Financial data as of June 30, 2000, and for the six month periods ended
June 30, 1999 and 2000 are derived from unaudited financial statements and, in
the opinion of management, include all adjustments, consisting only of normal
recurring adjustments, that we consider necessary for a fair presentation of our
financial position and results of operations for such periods. Our historical
results are not necessarily indicative of results to be expected for any future
period. The data presented below have been derived from financial statements
that have been prepared in accordance with generally accepted accounting
principles and should be read with our financial statements, including the
accompanying notes, and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
------------------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------- ----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
IN THOUSANDS, EXCEPT PER SHARE DATA
STATEMENT OF OPERATIONS DATA:
Revenues:
Ongoing research and development support........ $ 1,005 $ 698 $ 3,188 $ 6,750 $14,075 $7,660 $ 5,050
Contract, license and milestone payments........ -- -- 2,500 3,000 2,875 1,438 3,487
------- ------- ------- ------- ------- ------ -------
Total revenues................................ 1,005 698 5,688 9,750 16,950 9,098 8,537
------- ------- ------- ------- ------- ------ -------
Operating expenses:
Research and development........................ 6,460 5,896 8,085 10,592 14,018 7,206 7,115
General and administrative...................... 2,266 3,915 4,031 5,903 5,428 2,642 3,801
Purchase of in-process technology............... 592 -- -- -- -- -- --
------- ------- ------- ------- ------- ------ -------
Total operating expenses...................... 9,318 9,811 12,116 16,495 19,446 9,848 10,916
------- ------- ------- ------- ------- ------ -------
Loss from operations.............................. (8,313) (9,113) (6,428) (6,745) (2,496) (750) (2,379)
Other income, net................................. 413 496 263 398 577 255 263
------- ------- ------- ------- ------- ------ -------
Net loss.......................................... $(7,900) $(8,617) $(6,165) $(6,347) $(1,919) $ (495) $(2,116)
======= ======= ======= ======= ======= ====== =======
Net loss per common share, basic and diluted...... $(14.08) $(10.74) $ (6.44) $ (6.15) $ (1.83) $(0.48) $ (1.78)
======= ======= ======= ======= ======= ====== =======
Shares used in computing net loss per common
share, basic and diluted........................ 561 802 957 1,032 1,051 1,037 1,185
Pro forma net loss per common share, basic and
diluted......................................... $ (0.22) $ (0.24)
======= =======
Shares used in computing pro forma net loss per
common share.................................... 8,746 8,881
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------
AS OF DECEMBER 31, AS OF
---------------------------------------------------- JUNE 30,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
IN THOUSANDS
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments..................................... $ 13,880 $ 7,725 $ 9,364 $ 8,919 $ 13,884 $ 11,534
Working capital................................... 13,156 6,378 7,081 5,621 8,348 7,418
Total assets...................................... 15,226 8,638 10,547 11,721 28,636 25,457
Long-term obligations, less current portion....... 527 158 47 -- 6,822 6,680
Deferred compensation............................. (944) (974) (1,360) (836) (850) (1,691)
Accumulated deficit............................... (19,847) (28,464) (34,630) (40,977) (42,896) (45,012)
Total stockholders' equity........................ 13,691 6,864 8,644 5,280 11,931 10,209
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ WITH "SELECTED FINANCIAL
DATA" AND OUR FINANCIAL STATEMENTS AND NOTES INCLUDED ELSEWHERE IN THIS
PROSPECTUS. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS
REGARDING FORWARD-LOOKING STATEMENTS SHOULD BE READ AS APPLYING TO ALL RELATED
FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. OUR ACTUAL
RESULTS AND THE TIMING OF EVENTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED
HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO THESE DIFFERENCES INCLUDE THOSE
DISCUSSED IN "RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
PROSPECTUS. PLEASE READ "RISK FACTORS" AND "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS."
OVERVIEW
We develop gene-based products that cause the production of therapeutic proteins
at the site of disease. We believe that local production of proteins over a
sustained period will allow the proteins to deliver their potential therapeutic
benefit while minimizing side effects. Our current areas of focus are
cardiovascular disease, particularly coronary artery disease and peripheral
vascular disease, oncology and ophthalmology. We are developing BIOBYPASS
angiogen as part of our collaboration with Warner-Lambert, under which we may
receive more than $100.0 million, excluding royalties, in license fees, research
and development funding, milestone payments and equity purchases. As of
June 30, 2000, Warner-Lambert had paid us $49.5 million under this
collaboration. The following table summarizes actual payments received under our
collaboration with Warner-Lambert as of June 30, 2000.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ONGOING RESEARCH AND CONTRACT, LICENSE AND
DEVELOPMENT SUPPORT MILESTONE PAYMENTS
------------------------- ------------------------
PROCESS LICENSE MILESTONE EQUITY
YEAR RESEARCH DEVELOPMENT FEES(1) PAYMENTS PURCHASES TOTAL
--------------------- ----------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
1997 $ 3,000,000 $ -- $5,000,000 $ 2,000,000 $ 2,000,000 $12,000,000
1998 6,000,000 -- -- 2,000,000 -- 8,000,000
1999 5,500,000 6,250,000 3,750,000 -- 8,000,000 23,500,000
Six Months Ended
June 30, 2000 2,500,000 1,500,000 -- 2,000,000 -- 6,000,000
----------- ---------- ---------- ----------- ----------- -----------
Total as of
June 30, 2000 $17,000,000 $7,750,000 $8,750,000 $ 6,000,000 $10,000,000 $49,500,000
=========== ========== ========== =========== =========== ===========
</TABLE>
(1) For financial reporting purposes, the $5.0 million license fee received in
July 1997 is being amortized over five years and the $3.75 million license
fee received in January 1999 is being amortized over two years based on the
terms of the sponsored research and development agreements.
We have generated no product revenues and have funded our operations primarily
through the private placement of equity securities and the proceeds of our
corporate collaboration agreements. For more information about our collaboration
with Warner-Lambert, see "Business -- Strategic Alliances -- Our Collaboration
with the Warner-Lambert Company."
We expect our sources of revenue for the next several years to consist primarily
of payments under corporate collaborations and interest income. Revenues from
ongoing research and development support consist of cost-reimbursement
activities under our collaboration agreements. We recognize collaborative
research and development revenue from these activities as the related expenses
are incurred and when we have no future performance obligations. Contract,
license and milestone payments consist of license fees and specific
performance-based milestone payments. We recognize contract and license revenue
when milestones are met and our specific performance obligations have been
satisfied in accordance with the terms of the respective
23
<PAGE>
agreements. Research and development, contract, license and milestone revenue
recognized in our financial statements is not subject to repayment. In
accordance with Staff Accounting Bulletin 101, we have deferred recognition of
up-front contract or license payments received under our collaboration and
license agreements and are amortizing the related unearned revenues over the
terms of the collaboration agreements, generally ranging from two to five years.
We will not receive revenue from product sales until one or more of our product
candidates are commercialized. In order to accelerate product commercialization
and finance our research and development activities, we are currently engaged in
and are actively seeking collaborations with leading pharmaceutical and
biotechnology companies.
We have incurred operating losses each year since inception and, as of June 30,
2000, had an accumulated deficit of approximately $45.0 million. Our losses have
resulted principally from costs incurred in research and development and from
general and administrative activities. Research and development expenses consist
primarily of salaries and related personnel costs, sponsored research costs,
patent costs, technology access fees and other expenses related to our product
development and research programs. We expense our research and development costs
as they are incurred. General and administrative expenses consist primarily of
salaries and related expenses for executive, finance and other administrative
personnel, professional fees and other corporate expenses including business
development and general legal activities. We expect to incur substantial
additional operating losses for at least the next few years as a result of
increases in our expenses for research and development activities.
Our quarterly operating results will depend upon many factors. These factors
include variations in payments received or made by us under strategic alliances,
which include milestone payments, royalties, license fees and other revenues,
our ability to maintain and establish corporate collaborations and the amount
and timing of operating expenses relating to research and development,
preclinical testing and clinical trials. As a consequence, our quarterly
operating results have fluctuated in the past and are likely to do so in the
future.
Through June 30, 2000, we had recorded an aggregate of $4.9 million of deferred
compensation expense resulting from the granting of stock options to employees,
directors or consultants covering shares of our common stock, which stock
options had exercise prices below the fair value of the underlying common stock
at the date of their grant. Net of prior amortization, net deferred compensation
of $1.7 million at June 30, 2000 will be amortized over the vesting periods of
the respective options, typically four years. In September 2000, we issued stock
options to employees, for which we will record deferred compensation of
approximately $2.7 million which will be amortized over the vesting period of
the options. We anticipate recording total compensation charges resulting from
the amortization of the deferred compensation expense recorded as of June 30,
2000 and for deferred compensation expense to be recorded for the September 2000
grants approximately as follows: $684,000 in 2000, $1,149,000 in 2001,
$1,021,000 in 2002, $944,000 in 2003 and $571,000 in 2004.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES:
ONGOING RESEARCH AND DEVELOPMENT SUPPORT. Ongoing research and development
support decreased 34% to $5.0 million in the first six months of 2000 from $7.7
million in the comparable prior year period primarily as a result of scheduled
reductions in research and development support under our collaboration agreement
with Warner-Lambert. Revenue from ongoing research and development support in
the first six months of 1999 included additional revenues resulting from an
amendment to the collaboration agreement with Warner-Lambert effective
January 1, 1999. Pursuant to the amendment, Warner-Lambert received the right,
at its expense, to manufacture collaboration products for clinical and
commercial sales worldwide, excluding Asia. Prior to the amendment, we were
expending funds to develop manufacturing capability for which we were not
entitled to reimbursement. In connection with the amendment, we are entitled to
receive additional payments from Warner-Lambert for process development support
activities. These payments aggregated $3.75 million in the first six months of
1999 which included $1.25 million for reimbursement of expenditures incurred by
us prior to 1999. Payments for process
24
<PAGE>
development support in the first six months of 2000 totaled $1.5 million during
which time we successfully demonstrated the establishment of a manufacturing
process suitable for clinical manufacturing. Over 92% of our ongoing research
and development support in the first six months of 2000 and over 95% in the
comparable prior year period were earned under our collaboration agreement with
Warner-Lambert.
CONTRACT, LICENSE AND MILESTONE PAYMENTS. Recognition of contract, license and
milestone payments increased to $3.5 million in the first six months of 2000
from $1.4 million in the comparable prior year period. This increase resulted
primarily from a $2.0 million technology success fee received in 2000 under the
1999 amendment related to the development of a production process and testing
methods suitable for Phase III clinical trial manufacturing. Substantially all
contract, license and milestone payments in 1999 and 2000 were earned in
connection with the July 1997 collaboration agreement and the amendment to the
collaboration agreement referred to above.
OPERATING EXPENSES:
RESEARCH AND DEVELOPMENT. Research and development expenses remained relatively
stable at $7.1 million in the first six months of 2000 and $7.2 million in the
comparable prior year period. Our research and development activities related to
our therapeutic angiogenesis program, other product development programs and
research activities relating to our core adenovector systems.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 44%
to $3.8 million in the first six months of 2000 from $2.6 million in the
comparable prior year period. The increase was primarily attributable to higher
levels of expenditures related to legal and consulting fees associated with our
new product development initiatives, including acquiring and maintaining our
intellectual property portfolio, higher operating expenses related to our new
facility and higher compensation charges resulting from the amortization of the
deferred compensation expense from stock options granted.
OTHER INCOME. Other income, consisting primarily of interest income, net of
interest expense, increased 3% to $263,000 in 2000 from $255,000 in 1999. The
$8,000 increase was due to higher levels of cash available for investing
resulting from positive cash flow generated in 1999, offset by increased
interest expense related to the financing of our new facility.
YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES:
ONGOING RESEARCH AND DEVELOPMENT SUPPORT. Ongoing research and development
support increased 109% to $14.1 million in 1999 from $6.8 million in 1998 due to
the execution of an amendment to our collaboration agreement with Warner-Lambert
referred to above. In 1999, we recognized $8.0 million in the form of ongoing
development support funding which included $1.25 million for reimbursement of
process development expenditures incurred by us prior to the effective date of
the amendment. Over 94% of our ongoing research and development support in 1999
and over 88% in 1998 were earned under our collaboration agreement with Warner-
Lambert.
CONTRACT, LICENSE AND MILESTONE PAYMENTS. Recognition of contract, license and
milestone payments remained relatively constant at $2.9 million in 1999 and $3.0
million in 1998. All of our contract, license and milestone payments in 1999 and
1998 were earned under our collaboration agreement with Warner-Lambert.
OPERATING EXPENSES:
RESEARCH AND DEVELOPMENT. Research and development expenses increased 32% to
$14.0 million in 1999 from $10.6 million in 1998. The increase of $3.4 million
was attributed to continued growth in our research and development activities
related to our therapeutic angiogenesis program, other product development
programs and research activities relating to our core adenovector systems.
25
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased 8% to
$5.4 million in 1999 from $5.9 million in 1998. The decrease was primarily
attributable to the one-time expense of $1.2 million associated with a proposed
offering in 1998, partially offset by increases in salaries and benefits as we
expanded our management team, and legal fees associated with acquiring and
maintaining our intellectual property portfolio.
OTHER INCOME. Other income, consisting primarily of interest income, net of
interest expense, increased 45% to $577,000 in 1999 from $398,000 in 1998. The
$179,000 increase was due to increases in our cash available for investing as a
result of our convertible Series F preferred stock equity financing in
December 1998 and payments received under the amendment to our collaboration
agreement with Warner-Lambert in the first quarter of 1999.
YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES:
ONGOING RESEARCH AND DEVELOPMENT SUPPORT. Ongoing research and development
support increased 112% to $6.8 million in 1998 from $3.2 million in 1997. This
increase was due to the signing of two collaboration agreements during 1997 --
Warner-Lambert (July 1997) and FUSO Pharmaceuticals (September 1997). Over 88%
of our ongoing research and development support in 1998 and over 94% in 1997
were earned under our collaboration agreement with Warner-Lambert.
CONTRACT, LICENSE AND MILESTONE PAYMENTS. Recognition of contract, license and
milestone payments increased 20% to $3.0 million in 1998 from $2.5 million in
1997. All contract, license and milestone payments in 1998 and 1997 were earned
under our collaboration agreement with Warner-Lambert.
OPERATING EXPENSES:
RESEARCH AND DEVELOPMENT. Research and development expenses increased 31% to
$10.6 million in 1998 from $8.1 million in 1997. The increase of $2.5 million
was primarily attributed to growth in our research and development activities
related to our therapeutic angiogenesis program and technological development
programs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 46%
to $5.9 million in 1998 from $4.0 million in 1997. This increase was primarily
attributable to the one-time expense of $1.2 million associated with a proposed
offering in 1998, as well as the expansion of our management team and business
development activities.
OTHER INCOME. Other income, consisting primarily of interest income, net of
interest expense, increased 51% to $398,000 in 1998 from $263,000 in 1997. The
$135,000 increase was due to increases in our cash available for investing
during 1998.
LIQUIDITY AND CAPITAL RESOURCES
From inception through June 30, 2000, we financed our operations through the
private placement of equity securities, payments from corporate collaborators,
leases and debt financing. As of June 30, 2000, we have received aggregate gross
proceeds of approximately $52.7 million through the private placement of our
equity securities, approximately $49.3 million in research and development
funding, license fees and milestone payments from corporate collaborators,
approximately $3.0 million of equipment capital leases and debt financing and
$7.3 million in lease incentives and debt financing associated with our new
corporate office and laboratory facility. In addition, upon demonstration that a
process has been established for the production of bulk product at a scale and
site for pivotal clinical study, as shown by the preparation of three
consecutive lots of the first collaboration product, we will receive an
equity-based milestone payment of $5.0 million from Warner-Lambert.
As of December 31, 1999, we held $13.9 million in cash and cash equivalents and
short-term investments, as compared to $8.9 million as of December 31, 1998. Net
cash provided by operating activities was approximately $976,000 in 1999. Net
cash used in investing activities was approximately $10.2 million, which
consisted
26
<PAGE>
principally of the purchases of investment securities and property and equipment
offset by the proceeds from the sale of investment securities. Net cash provided
by financing activities was approximately $14.7 million, which consisted
principally of the proceeds from issuance of preferred stock and proceeds from a
financing arrangement for tenant improvements of our research and development
facility and corporate offices which we now occupy.
As of June 30, 2000, our net operating loss carryforwards were approximately
$35.7 million. If not utilized, our loss carryforwards will begin to expire in
2012. Utilization of our net operating losses to offset future taxable income,
if any, may be substantially limited due to "change of ownership" provisions in
the Internal Revenue Code of 1986. We have not yet determined the extent to
which limitations may have been triggered as a result of past or future
financings, including this offering. This annual limitation may result in the
expiration of certain net operating losses prior to their use.
We anticipate that annual expenditures for research and development, including
clinical trials, product development and preclinical studies, and general and
administrative activities will increase significantly in future years. In the
future, our liquidity and capital resources will depend upon, among other
things, the level of our research, development, clinical, regulatory and
marketing expenses and funding from collaborations.
As of August 31, 2000, we held cash and cash equivalents of approximately
$7.2 million. We believe that our cash reserves, the net proceeds from this
offering, the sale of shares to Warner-Lambert and anticipated cash flow from
our current corporate collaborations will be sufficient to support our
operations for at least 18 months. We expect that significant additional
financing will be required in the future, which we may seek to raise through
public or private equity offerings, debt financing, additional strategic
alliance and licensing arrangements or some combination of these financing
alternatives.
DISCLOSURE ABOUT MARKET RISK
Our exposure to market risk is confined to our cash and cash equivalents which
have maturities of less than one year and our investment portfolio. We maintain
a portfolio of investment grade government agency notes and corporate bonds and
commercial paper. As of June 30, 2000, securities totaling 16% of our investment
portfolio have maturities between one to three years. The securities in our
investment portfolio are not leveraged, are classified as available-for-sale and
are, due to their predominantly short-term nature, subject to minimal interest
rate risk. We currently do not hedge interest rate exposure. Because of the
short-term maturities of our investments, we do not believe that an increase in
market rates would have any significant negative impact on the realizable value
of our investment portfolio.
We have operated primarily in the United States and all revenues to date have
been received in U. S. dollars. Accordingly, we have not had any material
exposure to foreign currency rate fluctuations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the Staff of the Securities and Exchange Commission issued a
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 summarizes certain of the Staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements, including the recognition of non-refundable fees received
upon entering into arrangements. Our revenue recognition policies are consistent
with the provisions of SAB 101 and our financial statements reflect this policy
for all periods presented.
27
<PAGE>
BUSINESS
COMPANY OVERVIEW
We develop gene-based products that cause therapeutic proteins to be produced at
the site of disease. We believe that local production of proteins over a
sustained period will allow the proteins to deliver their potential therapeutic
benefit while minimizing the overall toxicity that can occur when large doses of
a protein are introduced directly into the body. Our current areas of focus are
cardiovascular disease, particularly coronary artery disease and peripheral
vascular disease, oncology and ophthalmology. Our products in development
consist of therapeutic genes and gene transfer systems, commonly called vectors,
that transport those genes into cells at the site of the disease. We have
specialized in the use and improvement of particular types of vectors called
adenovectors. We believe that our adenovector technology platform allows us to
test the therapeutic benefit of genes in a broad array of preclinical models of
human disease. We believe that our technology platform also allows us to advance
our product candidates to clinical testing generally in less time than
traditional drug discovery methods.
BACKGROUND
The promise of genomics is that an improved understanding of gene function will
lead to increased knowledge of disease and the ability to create new therapies.
Genomics information has become an important component of biological research
into the cause of human disease. Pharmaceutical and biotechnology companies are
using this information to develop new therapeutic products.
IMPROVING THE UNDERSTANDING OF THE BIOLOGY OF DISEASE. Genes are the essential
blueprint for life. Genes produce their effect through expression of proteins
using their DNA sequence as a blueprint. New technologies for life science
research and significant financial investment have accelerated the study of the
human genome and the genomes of other organisms. This field of study is
generally known as genomics. The majority of this effort has been to identify
partial and full gene sequences of the human genome. The first working draft of
the complete human genome sequence has recently been completed.
Gene sequences, while important, do not provide sufficient information to
determine the function of specific genes. Scientists are now working to
understand gene function and the role of gene function in disease. This field of
study is referred to as functional genomics. Many techniques are used to
determine gene function, including cell culture, biochemical studies and the
study of non-mammalian organisms. However, it is often difficult to determine
the function of a gene and its potential role in diseased states. Vectors
provide a means of carrying genes to specific cells in mammalian organisms so
that the function of specific genes and the proteins they encode in a particular
tissue may be rapidly and cost effectively assessed for their potential role in
the prevention or treatment of disease.
CONVERTING GENOMICS INFORMATION INTO THERAPEUTIC PRODUCTS. Key approaches being
used to develop new therapies based on genomics information are identification
of new targets for small molecule drugs, the use of proteins and antibodies as
drugs and the use of genes to treat disease. While each of these approaches has
their particular strengths, with small molecule drugs, proteins and antibodies
it is often difficult to maintain sufficient concentrations of the drugs at the
site of disease for a long enough period of time to demonstrate efficacy.
THE USE OF PROTEINS AS THERAPEUTIC PRODUCTS. Proteins that regulate biological
processes may be candidates to become therapeutic products. Therapeutic proteins
are widely used in the practice of medicine. In 1999, sales of therapeutic
proteins in the United States approximated $13 billion. Despite the commercial
success of many protein therapies, broad medical use of proteins is limited by
the inability to maintain sufficient concentrations of the protein at the site
of disease for a period of time long enough to provide therapeutic benefit,
while minimizing side effects caused by the protein's presence in other,
non-target tissues. In addition, production of proteins requires large scale
cell culture techniques and highly specialized purification and formulation
methods. These requirements can be expensive and time consuming.
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<PAGE>
OUR SOLUTION
Our solution for creating effective drug therapies is to use genes to produce
beneficial proteins at the site of disease. This approach provides us with an
opportunity to convert genomics discoveries directly into product candidates
that harness the powerful therapeutic potential of proteins in a wide variety of
applications. We believe that administering a gene-based product, rather than
the protein it encodes, may also overcome many of the production, speed and cost
issues associated with other discovery approaches. Our approach also may result
in greater control over the location, timing and amount of therapy. Since high
concentrations of the therapeutic protein are produced only at the site of
disease, we anticipate that our new treatments will be effective and well
tolerated.
Our product candidates are made up of vectors and genes intended to produce
proteins with therapeutic potential. To deliver genes for therapeutic
applications, we believe the adenovector has the combined advantages of being
well tolerated, efficient and flexible, allowing us to create multiple products
for a wide variety of diseases. We believe that our vectors can be engineered to
achieve useful performance characteristics and can be produced in commercial
quantities. In addition, we are able to use the same vector technology for
functional genomics purposes to help determine the function of a specific gene
and to create new therapeutic candidates--reducing the number of steps that are
typically involved from the point of developing an understanding of the biology
of the disease to creating a new drug.
OUR STRATEGY
Our goal is to lead in the discovery, development and commercialization of
innovative gene-based products that address major medical needs. To achieve this
goal, we intend to:
- DEVELOP AND COMMERCIALIZE A BROAD PORTFOLIO OF PRODUCTS. We believe that to
achieve maximum economic return with acceptable risk, we need to develop and
commercialize a broad portfolio of products. Our technology platform allows us
to create product candidates for the treatment of a variety of diseases. We
intend to use our technology to create a broad portfolio of products so that
we can increase the potential for significant revenues in the future. In order
for us to develop and commercialize multiple product candidates at the same
time, we intend to establish relationships with other companies. These
relationships would provide funding and clinical and marketing resources for
the development and commercialization of some of our product opportunities.
They would also enhance our ability to build our internal capabilities so that
we may independently develop and commercialize selected product opportunities.
- USE GENOMICS INFORMATION TO IDENTIFY AND CREATE NEW THERAPEUTIC PRODUCT
CANDIDATES. The genomics revolution is generating an abundance of information
regarding genes and gene function. We intend to use our drug discovery
technology to convert this information into therapeutic product candidates. To
help us assess the therapeutic potential of these genes and select the most
promising candidates for development, we will continue to establish alliances
with corporations and academic institutions. These relationships facilitate
our access to genes, genomics information, models of human disease and other
technologies useful for drug discovery purposes.
- SUSTAIN AND EXTEND OUR TECHNOLOGY POSITION IN SAFE, EFFICIENT AND TARGETED
GENE DELIVERY. Our core technology enables us to create products that deliver
genes that cause local production of therapeutic proteins. We will continue to
enhance our gene delivery capabilities through internal research,
collaborations and acquisitions. We expect improvements in our core technology
to enhance our drug discovery efforts and lead to additional product
candidates. We intend to further strengthen our technologies relating to
process development, formulation and manufacturing.
OUR PRODUCT CANDIDATES
We have used our proprietary drug discovery and development technologies to
create a portfolio of product candidates that treat a number of major diseases.
Our current areas of therapeutic focus include cardiovascular disease,
particularly coronary artery disease and peripheral vascular disease, oncology
and ophthalmology. Our existing product candidates use proprietary genes that we
have licensed from others.
29
<PAGE>
PORTFOLIO OF PRODUCT CANDIDATES
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
THERAPEUTIC
PRODUCT CANDIDATE GENE INDICATION PRECLINICAL PHASE I PHASE II PHASE III
----------------- ----------- ---------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BIOBYPASS angiogen... VEGF(121)
Coronary
Artery
Disease
-------------------------->
Peripheral
Vascular
Disease
-------------------------->
TNFerade............ TNFa
Locally
Advanced
Cancers
------->
PEDF................ PEDF
Macular
Degeneration
--->
Diabetic
Retinopathy
--->
GENSTENT............ INOS
Vascular
Damage
--->
</TABLE>
BIOBYPASS ANGIOGEN
BIOBYPASS angiogen is intended to improve blood flow by stimulating new blood
vessel formation in patients with coronary artery disease and peripheral
vascular disease.
Cardiovascular disease is the leading cause of death in the United States and in
most other developed countries. In 1999, the American Heart Association ("AHA")
estimated that 60 million Americans suffer from cardiovascular disease and that
over $185 billion is spent annually on the care and treatment of individuals
with this disease. Cardiovascular disease is characterized by insufficient blood
flow, or ischemia, which deprives tissues of oxygen and other vital nutrients.
Ischemia in the heart can lead to severe pain, impaired cardiac function and
heart attack. Ischemia in the legs can lead to intermittent or chronic pain
while at rest, and ultimately, to severe infection, for which amputation of a
limb is the only current treatment.
CORONARY ARTERY DISEASE. Approximately 50% of deaths attributable to
cardiovascular disease are due to coronary artery disease, which affects more
than 12 million patients in the United States. In patients with severe coronary
artery disease, angioplasty is often used to open blocked vessels. Angioplasty
involves the insertion of an inflatable balloon catheter to physically open a
narrowed blood vessel. The AHA estimates that in 1997, the latest date for which
data is available, 450,000 angioplasty procedures were performed on patients in
the United States at an average cost of $20,000 per procedure. Studies have
shown that within seven months following angioplasty, the blood vessel narrows
again in 20% to 40% of patients, a process called restenosis. Another option for
treating more severe coronary artery disease is coronary artery bypass graft
surgery, or CABG, which involves bypassing the diseased artery with a blood
vessel taken from another part of the body. The AHA estimates that in 1997 more
than 600,000 CABG procedures were performed in the United States at an average
cost of $45,000 per procedure. These procedures are highly invasive and
frequently need to be repeated. We believe that there is a substantial need for
products that are less invasive and provide longer lasting, improved results and
reduced deaths in patients undergoing angioplasty or coronary artery bypass
surgery. In addition, some coronary artery disease patients are ineligible for
angioplasty or coronary bypass procedures. For these patients, new treatments
are essential.
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<PAGE>
PERIPHERAL VASCULAR DISEASE. Peripheral vascular disease is characterized by
the progressive deterioration of blood flow to the legs. Approximately 5% of
individuals over the age of 50, or 8 million people in the United States, have
peripheral vascular disease, resulting in significant medical costs. The cost of
surgical procedures used to treat peripheral vascular disease are in excess of
$3 billion annually. Current therapies for the treatment of peripheral vascular
disease, ranging from changes in lifestyle and exercise programs to angioplasty
or artery bypass grafts, generally do not stop progression of the disease. In
addition, peripheral vascular disease patients who have widespread disease or
vessels that are too small to access tend to be poor candidates for angioplasty
or vascular grafts. Vascular surgeons perform approximately 140,000 amputations
per year, predominantly for end-stage peripheral vascular disease, in the United
States alone.
BIOBYPASS ANGIOGEN. We believe that restoring blood flow to areas of ischemia
through the formation of new blood vessels, a process known as angiogenesis,
offers one of the most promising therapeutic options for patients with coronary
artery disease and peripheral vascular disease. Angiogenesis, the body's natural
response to ischemia, is triggered by proteins such as VEGF. Providing VEGF to
ischemic tissue is intended to enhance the body's normal response and stimulate
additional blood vessel formation. Therapeutic use of the protein has been
limited however, because the VEGF protein is rapidly cleared by the body and can
be toxic when administered generally throughout the body.
Our lead product candidate, BIOBYPASS angiogen, uses one of our proprietary
vectors to deliver a proprietary gene, VEGF(121), to cells of the heart or legs.
The VEGF protein has a high degree of specificity for the endothelial cells
involved in new blood vessel formation, thereby reducing the potential for
unwanted side effects. We believe that local administration of BIOBYPASS
angiogen to the diseased tissue using injection catheters or syringes results in
production of VEGF protein where it is needed and avoids the toxicity associated
with systemic delivery. We have an exclusive worldwide license for all gene
therapy products of the VEGF(121) gene from Scios, Inc.
COLLABORATION WITH WARNER-LAMBERT. In July 1997, we entered into a
collaboration with Warner-Lambert, which was acquired by Pfizer in June 2000, to
research, develop and commercialize gene-based products incorporating the VEGF
gene for the treatment of coronary artery disease and peripheral vascular
disease. Under the terms of the collaboration, we granted Warner-Lambert an
exclusive, royalty-bearing license to manufacture and sell products resulting
from our relationship for the treatment of coronary artery disease and
peripheral vascular disease worldwide, excluding Asia. Warner-Lambert has the
primary responsibility for clinical development, regulatory approval,
manufacturing and commercialization of collaboration products. If specified
milestones are achieved, we may receive a total of more than $100 million,
excluding royalties, in license fees, research and development funding,
milestone payments and equity purchases.
CLINICAL STATUS. BIOBYPASS angiogen has entered Phase II clinical trials to
evaluate its potential use in the treatment of coronary artery disease and
peripheral vascular disease. Warner-Lambert is conducting the Phase II program.
The Phase II clinical studies are designed to be supportive of registration when
an application is filed with the FDA for product approval. In our earlier Phase
Ib clinical trials, we treated a total of 66 patients by direct injection into
the heart and legs and observed that BIOBYPASS angiogen was well tolerated. The
initial clinical studies of 31 patients with coronary artery disease, although
not placebo-controlled, did include measures of exercise capacity, clinical
symptoms, new blood vessel formation and blood flow. The initial clinical study
in 35 peripheral vascular disease patients included similar measures and, as in
the coronary artery disease studies, supported the initiation of Phase II
studies.
The clinical program plans to assess the efficacy, toleration and dosage of
BIOBYPASS angiogen administered through a number of different delivery methods,
including:
- endocardial injection catheter delivery by interventional cardiologists,
- minimally-invasive epicardial syringe delivery by cardiac surgeons, and
- intramuscular syringe delivery by vascular physicians, including surgeons and
vascular medicine physicians.
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The table below summarizes the status of the clinical program for BIOBYPASS
angiogen.
BIOBYPASS ANGIOGEN CLINICAL PROGRAM
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
PHYSICIAN PATIENT
INDICATION GROUP STATUS NUMBER TRIAL DESIGN(2)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORONARY ARTERY DISEASE
----------------------------------------------------------------------------------------
EPICARDIAL SYRINGE
DELIVERY:
Adjunct to CABG........ Cardiac Phase Ib-- 15 Open Label, Dose-
Surgeons Completed Escalation
Minimally Invasive Cardiac Phase Ib-- 16 Open Label, Dose-
Surgery.............. Surgeons Completed Escalation
Minimally Invasive Cardiac Phase II-- 70(1) Randomized, Controlled
Surgery.............. Surgeons Ongoing vs. Best Available
Treatment
ENDOCARDIAL INJECTION
CATHETER DELIVERY:
Pilot Study............ Interventional Phase Ib-- 12(1) Randomized, Double-
Cardiologists screening blind, Placebo
patients Controlled
----------------------------------------------------------------------------------------
PERIPHERAL VASCULAR DISEASE
----------------------------------------------------------------------------------------
Intramuscular Syringe Vascular Phase Ib-- 35 Open Label, Dose-
Delivery............. Physicians Completed Escalation
Intramuscular Syringe Vascular Phase II-- 105(1) Randomized, Double-
Delivery............. Physicians screening blind, Placebo
patients Controlled
</TABLE>
(1) Targeted patient enrollment numbers
(2) Open Label, Dose-Escalation indicates that the patient receives increasing
doses of the study medication in an open label fashion, that is, the
physician and the patient both know that the patient received the study
medication. In a Randomized, Double-blind, Placebo Controlled study, neither
the patient nor the physician administering the treatment knows whether the
patient is receiving the study medication or a placebo.
Warner-Lambert is also responsible for the manufacture of BIOBYPASS angiogen for
clinical and commercial use in its territories under our collaboration
agreement. Warner-Lambert is providing funding for us to develop a manufacturing
process and testing methods and to transfer this technology and know-how to its
newly constructed pilot manufacturing facility in Dublin, Ireland.
TNFERADE
Cancer is the second leading cause of death in the United States. Approximately
60% of all cancer patients in the U.S. receive radiation therapy as part of
their treatment.
We are developing a new product candidate, TNFerade, to provide therapeutic
benefit in conjunction with radiation therapy for cancer. TNFa is a protein with
a well-documented anti-cancer effect. The TNFa protein was recently approved for
marketing in Europe for the treatment of sarcoma and melanoma in the arms and
legs. In accordance with this approval, TNFa must be delivered in a manner that
requires complex surgery under a general anesthetic to isolate delivery to the
limb and avoid the toxicity of TNFa when administered systemically in the body.
This method of administration is applicable to very few cancers and is
cumbersome, expensive, and not without risk. TNFerade, which incorporates a
proprietary adenovector carrying the gene coding for TNFa, is delivered locally
to the tumor site and combined with radiation therapy. TNFerade is designed so
that the maximum gene expression is caused by radiation therapy in order to
enhance the local therapeutic effect of
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<PAGE>
TNFa while minimizing toxicity. We licensed rights to the TNFa gene in the
United States from Asahi Chemical Industry Co., Ltd.
We have completed preclinical testing, and anticipate filing an Investigational
New Drug Application for TNFerade in patients with various injectable solid
tumors, such as rectal cancer and head and neck cancer. Our preclinical studies
indicate that TNFerade enhances the effect of radiation in several preclinical
models of human cancer. For example, in a model of head and neck cancer,
TNFerade and radiation were found to have 90% greater tumor shrinkage than
either radiation or TNFerade alone. The combined effect of radiation and
TNFerade is believed to be related to selective disruption of the blood vessels
in the tumor. Damage to the blood vessels and rapid tumor death was evident in
the tumors but not in the surrounding normal tissues, indicating a selective
effect on diseased tissue. We may seek a corporate partner to co-develop and
co-commercialize TNFerade.
PEDF PRODUCT PROGRAM
The leading causes of blindness in the developed world are macular degeneration
and diabetic retinopathy, a secondary effect of diabetes. Both macular
degeneration and diabetic retinopathy involve an excess growth of abnormal blood
vessels in the eye that can lead to blindness. Macular degeneration is a
progressive eye disease in which new capillaries grow behind the retina. These
capillaries can bleed and scar, damaging light-sensing nerve cells and
effectively destroying a large portion of a person's sight. There are
approximately 300,000 new cases of "wet" age-related macular degeneration
diagnosed in the U.S. annually. Current treatments for macular degeneration are
only partially effective. Diabetic retinopathy, the abnormal growth of new blood
vessels within the retina, is the leading cause of blindness and visual
disability in the United States and Europe. Diabetes is estimated to affect over
120 million people worldwide. Findings suggest that after 15 years of diabetes,
2% of diabetic patients become blind while 10% develop severe visual
impairments. Ultimately, many diabetic patients will progress to have diabetic
retinopathy. The standard treatment, a procedure that involves laser coagulation
of the blood vessels, is often initially effective, but it can damage the retina
and surrounding cells and often loses its effectiveness after repeated
treatment.
We are developing the PEDF product candidates to treat macular degeneration and
diabetic retinopathy. The PEDF product candidates use an adenovector to locally
deliver the PEDF gene, the most potent known natural inhibitor of blood vessel
growth in the eye and regulator of nerve cell survival. PEDF is a secreted
protein that normally accumulates in the vitreous humour, or the liquid filled
interior of the eye, and regulates new vessel formation in the eye.
In February, we announced the completion of a licensing agreement with Public
Health Services (made up of The National Institutes of Health, the FDA, and the
Centers for Disease Control and Prevention) that granted us exclusive rights to
use the PEDF gene for all gene therapy applications in the eye. Since then, we
have developed preclinical data indicating that intraocular administration of a
vector containing the PEDF gene results in substantial inhibition of new vessel
formation in the eye in a preclinical model of human disease. We have also shown
that our vectors can be dosed multiple times in the eye and cause the repeat
production of protein from the delivered gene. Our product candidates appear to
be well tolerated. We may seek a corporate partner to co-develop and
co-commercialize our product candidates from this development program.
GENSTENT
Angioplasty and blood vessel grafts can damage blood vessel walls and lead to
abnormal narrowing of the injured vessel. It occurs in several medical
conditions, including restenosis following angioplasty procedures in patients
with coronary artery disease and peripheral vascular disease, and the closing of
grafts that are used to gain access to blood vessels in patients with kidney
disease who require dialysis. In these circumstances, damage to blood vessels
causes local responses in the body such as the growth of smooth muscle cells and
the inhibition of endothelial cell layer re-growth, both of which contribute to
vessel narrowing. The AHA estimates that in 1997, 450,000 angioplasty procedures
were performed in the United States. Restenosis occurs in 20% to 40% of these
patients within seven months. In addition, more than 200,000 patients in the
United States with end-stage kidney disease received dialysis which commonly
requires placement of a blood vessel graft. These grafts close prematurely and
may only be used for one to three years before they must be replaced.
33
<PAGE>
We are developing GENSTENT, a product candidate that contains the iNOS gene to
produce nitric oxide at the site of blood vessel damage. Nitric oxide, a natural
regulator of blood vessel function, has the potential to speed the normal
healing and thereby prevent unwanted narrowing of damaged blood vessels. We have
shown that GENSTENT inhibits the closing of damaged blood vessels in preclinical
models. We use one of our proprietary vectors to efficiently deliver genes to
smooth muscle cells in damaged blood vessels. We intend to seek a corporate
partner to develop and commercialize GENSTENT. We have an exclusive worldwide
license for all gene therapy products for the iNOS gene from the University of
Pittsburgh.
OUR DRUG DISCOVERY AND DEVELOPMENT TECHNOLOGY
We have focused on the development of technology to effectively and selectively
deliver genes to cause the production of therapeutic proteins at the location
needed to treat disease. Using our technology, we believe we can:
- rapidly put genes into vectors to evaluate gene function and therapeutic
usefulness;
- deliver our product candidates locally to specific organs or cell types to
avoid systemic exposure;
- achieve highly efficient gene delivery to target cells with lower dosages;
- control the rate and duration of gene expression directed by our therapeutic
product to allow flexibility in treating different diseases; and
- produce commercial quantities of our therapeutic products in a stable,
easy-to-use form.
In constructing our therapeutic product candidates, we combine a therapeutic
gene with a vector. We derive our vectors from a naturally occurring virus,
called an adenovirus. In humans, adenoviruses replicate in certain tissues,
spread and can cause a form of the common cold. We design our vectors to be
replication deficient. This means that our vectors cannot reproduce themselves.
This is done to limit toxicity, including unwanted effects on target cells and
the surrounding tissue, and to reduce any immune response to our vectors. We
have multiple versions of replication deficient vectors with one or more viral
gene deletions. Our intellectual property extends to cover the production of
stocks of vectors that do not contain any replicating virus.
When administered to tissues, our test vectors enter certain cells and produce
the protein encoded by the inserted gene. These test vectors can be used for
functional genomics purposes to help determine the function of a specific gene
and its potential use as a therapy, as well as to create therapeutic product
candidates. The utility of vectors can be increased measurably for both
functional genomics and product development purposes if the vector's ability to
enter desired cells and tissues is broadened or specified. Unlike other vector
systems, adenovectors have the potential to be readily re-engineered to alter
their performance characteristics, including their ability to efficiently
deliver genes to a wide range of tissues or to only selected cells in the
targeted tissue.
We believe that adenoviruses are an excellent starting point for generating
vectors because they are highly efficient gene transfer systems, readily
modified and have the following safety characteristics:
- adenoviruses do not integrate into the DNA of the target cell, thereby
minimizing the potential for mutations that can occur with other vector
systems;
- adenoviruses are naturally eliminated from cells and tissues; and
- vectors derived from adenoviruses have been well tolerated in clinical testing
when administered locally. Over 2,000 patients have been treated, with very
few serious adverse events related to the vector.
TECHNOLOGY FOR LOCAL DELIVERY AND EXPRESSION OF GENES
USE OF DELIVERY DEVICES. To achieve local production of therapeutic proteins,
we administer our products locally using medical devices, such as injection
catheters and syringes. Direct administration of our products into diseased
tissue allows us to maximize efficacy by achieving high concentrations of
therapeutic protein at disease sites while enhancing safety by significantly
avoiding systemic exposure throughout the body. For example, we are using
needle-injection catheters so that the interventional cardiologist can
administer BIOBYPASS angiogen directly into the diseased (ischemic) areas of the
heart.
DELIVERING GENES TO CELLS. We believe that we are a leader in understanding and
modifying the molecular interactions that specify how vectors derived from
adenoviruses bind to cells. Adenoviruses enter cells by initially binding
through a surface receptor on the surface of the cell called a Coxsackie
Adenovirus Receptor, or CAR. A second binding occurs between the adenovector
penton protein to another set of surface receptors, called integrins, on the
cell surface.
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In our BIOBYPASS angiogen program, we have taken advantage of our adenovector's
natural binding to CARs, which are abundant in the muscle cells found in the
heart. However, because not all disease targets contain this CAR receptor, we
have developed technology to direct the binding of our vectors to different
target receptors to enable a broad range of therapeutic applications. We can
alter our vectors such that binding to CAR can be removed and new binding
specificities added. We have the ability to modify both fiber protein and penton
protein to alter receptor binding characteristics.
We believe that we have a broad and advanced intellectual property position in
creating vectors derived from adenoviruses with new binding sites, also known as
ligands, to deliver therapeutic genes to specified cells.
- UTV TECHNOLOGY. Our proprietary Universal Transduction Vector, or UTV,
technology allows us to create product candidates that deliver genes to
essentially all cell types, including those types that do not express CAR on
their surface. We have engineered our vectors to contain a new ligand that
allows binding to all cells that we have tested to date.
- DART VECTORS. We have developed Directed And Restricted Tropism, or DART,
vectors that enable us to create product candidates that deliver genes only to
specific cells. In order to achieve selective delivery to target cells, we
remove the ability of the vector to bind to CAR and integrins. We then insert
new ligands into the vector that bind to specific receptors found only on the
surfaces of target cells. We have a broad proprietary position covering DART
vectors, including special cell lines required for their production.
We currently use both UTV technology and DART vectors in our drug discovery
process and we may incorporate these technologies into GENSTENT, TNFerade and
our PEDF product candidates.
CONTROL OF GENE EXPRESSION. Our technology allows us to control the location,
duration and rate of therapeutic gene expression. We control gene expression by
inserting a sequence of DNA, called a promoter, into our vectors adjacent to the
therapeutic gene. For some diseases, long-term expression of the therapeutic
gene is required to achieve a clinical benefit. Using our technology, we have
been able to achieve therapeutic gene expression for several months. In
TNFerade, we intend to achieve local expression of the TNFa gene in cancerous
tissue undergoing radiation treatment by inserting a specific promoter that will
increase protein expression after radiation, enhancing protein concentration in
the cancer tissue receiving radiation, thereby increasing efficacy and
decreasing the potential for toxicity. We have broad proprietary technology for
the use of radiation induced gene expression in TNFerade.
TECHNOLOGY FOR DRUG DISCOVERY AND TESTING
Rapid and accurate construction of test vectors is an important early step in
our drug discovery programs. Our test vectors contain one or more therapeutic
genes, appropriate promoters to control gene expression and may contain our DART
vectors or UTV technology. We believe that it is desirable to evaluate multiple
test vectors in preclinical testing in order to identify a product candidate
with the preferred efficacy and safety profile. To do this, we have developed
proprietary technologies for the rapid construction of test vectors. Our AdFAST,
AdACE and AdLIBRARY systems allow us to efficiently and accurately build our
vectors.
Standard techniques for constructing test vectors rely on assembly in mammalian
cells and typically require several months. Using our AdFAST system and AdACE
system, we can assemble test vectors in a few weeks. We can also modify any
region of the test vector and have the flexibility to place one or more
therapeutic genes at different locations in these test vectors. This simplifies
and speeds vector construction where multiple modifications are required at a
specific site.
We are developing AdLIBRARY technology to construct complex libraries of
adenovectors for use in drug discovery. AdLIBRARY technology is a specialized
use of our AdFAST and AdACE systems for the generation of collections, or
libraries, of adenovectors containing thousands of candidate therapeutic genes.
These libraries are suitable for screening genes for a desired biological
function.
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TECHNOLOGY FOR PRODUCTION, PURIFICATION, QUALITY ASSESSMENT AND FORMULATION
Our proprietary production technology and know-how facilitates the production,
purification, quality assessment and formulation of gene-based products. The
structure of our core vectors and the procedures for their production and
purification enables us to minimize the presence of contaminants. We have an
issued U.S. patent broadly covering stocks of replication-deficient adenovectors
that are free of undesirable replication-competent adenovirus. We believe our
proprietary positions in these areas provide a competitive advantage. We expect
to use substantially similar methods to produce, purify, assay and formulate
many of our adenovector products. This allows us to accelerate product
development in a cost effective manner. We have developed production and assay
technology suitable for late stage clinical testing of BIOBYPASS angiogen.
- PRODUCTION AND SCALE UP. We produce our adenovectors using cell lines grown
under standardized and controlled conditions. We have developed specialized
cell lines for production of our vectors. Our production processes have been
designed for commercial scale production and to reduce the potential for
contamination.
- PURIFICATION. We have proprietary methods for the purification of our vectors
that we believe are suitable for commercial scale as well as for small scale
use in discovery and testing of new product candidates.
- QUALITY ASSESSMENT. We have established proprietary methods to assess and
confirm the quality and purity of vectors for research purposes and clinical
testing. We use mass spectrometry, for which we have an issued U.S. patent, as
a means to establish product consistency and purity. We believe these methods
are also suitable for quality assessment of commercial production.
- FORMULATION. We have developed novel product formulations that improve the
stability of our vectors and are covered by an allowed U.S. patent
application. Our formulation allows products to be conveniently stored,
shipped and used. For research purposes, our formulation enhances the ease and
reproducibility of testing.
STRATEGIC ALLIANCES
We establish collaborations with pharmaceutical companies and other
organizations to enhance our ability to discover, evaluate, develop and
commercialize multiple product opportunities.
OUR COLLABORATION WITH THE WARNER-LAMBERT COMPANY
In July 1997, we entered into a collaboration with the Warner-Lambert Company to
research, develop and commercialize gene-based products incorporating the VEGF
gene for the treatment of coronary artery disease and peripheral vascular
disease. In June 2000, Pfizer, Inc. acquired Warner-Lambert and Warner-Lambert
became a wholly-owned subsidiary of Pfizer. Warner-Lambert has the primary
responsibility for clinical development, regulatory approval, manufacturing and
commercialization of products that we develop under this collaboration,
including BIOBYPASS angiogen.
Under the terms of the collaboration, we may receive more than $100.0 million,
excluding royalties, in research and development funding, milestone payments,
equity purchases and license fees. As of June 30, 2000, we had recognized an
aggregate of $36.5 million in research and development funding, milestone
payments and license fees. We have received, but not recognized, an additional
$3.0 million in funding under the collaboration. Warner-Lambert has agreed to
provide us a total of $34.3 million of research and development funding over the
first five years of the collaboration, of which $6.0 million, $9.8 million and
$9.0 million have been paid in the first three years of the collaboration, and
$5.5 million and $4.0 million is anticipated to be paid in years 4 and 5 of the
collaboration, respectively. We also have the potential to receive an aggregate
of $57.0 million in license fees and milestone payments related to the
development of the first collaboration product for coronary artery disease and
peripheral vascular disease, of which we have received $14.8 million as of
June 30, 2000. Additional milestone payments will be paid to us upon the
achievement of events related to the conduct of pivotal clinical studies and
filings for and receiving regulatory approvals to market collaboration products.
Warner-Lambert will make additional milestone payments to us for other
collaboration products developed for these indications. In consideration for
these payments, we granted Warner-Lambert an exclusive, royalty-bearing license
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to manufacture and sell collaboration products worldwide, excluding Asia,
subject to our right to co-promote in the United States and Canada for coronary
artery disease applications. The license is also subject to our exclusive right
to manufacture and sell gene-based products incorporating the VEGF gene for uses
other than coronary artery disease or peripheral vascular disease.
Warner-Lambert's research and development funding obligations to us extend
through July 2002, although Warner-Lambert may terminate its research funding
obligations to us with six months written notice. The collaboration expires on a
product-by-product and country-by-country basis until there are no remaining
royalty obligations.
As part of the collaboration, Warner-Lambert agreed to purchase up to an
aggregate of $20.0 million of our capital stock upon the achievement of
specified milestones. As of June 30, 2000, Warner-Lambert has purchased $10.0
million of our capital stock and will purchase $5.0 million of our capital stock
in a private placement concurrent with this offering. Warner-Lambert is required
to purchase, at our election, up to $5.0 million of our capital stock upon
demonstration that a process has been established for the production of bulk
product at a scale and site suitable for pivotal clinical studies as shown by
the preparation of three consecutive lots of the first collaboration product.
The purchase price for all of these equity purchases is 125% of the fair market
value of the securities. Warner-Lambert has also committed to guaranteeing a
loan to us in a principal amount of $5.0 million. In 1999, we used $2.5 million
of the loan guarantee to assist in the financing of our new research and
development/corporate headquarters facility.
OUR COLLABORATION WITH FUSO PHARMACEUTICALS INDUSTRIES, LTD.
In September 1997, we established a collaboration with Fuso to conduct research
and to identify, evaluate and develop gene therapy products for the treatment of
cancer. Under the terms of the collaboration, we will receive $750,000 annually
for five years, subject to Fuso's right to terminate the collaboration upon 90
days prior written notice. As part of the collaboration, we granted Fuso an
exclusive, royalty-bearing license to develop and commercialize products
developed under the collaboration for the treatment of cancer in Japan and at
Fuso's option, Korea and Taiwan. Fuso will be responsible for the development
and commercialization of any products in its territory. We will receive
additional payments for the achievement by Fuso of specified product development
and regulatory milestones, with the earliest of such payments not expected in
the near term. We will also receive royalties on the sale of any such products
commercialized by Fuso. We have retained all rights to develop and commercialize
these products for the treatment of cancer in the rest of the world, and
generally for all other uses worldwide, independently and with third parties.
OUR COLLABORATIONS WITH ACADEMIC INSTITUTIONS
We sponsor research at leading academic institutions to enhance our ability to
discover, evaluate and develop new product candidates. Our academic
collaborations include agreements with the following institutions:
- Cornell Medical College
- The Cleveland Clinic Foundation
- The University of Chicago
- The University of New Mexico
OUR LICENSES FOR THERAPEUTIC GENES
To create our product candidates, we combine our vectors with genes intended to
produce proteins with therapeutic potential. We have secured licenses to many
genes for this purpose. We often seek to obtain exclusivity, consistent with our
business needs, when securing such licenses. In return for the rights we receive
under our gene licenses, we typically are required to pay royalties based on any
commercial sales of the
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applicable product during a specified time period, as well as provide additional
compensation, including up-front license fees and product development-related
milestones. Our gene licenses include:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
SOURCE GENE NATURE OF LICENSE
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Scios, Inc........................... VEGF(121) Worldwide, exclusive for all gene therapy
products
University of Pittsburgh............. iNOS Worldwide, exclusive for all gene therapy
products
Asahi Chemical Industry Co., Ltd..... TNFa United States, non-exclusive, all gene therapy
applications
Public Health Services............... PEDF Worldwide, exclusive for all ocular gene therapy
applications
</TABLE>
Any of our licenses may be terminated by the licensor if we are in breach of a
term or condition of the license agreement, or if we become insolvent. In
addition, some of our licenses require us to achieve specific milestones.
PATENTS AND PROPRIETARY RIGHTS
We generally seek patent protection for our proprietary technology and product
candidates in the United States and abroad. Patent applications have been
submitted and are pending in the United States, as well as other countries. The
patent position of biotechnology firms generally is highly uncertain and
involves complex legal and factual questions. Our success will depend, in part,
on whether we can:
- obtain patents to protect our own products,
- obtain licenses to use the technologies of third parties, which may be
protected by patents,
- protect our trade secrets and know-how, and
- operate without infringing the intellectual property and proprietary rights of
others.
For a discussion of the risks and uncertainties associated with our intellectual
property position, see "Risk Factors -- Risks Related to our Industry -- If we
are unable to adequately protect our intellectual property rights, our
competitors may be able to take advantage of our research and development
efforts to compete with us," "-- If our potential products conflict with
intellectual property rights of competitors, universities or others, then we may
be unable to develop and commercialize those product candidates" and "-- If our
rights to use intellectual property we license from others is affected, our
ability to develop and commercialize our product candidates may be harmed."
PATENT RIGHTS; LICENSES.
We and our licensors have obtained patents and continue to seek patent
protection for technologies which relate to our product candidates, as well as
technologies which may prove useful for future product candidates. As of
September 15, 2000, we held or had licenses to 316 issued, allowed or pending
patents worldwide, of which 49 are issued or allowed in the U.S. These patents
and patent applications pertain to genes, vectors, cell lines used to propagate
vectors, gene expression control elements, vector targeting entities, methods of
constructing vectors that include therapeutic genes, methods of producing such
vectors with therapeutic genes (including purification, quality control and
assay techniques), methods of storing and shipping vector stocks, administration
of vectors with therapeutic genes, vector containment and regulation techniques
and devices for carrying out the administration of such vectors with therapeutic
genes.
BIOBYPASS ANGIOGEN. We have been granted an exclusive license for all gene
therapy products relating to the VEGF(121) gene. In addition, we have pending
patent applications pertaining to the special cell lines required for the
production of particular adenovectors, including a cell line we use in the
production of BIOBYPASS angiogen, as well as an issued patent pertaining to
stocks of replication-deficient adenovectors that are free of replication-
competent adenovirus. Furthermore, we have pending patent applications
pertaining to the delivery of angiogenic substances, such as our BIOBYPASS
angiogen. However, third parties have patents and pending patent
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applications for other forms of the VEGF gene, and these third parties or their
licensees may develop products using these forms of the gene. Third parties also
may have pending patent applications for adenovectors, including possibly the
adenovector used in the BIOBYPASS angiogen. Moreover, we are aware of the issued
patents and pending patent applications of third parties relating to special
cell lines required for the production of particular adenovectors, including a
cell line we use in the production of our BIOBYPASS angiogen, as well as issued
patents and pending patent applications relating to the delivery of therapeutic
substances to the heart, similar to our BIOBYPASS angiogen. It could be alleged
that our BIOBYPASS angiogen conflicts with such existing or future patents.
TNFERADE. We have been granted a nonexclusive license under the U.S. patent
relating to the TNFa gene and its use. In addition, we have issued patents and
pending patent applications pertaining to the adenovector contemplated for use
with TNFerade, regulatory elements particularly suited for use with TNFerade,
and methods of using TNFerade. In particular, we have an issued U.S. patent
covering the use of a spacer sequence positioned in a particular position in
certain adenovectors for improving the production of the adenovectors, including
TNFerade. Also, we have issued U.S. patents pertaining to radiation-induced gene
expression and a radiation-inducible promoter enabling controlled production of
therapeutic proteins from gene therapy products, including TNFerade. While we
have not conducted freedom to use patent searches of these product candidates,
we are aware, however, of pending patent applications of third parties
pertaining to adenovectors contemplated for use with TNFerade. It could be
alleged that TNFerade conflicts with patents that may issue on these patent
applications.
PEDF PRODUCT CANDIDATES. We have exclusive rights to use the PEDF gene for all
gene therapy applications in the eye. We have issued patents and pending patent
applications pertaining to particular adenovectors and methods of their use,
including adenovectors and related methods that may be utilized in conjunction
with our PEDF product program. However, we are aware of issued patents and
pending patent applications of third parties relating to various facets of gene
therapy to the eye. It could be alleged that our PEDF product candidates
conflict with such existing or future patents.
GENSTENT. We have an exclusive license in the field of gene therapy under a
U.S. patent relating to the iNOS gene and its use. We have pending patent
applications pertaining to the therapeutic use of GENSTENT in gene therapy.
However, we are aware of pending patent applications of third parties that also
claim the iNOS gene and its use. It could be alleged that GENSTENT conflicts
with patents that may issue on these patent applications.
UTV TECHNOLOGY AND DART VECTORS. We have issued patents and pending patent
applications covering our UTV technology that allows for the delivery of genes
in adenovectors to essentially all cell types, as well as our DART vectors, for
the purpose of creating products that deliver genes in adenovectors only to
selected cells, including special cell lines required for the production of the
UTV and DART vectors. We are aware, however, of the issued patents and pending
patent applications of third parties relating to such vectors. It could be
alleged that our UTV and DART vectors conflict with such existing or future
patents.
ADFAST, ADACE AND ADLIBRARY SYSTEMS. We have pending patent applications
relating to our AdFAST and AdACE systems for constructing adenovectors,
including adenovectors useful in therapeutic applications such as our product
candidates. Moreover, we have pending patent applications relating to
specialized uses of our AdFAST and AdACE systems for the generation of
collections, or libraries, of adenovectors containing many thousands of
candidate therapeutic genes. These libraries may be particularly well suited for
screening genes for a desired biological function. Third parties, however, have
issued patents and are pursuing pending patent applications relating to similar
systems. It is possible that these or other third parties could use such similar
systems in competition with our AdFAST and AdACE systems to construct
adenovectors and/or to screen gene libraries. In addition, it could be alleged
that our AdFAST, AdACE and AdLIBRARY systems conflict with such existing or
future patents.
PRODUCTION, PURIFICATION, QUALITY ASSESSMENT AND FORMULATION TECHNOLOGY. We
have issued patents and pending patent applications pertaining to vector
production, purification, quality assessment and formulation, including
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with respect to adenovectors such as contemplated for use with our product
candidates. In particular, we have pending patent applications covering
specialized cell lines for production of both small and large volumes of our
vectors, the process for propagating our vectors, the purification of our
vectors applicable to both research and commercial scales, methods of assessing
and confirming the quality and purity of our vectors for late-stage clinical
testing and commercialization (including an issued patent on the use of mass
spectrometry as a means to establish product consistency and purity), and
product formulations that improve the stability of adenovectors and allow our
vectors to be conveniently stored, shipped and used. There exist, however,
issued patents and pending patent applications of third parties relating to
these and other aspects of production, purification, quality assessment and
formulation technology. It could be alleged that our production, purification,
quality assessment and formulation technology conflicts with such existing or
future patents.
We anticipate that we and our current and future licensors will continue to seek
to improve existing technologies and to develop new technologies and, when
possible, secure patent protection for such improvements and new technologies.
TRADE SECRETS
To a more limited extent, we rely on trade secret protection and confidentiality
agreements to protect our interests. It is our policy to require our employees,
consultants, contractors, manufacturers, collaborators and other advisors to
execute confidentiality agreements upon the commencement of employment,
consulting or collaborative relationships with us. We also require signed
confidentiality agreements from any entity that is to receive confidential data.
With respect to employees, consultants and contractors, the agreements generally
provide that all inventions made by the individual while rendering individual
services to us shall be assigned to us as the property of the company.
Nevertheless, we cannot assure you that proprietary information will not be
disclosed to others, that others will not independently develop substantially
equivalent proprietary information or otherwise gain access to our trade
secrets, that we can meaningfully protect our trade secrets, or that all
inventions made by individuals while rendering individual services to us will be
assigned to the company. In the case of a collaborative arrangement, which
requires the sharing of information, our policy is to make available to our
collaborator only such information as is relevant to the arrangement, under
controlled circumstances, and only during the contractual term of the
collaborative arrangement, and subject to a duty of confidentiality on the part
of our collaborator. We cannot assure you, however, that such measures will
adequately protect our information. Any material leak of confidential
information into the public domain or to third parties may have a material
adverse effect on our business, financial condition and results of operations.
COMPETITION
Competition in the discovery and development of new methods for treating disease
is intense. We face, and will continue to face, intense competition from
pharmaceutical and biotechnology companies, as well as academic and research
institutions and government agencies, both in the United States and abroad. We
face significant competition from organizations that are pursuing the same or
similar technologies used by us in our drug discovery efforts and from
organizations that are developing pharmaceuticals that are competitive with our
potential products. Many of our competitors, either alone or together with their
collaborative partners, have substantially greater financial resources and
larger research and development staffs than we do. In addition, many of these
organizations, either alone or together with their collaborators, have
significantly greater experience than we do in developing products, undertaking
preclinical testing and clinical trials, obtaining FDA and other regulatory
approvals of products and manufacturing and marketing products. Additional
mergers and acquisitions in the pharmaceutical industry may result in even more
resources being concentrated with our competitors. These companies, as well as
academic institutions, governmental agencies and private research organizations,
also compete with us in recruiting and retaining highly qualified scientific
personnel and consultants. Our ability to compete successfully with other
companies in the pharmaceutical field will also depend to a considerable degree
on the continuing availability of capital to us.
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Future competition will likely come from existing competitors, including
competitors with rights to proprietary forms of the genes or proteins expressed
by the genes that we currently use in our product development programs and
competitors with rights to gene delivery technologies, as well as other
companies seeking to develop new treatments. Competitors or their collaborators
may identify important new drug discovery, genes or gene delivery technologies
before us, or develop gene-based therapies that are more effective than those
developed by us or our corporate collaborators, or obtain regulatory approvals
of their drugs more rapidly than us or our corporate collaborators. We expect
that competition in this field will intensify.
We are aware of products under development or manufactured by competitors that
are used for the prevention or treatment of diseases we have targeted for
product development. Various companies are developing biopharmaceutical products
that potentially compete with our product candidates. These include areas such
as the use of adenoviral vectors to treat cardiovascular disease, the use of
gene-based therapy to treat cancer, the development of gene-based therapies to
produce nitric oxide at the site of vascular damage and the use of inhibitors to
blood vessel growth to treat macular degeneration and diabetic retinoplasy. Some
of these product candidates are in clinical development.
We believe that our competitive success will be based on the efficacy and safety
of our products, our ability to create and maintain scientifically advanced
technology, attract and retain skilled scientific and management personnel,
obtain patents or other protection for our products and technology, obtain
regulatory approvals and manufacture and successfully market our products either
independently or through outside parties. We will rely on corporate
collaborators for support of some product candidates and enabling technologies
and intend to rely on corporate collaborators for the development, manufacturing
and marketing of some future product candidates. Generally, our strategic
alliance agreements do not preclude the corporate collaborator from pursuing
development efforts utilizing approaches distinct from that which is the subject
of the alliance. Our product candidates, therefore, may be subject to
competition with a potential product under development by a corporate
collaborator.
PRODUCTION FACILITIES
We currently rely on third-party manufacturers for current Good Manufacturing
Practice, or cGMP, production of our product candidates for clinical purposes.
We have a research and development facility and have established laboratories
and staff to support the non-cGMP production and process development of more
advanced manufacturing processes and product characterization methods for our
product candidates. We believe that much of the production and assay technology
that has been developed for BIOBYPASS angiogen is suitable for our other product
development programs. Warner-Lambert is providing funding for us to develop a
production process and testing methods suitable for Phase III clinical trial
manufacturing. Warner-Lambert is responsible for the manufacture of BIOBYPASS
angiogen for clinical and commercial use in its territories under the terms of
our collaboration agreement. We intend to transfer our production and assay
technology to Warner-Lambert's newly constructed pilot manufacturing facility in
Dublin, Ireland by the end of this year.
We intend to continue developing our own product development and manufacturing
capability while utilizing third party contractors where we lack sufficient
internal capability. This effort will require significant resources and will be
subject to ongoing government approval and oversight. We can not assure you that
our efforts in this regard will be successful. Please review "Risk Factors --
Risks Related to Our Business -- If we or our collaborators are unable to
manufacture our products in sufficient quantities or are unable to obtain
regulatory approvals for our manufacturing facility, we may be unable to meet
demand and lose potential revenues" for more information.
While we currently have only one supplier for certain of our manufacturing
components, including components necessary for BIOBYPASS angiogen, we have plans
in place to develop multiple suppliers for all critical supplies prior to the
time we would put any of our product candidates into commercial production.
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GOVERNMENT REGULATION
REGULATION OF PHARMACEUTICAL PRODUCTS
The development, production and marketing of any pharmaceutical products
developed by us or our collaborators will be subject to regulations by the
United States and non-U.S. governmental authorities. In the United States, new
drugs are subject to extensive regulation under the Federal Food, Drug and
Cosmetic Act, and biological products are subject to regulation both under
provisions of that Act and under the Public Health Services Act. The FDA
regulates, among other things, the testing, manufacture, safety, effectiveness,
labeling, storage, record keeping, advertising and promotion of biologics and
new drugs. The process of obtaining FDA approval for a new product is costly and
time-consuming.
The steps required by the FDA before our proposed products may be marketed in
the United States includes:
- preclinical tests;
- submission to the FDA of an Investigational New Drug Application, or IND,
which must become effective before human clinical trials may commence;
- adequate and controlled human clinical trials to establish the safety and
efficacy of the drug or biologic in our intended application;
- submission to the FDA of a New Drug Application, or NDA, for drugs, or a
Biologic License Application, or BLA, for biologics; and
- FDA approval of the NDA or BLA prior to any commercial sale or shipment of the
drug.
For a discussion regarding the risks related to the achievement of each of these
steps, please refer to "Risk Factors -- Risks Related to Our Business -- We have
not initiated clinical trials for any of our product candidates other than
BIOBYPASS angiogen, and if we fail to adequately demonstrate the safety and
efficacy of our product candidates we will not be able to obtain FDA approval
and commercialize our product candidates," "-- We may encounter delays or
difficulties in our BIOBYPASS angiogen clinical trials, which may delay or
preclude commercial use of the BIOBYPASS angiogen," "-- Because we or our
collaborators must obtain regulatory approval to market our products in the
United States and non-U.S. jurisdictions, we cannot predict whether or when we
will be permitted to commercialize our products" and "-- If we or our
collaborators are unable to manufacture our products in sufficient quantities or
are unable to obtain regulatory approvals for our manufacturing facility, we may
be unable to meet demand and lose potential revenues."
In addition to obtaining FDA approval for each product, each domestic
manufacturing establishment must be registered with, and approved by, the FDA
and must comply with cGMP regulations. To supply products for use in the United
States, including clinical trials, non-U.S. manufacturing establishments,
including third party facilities, must comply with cGMP regulations and are
subject to periodic inspection by the FDA or by corresponding regulatory
agencies in such countries under reciprocal agreements with the FDA.
Preclinical studies may take several years to complete and there is no guarantee
that the FDA will permit an IND based on those studies to advance to clinical
testing. Clinical trials generally take two to five years to complete and are
typically conducted in three sequential phases, which often overlap. After the
completion of all three phases, if the data indicates that the drug or biologic
product is safe and effective, a NDA or BLA is filed with the FDA to approve the
marketing and commercial shipment of the drug. This process takes substantial
time and effort and the FDA may not accept the NDA or BLA for filing, and, even
if filed, we cannot assure you that approval will be granted. FDA approval of a
NDA or BLA may take up to two years and may take longer if substantial questions
about the filing arise.
In addition to regulatory approvals that must be obtained in the United States,
a drug product is also subject to regulatory approval in other countries in
which it is marketed. No drug product can be marketed in a country until an
appropriate application has been approved by the regulatory authorities of that
country. FDA approval does not assure approval by other regulatory authorities.
In addition, regulatory approval of prices is required in
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most countries other than the United States. The pricing review period often
begins after market approval is granted.
OTHER REGULATIONS
Our business is also subject to regulation under various state and federal
environmental laws, including the Occupational Safety and Health Act, the
Resource Conservation and Recovery Act and the Toxic Substances Control Act.
These and other laws govern our use, handling and disposal of various
biological, chemical and radioactive substances used in and wastes generated by
our operations. We are not aware of any costs or liabilities in connection with
any environmental laws that will have a material adverse effect on our business
or financial condition.
EMPLOYEES AND CONSULTANTS
As of September 15, 2000, we had 82 full-time employees, 20 of whom hold M.D. or
Ph.D. degrees and 15 of whom hold other advanced degrees. Of our total
workforce, 63 are engaged in research and development activities and 19 are
engaged in business development, finance and administration functions. None of
our employees is represented by a labor union or covered by a collective
bargaining agreement, and we consider our employee relations to be good.
PROPERTY
We currently lease 42,900 square feet for our corporate offices and research and
development laboratories located at 65 West Watkins Mill Road in Gaithersburg,
Maryland. The lease expires on November 1, 2009. We have options to extend the
term of this lease for an additional fourteen years, through October 2023. We
believe that this facility is sufficient for our current needs. We have
additional space in our current facility to accommodate our anticipated growth
over the next several years.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
43
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
NAME AGE POSITION
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paul H. Fischer, Ph.D.......................... 51 President, Chief Executive Officer and Director
Jeffrey W. Church.............................. 43 Chief Financial Officer, Treasurer and Corporate Secretary
C. Richter King, Ph.D.......................... 46 Vice President, Research
Imre Kovesdi, Ph.D............................. 54 Vice President, Chief Scientific Officer
Henrik S. Rasmussen, M.D., Ph.D................ 42 Vice President, Clinical Operations and Regulatory Affairs
Thomas E. Smart................................ 37 Senior Vice President, Corporate Development
Grant A. Yonehiro.............................. 37 Vice President, Product Management
Herbert J. Conrad.............................. 67 Chairman of the Board of Directors
Hal S. Broderson, M.D.......................... 42 Director
Harry T. Rein.................................. 55 Director
Wendell Wierenga, Ph.D......................... 52 Director
Gregory F. Zaic................................ 52 Director
</TABLE>
PAUL H. FISCHER, PH.D. has been our President and Chief Executive Officer and a
director since November 1996, and has served in various positions with us since
March 1995, including Executive Vice President and Chief Operating Officer and
Vice President of Research and Development. Prior to joining us, he was
Executive Vice President of Research and Development at Aronex Pharmaceuticals,
Inc., formerly Oncologix, Inc., a biotechnology company. Dr. Fisher's previous
experience included Manager, Cancer Research at Pfizer, Inc., a pharmaceutical
company. Dr. Fischer received his B.S. in biology from the University of Denver,
his Ph.D. in pharmacology from the University of California at San Francisco and
performed post-doctoral research in pharmacology at the Yale University School
of Medicine and was an Associate Professor of Human Oncology at the University
of Wisconsin.
JEFFREY W. CHURCH has served as our Chief Financial Officer since August 1998.
From September 1997 to August 1998, Mr. Church served as Executive Vice
President and Chief Financial Officer of Biospherics, Inc., a telecommunications
and biotechnology company. From 1986 to August 1997, Mr. Church served in
various positions at Meridian Medical Technologies, Inc., formerly Survival
Technology, Inc., a medical device and drug delivery company, including
Controller and Senior Vice President of Finance and Chief Financial Officer.
From 1979 to 1986, Mr. Church was an Audit Manager at PriceWaterhouseCoopers
LLP. Mr. Church received his B.S. in accounting from the University of Maryland
and is a Certified Public Accountant.
C. RICHTER KING, PH.D. has served as our Vice President, Research since
May 1999. From May 1998 to May 1999, Dr. King has served as our Vice President,
New Products Research. From April 1995 to April 1998, Dr. King was an Associate
Professor of Biochemistry at Georgetown University Medical School's Lombardi
Cancer Research Center in Washington, D.C. From April 1992 to April 1995,
Dr. King was the Director of Drug Discovery at Aronex Pharmaceuticals, Inc.,
formerly Oncologix, Inc., a biotechnology company. Dr. King holds a Ph.D. in
biochemistry from Johns Hopkins University.
IMRE KOVESDI, PH.D. has served as our Vice President and Chief Scientific
Officer since April 1999. From September 1995 to April 1999, he served as our
Vice President of Discovery Research and from July 1993 to September 1995, he
served as our Director of Vector Biology. From 1987 to 1993, he led projects in
eukaryotic gene expression and neurotrophic factors at the Medical Research
Division of the American Cyanamid Company. Dr. Kovesdi received a B.S. in
electrical engineering from the University of British Columbia, a Ph.D. in
molecular biology from Simon Fraser University and did his post-doctoral
training at The Rockefeller University.
HENRIK S. RASMUSSEN, M.D., PH.D. has served as our Vice President of Clinical
Operations and Regulatory Affairs since April 1999. From 1994 to April 1999,
Dr. Rasmussen served as Vice President for Clinical Research/Senior
44
<PAGE>
Vice President for Clinical Research and Regulatory Affairs at British Biotech
in Annapolis, Maryland. From 1989 to 1994, Dr. Rasmussen served in various
positions at Pfizer Central Research, including Global Study Director and Global
Candidate Leader. Dr. Rasmussen has been involved in drug development in a
number of different therapeutic areas, including cardiology, oncology,
inflammation, acute care, neurology and dermatology and has authored or
co-authored over 120 scientific papers and abstracts. Dr. Rasmussen received his
M.D. and Ph.D. degrees from the University of Copenhagen and spent four years
practicing medicine in the fields of cardiology, gastroenterology, infectious
disease, immunology and rheumatology at a major university hospital in
Copenhagen.
THOMAS E. SMART joined us in March 1995 to lead our corporate development
function and currently serves as our Senior Vice President of Corporate
Development. Mr. Smart's previous experience included Director of Business
Development at Cell Genesys, Inc., a biotechnology company; various positions
within the Corporate Strategic Planning and Allied Business Group at G.D.
Searle, a pharmaceutical company; and Business Development Analyst at Genetics
Institute, a biotechnology company. Mr. Smart received his B.S. in the
biological sciences from Cornell University and his M.B.A. from the University
of Chicago.
GRANT A. YONEHIRO has been our Vice President, Product Management since 1997.
From March 1996 to April 1997, Mr. Yonehiro served as our Associate Director of
Corporate Development and from April 1997 to September 1997, he served as our
Director of Corporate Development. From January 1994 to March 1996,
Mr. Yonehiro served as a Manager, Corporate Development for Cell Genesys, Inc.,
a biotechnology company. Mr. Yonehiro received a Bachelor of Individualized
Studies from the University of Minnesota and his M.B.A. from the University of
California at Berkeley.
HERBERT J. CONRAD has served as Chairman of our board of directors since
September 1996, and as a director since August 1994. Mr. Conrad also served as
our Chief Executive Officer from September 1996 to December 1996. Mr. Conrad is
a former director of Theragen, Inc., which merged into GenVec in August 1994.
From 1982 until his retirement in 1993, he served as President of the
Pharmaceuticals Division and Senior Vice President of F. Hoffmann-La
Roche, Inc. Mr. Conrad joined Roche in 1960 and held various positions,
including Senior Vice President of the Pharmaceuticals Division, Chairman of the
Board of Medi-Physics, Inc., and Vice President, Public Affairs and Planning
Division. Mr. Conrad received a B.S and M.S. in pharmacy from Brooklyn College
of Pharmacy. Mr. Conrad is a director of Sicor Inc., Bio-Technology General
Corp., UroCor, Inc. and Reliant Pharmaceuticals, Inc.
HAL S. BRODERSON, M.D. has served as a director of GenVec since our inception in
1992. From December 1992 to September 1993, he was our President. From 1988 to
the present, he has been a general partner of Cashon Biomedical Associates,
L.P., which is the managing general partner of the Hillman Medical Ventures
Partnerships. Dr. Broderson is currently President of Rock Hill Ventures, Inc.,
a venture capital and management firm. Dr. Broderson received his B.A. in
biology from Indiana University, his M.D. from the University of Kentucky
College of Medicine and his M.B.A. from the Wharton School at the University of
Pennsylvania. He is a director of several other private companies.
HARRY T. REIN has served as a director of GenVec since September 1995. He was a
principal founder of Canaan Partners in 1987, a venture capital firm, and has
served as Managing General Partner since its inception. From 1979 to 1987,
Mr. Rein held various positions at GE, directing several of GE's lighting
businesses as General Manager before becoming President and Chief Executive
Officer of GE Venture Capital Corporation. Mr. Rein attended Emory University
and Ogelthorpe College and received an M.B.A. from the Darden School at the
University of Virginia. He is a director of Anadigics, Inc., OraPharma, Inc. as
well as several private companies.
WENDELL WIERENGA, PH.D. has served as a director of GenVec since April 1998.
Dr. Wierenga is currently President and CEO of Syrrx, Inc., a biotechnology
company. From 1990 until 2000, Dr. Wierenga was with the Parke-Davis
Pharmaceutical Research division of the Warner-Lambert Company, most recently as
Senior Vice President of Worldwide Preclinical Research, Development and
Technologies. Since 1997, he has also been an Adjunct Professor in the
Department of Chemistry at the University of Michigan. Dr. Wierenga received his
B.A.
45
<PAGE>
in chemistry from Hope College and his Ph.D. in chemistry from Stanford
University. Dr. Wierenga also currently serves as a director of Onyx
Pharmaceuticals.
GREGORY F. ZAIC has served as a director of GenVec since our inception in 1992.
From May 1993 to September 1993, Mr. Zaic was our Chief Executive Officer and
from May 1993 to September 1996, he was Chairman of our board of directors.
Since 1987, he has been a general partner of Prince Ventures, L.P., a venture
capital firm. Mr. Zaic received his B.S. in aerospace and mechanical engineering
from Princeton University and his M.S. in management from the Massachusetts
Institute of Technology. Mr. Zaic is also a director of Aronex
Pharmaceuticals, Inc. and Xylos Corporation.
SCIENTIFIC ADVISORS
We utilize scientists and clinicians to advise us on scientific, medical and
technical matters. We also consult with teams of scientists and clinicians on
scientific and technical matters for each of our anticipated product development
areas. Generally, our scientific advisors are compensated by retainer or on a
time and expense basis, and some of them have received shares of or options to
purchase shares of our common stock.
OUR SCIENTIFIC FOUNDER
RONALD G. CRYSTAL, M.D., Bruce Webster Professor of Internal Medicine at Weill
Medical College of Cornell University, Chief of the Division of Pulmonary and
Critical Care Medicine at New York Presbyterian Hospital-Weill Cornell Medical
Center and Director of the Institute of Genetic Medicine and the Belfer Gene
Therapy Core Facility at Weill Medical College of Cornell University.
Dr. Crystal is a pioneer in the field of gene therapy and is our scientific
founder. Dr. Crystal received his M.D. from the University of Pennsylvania.
CARDIOVASCULAR MEDICINE
TIMOTHY R. BILLIAR, M.D., Watson Professor of Surgery, University of Pittsburgh
School of Medicine. Dr. Billiar received his M.D. from the University of
Chicago.
JAN L. BRESLOW, M.D., Frederick Henry Leonhardt Professor, The Rockefeller
University, New York. Dr. Breslow is a member of the National Academy of
Sciences and a former President of the American Heart Association. Dr. Breslow
received his M.D. from Harvard Medical School.
MAURIZIO C. CAPOGROSSI, M.D., Chief, Laboratory of Vascular Pathology, Istituto
Dermopatico dell'Immacolata, Rome, Italy. Dr. Capogrossi received his M.D. from
the Universita Statale "La Sapienza" in Rome, Italy.
DELOS M. COSGROVE, M.D., Chairman of the Department of Thoracic and
Cardiovascular Surgery, The Cleveland Clinic Foundation, Cleveland, Ohio.
Dr. Cosgrove received his M.D. from the University of Virginia School of
Medicine.
TODD K. ROSENGART, M.D., Chief of Cardiothoracic Surgery, Evanston Northwestern
Healthcare, Evanston, Illinois. Dr. Rosengart received his M.D. from
Northwestern University.
ERIC J. TOPOL, M.D., Chairman of the Department of Cardiology and Director,
Joseph J. Jacobs Center for Thrombosis and Vascular Biology, The Cleveland
Clinic Foundation, Cleveland, Ohio. Dr. Topol received his M.D. from the
University of Rochester School of Medicine and Dentistry.
ONCOLOGY
ALBERT B. DEISSEROTH, M.D., PH.D., Ensign Professor of Medicine, Chief of
Medical Oncology, Yale University School of Medicine, New Haven, Connecticut.
Dr. Deisseroth received his M.D. and Ph.D. from the University of Rochester
School of Medicine and Dentistry.
SAMUEL HELLMAN, M.D., A.N. Pritzker Distinguished Service Professor, Department
of Radiation and Cellular Oncology, University of Chicago. Dr. Hellman was
formerly Dean for the Medical Center and Physician-in-Chief
46
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of the Memorial Sloan-Kettering Cancer Center. Dr. Hellman received his M.D.
from the State University of New York, College of Medicine at Syracuse.
DONALD W. KUFE, M.D., Professor of Medicine, Harvard Medical School, Chief,
Cancer Pharmacology, Department of Adult Oncology, Dana-Farber Cancer Institute,
Boston, Massachusetts.
TSUNEYA OHNO, M.D., PH.D., Jikei University School of Medicine, Tokyo, Japan,
and Chairman, the Study Group for Gene Therapy in Japan. Dr. Ohno received his
M.D. from the Jikei University School of Medicine in Tokyo, Japan, and his Ph.D.
in Molecular Biology from Keio University in Tokyo, Japan.
RALPH R. WEICHSELBAUM, M.D., Harold H. Hines, Jr. Professor and Chairman,
Department of Radiation and Cellular Oncology, University of Chicago.
Dr. Weichselbaum is a member of the Institute of Medicine of the National
Academy of Sciences. Dr. Weichselbaum received his M.D. from the University of
Illinois.
VECTOR TECHNOLOGY
CHARLES S. H. YOUNG, D.Phil., Professor of Microbiology, Columbia University.
Dr. Young received his D.Phil. in Yeast Genetics from Oxford University.
BOARD COMPOSITION
We currently have six directors. Upon the closing of this offering, the board
intends to appoint three additional directors. Also upon the closing of this
offering, the terms of office of the board of directors will be divided into
three classes. As a result, a portion of our board of directors will be elected
each year. The division of the three classes, the initial directors and their
respective election dates are as follows:
- Class I directors will be Hal S. Broderson, M.D., Harry T. Rein and Gregory F.
Zaic, and their term will expire at the annual meeting of stockholders to be
held in 2001;
- Class II directors will be Paul H. Fischer, Ph.D., Wendell Wierenga, Ph.D. and
one of the directors to be appointed upon closing, and their term will expire
at the annual meeting of stockholders to be held in 2002; and
- Class III directors will be Herbert J. Conrad and two of the directors to be
appointed upon closing, and their term will expire at the annual meeting of
stockholders to be held in 2003.
At each annual meeting of stockholders after the initial classification, the
successors to directors whose terms are to expire will be elected to serve from
the time of election and qualification until the third annual meeting following
election. The authorized number of directors may be changed only by resolution
of the board of directors. Any additional directorships resulting from an
increase in the number of directors will be distributed among the three classes
so that, as nearly as possible, each class will consist of one-third of the
directors. This classification of the board of directors may have the effect of
delaying or preventing changes in control or management of our company.
EXECUTIVE OFFICERS
Our executive officers are appointed by our board of directors and serve until
their successors are elected or appointed. There are no family relationships
among any of our directors or executive officers. No director has a contractual
right to serve as a member of our board of directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors currently consists of
Mr. Conrad, Mr. Zaic and Dr. Broderson. No interlocking relationship exists
between any member of our board of directors or our compensation committee and
any member of the board of directors or compensation committee of any other
company, and no such interlocking relationship has existed in the past.
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<PAGE>
BOARD COMMITTEES
EXECUTIVE COMMITTEE. Our executive committee comprises Dr. Fischer, Mr. Conrad
and Mr. Rein. This committee exercises all powers and authority of the board of
directors with some exceptions as provided under Delaware law.
COMPENSATION COMMITTEE. Our compensation committee, which currently consists of
Mr. Conrad, Mr. Zaic and Dr. Broderson, reviews and makes recommendations to our
board of directors regarding the compensation and benefits of our officers and
establishes and reviews general policies relating to compensation and benefits
to our employees and consultants.
AUDIT COMMITTEE. Our audit committee, which currently consists of Mr. Zaic,
Dr. Wierenga and Dr. Broderson, makes recommendations to our board of directors
regarding the selection of our independent auditors, reviews the results and
scope of the audit and other services provided by our independent auditors and
reviews and evaluates our internal accounting procedures and controls.
DIRECTOR COMPENSATION
Our non-employee directors currently receive $1,000 per board meeting attended,
$500 per committee meeting attended and $3,000 per quarter as a retainer.
Directors may be reimbursed for some expenses in connection with attendance at
board and committee meetings. Under our 2000 Director Option Plan, each new
non-employee director receives nondiscretionary, automatic grants of options to
purchase 10,000 shares of our common stock upon the effective date such
non-employee director joins our board of directors. Each non-employee director
who has served on our board of directors for at least six months shall receive a
nondiscretionary, automatic grant of options to purchase 6,000 shares of our
common stock on the date of each of our annual meetings of stockholders, if such
non-employee director is reelected, plus an additional 3,000 shares for each
committee such director serves on. Each option granted under our 2000 Directors
Option Plan will become exercisable ratably over a four-year period. See
"Related Party Transactions" for a description of our consulting agreement with
our chairman, Mr. Herbert J. Conrad.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY
Our amended and restated bylaws provide that we will indemnify our directors and
officers and may indemnify our other employees and other agents to the fullest
extent permitted by Delaware law. We may also enter into indemnification
contracts with our directors and officers and purchase insurance on behalf of
any person we are required or permitted to indemnify. We have entered into
indemnification agreements with each of our directors and executive officers.
We currently maintain director and officer liability insurance to cover
liabilities our directors and officers may incur in connection with their
services to us, including matters arising under the federal securities laws. The
amount of our coverage will be increased to standard public company levels
concurrent with the effectiveness of this registration statement. In addition,
our amended and restated certificate of incorporation provides that, to the
fullest extent permitted by Delaware law, our directors will not be liable for
monetary damages for breach of the directors' fiduciary duty of care to us and
our stockholders. This provision does not eliminate the duty of care, and in
appropriate circumstances, equitable remedies including an injunction or other
forms of non-monetary relief would remain available under Delaware law. Under
current Delaware law, a director's liability to us or our stockholders may not
be limited:
- for any breach of the director's duty of loyalty to us or our stockholders;
- for acts or omissions not in good faith or involving intentional misconduct or
a knowing violation of law;
- for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation
Law; or
- for any transaction from which the director derived an improper personal
benefit.
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This provision also does not affect a director's responsibilities under any
other laws, including the federal securities laws and state and federal
environmental laws.
There is no pending litigation or proceeding involving any of our directors or
officers as to which indemnification is being sought, nor are we aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.
EXECUTIVE COMPENSATION
The following table presents summary information for the year ended
December 31, 1999, regarding the compensation of our most highly compensated
executive officers. The following table also sets forth compensation information
about Dr. Henrik Rasmussen, who would have been one of our four most highly
compensated executive officers if he had been employed by us for the full year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
--------------------------------------------------
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- AWARDS -- SECURITIES
NAME AND POSITION YEAR SALARY BONUS(1) UNDERLYING OPTIONS
----------------- ---- -------- --------- --------------------
<S> <C> <C> <C> <C>
Paul H. Fischer, Ph.D. ..................................... 1999 $237,600 $ 20,203 100,000
President, Chief Executive Officer and Director
Jeffrey W. Church .......................................... 1999 $177,188 $ 5,326 --
Chief Financial Officer, Treasurer and Corporate Secretary
C. Richter King, Ph.D. ..................................... 1999 $154,500 $ 9,131 6,441
Vice President of Research
Imre Kovesdi, Ph.D. ........................................ 1999 $167,991 $ 19,856 13,000
Chief Scientific Officer
Henrik S. Rasmussen, M.D., Ph.D.(2) ........................ 1999 -- -- --
Vice President, Clinical Operations and Regulatory Affairs
Thomas E. Smart ............................................ 1999 $160,500 $ 18,262 32,500
Senior Vice President of Corporate Development
</TABLE>
--------------
(1) Represents a bonus that was awarded in 1998 but paid in the first quarter of
1999.
(2) Dr. Rasmussen joined GenVec in April 1999. Dr. Rasmussen's annual salary is
currently $190,000.
49
<PAGE>
OPTIONS GRANTED IN 1999
The following table presents each grant of stock options in 1999 to each of the
individuals listed in the summary compensation table.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM
OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION -----------------------
NAME GRANTED FISCAL 1999 SHARE DATE 5% 10%
---- ---------- ---------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Paul H. Fischer, Ph.D......... 100,000 16.8% $ 5.50 3/17/2009 $345,895 $876,535
Jeffrey W. Church............. -- -- -- -- -- --
C. Richter King, Ph.D......... 6,441 1.1% $ 6.30 9/15/2009 $ 25,520 $ 64,670
Imre Kovesdi, Ph.D............ 13,000 2.2% $ 6.30 9/15/2009 $ 51,507 $130,524
Henrik S. Rasmussen, M.D.,
Ph.D........................ 75,000 12.6% $ 6.30 6/16/2009 $297,155 $753,023
Thomas E. Smart............... 32,500 5.5% $ 6.30 9/15/2009 $128,767 $326,310
</TABLE>
The potential realizable value of these options is calculated based on the
ten-year term of the option at the time of grant. Stock price appreciation of 5%
and 10% is assumed pursuant to rules promulgated by the SEC and does not
represent our prediction of our stock price performance.
Percentages shown under "Percent of Total Options Granted to Employees in Fiscal
1999" are based on an aggregate of 593,755 options granted to our employees,
consultants and directors under our stock option plan during 1999.
OPTION VALUES AT DECEMBER 31, 1999
The following table presents the number and value of securities underlying
unexercised options that are held by each of the individuals listed in the
Summary Compensation Table as of December 31, 1999. No shares were acquired on
the exercise of stock options by these individuals during the year ended
December 31, 1999.
Amounts shown under the column "Value of Unexercised In-the-Money Options at
December 31, 1999" are based on the assumed initial public offering price of
$ per share, without taking into account any taxes that may be payable in
connection with the transaction, multiplied by the number of shares underlying
the option, less the exercise price payable for these shares.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Paul H. Fischer, Ph.D..................................... 308,433 30,265
Jeffrey W. Church......................................... 23,333 46,667
C. Richter King, Ph.D..................................... 26,482 43,518
Imre Kovesdi, Ph.D........................................ 56,086 13,637
Henrik S. Rasmussen, M.D., Ph.D........................... 12,499 62,501
Thomas E. Smart........................................... 58,896 49,546
</TABLE>
EMPLOYMENT AGREEMENTS
On March 9, 1995, we entered into a letter of employment with Paul H. Fischer,
Ph.D., to serve as our Vice President of Research and Development. On
November 7, 1996, Dr. Fischer was named President and Chief Executive Officer.
Under the terms of the letter, Dr. Fischer receives an annual salary of at least
$170,000.
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Dr. Fischer's salary for the fiscal year ended December 31, 1999 was $237,600.
The terms of the letter also provide for the continued payment of Dr. Fischer's
salary should he be terminated without cause. These salary payments will be paid
for nine months from the effective date of such termination, but will cease if
Dr. Fischer becomes permanently employed at the same or greater salary during
the nine-month period. Dr. Fischer entered into a letter agreement with us
regarding proprietary information, inventions and non-competition.
On August 24, 1998, we entered into a letter of employment with Jeffrey W.
Church, our Chief Financial Officer. Under the terms of the letter, Mr. Church
receives an annual salary of at least $175,000, with an anticipated annual
performance bonus of up to 25% of his salary, subject to the achievement of
particular milestones. Mr. Church's salary for the fiscal year ended
December 31, 1999 was $177,188. The terms of the letter also provide for at-will
employment and for the continued payment of Mr. Church's salary should he be
terminated without cause. These salary payments will be paid for six months from
the effective date of such termination, but will cease if Mr. Church becomes
permanently employed at the same or greater salary during the six-month period.
Mr. Church entered into a letter agreement with us regarding proprietary
information, inventions and non-competition.
On April 15, 1998, we entered into a letter of employment with C. Richter King,
Ph.D., our Vice President of New Product Research. Under the terms of the
letter, Dr. King receives an annual salary of at least $150,000, with an
anticipated annual performance bonus of up to 25% of his salary. Dr. King's
salary for the fiscal year ended December 31, 1999 was $154,500. The terms of
the letter also provide for at-will employment and for the continued payment of
Dr. King's salary should he be terminated without cause. These salary payments
will be paid for six months from the effective date of such termination, but
will cease if Dr. King becomes permanently employed at the same or greater
salary during the six-month period. Dr. King entered into a letter agreement
with us regarding proprietary information, inventions and non-competition.
On June 6, 1993, we entered into a letter of employment with Dr. Imre Kovesdi,
our Chief Scientific Officer. Under the terms of the letter, Dr. Kovesdi
receives an annual salary of at least $100,000. Dr. Kovesdi's salary for the
fiscal year ended December 31, 1999 was $167,991. The terms of the letter also
provide for the continued payment of Dr. Kovesdi's salary should he be
terminated without cause. These salary payments will be paid for twelve months
from the effective date of such termination, but will cease if Dr. Kovesdi
becomes permanently employed at the same time or greater salary during the
twelve month period. On June 11, 1993, Dr. Kovesdi entered into a letter
agreement with us regarding proprietary information, inventions and
non-competition.
On April 15, 1999, we entered into a letter of employment with Henrik Rasmussen,
M.D., Ph.D., our Vice President of Clinical Operations and Regulatory Affairs.
Under the terms of the letter, Dr. Rasmussen receives an annual salary of at
least $190,000 and is eligible for a bonus, in accordance with our current
compensation plan, based on achievement of corporate and individual goals. The
terms of the letter also provide for at-will employment and for the continued
payment of Dr. Rasmussen's salary should he be terminated without cause. These
salary payments will be paid for six months from the effective date of such
termination, but will cease if Dr. Rasmussen becomes permanently employed at the
same or greater salary during the six-month period. Dr. Rasmussen entered into a
letter agreement with us regarding proprietary information, inventions and non-
competition.
On March 9, 1995, we entered into a letter of employment with Thomas E. Smart,
to serve as our Executive Director of Corporate Development. In January 2000,
Mr. Smart was named Senior Vice President of Corporate Development. Under the
terms of the letter, Mr. Smart receives an annual salary of at least $110,000
plus bonus. Mr. Smart's salary for the fiscal year ended December 31, 1999 was
$160,500. The terms of the letter also provide for the continued payment of
Mr. Smart's salary should he be terminated without cause. These salary payments
will be paid for six months from the effective date of such termination, but
will cease if Mr. Smart becomes permanently employed at the same or greater
salary during the six-month period. Mr. Smart entered into a letter agreement
with us regarding proprietary information, inventions and non-competition.
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BENEFIT PLANS
AMENDED AND RESTATED 1993 STOCK INCENTIVE PLAN
Our board of directors adopted the 1993 Stock Incentive Plan, referred to as the
"1993 Plan," in October 1993, and amended and restated it in April 1998. In
April 2000, our board of directors increased the number of shares available for
issuance under the Plan. Our 1993 Plan provides for the grant of incentive stock
options to our employees and nonstatutory stock options to our employees,
directors and consultants. An aggregate of 3,100,000 shares of our common stock
has been reserved for issuance under our 1993 Plan. On the date of our annual
stockholders' meeting, the number of shares reserved for issuance under our 1993
Plan will be automatically increased by the number of shares needed to restore
the maximum aggregate number of shares reserved for issuance under our 1993 Plan
to 3,100,000 shares or a lesser amount determined by our board of directors. Our
1993 Plan will automatically terminate in 2003, unless we terminate it sooner.
In addition, our board of directors has the authority to amend, alter, suspend
or terminate the 1993 Plan provided it does not adversely affect any option
previously granted under our 1993 Plan.
Our board of directors, or a committee appointed by the board, administers the
stock option plan and determines the term of options granted, the exercise
price, the number of shares subject to individual option awards and the vesting
period of options. Options currently granted under our 1993 Plan generally
become exercisable at the rate of 1/8th of the shares six months from the
vesting commencement date and 1/48th of the shares monthly thereafter, so that
the option is fully exercisable four years from the vesting commencement date.
Options granted under our 1993 Plan generally are non-transferable and expire
three months after the termination of an optionee's service with us.
Our 1993 Plan provides that in the event we merge with or into another
corporation, or we sell substantially all of our assets, each option will fully
vest and become exercisable.
2000 EMPLOYEE STOCK PURCHASE PLAN
Concurrently with this offering, we intend to establish an Employee Stock
Purchase Plan, referred to as the "Purchase Plan." We have reserved a total of
350,000 shares of common stock for issuance under our Purchase Plan, plus annual
increases on the first day of each fiscal year beginning 2001 equal to the
lesser of:
- 350,000 shares;
- 2% of our outstanding shares as of such date; or
- a lesser amount determined by the board of directors.
All our employees are eligible to participate if they are customarily employed
by us or any participating subsidiary for at least 20 hours per week and more
than five months in any calendar year. However, the following employees may not
be granted options to purchase stock under our Purchase Plan:
- any employee who immediately after the grant would own stock possessing 5% or
more of the total combined voting power or value of all classes of our capital
stock; or
- any employee whose rights to purchase stock under all of our Purchase Plans
accrues at a rate which exceeds $25,000 worth of stock for each calendar year.
Participants may purchase common stock through payroll deductions of up to 15%
of the participant's compensation. The maximum number of shares a participant
may purchase during a six month offering period is 2,000 shares.
Amounts deducted and accumulated by the participant are used to purchase shares
of common stock at the end of each offering period. The price of stock purchased
under the purchase plan is 85% of the lower of the fair market value of the
common stock at the beginning of the offering period and the fair market value
of the common stock at end of the offering period.
52
<PAGE>
Our Purchase Plan provides that in the event we merge with or into another
company, or we sell substantially all of our assets, each outstanding option may
be assumed or substituted by the successor company. If the successor company
refuses to assume or substitute the options, the offering period then in
progress will be shortened and a new exercise date will be set, which will occur
before the proposed merger or sale.
Our Purchase Plan will become effective on the effective date of this offering
and will terminate ten years thereafter, unless sooner terminated by our board
of directors. Our board of directors has the authority to amend or terminate our
Purchase Plan, except that no such action may adversely affect any outstanding
rights to purchase stock.
2000 DIRECTOR OPTION PLAN
Our board of directors adopted the 2000 Director Option Plan, referred to as the
"Director Plan," in April 2000. The Director Plan provides for the automatic
grant of options to purchase shares of common stock to our non-employee
directors. We have reserved a total of 200,000 shares of common stock for
issuance under our Director Plan.
Each non-employee director who joins our board of directors after the effective
date of this offering will receive an option to purchase 10,000 shares of common
stock on the date such non-employee director joins our board. In addition, each
non-employee director who has served on our board for at least six months shall
receive an option to purchase 6,000 shares of our common stock on the date of
each of our annual meetings of stockholders, provided such non-employee director
is re-elected as a director at such meeting. In addition, we plan to amend the
plan to provide that each non-employee director will receive additional options
to purchase 3,000 shares of common stock for each committee such director serves
on. The options vest over a four-year period, with an exercise price equal to
the fair market value of the common stock on the date of grant. The maximum term
of the options granted under our Director Plan is ten years. Options granted
under our Director Plan are generally non-transferable. Unless otherwise
terminated by our board of directors, our Director Plan terminates automatically
in April 2010.
53
<PAGE>
RELATED PARTY TRANSACTIONS
Other than the employment agreements described under "Management" and the
transactions described below, there have not been any transaction or series of
similar transactions to which we were a party in which the amount involved
exceeded $60,000, and in which any director, executive officer, holder of more
than 5% of any class of our stock or any member of the immediate family of any
of these people had a direct or indirect material interest.
TRANSACTIONS WITH DIRECTORS, OFFICERS AND 5% STOCKHOLDERS
In December 1998, we sold 1,000,000 shares of our Class F preferred stock for
$7,000,000 and a warrant exercisable for 250,000 shares of our common stock, at
$0.01 per share, to Highland Capital Partners. Lee Wrubel, M.D., was a former
director of GenVec and a former principal at Highland Capital Partners.
In July 1997, we entered into a Stock Purchase Agreement with Warner-Lambert,
which allows us to require Warner-Lambert to purchase up to $20.0 million worth
of our capital stock in five separate transactions based on the occurrence of
particular milestones. In December of 1997, Warner-Lambert purchased 154,963
shares of our Class E1 Preferred Stock for $12.91 per share. In March of 1999,
Warner-Lambert purchased 266,666 shares of our Class E2 Preferred Stock for
$11.25 per share. In July of 1999, Warner-Lambert purchased 386,473 shares of
Class E3 Preferred Stock for $12.94 per share. All of the preferred stock we
issued to Warner-Lambert is entitled to registration rights. Wendell Wierenga,
one of our directors, was the Senior Vice President of Worldwide Preclinical
Research, Development and Technologies for the Parke-Davis Pharmaceuticals
Research Division of Warner-Lambert until September 2000.
In July 1997, we also entered into a Research, Development and Collaboration
Agreement with Warner-Lambert. Under this agreement, Warner-Lambert agreed to
manufacture products that we develop jointly for worldwide commercial sale
(excluding Asia). The agreement was amended in January of 1999. Under the
amendment, we are responsible for collaborating on the development of a
manufacturing process for the jointly developed products. Warner-Lambert agreed
to pay us over $100 million, excluding royalties, in research and development
funding, milestone payments, equity purchases and license fees for research and
reimbursement for our costs incurred. We recognized approximately $7.8 million
in ongoing research and development support revenue in 1999 pursuant to the
terms of the amendment. For more information on this agreement, See
"Business -- Strategic Alliances -- Our Collaboration with the Warner-Lambert
Company.
On March 1, 2000, we entered into a consulting agreement with Mr. Herbert J.
Conrad, the chairman of our board of directors. Under the agreement,
Mr. Herbert Conrad will consult with us for a minimum of 5 days per month for
$1,500 per day. The agreement expires in one year, subject to renewal.
We believe that all of the transactions described above were made on terms no
less favorable to us than would have been obtained from unaffiliated third
parties.
All future transactions will be approved by a majority of the board of
directors, including a majority of the independent and disinterested members of
the board of directors or, if required by law, a majority of the disinterested
stockholders, and will be on terms no less favorable to us than could be
obtained from unaffiliated third parties.
54
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents information regarding the beneficial ownership of
our common stock as of September 15, 2000, and as adjusted to reflect the sale
of our common stock offered by this prospectus, by:
- each of the individuals listed in the "Summary Compensation Table" above;
- each of our directors;
- each person, or group of affiliated persons, who is known by us to own
beneficially five percent or more of our common stock; and
- all current directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC
computing the number of shares beneficially owned by a person and the percentage
ownership of that person. Shares of common stock subject to options currently
exercisable or exercisable within 60 days after September 15, 2000 are
considered outstanding for the purpose of computing the percentage ownership of
the person holding such options, but are not considered outstanding when
computing the percentage ownership of each other person.
Except as indicated in the footnotes to this table and pursuant to state
community property laws, each stockholder named in the table has sole voting and
investment power for the shares shown as beneficially owned by them. Percentage
of ownership is based on 8,978,847 shares of common stock outstanding on
September 15, 2000 and shares of common stock outstanding after
completion of this offering. Unless otherwise indicated in the footnotes, the
address of each of the individuals named below is: c/o GenVec, Inc., 65 West
Watkins Mill Road, Gaithersburg, Maryland 20878.
<TABLE>
<CAPTION>
--------------------------------------------------------
BENEFICIAL OWNERSHIP
PRIOR TO OFFERING
----------------------------------
SHARES ISSUABLE
PURSUANT TO OPTIONS PERCENTAGE
NUMBER OF AND WARRANTS BENEFICIALLY OWNED
SHARES EXERCISABLE WITHIN -------------------
BENEFICIALLY 60 DAYS OF BEFORE AFTER
OWNED SEPTEMBER 15, 2000 OFFERING OFFERING
------------ ------------------- -------- --------
<S> <C> <C> <C> <C>
Highland Capital Partners(1)............................... 1,250,000 -- 13.9%
Hillman Medical Ventures Partnerships(2)................... 1,101,693 -- 12.3%
Pfizer, Inc.(3)............................................ 1,002,992 -- 11.2%
Biotech Growth SA(4)....................................... 847,457 -- 9.4%
Genentech, Inc.(5)......................................... 734,576 -- 8.2%
Prince Venture Partners, III, L.P.(6)...................... 550,846 -- 6.1%
Sierra Ventures, III, L.P.(7).............................. 550,846 -- 6.1%
Herbert J. Conrad.......................................... 5,401 49,494 *
Hal S. Broderson, M.D.(8).................................. 1,101,693 10,000 12.4%
Harry T. Rein(9)........................................... 305,084 10,000 3.5%
Wendell Wierenga, Ph.D..................................... -- 20,000 *
Gregory F. Zaic(10)........................................ 550,846 10,000 6.2%
Paul H. Fischer, Ph.D...................................... 12,711 329,134 3.7%
Jeffrey W. Church.......................................... -- 37,916 *
C. Richter King, Ph.D...................................... -- 41,467 *
Imre Kovesdi, Ph.D......................................... 23,499 60,243 *
Henrik S. Rasmussen, M.D., Ph.D............................ -- 28,124 *
Thomas E. Smart............................................ 42,372 82,174 1.4%
Grant Yonehiro............................................. 6,779 48,622 *
All directors and executive officers as a group
(12 persons)............................................. 2,048,385 727,174 28.6%
</TABLE>
--------------
* Represents beneficial ownership of less than 1 percent.
55
<PAGE>
(1) The address for Highland Capital Partners is Two International Place,
Boston, MA 02110. The number of shares beneficially owned includes
1,200,000 shares held by Highland Capital Partners IV Limited Partnership
and 50,000 shares held by Highland Entrepreneurs' Fund IV Limited
Partnership.
(2) The address for Hillman Medical Ventures Partnerships is c/o Rock Hill
Ventures, Inc., One Tower Bridge, Suite 1350, 100 Front Street, West
Conshohocken, PA 19428, Attention: Hal S. Broderson, M.D. The number of
shares beneficially owned includes 84,745 shares owned by Hillman Medical
Ventures 1992 L.P., 508,474 shares owned by Hillman Medical Ventures 1993
L.P., and 508,474 shares owned by Hillman Medical Ventures 1994 L.P. The
general partners of the Hillman Medical Ventures partnerships are Cashon
Biomedical Associates L.P. and Hillman/Dover Limited Partnership. The
general partners of Cashon are Hal S. Broderson, Ronald J. Brenner and
Charles G. Hadley. The general partner of Hillman/Dover is a wholly-owned
subsidiary of The Hillman Company, a firm engaged in diversified
investments and operations. The Hillman Company is controlled by Henry L.
Hillman, Elsie Hilliard Hillman and C.G. Grefenstette, Trustees of the
Henry L. Hillman Trust. The Cashon General Partners and the Trustees may be
deemed to be the beneficial owners of the 1,101,693 shares owned by the
Hillman Medical Ventures partnerships.
(3) These shares are held by the Warner-Lambert Company, a wholly-owned
subsidiary of Pfizer. The address for Pfizer, Inc. is 2800 Plymouth Road,
Ann Arbor, MI, 48105. The number of shares beneficially owned is adjusted
to reflect the sale of additional shares to Warner-Lambert
concurrently with the closing of this offering.
(4) The address for Biotech Growth SA is Bellevue Asset Management, AG,
Grasenweg 4, Zug/Postach, Zug-6301, Switzerland.
(5) The address for Genentech, Inc. is One DNA Way, South San Francisco, CA
94080.
(6) The address for Prince Venture Partners, III, L.P. is 25 Ford Road,
Westport, CT 06880, Attention: Gregory Zaic.
(7) The address for Sierra Ventures, III, L.P. is 3000 Sand Hill Road, Building
4, Suite 210, Menlo Park, CA 94025. The number of shares beneficially owned
includes 21,207 shares held by Sierra Ventures International IV, L.P. and
529,639 shares held by Sierra Ventures IV, L.P.
(8) The number of shares beneficially owned by Dr. Broderson includes 84,745
shares owned by Hillman Medical Ventures 1992 L.P., 508,474 shares owned by
Hillman Medical Ventures 1993 L.P. and 508,474 shares owned by Hillman
Medical Ventures 1994 L.P. The general partners of the Hillman Medical
Ventures partnerships are Cashon Biomedical Associates L.P. and
Hillman/Dover Limited Partnership. The general partners of Cashon are Hal
S. Broderson, Ronald J. Brenner and Charles G. Hadley. The general partner
of Hillman/Dover is a wholly-owned subsidiary of The Hillman Company, a
firm engaged in diversified investments and operations. The Hillman Company
is controlled by Henry L. Hillman, Elsie Hillard Hillman and C.G.
Grefenstette, Trustees of the Henry L. Hillman Trust. The Cashon General
Partners and the Trustees may be deemed to be the beneficial owners of the
1,101,693 shares owned by the Hillman Medical Ventures partnerships.
(9) The number of shares owned by Mr. Rein includes 16,322 shares held by
Canaan Capital, L.P., 136,220 shares held by Canaan Capital Offshore L.P.,
C.V. and 152,542 shares held by Canaan S.B.I.C., L.P. Mr. Rein disclaims
beneficial ownership of these shares.
(10) The number of shares owned by Mr. Zaic consists of 550,846 shares held by
Prince Venture Partners III, L.P. Mr. Zaic disclaims beneficial ownership
of these shares.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will consist of
60,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
undesignated preferred stock, $0.001 par value.
COMMON STOCK
As of September 15, 2000, there were 8,978,847 shares of common stock
outstanding on a pro forma basis to reflect the conversion of all our
outstanding shares of preferred stock which will occur upon the closing of this
offering, that were held by approximately 90 stockholders. The holders of common
stock are entitled to one vote per share on all matters submitted to a vote of
our stockholders and do not have cumulative voting rights. The holders of common
stock are entitled to receive ratably any dividends as may be declared by the
board of directors out of legally available funds, after the superior rights of
the holders of preferred stock have been satisfied. Please read "Dividend
Policy." In the event of a liquidation, dissolution or winding up of our
company, the holders of our common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding. Our common stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to our common stock. All
outstanding shares of our common stock are fully paid and nonassable.
PREFERRED STOCK
The board of directors has the authority to issue the undesignated preferred
stock in one or more series, to fix the rights, preferences, privileges and
restrictions granted to or imposed upon any wholly unissued shares of
undesignated preferred stock and to fix the number of shares constituting any
series and the designation of such series. The issuance of preferred stock could
have the effect of delaying, deferring or preventing a change in control of
GenVec. We have no present plans to issue any shares of our preferred stock.
WARRANTS
As of September 15, 2000, we had outstanding:
- a warrant to purchase 211,864 shares of our common stock at $13.28 per share
expiring in May 2001, or, if we have not effected an initial public offering
by May 31, 1998, upon the fifth anniversary of the initial public offering,
but not later than May 31, 2006;
- a warrant to purchase 67,796 shares of our common stock at $14.75 per share
expiring in May 2001, or, if we have not effected an initial public offering
by June 30, 1998, on the third anniversary of the initial public offering but
not later than June 30, 2006;
- a warrant to purchase 67,796 shares of our common stock at $17.70 per share
expiring on the fifth anniversary of the scheduled vesting date or if we have
not effected an initial public offering by May 15, 2000, on the third
anniversary of the initial public offering but not later than May 15, 2008;
- a warrant to purchase 16,949 shares of our Series B preferred stock at $5.90
per share expiring in September 2006; and
- warrants to purchase 23,807 shares of our Series B preferred stock at $5.90
per share expiring upon the later of October 17, 2005 or five years from the
effective date of our initial public offering.
REGISTRATION RIGHTS
On the date 180 days after the completion of this offering, the holders of
7,551,010 shares of common stock and warrants exercisable for 211,864 additional
shares of common stock have rights which enable them to sell shares in
transactions registered under the Securities Act of 1933. If we propose to
register any of our securities under the Securities Act, either for our own
account or for the account of other securityholders, the holders of these
57
<PAGE>
shares will be entitled to notice of the registration and will be entitled to
include, at our expense, their shares of common stock. In addition, the holders
of these shares may require us, at our expense and on not more than three
occasions at any time beginning approximately six months from the date of the
closing of this offering, to file a registration statement under the Securities
Act covering their shares of common stock, and we will be required to use our
best efforts to have the registration statement declared effective. These rights
shall terminate on the earlier of five years after the effective date of this
offering, or when a holder is able to sell all its shares pursuant to Rule 144
under the Securities Act in any 90-day period. These registration rights are
subject to conditions and limitations, including the right of the underwriters
to limit the number of shares included in the registration statement.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND CHARTER PROVISIONS
Delaware law and our certificate of incorporation and bylaws could make it more
difficult for another person to acquire us and to remove our current officers
and directors. These provisions are intended to discourage coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of us to first negotiate with us. We believe that protecting our
ability to negotiate with the proponent of an unfriendly or unsolicited takeover
proposal outweighs the disadvantages of discouraging a takeover proposal because
negotiation of a proposal could result in an improvement of its terms.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
We are subject to section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, section 203 prohibits a publicly held Delaware
corporation from engaging in a business combination with an interested
stockholder for a period of three years following the date the person became an
interested stockholder. section 203 generally does not apply if the business
combination or the transaction in which the person became an interested
stockholder is approved in advance. Generally, a business combination includes a
merger, asset or stock sale or other transaction resulting in a financial
benefit to the interested stockholder. Generally, an interested stockholder is a
person who, with affiliates and associates, owns or, within three years before
the determination of interested stockholder status, did own 15% or more of a
corporation's voting stock. Section 203 may delay or prevent a change in control
of us without further action by the stockholders.
CERTIFICATE OF INCORPORATION AND BYLAWS
Upon the closing of this offering, our certificate of incorporation and bylaws
will:
- provide that stockholders must hold an annual or special meeting to take
action and may not act by written consent;
- provide that special meetings of stockholders may be called only by a
majority of our board members then in office;
- require stockholders to provide advance notice of nominations for election
to the board of directors and proposals they intend to submit for approval
at stockholders meetings;
- provide that our board of directors will be divided into three classes,
with each class serving staggered three-year terms, and provide that the
number of directors cannot be increased by 50% or more in any 12-month
period unless the increase is approved by two-thirds of the board members
then in office;
- require the approval of holders of at least 66 2/3% of the voting power of
all outstanding stock to remove a director for cause; and
- require the approval of holders of at least 66 2/3% of the voting power of
all outstanding stock, unless recommended by a vote of "continuing
directors," of significant amendments by the stockholders to the
certificate of incorporation and the bylaws.
58
<PAGE>
For the purposes of our certificate of incorporation, a "continuing director"
means either a member of our board prior to the time any person acquires 25% or
more of our voting power or any of our voting securities, or an individual
designated (before his or her election to our board) as a "continuing director"
by a majority of our then continuing directors.
Our certificate of incorporation also allows our board of directors to issue
preferred stock without stockholder approval as described under " -- Preferred
Stock" above.
TRANSFER AGENT AND REGISTRAR
Chase Mellon Shareholder Services has been appointed the transfer agent and
registrar for our common stock.
NASDAQ NATIONAL MARKET LISTING
We have applied to have our shares of common stock listed on the Nasdaq National
Market under the symbol "GNVC."
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could adversely affect the market price of our common stock. Upon completion of
this offering, we will have outstanding an aggregate of shares of common
stock. Of these shares, all of the shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
unless these shares are purchased by our affiliates. The remaining
shares of common stock held by existing stockholders are restricted securities.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under the Securities Act.
All of our executive officers, directors and stockholders have agreed pursuant
to "lock-up" agreements that, with limited exceptions, for a period of 180 days
from the date of this prospectus, they will not sell any shares of common stock
without the prior written consent of J.P. Morgan Securities Inc.
As a result of these "lock-up" agreements and the rules under the Securities
Act, the restricted shares will be available for sale in the public market,
subject, to volume and other restrictions, as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
DAYS AFTER THE NUMBER OF SHARES
EFFECTIVE DATE ELIGIBLE FOR SALE COMMENT
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
On Effectiveness..... Shares not locked-up and eligible for sale under Rule 144
90 days.............. -- Shares not locked-up and eligible for sale under Rule 144 and 701
180 days............. Lock-up released; shares eligible for sale under Rules 144 and 701
</TABLE>
Additionally, of the 2,293,302 shares that may be issued upon the exercise of
options outstanding as of September 15, 2000, approximately shares are
subject to options which will be vested and exercisable 180 days after the date
of this prospectus.
REGISTRATION RIGHTS
On the date 180 days after the completion of this offering, the holders of
7,551,010 shares of our common stock and warrants exercisable for 211,864
additional shares of common stock will have rights to require us to register
their shares under the Securities Act. Upon the effectiveness of a registration
statement covering these shares, the shares would become freely tradable.
STOCK OPTION AND STOCK PURCHASE PLANS
Immediately after this offering, we intend to file a registration statement
under the Securities Act covering approximately 3.65 million shares of common
stock reserved for issuance under our stock option and stock purchase plans. We
expect the registration statement to be filed and become effective as soon as
practicable after the closing of this offering. Accordingly, shares registered
under such registration statement will be available for sale in the open market
after the effectiveness of the registration statement, subject to the lock-up
agreements described above.
60
<PAGE>
UNDERWRITING
J.P. Morgan Securities, Inc. is acting as sole bookrunning manager for this
offering. We and the underwriters named below have entered into an underwriting
agreement covering the common stock to be offered in this offering. J.P. Morgan
Securities Inc., UBS Warburg LLC and A.G. Edwards & Sons, Inc. are acting as
representatives of the underwriters. Each underwriter has agreed to purchase the
number of shares of common stock set forth opposite its name in the following
table:
<TABLE>
<CAPTION>
----------------
NUMBER OF SHARES
----------------
<S> <C>
UNDERWRITERS
J.P. Morgan Securities Inc..................................
UBS Warburg LLC.............................................
A.G. Edwards & Sons, Inc....................................
-------------
Total.....................................................
=============
</TABLE>
The underwriting agreement provides that if the underwriters take any of the
shares presented in the table above, then they must take all of these shares. No
underwriter is obligated to take any shares allocated to a defaulting
underwriter except under limited circumstances.
The underwriters are offering the shares of common stock, subject to the prior
sale of shares, and when, as and if such shares are delivered to and accepted by
them. The underwriters will initially offer to sell shares to the public at the
initial public offering price shown on the cover page of this prospectus. The
underwriters may sell shares to securities dealers at a discount of up to $
per share from the initial public offering price. Any of these securities
dealers may resell shares to other brokers or dealers at a discount of up to
$ per share from the initial offering price. After the initial public
offering, the underwriters may vary the public offering price and other selling
items.
If the underwriters sell more shares than the total number shown in the table
above, the underwriters have the option to buy up to an additional
shares of common stock from us to cover these sales. They may exercise this
option during the 30-day period from the date of this prospectus. If any shares
are purchased with this option, the underwriters will purchase shares in
approximately the same proportion as shown in the table above.
The following table shows the per share and total underwriting discounts that we
will pay to the underwriters. These amounts are shown assuming both no exercise
and full exercise of the underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share................................................... $ $
Total..................................................... $ $
</TABLE>
The representatives have advised us that, on behalf of the underwriters, they
may make short sales of our common stock in connection with this offering,
resulting in the sale by the underwriters of a greater number of shares than
they are required to purchase pursuant to the underwriting agreement. The short
position resulting from those short sales will be deemed a "covered" short
position to the extent that it does not exceed the shares subject to the
underwriters' over-allotment option and will be deemed a "naked" short position
to the extent that it exceeds that number. A naked short position is more likely
to be created if the underwriters are concerned that there may be downward
pressure on the trading price of the common stock in the open market that could
adversely affect investors who purchase shares in this offering. The
underwriters may reduce or close out their covered short position either by
exercising the over-allotment option or by purchasing shares in the open market.
In determining which of these alternatives to pursue, the underwriters will
consider the price at which
61
<PAGE>
shares are available for purchase in the open market as compared to the price at
which they may purchase shares through the over-allotment option. Any "naked"
short position will be closed out by purchasing shares in the open market.
Similar to the other stabilizing transactions described below, open market
purchases made by the underwriters to cover all or a portion of their short
position may have the effect of preventing or retarding a decline in the market
price of our common stock following this offering. As a result, our common stock
may trade at a price that is higher than the price that otherwise might prevail
in the open market.
The representatives have advised us that, pursuant to Regulation M under the
Securities Exchange Act of 1934, they may engage in transactions, including
stabilizing bids or the imposition of penalty bids, that may have the effect of
stabilizing or maintaining the market price of the shares of common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of shares of common stock on
behalf of the underwriters for the purpose of fixing or maintaining the price of
the common stock. A "penalty bid" is an arrangement permitting the
representatives to claim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with the offering if the common
stock originally sold by that underwriter or syndicate member is purchased by
the representatives in the open market pursuant to a stabilizing bid or to cover
all or part of a syndicate short position. The representatives have advised us
that stabilizing bids and open market purchases may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise and, if commenced,
may be discontinued at any time.
We estimate that the total expenses of this offering, excluding underwriting
discounts, will be approximately $ .
We have agreed to indemnify the underwriters against some liabilities, including
liabilities under the Securities Act of 1933.
We and our executive officers, directors and stockholders have agreed that, with
limited exceptions, during the period beginning from the date of this prospectus
and continuing to and including the date 180 days after the date of this
prospectus, none of us will, directly or indirectly, offer, sell, offer to sell,
contract to sell or otherwise dispose of any shares of common stock or any of
our securities which are substantially similar to the common stock including,
but not limited to, any securities that are convertible into or exchangeable
for, or that represent the right to receive, common stock or any substantially
similar securities or enter into any swap, option, future, forward or other
agreement that transfers, in whole or in part, the economic consequence of
ownership of common stock or any securities substantially similar to the common
stock, other than pursuant to employee stock option plans existing on the date
of this prospectus, without the prior written consent of J.P. Morgan Securities
Inc.
At our request, the underwriters have reserved shares of common stock for sale
to our directors, officers, employees, consultants and family members of the
foregoing. We expect these persons to purchase no more than five percent, or
shares, of the common stock offered in this offering. The number of
shares available for sale to the general public will be reduced to the extent
such persons purchase such reserved shares.
We have applied to have our shares of common stock listed on the Nasdaq National
Market under the symbol "GNVC."
It is expected that delivery of the shares will be made to investors on or about
, 2000.
There has been no public market for the common stock prior to this offering. We
and the underwriters will negotiate the initial offering price. In determining
the price, we and the underwriters expect to consider a number of factors in
addition to prevailing market conditions, including:
- the history of and prospects for our industry and for biotechnology companies
generally;
- an assessment of our management;
- our present operations;
- our historical results of operations;
- the trend of our revenues and earnings; and
- our earnings prospects.
62
<PAGE>
We and the underwriters will consider these and other relevant factors in
relation to the price of similar securities of generally comparable companies.
Neither we nor the underwriters can assure investors that an active trading
market will develop for the common stock, or that the common stock will trade in
the public market at or above the initial offering price.
From time to time in the ordinary course of their respective businesses, some of
the underwriters and their affiliates have engaged in and may in the future
engage in commercial banking and/or investment banking transactions with us and
our affiliates.
63
<PAGE>
LEGAL MATTERS
Arnold & Porter, Washington, DC, will render an opinion for us that the shares
of common stock offered hereby, when sold in connection with this offering, will
be validly issued, fully paid and non-assessable. Legal matters in connection
with the offering will be passed upon for the underwriters by Davis Polk &
Wardwell, New York, New York.
EXPERTS
The financial statements of GenVec, Inc. as of December 31, 1998 and 1999, and
for each of the years in the three-year period ended December 31, 1999, have
been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
Some statements included in this Prospectus under the captions "Risk Factors --
Risks Related to Our Industry -- If we are unable to adequately protect our
intellectual property rights, our competitors may be able to take advantage of
our research and development efforts to compete with us, "-- If our potential
products conflict with intellectual property rights of competitors, universities
or others, then we may be unable to develop and commercialize those product
candidates", "-- If our rights to use intellectual property we license from
others is affected, our ability to develop and commercialize our product
candidates may be harmed," and "Business -- Patents and Proprietary Rights" have
been reviewed and approved by Leydig, Voit & Mayer, Ltd., our patent counsel, as
experts on such matters.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act of 1933 regarding the shares of common stock offered by us. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information contained in the registration statement, some
items of which are contained in exhibits to the registration statement as
permitted by the rules and regulations of the SEC. For further information on us
and the common stock we are offering, reference is made to the registration
statement, including the exhibits, and the financial statements and notes filed
as a part of the registration statement. A copy of the registration statement,
including exhibits and the financial statements and notes filed as a part of it,
may be inspected without charge at the public reference facilities maintained by
the SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies
of all or any part of the registration statement may be obtained from the SEC
upon the payment of fees prescribed by it. The SEC maintains a web site at
HTTP://WWW.SEC.GOV that contains reports, proxy and information statements and
other information regarding companies that file electronically with it.
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934 and will file
periodic reports, proxy statements and other information with the SEC. You may
inspect any of these documents as described in the preceding paragraph. Upon
approval of our common stock for quotation on the Nasdaq National Market, these
reports, proxy statements and other information may also be inspected at the
offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
64
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
--------
PAGE
--------
<S> <C>
AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report................................ F-2
Balance Sheets as of December 31 1998 and 1999.............. F-3
Statements of Operations and Comprehensive Loss -- Years
Ended December 31, 1997, 1998 and 1999.................... F-5
Statements of Stockholders' Equity -- Years Ended December
31, 1997, 1998 and 1999................................... F-6
Statements of Cash Flows -- Years Ended December 31, 1997,
1998 and 1999............................................. F-7
Notes to Financial Statements............................... F-8
UNAUDITED CONDENSED FINANCIAL STATEMENTS
Condensed Balance Sheet as of June 30, 2000................. F-24
Condensed Statements of Operations and Comprehensive Loss --
Six Months Ended June 30, 1999 and 2000................... F-25
Condensed Statements of Cash Flows -- Six Months Ended June
30, 1999 and 2000......................................... F-26
Notes to Unaudited Condensed Financial Statements........... F-27
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
GenVec, Inc.:
We have audited the accompanying balance sheets of GenVec, Inc. as of
December 31, 1998 and 1999, and the related statements of operations and
comprehensive loss, stockholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 referred to above present fairly, in
all material respects, the financial position of GenVec, Inc. as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
McLean, Virginia
February 18, 2000
F-2
<PAGE>
GENVEC, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
---------------------------
AS OF DECEMBER 31,
---------------------------
1998 1999
ASSETS ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 3,083,377 $ 8,470,353
Short-term investments (note 3)........................... 5,835,644 5,413,651
Prepaid expenses.......................................... 432,355 438,754
Receivables from related party (note 6)................... -- 778,250
Other current assets...................................... 197,291 148,899
------------ ------------
Total current assets.................................... 9,548,667 15,249,907
------------ ------------
Property and equipment, net (note 4)........................ 2,120,739 9,333,074
Bond investment trust (note 5).............................. -- 1,423,066
Long-term investments (note 3).............................. -- 2,484,893
Other assets (note 2)....................................... 51,562 145,491
------------ ------------
Total assets............................................ $ 11,720,968 $ 28,636,431
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE>
GENVEC, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
---------------------------
AS OF DECEMBER 31,
---------------------------
1998 1999
LIABILITIES AND STOCKHOLDERS' EQUITY ------------ ------------
<S> <C> <C>
Current liabilities:
Bank overdraft payable.................................... $ 334,593 $ --
Accounts payable.......................................... 832,245 1,435,085
Accrued expenses.......................................... 768,329 809,992
Accrued construction in progress.......................... -- 482,474
Accrued technological license and intellectual property
expenses................................................ 790,086 624,320
Accrued payroll and related expenses...................... 156,531 208,794
Unearned revenue.......................................... 1,000,000 2,975,000
Current portion of notes payable and capital lease
obligation (notes 5 and 7).............................. 45,933 366,320
------------ ------------
Total current liabilities............................... 3,927,717 6,901,985
------------ ------------
Notes payable and capital lease obligations, less current
portion (note 5).......................................... -- 1,822,195
Bond payable (note 5)....................................... -- 5,000,000
Deferred credit (note 7).................................... -- 1,280,780
Unearned revenue............................................ 2,500,000 1,700,000
Other non-current liabilities............................... 13,250 --
------------ ------------
Total non-current liabilities........................... 2,513,250 9,802,975
------------ ------------
Commitments (notes 5 and 7)
Stockholders' equity (notes 6 and 8):
Convertible preferred stock, $.001 par value, 7,083,019
and 7,736,158 shares authorized at December 31, 1998 and
1999, 7,042,263 and 7,695,402 shares issued and
outstanding (liquidation preference of $52,052,177) at
December 31, 1998 and 1999.............................. 7,042 7,695
Preferred stock, $0.001 par value, 4,346,861 shares
authorized, no shares issued and outstanding at December
31, 1998 and 1999....................................... -- --
Common stock, $0.001 par value, 50,000,000 shares
authorized at December 31, 1998 and 1999, 1,036,582 and
1,065,742 shares issued and outstanding at December 31,
1998 and 1999........................................... 1,036 1,065
Additional paid-in capital.................................. 47,084,204 55,716,746
Accumulated deficit......................................... (40,976,593) (42,896,083)
Deferred compensation (note 8).............................. (835,641) (850,419)
Accumulated other comprehensive loss -- unrealized loss on
securities (note 3)....................................... -- (47,486)
Treasury stock, at cost, 47,300 common shares............... (47) (47)
------------ ------------
Total stockholders' equity.............................. 5,280,001 11,931,471
------------ ------------
Total liabilities and stockholders' equity.............. $ 11,720,968 $ 28,636,431
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE>
GENVEC, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
---------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenues (note 6):
Ongoing research and development support............. $ 3,187,500 $ 6,750,000 $14,074,949
Contract, license and milestone payments............. 2,500,000 3,000,000 2,875,000
----------- ----------- -----------
Total revenues..................................... 5,687,500 9,750,000 16,949,949
----------- ----------- -----------
Operating expenses:
Research and development............................. 8,085,421 10,592,366 14,017,725
General and administrative........................... 4,030,602 5,902,844 5,428,607
----------- ----------- -----------
Total operating expenses........................... 12,116,023 16,495,210 19,446,332
----------- ----------- -----------
Loss from operations............................... (6,428,523) (6,745,210) (2,496,383)
----------- ----------- -----------
Other income (expense):
Interest income...................................... 319,538 408,026 742,387
Interest expense..................................... (56,570) (9,890) (135,197)
Loss on disposal of assets........................... -- -- (30,297)
----------- ----------- -----------
Total other income................................. 262,968 398,136 576,893
----------- ----------- -----------
Net loss........................................... $(6,165,555) $(6,347,074) $(1,919,490)
=========== =========== ===========
Other comprehensive loss, net of tax:
Unrealized holding losses arising during the
period............................................. $ -- $ -- $ (47,486)
=========== =========== ===========
Comprehensive loss..................................... $(6,165,555) $(6,347,074) $(1,966,976)
=========== =========== ===========
Basic and diluted net loss per share (note 2).......... $ (6.44) $ (6.15) $ (1.83)
=========== =========== ===========
Shares used in computing basic and diluted net loss per
share
(note 2)............................................. 956,856 1,032,451 1,050,962
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-5
<PAGE>
GENVEC, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- -------------------- PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
--------- -------- --------- -------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996.... 5,811,971 $ 5,812 987,419 $ 987 $ 36,295,051 $ (973,556) $(28,463,964)
Issuance of Class E
convertible preferred
shares, net of issuance
costs of $3,215 (note 8).... 75,329 75 -- -- 996,712 -- --
Issuance of Class E1
convertible preferred
shares, net of issuance
costs of $68,842 (note 8)... 154,963 155 -- -- 1,931,002 -- --
Exercise of options........... -- -- 33,594 34 22,286 -- --
Deferred compensation
resulting from grant of
options below fair value.... -- -- -- -- 895,330 (895,330) --
Amortization of deferred
compensation................ -- -- -- -- -- 495,195 --
Cancellation of options....... -- -- -- -- (13,794) 13,794 --
Net loss...................... -- -- -- -- -- -- (6,165,555)
--------- -------- --------- -------- ------------ ------------- ------------
Balance, December 31, 1997.... 6,042,263 6,042 1,021,013 1,021 40,126,587 (1,359,897) (34,629,519)
Issuance of Class F
convertible preferred
shares, net of issuance of
costs of $80,562 (note 8)... 1,000,000 1,000 -- -- 5,888,438 -- --
Issuance of 250,000 common
stock warrants in connection
with Class F convertible
preferred shares............ -- -- -- -- 1,030,000 -- --
Exercise of options........... -- -- 15,569 15 26,271 -- --
Deferred compensation
resulting from grant of
options below fair value.... -- -- -- -- 12,908 (12,908) --
Amortization of deferred
compensation................ -- -- -- -- -- 537,164 --
Net loss...................... -- -- -- -- -- -- (6,347,074)
--------- -------- --------- -------- ------------ ------------- ------------
Balance, December 31, 1998.... 7,042,263 7,042 1,036,582 1,036 47,084,204 (835,641) (40,976,593)
Issuance of Class E2
convertible preferred
shares, net of issuance of
costs of $6,191 (note 8).... 266,666 267 -- -- 2,993,535 -- --
Issuance of E3 convertible
preferred shares, net of
issuance of costs of $6,472
(note 8).................... 386,473 386 -- -- 4,993,136 -- --
Exercise of options........... -- -- 29,160 29 67,541 -- --
Deferred compensation
resulting from grant of
options below fair value.... -- -- -- -- 578,330 (578,330) --
Amortization of deferred
compensation................ -- -- -- -- -- 563,552 --
Net loss...................... -- -- -- -- -- -- (1,919,490)
--------- -------- --------- -------- ------------ ------------- ------------
Balance, December 31, 1999.... 7,695,402 $ 7,695 1,065,742 $ 1,065 $ 55,716,746 $ (850,419) $(42,896,083)
========= ======== ========= ======== ============ ============= ============
<CAPTION>
---------------------------------------
ACCUMULATED
TREASURY OTHER
STOCK COMPREHENSIVE
AMOUNT INCOME TOTAL
-------- -------------- -----------
<S> <C> <C> <C>
Balance, December 31, 1996.... $ (47) $ -- $ 6,864,283
Issuance of Class E
convertible preferred
shares, net of issuance
costs of $3,215 (note 8).... -- -- 996,787
Issuance of Class E1
convertible preferred
shares, net of issuance
costs of $68,842 (note 8)... -- -- 1,931,157
Exercise of options........... -- -- 22,320
Deferred compensation
resulting from grant of
options below fair value.... -- -- --
Amortization of deferred
compensation................ -- -- 495,195
Cancellation of options....... -- -- --
Net loss...................... -- -- (6,165,555)
-------- -------------- -----------
Balance, December 31, 1997.... (47) -- 4,144,187
Issuance of Class F
convertible preferred
shares, net of issuance of
costs of $80,562 (note 8)... -- -- 5,889,438
Issuance of 250,000 common
stock warrants in connection
with Class F convertible
preferred shares............ -- -- 1,030,000
Exercise of options........... -- -- 26,286
Deferred compensation
resulting from grant of
options below fair value.... -- -- --
Amortization of deferred
compensation................ -- -- 537,164
Net loss...................... -- -- (6,347,074)
-------- -------------- -----------
Balance, December 31, 1998.... (47) -- 5,280,001
Issuance of Class E2
convertible preferred
shares, net of issuance of
costs of $6,191 (note 8).... -- -- 2,993,802
Issuance of E3 convertible
preferred shares, net of
issuance of costs of $6,472
(note 8).................... -- -- 4,993,522
Exercise of options........... -- -- 67,570
Deferred compensation
resulting from grant of
options below fair value.... -- -- --
Amortization of deferred
compensation................ -- -- 563,552
Net loss...................... -- (47,486) (1,966,976)
-------- -------------- -----------
Balance, December 31, 1999.... $ (47) $ (47,486) $11,931,471
======== ============== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-6
<PAGE>
GENVEC, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(6,165,555) $(6,347,074) $ (1,919,490)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization expense............. 484,334 407,602 746,895
Stock option and warrant compensation expense
(note 8)........................................ 495,195 537,164 563,552
Loss on disposal of assets........................ -- -- 30,297
Increase in receivables from related party........ -- -- (778,250)
(Increase) decrease in other current assets....... (32,003) (61,576) 48,392
(Increase) decrease in other assets............... -- (13,612) 115,806
Increase in prepaid expenses...................... (245,897) (21,529) (6,399)
Increase in accounts payable...................... 123,139 445,095 602,840
(Decrease) increase in accrued expenses........... (151,121) 577,627 576,400
Increase (decrease) in unearned revenue........... 4,500,000 (1,000,000) 1,175,000
Increase (decrease) in accrued technology license
and intellectual property expenses.............. 481,018 (130,398) (165,766)
Increase (decrease) in other non-current
liabilities..................................... 26,500 (13,250) (13,250)
----------- ----------- ------------
Net cash (used in) provided by operating
activities.................................... (484,390) (5,619,951) 976,027
----------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment................. (475,760) (1,908,481) (6,602,684)
Purchases of investments available-for-sale......... -- -- (9,143,094)
Purchases of investments held-to-maturity........... (4,361,879) (5,835,644) (2,217,660)
Purchases of investment bond trust.................. -- -- (5,000,000)
Proceeds from maturities of investments
held-to-maturity.................................. 4,363,013 2,555,987 2,500,000
Proceeds from sale of investment securities
available-for-sale................................ -- -- 6,644,305
Proceeds from sale of investment bond trust......... -- -- 3,576,934
----------- ----------- ------------
Net cash used in investing activities........... (474,626) (5,188,138) (10,242,199)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from exercise of common stock options...... 22,320 26,286 67,570
Proceeds from issuance of preferred stock, net of
issuance costs.................................... 2,927,944 6,919,438 7,987,324
Loan proceeds....................................... -- -- 7,484,404
Payments under capital lease obligation............. (351,084) (175,241) (45,933)
Loan payments....................................... -- -- (295,889)
Bond financing payments............................. -- -- (209,735)
Change in bank overdraft payable.................... -- 334,593 (334,593)
----------- ----------- ------------
Net cash provided by financing activities....... 2,599,180 7,105,076 14,653,148
----------- ----------- ------------
Increase (decrease) in cash and cash
equivalents................................... 1,640,164 (3,703,013) 5,386,976
Cash and cash equivalents, beginning of year.......... 5,146,226 6,786,390 3,083,377
----------- ----------- ------------
Cash and cash equivalents, end of year................ $ 6,786,390 $ 3,083,377 $ 8,470,353
=========== =========== ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest.............. $ 36,158 $ 10,767 $ 250,329
=========== =========== ============
Supplemental disclosure of non-cash investing and
financing activities:
Property and equipment and other assets financed by
lessor............................................ $ -- $ -- $ 1,280,780
=========== =========== ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-7
<PAGE>
GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(1) ORGANIZATION AND BUSINESS DESCRIPTION
GenVec, Inc. (GenVec or the Company) develops gene-based products that cause the
production of therapeutic proteins at the site of disease. The Company's current
areas of focus are cardiovascular disease, oncology and ophthalmology. The
Company's products in development are made up of genes and gene transfer systems
to transport those genes into cells at the site of the disease. These gene
transfer systems are commonly called "vectors." The Company's product candidates
are administered directly to the site of disease through devices, such as
catheters and syringes.
GenVec has the ability to build vectors that enable the Company to test the
therapeutic benefit of genes in a broad array of preclinical models of human
disease and to advance product candidates to clinical testing in generally less
time than traditional drug discovery methods.
GenVec uses its technology platform to convert advances in genomics into
therapeutic product candidates. The Company intends to develop and commercialize
these product candidates through corporate collaborations and internally.
GenVec has developed a portfolio of product candidates. The Company's lead
product candidate, BIOBYPASS-Registered Trademark- angiogen, which is being
developed in collaboration with Warner-Lambert is intended to treat patients
with coronary artery disease and peripheral vascular disease by inducing the
formation of new blood vessels in tissues with inadequate blood flow. The
Company is also developing TNFerade, which is intended to treat patients with
various injectible solid tumors such as rectal cancer and head and neck cancer.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) REVENUE RECOGNITION
The Company currently generates substantially all of its revenue through a
collaborative research and development agreement with a related party (note 6).
Research and development revenue from cost-reimbursement agreements are
recognized as revenue as the related expenses are incurred and the Company has
no future performance obligations. Contract, license and milestone payments are
recognized as revenue when the Company's specific performance obligations have
been satisfied in accordance with the terms of the respective agreements.
Research and development, contract, license and milestone revenue recognized in
the accompanying statements of operations is not subject to repayment. The
Company's revenue recognition policy is consistent with the provisions of SAB
101 and the accompanying financial statements reflect the policy for all periods
presented.
(B) RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred. Such costs
include proprietary research and development activities and expenses associated
with collaborative research agreements.
(C) TECHNOLOGICAL LICENSE AND INTELLECTUAL PROPERTY
Technological license and intellectual property costs consist of payments
associated with license agreements and legal costs associated with the
acquisition and development of intellectual property. Costs associated with the
acquisition and development of intellectual property are expensed when incurred.
F-8
<PAGE>
GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and equipment is depreciated
using the straight-line method over the estimated useful lives of assets,
generally three to five years for equipment and seven years for furniture and
fixtures. Leased property meeting certain criteria is capitalized at the lower
of the present value of the future minimum lease payments or fair value at the
inception of the lease. Amortization of capitalized leased assets is computed on
the straight-line method over the term of the lease.
(E) INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES.
Under the asset and liability method of Statement of Financial Accounting
Standards No. 109, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that are expected to apply
to taxable income in the years in which those temporary differences are expected
to be recovered or settled.
(F) CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original maturities
of three months or less, and are recorded at amortized cost, which approximates
fair value. Cash equivalents consist primarily of money market funds and
commercial paper.
(G) SHORT-TERM INVESTMENTS
The Company's short-term investments consist primarily of bonds and commercial
paper. Through April 1999, these investments were classified as a
held-to-maturity portfolio as the Company had both the ability and intent to
hold securities until maturity. The portfolio was carried at amortized cost,
which approximated fair value. During April 1999, the Company signed a
management agreement allowing an institutional trustee limited power to buy and
sell individual issues to take advantage of market changes. At that time all
existing securities, totaling $5,555,832 on an amortized cost-basis with
unrealized losses of $33,205, were transferred to an account under control of
the trustee and are classified as available-for-sale securities.
Available-for-sale securities are carried at fair value, with the unrealized
holding gains and losses, net of the related tax effect, reported as a separate
component of other comprehensive income until realized. Realized gains and
losses from the sale of available-for-sale securities are determined on a
specific identification basis.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed to be other than temporary results in a
reduction in carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established. Premiums and
discounts are amortized or accreted over the life of the related
held-to-maturity or available-for-sale security as an adjustment to yield using
the effective interest method. Dividend and interest income are recognized when
earned.
F-9
<PAGE>
GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(H) COSTS OF BORROWING
Interest costs incurred on borrowed funds during the period of construction of
capital assets are capitalized as a component of the cost of acquiring those
assets.
(I) OTHER ASSETS
Other assets consist primarily of direct financing costs that are deferred and
amortized over the life of the financing on a straight-line basis.
(J) NET LOSS PER SHARE
Basic and diluted net loss per share have been computed using the weighted
average number of shares of common stock outstanding during the period.
Had the Company been in a net income position, diluted earnings per share would
have been presented and would have included the shares used in the computation
of basic net loss per share as well as additional potential common shares
related to outstanding options and warrants. The diluted EPS computation is not
included, as all potential common shares are antidilutive.
(K) USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles may require management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
(L) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, as reflected in the
accompanying balance sheets, approximate fair value. Financial instruments
consist of cash and cash equivalents, short-term investments, receivables from
related party, bond investment trust, long-term investments, bank overdraft
payable, accounts payable, accrued technological license and intellectual
property expenses, accrued expenses, accrued payroll and related expenses, notes
payable and capital lease obligations.
(M) STOCK OPTION PLAN
The Company accounts for stock-based compensation in accordance with the
provisions of Accounting Principle Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), and related interpretations, and complies
with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based
Compensation. Under APB 25, compensation expense is based on the difference, if
any, on the date of grant, between the fair value of the Company's stock and the
exercise price. All stock-based awards to non-employees (including options
granted to members of the Scientific Advisory Board) are accounted for at their
fair value in accordance with the provisions of SFAS No. 123.
F-10
<PAGE>
GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(N) COMPREHENSIVE LOSS
Comprehensive loss consists of net loss and unrealized holding gains from
available-for-sale securities and is presented in the statements of
stockholders' equity. Components of comprehensive loss, as detailed on the
statements of operations and comprehensive income, are reported net of tax.
(3) INVESTMENTS
The amortized cost, gross unrealized holding gains and losses and fair value of
available-for-sale and held-to-maturity securities by major security type at
December 31, 1998 and 1999, are as follows:
<TABLE>
<CAPTION>
------------------------------------------
1998
------------------------------------------
GROSS UNREALIZED
AMORTIZED HOLDING GAINS FAIR
COST (LOSSES) VALUE
---------- ---------------- ----------
<S> <C> <C> <C>
Held-to-maturity:
Tax exempt bonds............................. $ 301,134 $ 396 $ 301,530
Corporate bonds.............................. 5,534,510 (3,438) 5,531,072
---------- -------- ----------
$5,835,644 $ (3,042) $5,832,602
========== ======== ==========
Classified as cash equivalents:
Money market funds........................... $2,966,822 $ -- $2,966,822
========== ======== ==========
<CAPTION>
------------------------------------------
1999
------------------------------------------
GROSS UNREALIZED
AMORTIZED HOLDING GAINS FAIR
COST (LOSSES) VALUE
---------- ---------------- ----------
<S> <C> <C> <C>
Available-for-sale:
Government agency notes...................... $1,501,703 $ (1,478) $1,500,225
Corporate bonds.............................. 6,444,327 (46,008) 6,398,319
---------- -------- ----------
$7,946,030 $(47,486) $7,898,544
========== ======== ==========
Classified as cash equivalents:
Commercial paper............................. $7,996,917 $ -- $7,996,917
========== ======== ==========
</TABLE>
Maturities of debt securities classified as available-for-sale were as follows
at December 31, 1999:
<TABLE>
<CAPTION>
-----------------------
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Available-for-sale
Due within one year....................................... $5,428,337 $5,413,651
Due after one year through five years..................... 2,517,693 2,484,893
---------- ----------
$7,946,030 $7,898,544
========== ==========
</TABLE>
F-11
<PAGE>
GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
Equipment................................................... $3,660,886 $5,111,520
Leasehold improvements...................................... 369,692 93,887
Furniture and fixtures...................................... 100,089 303,928
Construction-in-progress.................................... 54,232 6,257,907
---------- ----------
4,184,899 11,767,242
Less accumulated depreciation and amortization.............. (2,064,160) (2,434,168)
---------- ----------
Property and equipment, net............................. $2,120,739 $9,333,074
========== ==========
</TABLE>
In May 1999, the Company entered into a lease agreement for a new 42,900 square
foot executive office and laboratory facility to be constructed by the lessor.
The $7.3 million project was financed by a $5.0 million Industrial Revenue Bond
with the State of Maryland (the "Bond"), a $125,000 economic development loan
from Montgomery County, Maryland, approximately $1.3 million in lease incentives
provided by the landlord and an $858,000 term loan from the landlord.
Although the building was substantially complete by December 31, 1999, the
Company did not take possession of the building until January 2000. The ten year
lease term commenced on November 1, 1999 (see note 7 for discussion of lease
agreement). At December 31, 1999, the Company accrued approximately
$1.1 million of unbilled construction costs. Applicable interest charges
incurred during the buildout of the new facility are capitalized as one of the
elements of cost and will be amortized over the estimated useful life. Interest
capitalized during 1999 was approximately $48,000.
Depreciation and amortization expense related to property and equipment were
$484,334, $386,276, and $637,962 for the years ended December 31, 1997, 1998,
and 1999, respectively.
(5) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
-----------------------
DECEMBER 31,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
Industrial Revenue Bond..................................... $ -- $5,000,000
Notes payable:
Term loan................................................. -- 858,000
Equipment financing....................................... -- 1,205,515
Economic development loan................................. -- 125,000
---------- ----------
-- 7,188,515
Less: current maturities of long-term debt.............. -- (366,320)
---------- ----------
$ -- $6,822,195
========== ==========
</TABLE>
F-12
<PAGE>
GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(5) LONG-TERM DEBT (CONTINUED)
(A) INDUSTRIAL REVENUE BOND
In June 1999, in connection with the lease of the new building, the Company
borrowed $5.0 million under an Industrial Revenue Bond with the State of
Maryland to fund leasehold improvements and additional equipment needs of the
Company. The Bond is secured by a first priority lien on all equipment and
fixtures financed. The Bond is secured by a $2.5 million letter of credit
facility guaranteed by the Maryland Industrial Development Finance Authority and
a $2.5 million guarantee from Warner-Lambert. The Company incurs an annual fee
for the letter of credit equal to one percent of the outstanding balance which
totaled $50,822 for the year ended December 31, 1999. Warner-Lambert's guarantee
will remain as long as the outstanding principal balance on the Bond is greater
than $2.5 million. Warner-Lambert's guarantee will be reduced in value dollar
for dollar as the principal balance decreases below $2.5 million.
The Bond bears interest at a variable rate and matures on June 1, 2009. The
weighted-average interest rate during 1999 was 5.6 percent. The Bond is subject
to mandatory sinking fund redemption beginning July 2001.
The $5.0 million Bond proceeds were held in a trust for the sole purpose of
funding construction. The balance of the trust was $1,423,066 at December 31,
1999.
(B) TERM LOAN
In connection with the lease of the new building (see note 7), the landlord
contributed $858,000 towards the construction of leasehold improvements in the
form of a term loan. This loan is payable in monthly installments of $11,577,
including interest at a fixed rate of 10.5 percent, commencing November 1999
over the 10 year term of the building lease.
(C) EQUIPMENT FINANCING
On January 27, 1999, the Company secured $1.5 million in financing for certain
assets purchased by the Company at an interest rate of 10.8 percent. The note is
payable in monthly installments of $35,845 commencing January 1999 through
December 2002, followed by a balloon payment of $150,140 payable in
January 2003. The loan is secured by the equipment financed by the note.
(D) ECONOMIC DEVELOPMENT LOAN
On September 29, 1999, the Company entered into an economic development fund
agreement with Montgomery County, Maryland (the County) and received $125,000
for the purpose of relocation and expansion related expenses. The $125,000
received is considered a loan which accrues interest on the principal balance at
5 percent a year until December 31, 2001. Quarterly payments on the principal
and interest commence January 15, 2002. The final payment on the loan is due
January 15, 2007.
Loan payments may be deferred or forgiven by the County if the Company achieves
certain incentive provisions outlined in the loan agreement related to the
hiring of new employees within the Company. No guarantee can be made that the
Company will achieve the targets that would result in a deferral or forgiveness
of the loan.
F-13
<PAGE>
GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(5) LONG-TERM DEBT (CONTINUED)
Should the Company sell, close, or relocate a majority of its business interest
outside the County within 5 years from the commencement date of the loan, the
Company must repay the entire balance of the outstanding loan plus all accrued
interest.
Aggregate maturities and sinking fund obligations for the Bond and notes payable
are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 366,320
2001........................................................ 832,789
2002........................................................ 928,791
2003........................................................ 725,080
2004........................................................ 620,304
Thereafter.................................................. 3,715,231
----------
$7,188,515
==========
</TABLE>
(6) STRATEGIC ALLIANCES
The Company has established collaborations with pharmaceutical and biotechnology
companies to enhance its ability to discover, evaluate, develop and
commercialize multiple product opportunities.
(A) WARNER-LAMBERT COMPANY
In July 1997, the Company entered into a collaboration with Warner-Lambert, a
related party, to research, develop and commercialize gene-based products
incorporating the VEGF gene for the treatment of coronary artery disease and
peripheral vascular disease. The agreement was amended effective January 1,
1999. Warner-Lambert has the primary responsibility for clinical development,
regulatory approval, manufacturing and commercialization of products that the
Company develops under this collaboration, including BIOBYPASS angiogen.
Under the terms of the collaboration, the Company may receive more than
$100.0 million in research and development funding, milestone payments, equity
purchases and license fees. As of December 31, 1999, the Company has received
$33.5 million and has recognized an aggregate of $29.1 million in research and
development funding, license fees and milestone payments. Warner-Lambert has
agreed to provide the Company a total of $34.3 million of research and
development funding over the first five years of the collaboration, and the
Company has the potential to receive an aggregate of $50.0 million in milestone
payments related to the development of the first collaboration product for
coronary artery disease and peripheral vascular disease. Warner-Lambert will
make additional milestone payments to the Company upon the achievement of events
related to the conduct of pivotal clinical studies and filings for and receiving
regulatory approvals to market collaboration products and, for other
collaboration products developed for these indications. In consideration for
these payments, the Company granted Warner-Lambert an exclusive, royalty-bearing
license to manufacture and sell collaboration products worldwide, excluding
Asia, subject to the Company's right to co-promote in the United States and
Canada for coronary artery disease applications (See note 7(b)). This license is
also subject to the Company's exclusive right to manufacture and sell any
collaboration products for uses other than coronary artery disease and
peripheral vascular disease. Warner-Lambert's research and development funding
obligations to the Company extend through July 2002, although Warner-Lambert may
terminate its research funding obligations to
F-14
<PAGE>
GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(6) STRATEGIC ALLIANCES (CONTINUED)
the Company with six months written notice. The collaboration expires on a
product-by-product and country-by-country basis until there are no remaining
royalty obligations.
As part of the collaboration, Warner-Lambert has agreed to purchase an aggregate
of $20.0 million of the Company's capital stock upon the achievement of specific
milestones. As of December 31, 1999, Warner-Lambert has purchased $10.0 million
of the Company's capital stock including $2.0 million of the Company's capital
stock in December 1997, consisting of 154,963 shares of the Company's Class E1
preferred stock at a price of approximately $12.91 per share, $3.0 million of
the Company's capital stock in March 1999, consisting of 266,666 shares of Class
E2 preferred stock at a price of $11.25 per share and 386,473 shares of Class E3
convertible preferred stock for $5.0 million at a price of $12.94 per share in
July 1999. In addition, Warner-Lambert will purchase $5.0 million of the
Company's capital stock in a private placement concurrent with an initial public
offering by the Company. Warner-Lambert is required to purchase, at the
Company's election, up to $5.0 million of the Company's capital stock upon
demonstration that a process has been established for the production of bulk
product at a scale and site suitable for pivotal clinical studies as shown by
the preparation of three consecutive lots of the first collaboration product.
The purchase price for all these equity purchases is 125% of the fair market
value of the securities. Warner-Lambert has also committed to guaranteeing a
loan to the Company in a principal amount of $5.0 million. In 1999, the Company
used $2.5 million of the loan guarantee to assist in the financing of leasehold
improvements to the Company's new research and development/corporate
headquarters facility.
(B) FUSO PHARMACEUTICALS INDUSTRIES, LTD.
In September 1997, the Company established a collaboration with Fuso to conduct
research and to identify, evaluate and develop gene therapy products for the
treatment of cancer. Under the terms of the contract, the Company will receive
$750,000 annually for five years, subject to Fuso's right to terminate the
collaboration upon 90 days prior written notice. As part of the collaboration,
the Company granted Fuso an exclusive, royalty-bearing license to develop and
commercialize products developed under the collaboration for the treatment of
cancer in Japan and at Fuso's option, Korea and Taiwan. Fuso will be responsible
for the development and commercialization of any products in its territory. The
Company will receive additional payments for the achievement by Fuso of specific
product development and regulatory milestones, with the earliest of such
payments not expected in the near term. The Company will also receive royalties
on the sale of any such products commercialized by Fuso. The Company has
retained all rights to develop and commercialize these products for the
treatment of cancer in the rest of the world, and generally for all other uses
worldwide, subject to certain restrictions, independently and with third
parities. In connection with establishment of the collaboration, Fuso purchased
$1.0 million of the Company's capital stock consisting of 75,329 shares of the
Company's Class E convertible preferred stock for $13.28 per share. The Company
recognized contract revenues from Fuso of $187,500 for the year ended
December 31, 1997, and $750,000 for each of the years ended December 31, 1998
and 1999.
(C) SCIOS, INC.
In May 1996, the Company entered into an exclusive, worldwide license agreement
with Scios for rights to all gene therapy applications of its proprietary form
of the VEGF gene. Scios will share in certain profits the Company realizes from
the research, development and commercialization of products incorporating the
VEGF
F-15
<PAGE>
GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(6) STRATEGIC ALLIANCES (CONTINUED)
gene. The Company has agreed to provide a minimum royalty on revenues generated
from the development of these products, which is creditable against the profits
to be shared. In connection with the license agreement, Scios purchased 96,852
shares of the Company's Class D convertible preferred stock at a price of $10.33
per share. In addition, the Company granted Scios a warrant to purchase shares
of the Company's Common Stock, which vests upon the earlier of the achievement
of specified product development milestone events or certain dates. The warrants
remain outstanding as of December 31, 1999.
(D) CANTAB PHARMACEUTICALS RESEARCH LIMITED
In November 1999, the Company and Cantab Pharmaceuticals Research Limited
(Cantab) entered into a multi-year non-exclusive license agreement and an option
agreement for an exclusive license to develop and commercialize products
utilizing GenVec's herpes simplex virus patent portfolio. In consideration,
Cantab paid the Company a non-refundable, non-creditable license fee and will
make additional payments for the remaining term of the option agreement.
As part of the agreement, should Cantab exercise the option and obtain an
exclusive license, the Company will receive a license exercise fee, additional
payments for the achievement by Cantab of specific product development and
regulatory milestones, and royalties on the sale of any products commercialized
by Cantab. Payment of such milestones may result in payments having to be made
by the Company to the University of Pittsburgh, from whom GenVec has licensed
the herpes simplex virus technology.
(7) COMMITMENTS
(A) LEASE AGREEMENTS
In January 1994, the Company entered into a capital lease agreement allowing it
to fund the acquisition of up to $1.5 million of furniture and equipment
purchases. Lease terms of new purchases were 42 months with an interest rate of
9.6 percent. In connection with this agreement, the Company granted the lessor
warrants to purchase approximately 23,800 shares of Class B convertible
preferred stock at a purchase price of approximately $5.90 per share. Pursuant
to this lease agreement, in May 1994, the Company entered into a sale lease-back
transaction whereby it sold and subsequently leased-back furniture and equipment
to which it held title. Additional equipment purchases have been funded under
extensions made to this agreement through 1996.
Included in property and equipment at December 31, 1998, are assets recorded
under this agreement of $265,093 and accumulated depreciation and amortization
for the capital lease of $227,356. During 1999, the Company's capital lease
expired. The Company has opted to purchase the related assets in accordance with
provisions of the original lease agreement. As of December 31, 1999, all
commitments related to this lease have been satisfied.
In addition to the aforementioned capital lease, the Company has a ten-year
noncancelable operating lease primarily for office and laboratory space. The
lease contains renewal options for up to fourteen years and requires the Company
to pay all executory costs such as maintenance and insurance. As part of the
lease, the landlords' initial contribution of $1,290,000 is considered a
reduction of rental expense that is recognized on a straight-line basis over the
term of the new lease. Rent expense under operating leases was approximately
$240,000, $379,000 and $571,000 for the years ended December 31, 1997, 1998 and
1999.
F-16
<PAGE>
GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(7) COMMITMENTS (CONTINUED)
Future minimum lease payments under non-cancelable operating leases as of
December 31, 1999 are:
<TABLE>
<S> <C>
2000........................................................ $ 654,773
2001........................................................ 651,356
2002........................................................ 663,523
2003........................................................ 683,397
2004........................................................ 704,060
Thereafter.................................................. 3,710,278
----------
$7,067,387
==========
</TABLE>
(B) RESEARCH AND DEVELOPMENT AGREEMENTS
The Company has agreed to provide grants for certain research projects under
agreements with several universities and research organizations. Under the terms
of these agreements, the Company has received exclusive licenses to the
resulting technology. Total grants paid by the Company were $2,734,000,
$2,487,000 and $2,667,000 for the years ended December 31, 1997 1998 and 1999,
respectively. The Company has commitments to pay up to approximately $1,613,000,
$1,525,000, and $356,000 related to these grants for the years ended 2000, 2001,
and 2002, respectively.
Additionally, certain agreements disclosed in note 6 require the Company to pay
royalties upon commercial sales, if any, of specified products. The royalties
are generally based on a percentage of net sales or other product fees earned by
the Company. Royalties will become due when sales are generated.
(8) STOCKHOLDERS' EQUITY
(A) CAPITAL CHANGES
On July 22, 1999, the Company amended and restated its Certificate of
Incorporation which effected the authorization of the following classes and
amounts of stock each having a par value of $.001 per share:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
CLASS SHARES
----- ----------
<S> <C>
Common stock................................................ 50,000,000
Undesignated preferred stock................................ 4,346,861
Convertible preferred stock:
Class A................................................... 226,099
Class B................................................... 1,959,444
Class C................................................... 3,570,332
Class D................................................... 96,852
Class E................................................... 75,329
Class E1.................................................. 154,963
Class E2.................................................. 266,666
Class E3.................................................. 386,473
Class F................................................... 1,000,000
</TABLE>
F-17
<PAGE>
GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(8) STOCKHOLDERS' EQUITY (CONTINUED)
(B) REVERSE STOCK SPLIT
On June 2, 1998, the Company effected a 5.9 for 1 reverse stock split. All
common and preferred share and per share amounts in the accompanying financial
statements have been retroactively adjusted for all periods presented to reflect
this reverse stock split.
(C) CONVERTIBLE PREFERRED STOCK
The following table summarizes information regarding the number of shares
issued, cash consideration received and liquidation value per share for each
class of convertible preferred stock.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
CASH
NUMBER OF CONSIDERATION LIQUIDATION VALUE
CLASS SHARES ISSUED RECEIVED PER SHARE
----- ------------- ------------- -----------------
<S> <C> <C> <C>
A........................................... 226,099 $ 667,000 $ 2.95
B........................................... 1,918,688 $11,320,000 $ 5.90
C........................................... 3,570,332 $21,065,000 $ 5.90
D........................................... 96,852 $ 1,000,000 $ 10.33
E........................................... 75,329 $ 1,000,000 $ 13.28
E1.......................................... 154,963 $ 2,000,000 $ 12.91
E2.......................................... 266,666 $ 3,000,000 $ 11.25
E3.......................................... 386,473 $ 5,000,000 $ 12.94
F........................................... 1,000,000 $ 7,000,000 $ 7.00
</TABLE>
Preferred stockholders participate in the dividends declared to common
stockholders, if any, in an amount proportionate to the number of shares of
common stock into which the preferred stock is convertible. Preferred holders
are entitled to one vote for each share of common stock into which the preferred
shares can be converted.
In the event of any voluntary or involuntary liquidation of the Company, before
any distribution can be made to the holders of common stock, the preferred
stockholders are entitled to receive payment of their respective liquidation
values per share stock, plus any declared but unpaid dividends. No dividends
were declared for the years ended December 31, 1997, 1998, or 1999.
Holders of each class of preferred stock have the right at any time, at their
option, to convert without the payment of additional consideration, each
preferred stock share into an equivalent number of common stock shares. Holders
of each class of convertible preferred stock convert on a one-for-one basis. The
conversion rates of the Class A, B, C and F convertible preferred stock are
subject to certain antidilution adjustments in the event of certain issuances of
stock by the Company at prices below the original purchase price of the stock.
The Company has reserved 7,695,402 shares of common stock for issuance upon
conversion of the convertible preferred stock. Upon the occurrence of an initial
public offering of GenVec common stock which yields the Company at least
$15.0 million at a minimum per share price of $8.85, all shares of preferred
stock automatically convert to shares of common stock. The preferred
stockholders have voting rights equal to the common shares they would own upon
conversion.
F-18
<PAGE>
GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(8) STOCKHOLDERS' EQUITY (CONTINUED)
(D) RESTRICTED COMMON STOCK
In 1993, the Company issued to a former officer a total of 185,939 shares of
restricted common stock at a purchase price equal to the fair market value on
the date of grant in 1993, and recorded a note receivable as a reducing
component of equity (reduction in additional paid-in capital). As of
December 31, 1999, 135,091 shares are still restricted and the Company has a
note receivable with the former officer for $79,704 plus accrued interest of
$38,105 related to this restricted common stock.
(E) STOCK INCENTIVE PLAN
The Company adopted its 1993 Stock Incentive Plan (the Stock Plan) in
October 1993. The Stock Plan was amended and restated in April 1998. An
aggregate of 3,100,000 shares of common stock has been reserved for issuance
under the Stock Plan. The Stock Plan will continue in effect for a term of ten
years, unless terminated by the Board at an earlier date.
Options granted to employees to purchase common stock under the Stock Plan are
exercisable at the rate of 12.5 percent of the shares six months from the
vesting commencement date and approximately 1/48th of the shares monthly
thereafter, such that the option is fully exercisable four years from the
vesting commencement date. Options granted to consultants vest over the terms of
their contractual agreements which is generally one to four years.
The maximum term for options granted under the Stock Plan is ten years, except
that if, at the time of the grant, the optionee possesses more than ten percent
of the combined voting power of the Company, the maximum term of the option is
five years. For options granted to a ten percent stockholder, then the exercise
price must be equal to at least 110 percent of the fair value of the stock on
the date of grant. Options granted under the Stock Plan expire three months
after the termination of an optionee's service to the Company.
The Company applies SFAS No. 123 for options granted to consultants. In adopting
SFAS No. 123 for options granted to consultants, $198,233, $158,092 and $125,071
for the years ended December 31, 1997, 1998 and 1999 was recognized as
compensation expense.
The Company applies APB 25 in accounting for its stock option plan for options
granted to employees. As a result, the Company recorded deferred compensation
for the difference between the exercise price of stock options granted and the
fair value of the Company's common stock at the date of issuance or grant. The
deferred compensation will be amortized over the vesting period of the related
options, which is generally four years. Gross deferred compensation recorded
during the years ended December 31, 1997, 1998, and 1999 totaled $486,139, $0
and $478,550, and related amortization amounted to $296,962, $379,072, and
$438,481, respectively. This deferred compensation is subject to reduction for
any employee who terminates employment prior to the expiration of such
employee's option vesting period.
F-19
<PAGE>
GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(8) STOCKHOLDERS' EQUITY (CONTINUED)
Had the Company determined compensation expense based on the fair value at the
grant date for its stock options issued to employees under SFAS No. 123, the
Company's net loss would have been adjusted to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net loss
As reported................................... $(6,165,555) $(6,347,074) $(1,919,490)
=========== =========== ===========
Pro forma..................................... $(6,216,295) $(6,459,920) $(2,108,246)
=========== =========== ===========
Basic net loss per common share
As reported................................... $ (6.44) $ (6.15) $ (1.83)
=========== =========== ===========
Pro forma..................................... $ (6.50) $ (6.26) $ (2.01)
=========== =========== ===========
</TABLE>
Pro forma net loss reflects compensation expense determined under SFAS No. 123
only for options granted since December 31, 1995. Therefore, the full impact of
calculating compensation expense for stock options under SFAS No. 123 is not
reflected in the pro forma net loss amounts presented above because compensation
expense is reflected over the options' vesting period and compensation cost for
options granted prior to January 1, 1996 is not considered.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in:
<TABLE>
<CAPTION>
---------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Expected volatility................................... .10% .10% .10%
Dividend yield........................................ -- -- --
Risk free interest rate............................... 5.78% 4.94% 5.86%
Expected life......................................... 3-5 years 3-5 years 1-4 years
</TABLE>
F-20
<PAGE>
GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(8) STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the status of the Company's stock options as of December 31, 1997,
1998 and 1999, and changes during the year ending on those dates is presented
below:
<TABLE>
<CAPTION>
---------------------------------------------------------------
1997 1998 1999
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000)'S PRICE (000)'S PRICE (000)'S PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........... 860 $ 1.06 1,114 $ 1.95 1,467 $ 2.51
Granted.................................... 335 4.01 369 4.13 594 6.07
Cancelled.................................. (47) 0.53 (1) 0.59 (84) 3.46
Exercised.................................. (34) 0.65 (15) 0.59 (29) 2.32
-------- -------- -------- -------- -------- --------
Outstanding at end of year................. 1,114 $ 1.95 1,467 $ 2.51 1,948 $ 3.55
======== ======== ======== ======== ======== ========
Options exercisable at end of year......... 562 $ 1.18 799 $ 1.62 1,177 $ 2.44
======== ======== ======== ======== ======== ========
Weighted average fair value of options
granted during the year.................. $ 2.18 $ 0.76 $ 1.97
======== ======== ========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- --------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES NUMBER LIFE PRICE NUMBER PRICE
------------------------------- --------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.59.......................... 548,583 5.3 years $ 0.59 543,566 $ 0.59
1.48........................... 90,672 6.5 1.48 82,124 1.48
3.54........................... 171,932 6.6 3.54 143,528 3.54
4.13........................... 550,414 8.3 4.13 250,715 4.13
5.50........................... 154,929 9.3 5.50 132,480 5.50
6.30........................... 431,201 9.7 6.30 24,368 6.30
--------- ------------- -------- --------- --------
$0.59-6.30..................... 1,947,731 7.5 years $ 3.55 1,176,781 $ 2.44
========= ============= ======== ========= ========
</TABLE>
(G) WARRANTS
Warrants to purchase common and preferred stock are granted to organizations and
institutions in conjunction with certain licensing and funding activities. The
warrants vest according to a combination of time and events as prescribed in the
agreements. The Company applies the provisions of APB 25 to warrants issued
prior to 1996. No warrants were granted during the year ended December 31, 1997.
During the year ended December 31, 1998, 250,000 common stock warrants were
granted at an exercise price of $0.01 in connection with the private placement
of Series F convertible preferred stock and 67,796 common stock warrants were
granted at an exercise price of $17.70 to a university research foundation.
During the year ended December 31, 1997, 33,898 common
F-21
<PAGE>
GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(8) STOCKHOLDERS' EQUITY (CONTINUED)
stock warrants expired. At December 31, 1997, 1998, and 1999, the Company had
the following warrants outstanding.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
1997 1998 1999
EXERCISE --------------------- --------------------- ---------------------
PRICE OUTSTANDING VESTED OUTSTANDING VESTED OUTSTANDING VESTED
-------- ----------- ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Class B preferred stock warrants......... $ 5.90 40,756 23,807 40,756 23,807 40,756 40,756
=========== ======= =========== ======= =========== =======
Common stock warrants.................... $ 14.75 67,796 33,898 67,796 33,898 67,796 50,847
$ 13.28 211,864 158,898 211,864 211,864 211,864 211,864
$ 0.01 -- -- 250,000 250,000 250,000 250,000
$ 17.70 -- -- 67,796 11,864 67,796 17,796
----------- ------- ----------- ------- ----------- -------
Total common stock warrants.............. 279,660 192,796 597,456 507,626 597,456 530,507
=========== ======= =========== ======= =========== =======
</TABLE>
(9) INCOME TAXES
A reconciliation of tax credits computed at the statutory federal tax rate on
loss from operations before income taxes to the actual income tax expense is as
follows:
<TABLE>
<CAPTION>
-------------------------------------
1997 1998 1999
----------- ----------- ---------
<S> <C> <C> <C>
Tax provision computed at the statutory rate..... $(2,096,300) $(2,158,000) $(652,600)
State income taxes, net of federal income tax
provision...................................... (284,900) (293,300) (88,800)
Book expenses not deductible for tax purposes.... 8,100 12,500 9,700
Research and experimentation tax credit.......... (144,900) (342,800) (403,800)
Nondeductible compensation expense............... 101,000 128,900 120,400
Change in the beginning of the period valuation
allowance for deferred tax assets allocated to
tax expense.................................... 2,421,100 2,535,400 911,000
Other, net....................................... (4,100) 117,300 104,100
----------- ----------- ---------
Income tax expense........................... $ -- $ -- $ --
=========== =========== =========
</TABLE>
Deferred income taxes reflect the net effects of net operating loss
carryforwards and the temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
F-22
<PAGE>
GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(9) INCOME TAXES (CONTINUED)
income tax purposes. Significant components of the Company's deferred tax assets
as of December 31, 1997, 1998, and 1999, are as follows:
<TABLE>
<CAPTION>
------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........... $ 10,031,000 $ 12,647,000 $ 12,973,200
Research and experimentation tax credit.... 686,000 1,029,000 1,432,400
Cumulative effect of using cash basis
method of accounting for income tax
purposes................................. 433,000 510,000 393,700
Deferred revenue........................... 1,737,900 1,351,700 1,805,500
Property and equipment, principally due to
differences in depreciation.............. 115,000 (16,000) (251,600)
Deferred compensation expense.............. 229,000 291,000 373,000
Other...................................... 75,000 29,600 27,100
------------ ------------ ------------
Total deferred tax assets................ 13,306,900 15,842,300 16,753,300
Valuation allowance.......................... (13,306,900) (15,842,300) (16,753,300)
------------ ------------ ------------
Net deferred tax assets.................. $ -- $ -- $ --
============ ============ ============
</TABLE>
The valuation allowance for deferred tax assets increased approximately
$2,421,100, $2,535,400 and $911,000 for the years ended December 31, 1997, 1998,
and 1999, respectively.
At December 31, 1999, the Company has net operating loss carryforwards of
approximately $33.6 million for federal income tax purposes of which
$25.6 million expire at various dates through 2012, and $8.0 million expire in
2018 and 2019. The Company also has research and experimentation tax credit
carryforwards of $1,432,400 at December 31, 1999, of which $686,000 expire
through 2012 and $746,400 expire in 2018 and 2019. These carryforwards may be
significantly limited under the Internal Revenue Code as a result of ownership
changes experienced by the Company.
(10) DEFINED CONTRIBUTION PLAN -- 401(K)
The Company has a defined contribution plan (the Plan) under Internal Revenue
Code Section 401(k). All full-time employees who have completed six months of
service and are over age 21 are eligible for participation in the Plan.
Participants may elect to have up to 15 percent of compensation contributed to
the Plan. Under the Plan, the Company's contributions are discretionary. During
the years ended December 31, 1997, 1998 and 1999, no discretionary contributions
were made.
F-23
<PAGE>
GENVEC, INC.
UNAUDITED CONDENSED FINANCIAL STATEMENTS
AS OF JUNE 30, 2000 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
GENVEC, INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
------------
AS OF
JUNE 30,
2000
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,632,314
Short-term investments.................................... 4,901,381
Prepaid expenses.......................................... 223,926
Receivables from related party............................ 687,798
Other current assets...................................... 541,312
------------
Total current assets.................................... 12,986,731
------------
Property and equipment, net................................. 9,278,838
Long-term investments....................................... 3,057,956
Other assets................................................ 133,362
------------
Total assets............................................ $ 25,456,887
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 433,990
Accrued expenses.......................................... 1,062,497
Accrued technology, license and intellectual property
expense................................................. 224,153
Accrued payroll and related expenses...................... 187,917
Unearned revenue.......................................... 3,237,500
Current portion of notes payable and capital leases
obligations............................................. 422,584
------------
Total current liabilities............................... 5,568,641
------------
Notes payable and capital lease obligations, less current
portion................................................... 1,680,358
Bond payable................................................ 5,000,000
Unearned revenue............................................ 1,700,000
Other non-current liabilities............................... 1,298,863
------------
Total liabilities....................................... 15,247,862
------------
Stockholders' equity:
Convertible preferred stock, $0.001 par value 7,736,158
shares authorized
at June 30, 2000, 7,695,402 shares issued and
outstanding at June 30, 2000............................ 7,695
Preferred stock, $0.001 par value per share
4,346,861 shares authorized, no shares issued and
outstanding at June 30, 2000............................ --
Common stock, $0.001 par value per share
50,000,000 shares authorized at June 30, 2000, 1,324,626
shares issued and
1,277,326 shares outstanding at June 30, 2000........... 1,325
Additional paid-in capital.................................. 56,931,267
Accumulated deficit......................................... (45,011,748)
Deferred compensation....................................... (1,691,043)
Accumulated other comprehensive loss -- unrealized loss on
securities................................................ (28,424)
Treasury stock, at cost, 47,300 common shares............... (47)
------------
Total stockholders' equity.............................. 10,209,025
------------
Total liabilities and stockholders' equity.............. $ 25,456,887
============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
F-24
<PAGE>
GENVEC, INC.
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
------------------------
SIX MONTHS ENDED
JUNE 30,
------------------------
1999 2000
---------- -----------
<S> <C> <C>
Revenues:
Ongoing research and development support.................. $7,660,169 $ 5,049,588
Contract, license and milestone payments.................. 1,437,500 3,487,500
---------- -----------
Total revenues.......................................... 9,097,669 8,537,088
---------- -----------
Operating expenses:
Research and development.................................. 7,205,887 7,115,275
General and administrative................................ 2,642,469 3,800,950
---------- -----------
Total operating expenses................................ 9,848,356 10,916,225
---------- -----------
Loss from operations.................................... (750,687) (2,379,137)
---------- -----------
Other income (expense):
Interest income........................................... 319,902 541,490
Interest expense.......................................... (65,334) (259,413)
Gain (loss) on disposal of assets......................... 614 (18,605)
---------- -----------
Total other income...................................... 255,182 263,472
---------- -----------
Net loss.................................................... $ (495,505) $(2,115,665)
========== ===========
Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss) arising during the
period.................................................. $ (26,795) $ 19,063
========== ===========
Comprehensive loss.......................................... $ (522,300) $(2,096,602)
========== ===========
Basic and diluted net loss per share........................ $ (0.48) $ (1.78)
========== ===========
Shares used in computing basic and diluted net loss per
share..................................................... 1,037,221 1,185,546
========== ===========
</TABLE>
See accompanying notes to unaudited condensed financial statements.
F-25
<PAGE>
GENVEC, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
-------------------------
SIX MONTHS ENDED
JUNE 30,
-------------------------
1999 2000
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (495,505) $(2,115,665)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization expense................. 352,154 781,319
Stock option and warrant compensation expense......... 213,198 364,645
Loss on disposal of assets............................ -- 18,605
Unrealized market gain on cash equivalents............ -- 12,420
(Increase) decrease in receivables from related
party............................................... (535,169) 90,452
Decrease (increase) in other current assets........... 35,540 (392,414)
(Increase) decrease in other assets................... (51,838) 4,906
Decrease in prepaid expenses.......................... 216,181 182,166
(Decrease) in bank overdraft.......................... (334,593) --
(Decrease) in accounts payable and accrued expenses... (828,902) (1,651,491)
Increase in unearned revenue.......................... 2,312,500 262,500
(Decrease) increase in other long term liabilities.... (13,250) 17,468
----------- -----------
Net cash provided by (used in) operating
activities........................................ 870,316 (2,425,089)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment....................... (954,675) (690,962)
Purchases of investment available-for-sale................ (5,251,462) (2,401,526)
Purchases of investment bond trust........................ (5,000,000) --
Proceeds from sale of investment securities
available-for-sale...................................... 4,215,811 2,320,588
Proceeds from sale of investment bond trust............... 156,544 1,423,066
Proceeds from sale of assets.............................. -- 11,945
----------- -----------
Net cash (used in) provided by investing
activities........................................ (6,833,782) 663,111
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock........................... 2,993,700 9,512
Loan proceeds............................................. 6,501,404 93,263
Loan payments............................................. (150,634) (170,946)
Payments under capital lease obligations.................. (36,014) (7,890)
----------- -----------
Net cash provided by (used in) financing
activities........................................ 9,308,456 (76,061)
----------- -----------
Increase (decrease) in cash and cash equivalents.... 3,344,990 (1,838,039)
Cash and cash equivalents, beginning of period.............. 3,083,377 8,470,353
----------- -----------
Cash and cash equivalents, end of period.................... $ 6,428,367 $ 6,632,314
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 65,334 $ 227,011
=========== ===========
Supplemental disclosure of non-cash investing and financing
activities:
Property and equipment and other assets financed by
lessor.................................................. $ -- $ 93,263
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed financial staements
F-26
<PAGE>
GENVEC, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2000
(1) BASIS OF PRESENTATION
The unaudited condensed financial statements have been prepared from the books
and records of GenVec, Inc. (the "Company") in accordance with generally
accepted accounting principles for interim financial information pursuant to
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Interim results may not be indicative of the results that may be
expected for the year. The interim condensed financial statements should be read
in conjunction with the audited financial statements and notes thereto included
elsewhere in this prospectus.
(2) STOCKHOLDERS' EQUITY
The changes in stockholders' equity are as follows:
<TABLE>
<S> <C>
Balance at December 31, 1999................................ $11,931,471
Net loss.................................................... $(2,115,665)
Changes in unrealized loss on securities.................... $ 19,062
Exercise of options......................................... $ 7,012
Exercise of warrants........................................ $ 2,500
Amortization of deferred compensation....................... $ 364,645
-----------
Balance of June 30, 2000.................................... $10,209,025
===========
</TABLE>
F-27
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than underwriting
discounts and commissions, payable by GenVec in connection with the sale of the
common stock being registered. All amounts shown are estimates except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------
<S> <C>
SEC registration fee........................................ $ 13,200
NASD filing fee.............................................
Nasdaq National Market listing fee.......................... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue sky qualification fees and expenses.................... *
Transfer agent and registrar fees........................... *
Miscellaneous expenses...................................... *
--------
Total................................................... $ *
========
</TABLE>
--------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and any corporate agents in the terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). The Registrant's Restated
Certificate of Incorporation to be filed upon the closing of the offering to
which this Registration Statement relates (Exhibit 3.1 hereto) and the
Registrant's Bylaws (Exhibit 3.2 hereto) provides for indemnification of the
Registrant's directors, officers, employees and other agents to the extent and
under the circumstances permitted by the Delaware General Corporation Law. The
Registrant has also entered into agreements with its directors and executive
officers that require the Registrant among other things to indemnify them
against certain liabilities that may arise by reason of their status or service
as directors to the fullest extent not prohibited by Delaware law.
The Underwriting Agreement provides for indemnification by the Underwriters of
the Registrant, its directors and officers, and by the Registrant of the
Underwriters, for certain liabilities, including liabilities arising under the
Act, and affords certain rights of contribution with respect thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1997, the Registrant has issued and sold the following
unregistered securities:
(1) From January 1, 1997 to September 30, 2000, Registrant granted options to
purchase 1,664,211 shares of Common Stock pursuant to its Amended and
Restated 1993 Stock Incentive Plan at exercise prices ranging from $3.54 per
share to $11.20 per share.
(2) From January 1, 1997 to September 30, 2000, Registrant issued and sold an
aggregate of 98,431 shares of Common Stock to its employees, directors and
consultants upon exercise of stock options granted pursuant to
II-1
<PAGE>
Registrant's Amended and Restated 1993 Stock Incentive Plan at exercise
prices ranging from $0.59 to $5.50 for an aggregate consideration of
$136,885.
(3) In October 1997, Registrant issued and sold an aggregate of 75,329 shares of
Class E Convertible Preferred Stock to Fuso Pharmaceuticals Industries, Ltd.
for an aggregate cash consideration of approximately $1.0 million.
(4) In December 1997, Registrant issued and sold an aggregate of 154,963 shares
of Class E-1 Convertible Preferred Stock to Warner-Lambert Company for an
aggregate cash consideration of approximately $2.0 million. Wendell
Wierenga, a director of the Registrant, was the Senior Vice President of
Worldwide Preclinical Research, Development and Technologies for the
Parke-Davis Pharmaceuticals Research division of Warner-Lambert Company.
(5) In December 1998, Registrant issued and sold an aggregate of 1,000,000
shares of Class F Convertible Preferred Stock to Highland Capital Partners
IV LP and Highland Entrepreneurs' Fund IV L.P. for an aggregate cash
consideration of approximately $7.0 million. Included in this transaction
were 250,000 common stock warrants exercisable at $.01 per share which were
subsequently exercised in April 2000 for an aggregate cash consideration of
$2,500. Lee Wrubel, a former director of the Registrant, was a principal at
Highland Capital Partners.
(6) In March 1999, Registrant issued and sold an aggregate of 266,666 shares of
Class E-2 Convertible Preferred Stock to Warner-Lambert Company for an
aggregate cash consideration of approximately $3.0 million.
(7) In July 1999, Registrant issued and sold an aggregate of 386,473 shares of
Class E-3 Convertible Preferred Stock to Warner-Lambert Company for an
aggregate cash consideration of approximately $5.0 million.
There were no underwriters employed in connection with any of the above
transactions. See "Related Party Transactions" in the form of the Prospectus
included herein.
The sales of the securities described in Items 15(1) and 15(2) were deemed to be
exempt from registration under the Securities Act in reliance on Rule 701
promulgated under Section 3(b)of the Securities Act as transactions pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under such Rule 701. The sale of securities described in Items 15 (3) through 15
(7) were deemed to be exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act, or Regulation D promulgated
thereunder, as transactions by an issuer not involving a public offering. The
recipients of securities in each such transaction represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates and other instruments issued in such transactions. All
recipients either received adequate information about the Registrant or had
access, through employment or other relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Amended & Restated Certificate of Incorporation, to be
effective upon the closing of the offering.*
3.2 Amended & Restated Bylaws, to be effective upon the closing
of the offering.*
4.1 Specimen Common Stock Certificate.*
5.1 Opinion of Arnold & Porter.*
10.1 Form of Indemnification Agreement for Directors and
Officers.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.2 Amended and Restated 1993 Stock Incentive Plan and forms of
agreements thereunder.
10.3 2000 Employee Stock Purchase Plan, and form of agreement
thereunder.
10.4 2000 Director Option Plan.
10.5 Research, Development and Collaboration Agreement dated
July 21, 1997 between the Warner-Lambert Company and the
Registrant.+
10.5.1 Amendment 1 to Research, Development and Collaboration
Agreement between Warner-Lambert Company and Registrant
effective January 1, 1999.+
10.6 Stock Purchase Agreement dated July 21, 1997 between the
Warner-Lambert Company and the Registrant.
10.7 License Agreement dated May 31, 1996 between Scios, Inc. and
the Registrant.+
10.8 Collaboration Agreement dated September 26, 1997 between
Fuso Pharmaceutical Industries, Ltd. and the Registrant.+
10.9 Commercialization Agreement dated September 26, 1997 between
Fuso Pharmaceutical Industries Ltd. and the Registrant.+
10.10 License Agreement dated February 1, 1998 between Asahi
Chemical Industry Co., Ltd. and the Registrant.+
10.11 Sponsored Research Agreement dated April 1, 1998 between
Cornell University and the Registrant.+
10.12 Amended and Restated Exclusive License Agreement dated
April 1, 1993 between Cornell University and the
Registrant.+
10.13 Lease Agreement dated May 4, 1999 between MOR BENNINGTON
LLLP and Registrant.
10.14 Consulting Agreement dated March 17, 1999 between the
Registrant and Herbert J. Conrad, and amendment number 1
thereto dated March 1, 2000.
10.15 Amended and Restated Registration Rights Agreement dated
December 2, 1998 among the Registrant and certain
stockholders.
10.16 Patent License Agreement dated January 8, 2000 between the
Registrant and the Public Health Service, as amended, and
amendment number 1 hereto dated March 9, 2000.+
10.17 License Agreement dated June 30, 1996 between the Registrant
and the University of Pittsburgh -- of the Commonwealth
system of Higher Education, and amendments thereto.+
10.18 Employment Agreement between the Registrant and Paul H.
Fischer, Ph.D. dated March 1, 1995.
10.19 Employment Agreement between the Registrant and Imre
Kovesdi, Ph.D. dated June 3, 1993
10.20 Employment Agreement between the Registrant and Thomas E.
Smart dated March 7, 1995.
10.21 Employment Agreement between the Registrant and Henrik
Rasmussen, M.D., Ph.D. dated April 13, 1999.
10.22 Employment Agreement between the Registrant and C. Richter
King, Ph.D. dated April 8, 1998.
10.23 Employment Agreement between the Registrant and Jeffrey W.
Church dated July 28, 1998.
10.24 Form of Confidentiality, Invention and Non-Compete
Agreement.
10.25 Form of Confidentiality, Invention and Non-Compete
Agreement.
23.1 Consent of KPMG LLP.
23.2 Consent of Arnold & Porter (included in Exhibit 5.1).
23.3 Consent of Leydig, Voit & Mayer, Ltd.*
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
24.1 Power of Attorney (included as part of signature page).
27.1 Financial Data Schedule (available in EDGAR format only).
</TABLE>
--------------
* To be filed by amendment
+ Certain portions of this exhibit have been omitted based upon a request for
confidential treatment. The omitted portions have been filed with the
Commission pursuant to our application for confidential treatment.
(B) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information required to
be set forth therein is not applicable or is shown in the financial statements
or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes that:
(a) It will provide to the Underwriters at the closing as specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
(b) Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act and will
be governed by the final adjudication of such issue.
(c) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(d) For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Gaithersburg, Maryland,
on the 4th day of October, 2000.
<TABLE>
<S> <C> <C>
GENVEC, INC.
By: /s/ PAUL H. FISCHER
-----------------------------------------
Paul H. Fischer
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints, jointly and severally, Paul H. Fischer and
Jeffrey W. Church and each one of them, his true and lawful attorney-in-fact and
agents, each with full power of substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments, including
post-effective amendments, to this registration statement, and any registration
statement related to the offering contemplated by this registration statement
that is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933 and to file the same, with all exhibits thereto and all other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that each of said attorneys-in-fact and agents or any of them, or his or their
substitute or substitutes, may lawfully do or cause to be done or by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ PAUL H. FISCHER Director, President and Chief
-------------------------------------- Executive
Paul H. Fischer Officer (Principal Executive
Officer) October 4, 2000
/s/ JEFFREY W. CHURCH Chief Financial Officer,
-------------------------------------- Treasurer, and
Jeffrey W. Church Secretary (Principal Financial
and
Accounting Officer October 4, 2000
/s/ HAL S. BRODERSON Director
--------------------------------------
Hal S. Broderson October 4, 2000
/s/ HERBERT J. CONRAD Director
--------------------------------------
Herbert J. Conrad October 4, 2000
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ HARRY T. REIN Director
--------------------------------------
Harry T. Rein October 4, 2000
/s/ WENDELL WIERENGA Director
--------------------------------------
Wendell Wierenga October 4, 2000
/s/ GREGORY ZAIC Director
--------------------------------------
Gregory Zaic October 4, 2000
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Amended & Restated Certificate of Incorporation, to be
effective upon the closing of the offering.*
3.2 Amended & Restated Bylaws, to be effective upon the closing
of the offering.*
4.1 Specimen Common Stock Certificate.*
5.1 Opinion of Arnold & Porter.*
10.1 Form of Indemnification Agreement for Directors and
Officers.
10.2 Amended and Restated 1993 Stock Incentive Plan and form of
agreement thereunder.
10.3 2000 Employee Stock Purchase Plan and form of agreement
thereunder.
10.4 2000 Director Option Plan.
10.5 Research, Development and Collaboration Agreement dated
July 21, 1997 between the Warner-Lambert Company and the
Registrant.+
10.5.1 Amendment 1 to Research, Development and Collaboration
Agreement between Warner-Lambert Company and Registrant
effective January 1, 1999.+
10.6 Stock Purchase Agreement dated July 21, 1997 between the
Warner-Lambert Company and the Registrant.
10.7 License Agreement dated May 31, 1996 between Scios, Inc. and
the Registrant.+
10.8 Collaboration Agreement dated September 26, 1997 between
Fuso Pharmaceutical Industries, Ltd. and the Registrant.+
10.9 Commercialization Agreement dated September 26, 1997 between
Fuso Pharmaceutical Industries Ltd. and the Registrant.+
10.10 License Agreement dated February 1, 1998 between Asahi
Chemical Industry Co., Ltd. and the Registrant.+
10.11 Sponsored Research Agreement dated April 1, 1998 between
Cornell University and the Registrant.+
10.12 Amended and Restated Exclusive License Agreement dated
April 1, 1993 between Cornell University and the
Registrant.+
10.13 Lease Agreement dated May 4, 1999 between MOR BENNINGTON
LLLP and the Registrant.
10.14 Consulting Agreement dated March 17, 1999 between the
Registrant and Herbert J. Conrad, and amendment number 1
thereto dated March 1, 2000.
10.15 Amended and Restated Registration Rights Agreement dated
December 2, 1998 among the Registrant and certain
stockholders.
10.16 Patent License Agreement dated January 8, 2000 between the
Registrant and the Public Health Service, as amended, and
amendment Number 1 thereto, dated March 9, 2000.+
10.17 License Agreement dated June 30, 1996 between the Registrant
and the University of Pittsburgh -- of the Commonwealth
system of Higher Education.+
10.18 Employment Agreement between the Registrant and Paul H.
Fischer, Ph.D. dated March 1, 1995.
10.19 Employment Agreement between the Registrant and Imre
Kovesdi, Ph.D. dated June 3, 1993
10.20 Employment Agreement between the Registrant and Thomas E.
Smart dated March 7, 1995.
10.21 Employment Agreement between the Registrant and Henrik
Rasmussen, M.D., Ph.D. dated April 13, 1999.
10.22 Employment Agreement between the Registrant and C. Richter
King, Ph.D. dated April 8, 1998.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.23 Employment Agreement between the Registrant and Jeffrey W.
Church dated July 28, 1998.
10.24 Form of Confidentiality, Invention and Non-Compete
Agreement.
10.25 Form of Confidentiality, Invention and Non-Compete
Agreement.
23.1 Consent of KPMG LLP.
23.2 Consent of Arnold & Porter (included in Exhibit 5.1).
23.3 Consent of Leydig, Voit & Mayer, Ltd.*
24.1 Power of Attorney (included as part of signature page).
</TABLE>
--------------
* To be filed by amendment
+ Certain portions of this exhibit have been omitted based upon a request for
confidential treatment. The omitted portions have been filed with the
Commission pursuant to our application for confidential treatment.
