<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-20815
AVIRON
(Exact name of registrant as specified in its charter)
Delaware 77-0309686
-------- --------------
(State or other jurisdiction of incorporation or organization) (I.R.S.
Employer Identification No.)
297 North Bernardo Avenue, Mountain View, California 94043
(Address of principal executive offices including zip code)
(415) 919-6500
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act
None
Securities Registered Pursuant to Section 12(g) of the Act
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based on the closing sale price of $12.00 on March 11, 1997, the aggregate
market value of the voting stock held by non-affiliates of the Registrant was
$100,259,328.
On March 11, 1997, there were outstanding 11,479,428 shares of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
(to the extent indicated herein)
Part III - Portions of the Registrant's definitive Proxy Statement for the
Registrant's Annual Meeting of Stockholders to be held June 5, 1997, which will
be filed with the Securities and Exchange Commission, are incorporated by
reference to the extent stated herein.
<PAGE>
<TABLE>
<CAPTION>
AVIRON
TABLE OF CONTENTS
PAGE
<S> <C> <C>
COVER PAGE
TABLE OF CONTENTS............................................................................... i
PART I.......................................................................................... 1
Item 1. Business.................................................................. 1
Item 2. Properties................................................................ 24
Item 3. Legal Proceedings......................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders....................... 25
PART II......................................................................................... 26
Item 5. Market for the Registrant's Common Stock and Related Stock Matters........ 26
Item 6. Selected Financial Data................................................... 27
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 28
Item 8. Financial Statements and Supplementary Data............................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.............................................................. 31
PART III........................................................................................ 32
Item 10. Directors and Executive Officers of the Registrant........................ 32
Item 11. Executive Compensation.................................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 32
Item 13. Certain Relationships and Related Transactions............................ 32
PART IV......................................................................................... 33
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 33
SIGNATURES...................................................................................... 35
POWER OF ATTORNEY............................................................................... 35
EXHIBIT INDEX................................................................................... 37
</TABLE>
i.
<PAGE>
PART I.
ITEM 1. BUSINESS.
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Business Risks" and
elsewhere in this Form 10-K.
OVERVIEW
Aviron is a biopharmaceutical company whose strategy is to focus on
prevention of disease. The Company's goal is to become a leader in the
discovery, development, manufacture and marketing of live virus vaccines which
are sufficiently cost effective to justify their use in immunization programs
targeting the general population. Live virus vaccines, such as those for
smallpox, polio, measles, mumps and rubella, have had a long record of success
in preventing, and in some eases eliminating, disease.
The Company currently is conducting a pivotal Phase III clinical trial in
children of its live cold adapted intranasal vaccine for influenza. The Company
has also completed a Phase II challenge study in adults for its live cold
adapted intranasal vaccine for influenza. The Company has in-licensed a live
intranasal vaccine for Parainfluenza Virus Type 3 (PIV-3) which has been tested
by others in Phase I/II clinical trials. The Company also is developing a
vaccine for Epstein-Barr virus (EBV). In addition, Aviron is using its
proprietary, "Rational Vaccine Design" technology to discover new live virus
vaccines. Rational Vaccine Design involves the deletion or modification of
virulence proteins, changes to the virus' genetic control signals to slow down
its replication, or addition of information to enhance the virus' stimulation of
the immune system. The Company is applying this technology to develop
candidates for the prevention of influenza in elderly persons and diseases
caused by Cytomegalovirus (CMV), Herpes Simplex Virus Type 2 (HSV-2) and
Respiratory Syncytial Virus (RSV).
AVIRON'S TECHNOLOGY
Aviron's vaccine programs are based on both classical live virus vaccine
attenuation techniques and the Company's proprietary genetic engineering
technology.
Cold Adapted Influenza Technology
The Company is applying its expertise in the molecular biology of influenza
to develop a live virus vaccine discovered using classical cold-adaption
techniques. This cold adapted influenza vaccine technology was first developed
by Dr. H. F. Maassab at the University of Michigan in 1967. Dr. Maassab created
weakened influenza strains by propagating the virus in progressively colder
conditions until these strains had lost the ability to grow well at human body
temperature. The Company has obtained worldwide exclusive rights to this cold
adapted influenza vaccine technology.
The cold adapted influenza vaccine technology includes the master strains
for influenza A and B, as well as techniques useful for updating the vaccine
each year according to recommendations of the United States Centers for Disease
Control and Prevention (the "CDC") and the United States Food and Drug
Administration (the "FDA"). Updated strains are made by mating the master
strains with recent strains to obtain viruses with the attenuated properties of
the cold adapted master strain and the antigenic properties of the current wild-
type strain. This process is called genetic reassortment. After cultured cells
are infected with two different strains of virus, the eight RNA genes of
influenza mix at random in the cells and it is possible to select the two genes
for the antigens of the expected epidemic strain and the six remaining genes
from the cold adapted master donor strain. The Company has received the
technology for updating the cold adapted master strains from the
1.
<PAGE>
University of Michigan and has extended this approach by the introduction of
Aviron's proprietary techniques, including those of reverse genetics, which may
facilitate the annual process of creating a reassorted vaccine.
Rational Vaccine Design
Since the Company's founding, its core vaccine discovery strategy has been
to apply genetic engineering techniques to create live attenuated virus vaccine
candidates for targets where traditional discovery techniques have been
inadequate. The Company believes that this "Rational Vaccine Design" approach
is more flexible and systematic than traditional methods of live vaccine
discovery and is a platform that can be applied to many viral targets and,
potentially, to the creation of viruses used in gene therapy and the treatment
of cancer. Furthermore, Aviron believes that a particular advantage of Rational
Vaccine Design is that engineered viruses can be designed so that they are less
likely to revert to wild-type characteristics than classically derived vaccines.
Three ways of implementing this approach are:
. Deleting or modifying specific viral genes which encode virulence
proteins. Virulence proteins are viral components thought to be
particularly important in the mechanism of disease, but which are not
required for the virus to replicate and stimulate a strong immune
response. An example of this strategy is the Company's program to
create a live attenuated vaccine against the HSV-2 virus which causes
genital herpes. One of the Company's founders, Dr. Bernard Roizman,
discovered a particular protein important in the ability of HSV-2 to
grow in nerve cells. Since nerve ganglia are the reservoir from which
HSV-2 reseeds itself to cause painful skin lesions, deletion of the
gene encoding this protein is the basis of the Company's Rational
Vaccine Design program for development of a vaccine for this target.
. Altering the genetic information used by the virus in controlling its
replication. An example of this strategy is work by Company
scientists to create live attenuated vaccine candidates for influenza.
Until recently, it was impossible to genetically engineer vaccine
strains of influenza because influenza genes are composed of negative-
strand RNA rather than DNA or positive-strand RNA. Dr. Peter Palese,
one of the Company's founders, discovered how to create recombinant
negative-strand RNA viruses using reverse genetics. Company
scientists have employed this reverse genetics technology to engineer
mutations into a gene used by the influenza virus to make copies of
itself. The resulting strains are attenuated in animal models and at
least one strain has been identified as a potential candidate for
clinical trials.
. Adding antigenic information displayed by the vaccine virus. An
example of this strategy, is the Company's approach to the creation of
a live attenuated CMV vaccine, which begins with a vaccine candidate
thought to be over-attenuated and thus insufficiently immunogenic.
Aviron discovered genes for certain antigen structures present in
wild-type CMV viruses. These genes are being engineered into an over-
attenuated vaccine candidate to create a potentially more immunogenic
vaccine. The Company believes this technique of adding antigen
structures may enable the Company to create combination vaccines
expressing antigens of more than one virus in a single vaccine strain.
BUSINESS STRATEGY
Aviron's objective is to become a leader in the discovery, development,
manufacture and marketing of live virus vaccines which are sufficiently cost
effective to justify their use in immunization programs targeting the general
population. The Company's strategy is to:
Address Infectious Diseases Which Merit Widespread Immunization Programs.
The concept of universal immunization is well established for certain infectious
diseases where safe and effective vaccines are already available, including
immunization against pathogens such as polio, measles, mumps, rubella and
hepatitis B. For each of its potential products, the Company's objective is to
produce vaccine strains which are
2.
<PAGE>
sufficiently safe and cost effective to obtain official recommendations for
universal use in childhood vaccine regimens or, in the case of influenza, annual
use in the general population.
Apply Rational Vaccine Design Technology to a Range of Viral Targets.
Aviron believes that its proprietary genetic engineering technologies may be
used to create live attenuated vaccines for a wide range of viral targets, such
as viruses related to influenza and herpes viruses.
Select Programs and Market Vaccines Based on Pharmacoeconomic Data. Public
health agencies and managed care systems are increasingly concerned with the
economic impact of potential new mandates for vaccines. In setting its internal
product development priorities, the Company considers the costs of implement ing
widespread vaccine programs based on its products in relation to potential cost
savings to the government and managed health care systems and intends to perform
rigorous cost-effectiveness analyses on its products.
In-License Promising Vaccine Technology. Aviron evaluates in-licensing
opportunities and intends to add programs which complement the Company's core
technologies and capabilities. For example, the Company obtained exclusive
rights to the cold adapted influenza vaccine technology from the University of
Michigan and the National Institutes of Health ("NIH"), and to the PIV-3 vaccine
from the NIH.
Establish Collaborative Arrangements to Enhance Product Development
Efforts. Aviron intends to enter into collaborative arrangements to gain access
to specific technologies and skills which may accelerate product development and
provide additional financial resources to support its research and development
and commercialization efforts, particularly outside of the United States. The
Company has entered into collaborative arrangements with SmithKline Beecham for
development of an EBV vaccine and with Sang-A for certain rights to the
Company's products in Korea.
3.
<PAGE>
VACCINE PRODUCTS UNDER DEVELOPMENT
The following table summarizes Aviron's most advanced potential products
under research and development. This table is qualified in its entirety, by
reference to the more detailed descriptions appearing elsewhere in this Form 10-
K.
<TABLE>
<CAPTION>
COMMERCIAL
PROGRAM VACCINE TYPE STATUS (1) RIGHTS (2)
- ----------------------------- ------------------------------------------ ----------------------------- ----------------------
<S> <C> <C> <C>
Influenza
Children Cold adapted live virus Pivotal Phase III Clinical Aviron
Trial
Adults Cold adapted live virus Phase II Challenge Study Aviron
Completed
Elderly Cold adapted live virus Clinical Trial Planned Aviron
(co-administered with inactivated
vaccine)
Parainfluenza Virus Type 3 Bovine live virus IND Planned Aviron
Epstein-Barr Virus Recombinant subunit glycoprotein Preclinical SmithKline Beecham/
Aviron (3)
Cytomegalovirus Genetically engineered live virus Preclinical Aviron
Herpes Simplex Virus Type 2 Genetically engineered live virus Preclinical Aviron
Respiratory Syncytial Virus Genetically engineered live virus Research Aviron
(1) "Pivotal Phase III Clinical Trial" means Aviron is conducting a multi-center, double-blind, placebo-controlled clinical
trial for safety and efficacy.
"Phase II Challenge Study Completed" means Aviron completed vaccination of subjects in a multi-center, double-blind,
placebo-controlled clinical trial for safety, immunogenicity and efficacy.
"Clinical Trial Planned" indicates that no clinical trial has been conducted by Aviron to date. Aviron intends to
discuss with the FDA its plans to proceed directly to Phase III clinical trials.
"Preclinical" includes assessment of specific vaccine candidates for growth properties in cell culture and for
attenuation and immunogenicity in animal models.
"IND Planned" indicates that no clinical trials have been conducted by Aviron to date. The Company is evaluating the
timing and level of commitment for Aviron-sponsored clinical trials.
"Research" includes identification of vaccine candidates and approaches to create new candidate strains. See
"Government Regulation."
(2) Commercial rights for Korea for most listed programs are licensed to Sang-A. See "-- Collaborative Agreements."
(3) Worldwide rights licensed to SmithKline Beecham; Aviron retains certain United States co-promotion rights. See "--
Collaborative Agreements."
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4.
<PAGE>
INFLUENZA
Aviron's Cold Adapted Influenza Vaccine. The Company's most advanced
program is based on the live cold adapted influenza vaccine technology
discovered by Dr. H. E. Maassab, licensed from the University of Michigan and
subject to a Cooperative Research and Development Agreement ("CRADA") with the
NIH. The cold adapted influenza vaccine is currently undergoing extensive
clinical trials by Aviron with a network of NIH-sponsored investigators. Prior
to Company-initiated trials, at least 65 clinical trials of the cold adapted
influenza vaccine technology have been performed since 1977, involving more than
15,000 volunteers, of whom over 7,000 received the cold adapted influenza
vaccine. See "-- Influenza Clinical Trials."
The Company intends to develop the cold adapted influenza vaccine for
widespread annual use in children and adults, and for co-administration with the
inactivated vaccine for improved protection in the elderly. The quality of the
immune response induced by cold adapted influenza vaccine differs from that
induced by inactivated influenza vaccines. The cold adapted influenza vaccine
elicits an immune response to multiple viral proteins mimicking the natural
immunobiology of influenza whereas the response to the classical inactivated
vaccine is directed primarily to one component of the virus. Because the cold
adapted influenza vaccine is delivered as a nasal spray, the Company believes it
would provide the first practical way to immunize children on an annual basis.
Children are an important target because, while the elderly experience the
greatest mortality from the annual influenza epidemic, much of the morbidity
and illness occurs in young children. Children are also thought to be important
in the spread of influenza in the population. In addition to its proposed use
in physician's offices, Aviron believes that the nasal spray delivery of this
vaccine will enable it to be administered by adults without special medical
training, so that it will be practical to consider delivery via pharmacies,
schools, day care centers, and possibly in the home. However, before delivery
methods are established in these settings, the Company will be required to
formulate the cold adapted influenza vaccine to ensure stability of the vaccine
in such settings. There can be no assurance that the Company will be able to do
so or that regulatory authorities will approve such delivery methods.
Aviron also is targeting healthy adults, many of whom are being offered
influenza prophylaxis by their employer and who may prefer Aviron's intranasal
administration to injection. The Company believes that many adults who
regularly receive the inactivated influenza vaccine will select the intranasal
vaccine if given the choice, and that people who have avoided "flu shots" in the
past will receive a vaccination if the intranasal alternative is available. In
addition, the Company is developing its vaccine for co-administration by nasal
spray with the inactivated influenza vaccine injection for the elderly. While
efficacy in the elderly has not been conclusively demonstrated, nursing home
studies suggest that simultaneous administration of the intranasal cold adapted
influenza vaccine with an injection of the inactivated vaccine offers added
protection compared to administration of the inactivated vaccine alone. Aviron
intends to seek recommendations from the Advisory Committee on Immunization
Practices ("ACIP") and the American Academy of Pediatrics for use of the cold
adapted influenza vaccine in the appropriate population.
The Company has completed Phase I/II clinical trials in children of its
live cold adapted intranasal vaccine for influenza and currently is conducting a
pivotal Phase III clinical trial during the 1996/1997 influenza season. The
Company has also completed a Phase II challenge study in adults for its live
cold adapted intranasal vaccine for influenza. In addition, the Company intends
to discuss with the FDA its plans for Phase III clinical trials to demonstrate
efficacy of the co-administration with the inactivated influenza vaccine in the
elderly. No assurances can be given that the Company will commence clinical
trials as planned, or that if commenced, such trials can be successfully
completed on a timely basis, if at all. See "-- Influenza Clinical Trials."
Aviron's Next-Generation Genetically Engineered Influenza Vaccine. The
Company is using its proprietary reverse genetics technology to engineer future
generations of influenza vaccines which are designed to the needs of various age
groups in the population. The Company's first priority is to develop strains
which offer improved protection in the elderly compared to the currently
available inactivated vaccines. Since most elderly persons have had experience
with several influenza infections in their lifetime, pre-existing antibodies may
5.
<PAGE>
prevent the cold adapted virus from multiplying sufficiently to be used as an
alternative to the currently available vaccines in the elderly. To address this
problem, Aviron scientists have created new strains of influenza vaccine
candidates which have been evaluated and shown to be attenuated in ferrets, an
animal model for influenza. Vaccinated animals were protected from subsequent
challenge with a virulent strain of influenza. Some of the Company's
genetically engineered strains have been found to better replicate in the upper
respiratory tract of these animals than the cold adapted influenza vaccine,
while retaining the property of restricted growth in the lower respiratory
tract. Work with the cold adapted influenza vaccine has shown that these
features are associated with desirable characteristics of attenuation in humans.
However, animal model results are not necessarily predictive of results in
humans. The Company believes that these strains may be more immunogenic than
the cold adapted vaccine and, therefore, more suitable for use as a single-dose
vaccine for the elderly. No assurance can be given that the Company will be
able to commence or successfully complete clinical trials on a timely basis, if
at all.
PARAINFLUENZA VIRUS TYPE 3
PIV-3 is a common respiratory virus of childhood which causes croup, cough,
fever and pneumonia. Every year, primarily during the spring and summer months,
PIV-3 infects infants, children and adults. In the United States, at least 60%
of children are infected by the time they reach two years of age, and 80% by
four years of age. These cases are associated with symptoms lasting from three
to eight days and approximately 17,000 hospitalizations per year. Children are
also a major factor in introducing PIV-3 infection into the family setting.
PIV-3 frequently reoccurs and children typically experience two to three
infections of decreasing severity. Unlike influenza, PIV-3 undergoes only a
very minor degree of variation in the surface proteins from year to year;
therefore, a PIV-3 vaccine will not require annual updates.
Both serum and nasal antibodies directed to PIV-3 surface proteins play a
role in protection against PIV-3 disease. It is thought that protection of the
lower respiratory tract from PIV-3 replication and disease requires high serum
antibody levels, whereas resistance to infection and protection against disease
in the upper respiratory. tract requires mucosal antibodies in the nose. There
is currently no available vaccine to protect against PIV-3 infection, and no
drug for treatment of PIV-3 disease.
Aviron's Live Parainfluenza Virus Type 3 Vaccine. The Company's live PIV-3
vaccine program utilizes bovine PIV-3 (bPIV-3) vaccine technology licensed from
the NIH. Use of bPIV-3 as a vaccine to protect humans against human PIV-3
strains is based on the successful strategy first used by Dr. Edward Jenner for
smallpox vaccination, in which an animal virus is used to protect humans from
the analogous human virus. It is thought that the attenuation of bPIV-3 in
primates is due to mutations sustained throughout its genome during its long
evolutionary adaptation to the bovine host.
Prior to the Company's in-licensing of the bPIV-3 vaccine, it had been
tested in Phase I/II clinical trials in adults, children and infants. In all
age groups, the bPIV-3 vaccine appeared satisfactorily attenuated, safe and
genetically stable. Eighty-five percent of seronegative children (six to 60
months of age) were infected by the tested dose, and 61% of bPIV-3 recipients
developed a level of antibody to PIV-3 previously associated with protection
from disease. The vaccine strain infected 92% of infants younger than six
months of age, even in the presence of maternally-derived PIV-3 antibodies.
Infection with the bPIV-3 vaccine stimulated an immune response to PIV-3 in 42%
of these young infants. The Company is evaluating the timing and level of
commitment for Aviron-sponsored Phase II clinical trials of bPIV-3 using the
existing bPIV-3 vaccine supply produced and tested for the NIAID. There can be
no assurance that these or any additional clinical trials will be commenced or,
if commenced, will be successful, or that the Company will develop successfully
and receive FDA approval of its bPIV-3 vaccine.
EPSTEIN-BARR VIRUS
Epstein-Barr virus, a herpes virus that causes infectious mononucleosis,
infects most people at some point in their lifetime. Infection at a young age
may cause mild symptoms, but the debilitating syndrome of
6.
<PAGE>
infectious mononucleosis is most common where infection first occurs in
adolescence or young adulthood via exchange of saliva. Sore throat and swollen
neck glands are followed by a period of fatigue and lethargy which can last for
weeks or even months. Approximately 10% of high school and college students
become infected with EBV each year in the United States, of which half or more
may develop infectious mononucleosis. The disease usually runs its course
without significant medical intervention; however, the long duration of
infectious mononucleosis can be a serious problem for high school and college
students and workers. Enlargement of the liver and spleen are also common, so
doctors typically prohibit participation in athletic activities to prevent
serious injuries. EBV is one of the viruses implicated as a contributing cause
of cancer in humans, including Hodgkin's disease, post-transplant and other
lymphomas, nasopharyngeal carcinoma (the most common head and neck cancer in
large regions of Asia) and Burkitt's lymphoma (a significant disease in Africa).
The Company is developing a subunit vaccine for EBV based on the single
surface antigen responsible for most of the neutralizing antibodies stimulated
by EBV infection. Quantities of this antigen have been expressed, purified and
evaluated in a rabbit model, where preliminary results indicate that the antigen
is immunogenic when combined with an adjuvant. In 1995, the Company entered
into a worldwide collaboration with SmithKline Beecham, excluding Korea, whereby
SmithKline Beecham will fund the development of Aviron's EBV vaccine in exchange
for certain marketing rights. See "-- Collaborative Agreements."
CYTOMEGALOVIRUS
Most people become infected with CMV, another member of the herpes virus
family, at some time in their life, and in the United States 40% to 60% of
infections occur in childhood. These infections are typically asymptomatic or
result in mild illness with sore throat, headache, fatigue and swollen glands.
CMV also can cause an infectious mononucleosis syndrome clinically
indistinguishable from that associated with EBV infec tion. More serious CMV
disease is also often associated with a weakened immune system, as is often
found in AIDS, cancer and transplant patients, which may be due to reactivation
of CMV acquired early in life or a primary, infection. In addition, if a woman
is first exposed to this virus early in pregnancy, the resulting infection can
cause serious fetal abnormalities. Approximately 40,000 infants in the United
States are infected each year, resulting in varying levels of brain damage or
deafness in over 10% of these infants. Congenital CMV syndrome results in
significant expenditures for neonatal intensive care.
No vaccine currently is available for CMV. Antibodies from persons with
high levels of immunity, are available in the form of hyperimmune globulins for
certain high-risk patients, but use of these products can be costly and of
limited efficacy. The Company believes that widespread vaccination of children
with a safe effective CMV vaccine is justified for the same reason that children
in the United States are vaccinated against rubella: to protect unborn children
from birth defects by reducing the risk that mothers are exposed to infected
children.
A live attenuated CMV vaccine candidate, known as the Towne strain, has
been tested by third parties in several hundred people. This strain was
reported to be well tolerated, but did not provide sufficient protection in
pregnant mothers of children in day care who were at risk for congenital CMV, or
in transplant recipients at risk of acquiring CMV from the donor organs. Aviron
scientists have discovered differences between the genome of the Towne strain
and that of wild-type CMV. Based on this knowledge, the Company has used its
Rational Vaccine Design approach to create new recombinant CMV vaccine
candidates in an attempt to strike the appropriate balance between attenuation
and protection. Some of these vaccine candidates have been made and tested by
Aviron in a specialized animal model. The Company expects to select vaccine
candidates to prevent CMV infection for testing in clinical trials. However, no
assurance can be given that the Company will be successful in identifying CMV
vaccine candidates.
HERPES SIMPLEX VIRUS TYPE 2
It is estimated that HSV-2, the cause of genital herpes, infects one out of
five persons in the United States. Only one-third of those infected experience
symptoms, but a significant portion of new infections are
7.
<PAGE>
caused by transmission from asymptomatic individuals. Genital herpes is a non-
lethal but incurable disease that invades the body once and settles in for a
lifetime, often manifesting its presence several times a year with painful sores
in the genital area. It is estimated that there are over 700,000 new cases of
genital herpes per year in the United States, and that the disease is
responsible for over 500,000 physician visits per year.
Genital herpes also can be acquired by newborn babies as they pass through
the birth canal of infected mothers. Neonatal herpes simplex infection can
result in serious damage to the brain and many other organs. Even with therapy,
over 20% of the 1,500 infants infected each year in the United States die, and
many of the survivors are seriously impaired. In addition, efforts to prevent
neonatal herpes contribute significantly to the cost of the disease. Thousands
of women in the United States with a history of genital herpes are advised to
undergo a Cesarean section when prenatal cultures or examinations suggest a
recurrence near the time of delivery. HSV-2 infection can also lead to serious
and fatal complications in adults with impaired immune systems due to AIDS or
drug therapy for organ transplants.
The most widely used drug therapy for HSV-2 disease is acyclovir (Zovirax),
which has been shown to reduce the severity and duration of herpetic lesions,
although most patients treated still experience symptoms for several days. When
taken several times a day as a prophylaxis for HSV-2, acyclovir also has been
shown to reduce the frequency of recurrences. Several additional therapeutics
are available or are in the late stages of clinical trials, and several
prophylactic vaccines are in clinical trials; however, no vaccine currently is
available to prevent genital herpes. At least two companies are in Phase III
clinical trials of subunit vaccines for the primary prevention of genital
herpes.
Aviron has used its Rational Vaccine Design approach to create
injectable live attenuated vaccine candidates to be used in uninfected
children and young adults to prevent genital herpes. Two of the Company's
founders, Dr. Bernard Roizman and Dr. Richard Whitley, in collaboration with
Pasteur Merieux Serums et Vaccins, developed a prototype live herpes vaccine
based on an oral herpes virus (HSV-1) backbone. After extensive preclinical
testing, the virus was tested in humans; however, the immune response
following vaccination was deemed insufficient. This insufficiency was
attributed to the use of the HSV-1 backbone from which too many important
genes had been deleted, thus rendering the virus over-attenuated. Aviron has
licensed this technol ogy, along with patents covering strategies for more
specific deletions, from ARCH Development Corporation. Aviron has used this
technology to create live vaccine candidates using an HSV-2 backbone, which it
currently is evaluating in preclinical models. Several candidates have shown
attenuation in various rodent models, as well as efficacy in protecting guinea
pigs and primates from challenge with a lethal dose of wild-type HSV-2. The
Company intends to use the results of animal studies to select these or other
strains under development for evaluation in clinical trials. There can be no
assurance, however, that the Company will commence or success fully complete
clinical trials on a timely basis, if at all.
In July 1996, Aviron licensed certain of its patent rights covering or
related to the use of HSV-2 for treatment of cancer and for gene therapy, but
excluding use for vaccines, to NeuroVir Research Inc., a private Canadian
corporation ("NeuroVir"). In exchange, Aviron received shares of capital stock
and warrants to purchase shares of capital stock, representing in the aggregate
approximately 27% of the outstanding equity securities of NeuroVir on a fully-
diluted basis after the first round of financing. Prior to the execution of
this agreement, NeuroVir had no employees and had conducted no material
operations. Aviron is under no obligation to fund development of this
technology.
RESPIRATORY SYNCYTIAL VIRUS
RSV is the major cause of lower respiratory tract illness in the very
young, responsible for over 90,000 hospitalizations and more than 4,000 deaths a
year in the United States. Infection is manifested as cough and fever and, in
some cases, pneumonia. While RSV infection can occur at any time of year,
epidemics generally occur in the winter. Most cases are in children under age
four, with the peak of severe illness under six months of age, particularly in
infants with pre-existing heart and lung disease. No vaccine for RSV currently
is available, although certain third parties are testing a cold adapted live
attenuated RSV vaccine in infants.
8.
<PAGE>
Available drug therapy is reserved for the most serious cases as it has
significant side effects. Aviron is developing a genetically engineered live
attenuated virus vaccine for RSV using its proprietary reverse genetics
technology. Aviron's objective is to use this technology to create a number of
live virus vaccine candidates which can be tested in animal models before
selecting a candidate for testing in humans. However, no assurance can be given
that the Company will be successful in identifying a vaccine candidate.
INFLUENZA CLINICAL TRIALS
The Company intends to conduct clinical trials to demonstrate safety and
efficacy of its cold adapted influenza vaccine. While the Company believes that
it can use previous trial data to support its regulatory filings, the Company's
use of the previous data to establish safety and efficacy of its proposed
vaccine is limited because very few of the clinical trials involved a vaccine
delivered through a nasal spray. The Aviron trials will relate to the safety
and efficacy of the trivalent formulation as well as the safety of its delivery,
by intranasal spray. Aviron enrolled a total of 615 patients in Phase I/II
clinical trials and 92 patients in a Phase II challenge study in five Vaccine
Treatment Evaluation Units ("VTEUs") as part of the Company's CRADA with the
NIH.
Aviron conducted a safety and immunogenicity study involving 259 healthy
adults at three university research laboratories. Patients were randomly
assigned to receive either Aviron's live cold adapted influenza vaccine by
nasal spray or nose drops, or placebo by nasal spray or nose drops. No serious
adverse events attributable to Aviron's vaccine were seen in any subjects, and
there were no statistically significant differences in the occurrence of
fever, sore throat, runny nose, cough, headache or any other potential
reaction assessed in the study between the vaccine or placebo or between the
different types of administration. Statistically significant serum antibody
responses to all three strains in the spray vaccine were observed in the
subjects receiving the live cold adapted influenza vaccine compared to
placebo. The magnitude of these antibody responses was within the range of
responses seen in previous trials by others of the live cold adapted influenza
vaccine, which are lower than the serum responses typically observed following
immunizations with the inactivated influenza vaccine.
Two hundred thirty-eight children between the ages of 18 months and five
years were enrolled at four VTEUs and 118 children were enrolled at the Center
for Vaccine Development in Santiago, Chile, in a Phase I/II double-blind,
placebo-controlled safety, immunogenicity and dose-escalation study. The study
design and endpoints were similar to the adult study, except that the initial
phases used a dose lower than that given to adults. No serious adverse events
were seen in any subjects in any of the three phases of the dose escalation, and
there were no statistically significant differences in the occurrences of fever,
sore throat, runny nose, cough, wheezing, or irritability assessed in the study
between the vaccine or placebo or between the different types of administration.
Statistically significant serum antibody responses to two of the three strains
were observed in the subjects receiving the higher doses of the live cold
adapted influenza vaccine compared to placebo. The magnitude of these antibody
responses were within the range of responses seen in previous trials by others
of the trivalent cold adapted influenza vaccine.
Aviron's intranasal spray formulation of the live cold adapted influenza
vaccine also has been tested in a double-blind, placebo-controlled Phase II
challenge study at two VTEUs involving 92 healthy young adults. Subjects were
randomized to receive either the live cold adapted intranasal vaccine, the
inactivated injectable vaccine or placebo. There were no serious adverse events
attributable to Aviron's vaccine seen in any subjects, and there were no
statistically significant differences in the occurrence of any potential
reactions assessed in the study between either vaccine or placebo. Following
vaccination and subsequent intranasal administration of the wild-type challenge
virus, the incidence of laboratory-documented influenza, a prospectively defined
primary endpoint of the trial, was 7% in subjects vaccinated with the live cold
adapted intranasal influenza vaccine, 13% in subjects vaccinated with the
inactivated injectable influenza vaccine and 45% in subjects who received
placebo. The reduction in laboratory-documented influenza compared to placebo
was statistically significant for the live cold adapted vaccine (p less than
0.001) and the inactivated vaccine (p = 0.01). The other prospectively defined
primary endpoint of the study was the proportion of subjects shedding the
challenge virus after its administration. No significant differences were seen
between the two vaccines and placebo in viral shedding.
9.
<PAGE>
Of the recipients of the live cold adapted influenza vaccine, 10%
experienced moderate or severe respiratory symptoms following administration of
the wild-type influenza challenge virus, a statistically significant reduction
compared to 39% of placebo recipients (p = 0.01). The rate of moderate or
severe respiratory, symptoms observed following challenge virus in the
inactivated injectable vaccine was 22% which was not statistically significant
compared to placebo. While the rate of respiratory illness seen in the placebo
group was consistent with previous influenza challenge efficacy trials by
others, the rate of febrile or systemic illness following challenge was lower
than in previous trials. These data have not been peer reviewed, however, and
no assurance can be given that the conclusions drawn from this analysis will not
change as a result of further study by the Company or during the peer review
process. See "Business Risks -- Uncertainties Related to Clinical Trials."
Based on trials by others which showed that a modest immune response in
young children to one or two of the strains after a single dose could be boosted
significantly by a second dose approximately two months later, the Company is
conducting a pivotal Phase III clinical trial which will evaluate one- and two-
dose regimens in children. The Company's clinical trial data suggest that a
repeat or booster dose may be required in young children due to their lack of
previous exposure to influenza or influenza vaccines. Two doses of the
inactivated injectable influenza vaccine are recommended annually for young
children requiring influenza prophylaxis for the first time. The Company has
enrolled 1,602 children at 10 clinical sites in the pivotal Phase III clinical
trial, of which 1,314 were vaccinated with a second dose 46 to 74 days after
initial vaccination. The primary endpoint of the study will be protection of
children from culture-confirmed influenza during naturally occurring epidemics
of influenza. There can be no assurance that these or any additional trials
will be successful or that the Company will successfully develop and receive FDA
approval of its cold adapted influenza vaccine.
In March 1997, Aviron announced its intentions to unblind study data in the
third quarter of 1997, following a single year of patient accrual, rather than
continuing to collect efficacy data for a second influenza season next winter.
At this time, the Company and the clinical investigators remain blinded as to
which cases of influenza are in the placebo or vaccine group. Efficacy results
from the study will not be known until the study data are unblinded and
announced later in 1997.
Aviron intends to commence a manufacturing consistency trial this spring in
500 children at the Center for Vaccine Development at the University of
California, Los Angeles. Approval to market vaccines typically requires
evidence from such a trial demonstrating that the product can be manufactured
consistently from lot to lot. A follow-up study is planned for children
participating in the current efficacy study to evaluate the use of a
revaccinating dose in a subsequent influenza season. Studies are also being
planned to evaluate the effectiveness of the intranasal vaccine in preventing
work loss and reducing health care utilization to healthy adults and the
elderly.
ADDITIONAL RESEARCH PROGRAMS
Live Viruses as Vectors
Aviron believes that its virus engineering technology may be used to create
strains which carry "foreign" genes and are able to deliver genetic or antigenic
information to specific tissues in the host. For example, it is possible to
engineer antigens from other viruses into influenza, as has already been
demonstrated for small antigenic regions from agents such as HIV and malaria.
RSV and PIV-3 are two other important causes of childhood infections which may
be targeted by using the influenza virus as a vector to deliver antigens.
Members of the herpes virus family may also serve as vectors to deliver
antigens to make vaccines which protect against other viruses. Due to the
natural properties of this virus, it may be useful to delivery genetic
information to the central nervous system.
10.
<PAGE>
Modified Herpes Simplex Viruses to Treat Brain Cancer
The Company's proprietary technology to modify herpes simplex viruses has
been evaluated by others in animal models for the treatment of brain cancer.
Malignant glioma is the most lethal of the common tumors originating in the
brain. In spite of surgical therapy radiotherapy and chemotherapy, five-year
survival rates in humans of approximately 5% are seen. Many new therapies have
been investigated, including radiation, hyperthermia, phototherapy,
immunotherapy, novel drug delivery for chemotherapy and gene therapy. Two of
Aviron's founders, Dr. Richard Whitley and Dr. Bernard Roizman, modified the
herpes simplex virus using genetic engineering and have tested this virus in an
animal model of malignant glioma. Preliminary results show that tumor size was
reduced by the modified viruses, resulting in longer life and reduced
neurological deficit for the treated animals.
Aviron has entered into a collaboration with NeuroVir to develop the
Company's proprietary technology for the use of herpes simplex virus to treat
brain cancer and as a vector for gene therapy for treatment of cancer and
neurological disease. No assurance can be given that NeuroVir will be
successful in developing this technology.
MANUFACTURING
The cold adapted vaccine material used in the Company's current clinical
trials is being supplied by Evans Medical Limited, a subsidiary of Medeva plc
("Evans") pursuant to a manufacturing and development agreement (the "Evans
Agreement"). Evans is one of four companies licensed by the FDA to produce
influenza vaccine for sale in the United States. Under the Evans Agreement,
Evans is collaborating with Aviron to develop a manufacturing process for
production of cold adapted influenza vaccine, as well as producing and supplying
the Company with sufficient quantities of cold adapted influenza vaccine to
conduct its current clinical trials and those planned for the 1997/98 influenza
season, subject to certain limitations. In addition, in the event that the
Company seeks to offer manufacturing rights to a third party, Evans has a right
of first negotiation to supply a portion of the Company's commercial
requirements for the vaccine in certain European markets. The Company also
granted Evans a right of first negotiation with respect to distribution rights
for the vaccine in Europe. After December 31, 1996, either party may terminate
the Evans Agreement upon six months notice to the other party.
The Company currently does not have facilities to manufacture products for
large-scale clinical trials or in commercial quantities and has no experience in
commercial-scale manufacturing. To manufacture its products for large-scale
clinical trials or on a commercial scale, the Company will have to build or gain
access to a large-scale manufacturing facility which will require a significant
amount of funds. The Company is in the final stages of negotiations with Evans
for commercial scale manufacturing of bulk cold adapted influenza vaccine for
the 1999/2000 and 2000/2001 influenza seasons. There can be no assurance that
an agreement with Evans can be reached on terms satisfactory to the Company, or
at all. To complete manufacture of the Company's cold adapted influenza vaccine
product supplied in bulk by Evans for the 1999/2000 and 2000/2001 influenza
seasons, the Company will have to gain access to a large-scale fill and finish
facility, either at Evans or elsewhere, and to commission the manufacture of
specialized equipment, which may require a significant amount of funding. There
can be no assurance that an agreement with Evans or any other third party with
respect to such fill and finish of the cold adapted influenza product can be
reached, or if reached, on terms satisfactory to the Company and in time for
product launch. The production of the Company's cold adapted influenza vaccine
is subject to the availability of a large number of pathogen-free hen eggs, for
which there are currently a limited number of suppliers. Contamination or
disruption of this source of supply would adversely affect the ability to
manufacture the Company's cold adapted influenza vaccine. In addition, to make
the vaccine available for clinical trials or commercial sales before the
influenza season, the Company must successfully modify the vaccine within a six-
month period to include selected strains for a particular year.
In April 1996, the Company completed construction of a pilot manufacturing
facility for its potential vaccine products other than cold adapted influenza.
Funding was obtained through the Company's existing
11.
<PAGE>
capital lease line of credit. The Company currently is considering whether to
construct manufacturing facilities capable of producing commercial quantities of
its potential vaccine products. The scale-up of manufacturing for commercial
production will require the Company to develop advanced manufacturing techniques
and rigorous process controls. Furthermore, the Company will be required to
register its facility with the FDA and with the California Department of Health
Services and will be subject to state and federal inspections confirming the
Company's compliance with cGMP regulations established by the FDA. However, no
assurance can be given as to the ability of the Company to produce commercial
quantities of its potential products in compliance with applicable regulations
or at an acceptable cost, or at all.
The Company is alternatively considering the use of contract manufacturers
for the commercial production of its potential products. The Company is aware
of only a limited number of manufacturers which it believes have the ability and
capacity to manufacture its potential products, including the cold adapted
influenza vaccine, in a timely manner. There can be no assurance that the
Company would be able to contract with any of these companies for the
manufacture of its products on acceptable terms, if at all. If the Company
enters into an agreement with a third-party manufacturer, it will be required to
relinquish control of the manufacturing process, which might adversely affect
the Company's results of operations. Furthermore, a third-party manufacturer
also will be required to manufacture the Company's products in compliance with
state and federal regulations. Failure of any such third-party manufacturer to
comply with state and federal regulations and to deliver the required quantities
on a timely basis and at commercially reasonable prices would materially
adversely affect the Company's business, financial condition and results of
operations. No assurance can be given that the Company, alone or with a third
party, will be able to make the transition to commercial-scale production of its
potential products successfully, if at all, or that if successful, the Company
will be able to maintain such production.
MARKETING AND SALES
The current purchasers of vaccines are principally physicians, large HMOs
and state and federal government agencies. However, the United States health
care system is undergoing significant changes and the relative proportion that
each group will represent in the future will depend on factors such as
legislative changes and the economy. The Company intends to sell its products
directly to HMOs and state and federal health care agencies, and to other buyers
through partners with strong capabilities in local markets. Outside the United
States, the Company plans to sell its potential products through collaborative
agreements with strategic partners. Aviron intends to use rigorous cost-
effectiveness analysis as a guide for its pricing strategy and in support of its
marketing plans.
The Company currently has no marketing, sales or distribution capabilities.
To market any products, Aviron must either obtain the assistance of a third
party with a suitable distribution system, develop a direct sales and marketing
staff of its own or combine the efforts of a third party with its own efforts.
Other than SmithKline Beecham and Sang-A, the Company to date has no agreements
for marketing or distributing its potential products.
The success and commercialization of the Company's products is dependent in
part upon the ability of the Company to maintain and enter into additional
collaborative agreements with corporate partners for the development, testing
and marketing of certain of its vaccines and upon the ability, of these third
parties to perform their responsibilities. Although Aviron believes that
parties to any such arrangements would have an economic motivation to succeed in
performing their contractual responsibilities, the amount and timing of
resources devoted to these activities will not be within the control of the
Company. There can be no assurance that any such agreements or arrangements
would be available on terms acceptable to the Company, if at all, that such
third parties would perform their obligations as expected, or that any revenue
would be derived from such arrangements. If Aviron is not able to enter into
such agreements or arrangements, it could encounter delays in introducing its
potential products into the market or be forced to limit the scope of its
commercialization activities. If the Company were to market products directly,
significant additional expenditures, management resources and time would be
required to develop a marketing and sales staff within the Company. In
addition,
12.
<PAGE>
the Company would also be competing with other companies that currently have
experienced and well-funded marketing and sales operations. There can be no
assurance that the Company will be able to establish its own marketing and sales
force or that any such force, if established, would be successful.
COLLABORATIVE AGREEMENTS
The Company's strategy for the development, clinical trials, manufacturing
and commercialization of certain of its products includes maintaining and
entering into various collaborations with corporate partners, licensors,
licensees and others. There can be no assurance that the Company will be able
to maintain existing collaborative agreements, negotiate collaborative
arrangements in the future on acceptable terms, if at all, or that any such
collaborative arrangements will be successful. To date the Company has entered
into the following collaborative agreements.
National Institute of Allergy and Infectious Diseases - Parainfluenza Virus
Type 3
In May 1996, the Company obtained exclusive rights from the National
Institute of Allergy and Infectious Disease (the "NIAID") of the NIH to certain
biological materials and clinical trial data for its PIV-3 program. The NIH
granted to the Company exclusive rights in specific strains of bovine
parainfluenza virus (the "Licensed Materials") to develop, test, manufacture,
use and sell products for vaccination against human parainfluenza virus and
other human and animal diseases ("Licensed Products"). In addition, the Company
obtained from the NIAID the right to reference an existing IND and certain data
relating to the Licensed Materials. The NIH retained certain rights to the
Licensed Materials on behalf of the United States Government to conduct research
and to grant research licenses to third parties under certain circumstances. In
return for the rights granted by NIH, the Company will make payments to NIH on
the achievement of specified milestones and will make certain royalty payments
to NIH. Unless otherwise terminated, the Agreement will terminate on cessation
of commercial sales of Licensed Products by the Company or its sublicensee. The
Company has the unilateral right to terminate the Agreement in any country upon
providing 60 days notice to NIH.
SmithKline Beecham Biologicals S.A.
In October 1995, the Company signed an agreement with SmithKline Beecham
defining a collaboration on the Company's EBV vaccine technology (the SB
Agreement). Under the terms of the SB Agreement, the Company granted SmithKline
Beecham an exclusive license to produce, use and sell EBV vaccines incorporating
the Company's technology for prophylactic and therapeutic uses on a worldwide
basis, except in South and North Korea (together, Korea). The Company has
retained the right to co-distribute a monovalent formulation of the vaccine in
certain markets in the United States and to have SmithKline Beecham supply such
vaccine. In addition, SmithKline Beecham obtained a right of first refusal to
an exclusive, worldwide (except Korea) license under any intellectual property
rights relating to any live EBV vaccine technology developed or controlled by
the Company during the term of the SB Agreement.
SmithKline Beecham has agreed to fund research and development at the
Company related to the EBV vaccine, in specified minimum amounts, during the
first two years of the SB Agreement. SmithKline Beecham made an initial upfront
payment to the Company and agreed to make additional payments upon the
achievement of certain product development milestones. The Company is entitled
to royalties from SmithKline Beecham based on net sales of the vaccine. Unless
otherwise terminated, the SmithKline Beecham Agreement will expire upon the
expiration or invalidation of the last remaining patent covered by the SB
Agreement or 10 years from the date of first commercial sale of the vaccine,
whichever is later. The SB Agreement may be terminated by SmithKline Beecham
with respect to any country at any time. See "Legal Proceedings."
Sang-A Pharm. Co., Ltd.
In May 1995, the Company entered into a Development and License Agreement
with Sang-A. The Company granted to Sang-A exclusive clinical development,
manufacturing and marketing rights in Korea for
13.
<PAGE>
specified products developed by Aviron, including vaccines for influenza (cold
adapted and recombinant), EBV, CMV, HSV-2 and RSV. However, the Company is
under no obligation to develop any product. Sang-A also will make payments to
the Company upon the Company's meeting certain regulatory milestones for each
product in Korea and will pay a royalty to the Company on net sales of such
products in Korea.
Sang-A is obligated to establish a manufacturing facility with at least
enough capacity to meet demand for all Korean product requirements for each
product that reaches commercialization, if any. In the event that Sang-A's
manufacturing capabilities satisfy certain objective criteria and subject to
an obligation to cooperate with the Company's future corporate partners for
any given products, Sang-A has a right of first refusal to manufacture a
portion of the total requirements of the Company, its affiliates and
sublicensees for the specified products, with the exception of the EBV
vaccine, in specified countries, including the United States, provided that it
can do so at a competitive price, quality and timeline.
The term of this agreement extends, on a product-by-product basis, until 10
years from the date of first commercial sale of each product in Korea. At the
conclusion of the term, Sang-A has an option to extend the agreement on a
product-by-product basis, for the longer of an additional 10 years or the
expiration of the patents covering such product. During any such extension,
Sang-A will have either no royalty obligation to the Company or a reduced
royalty obligation, depending on the product.
In return for the rights granted to Sang-A, Sang-A made an equity
investment in the Company in May 1995 of approximately $4.0 million. Sang-A
subsequently made additional equity investments of approximately $1.6 million in
the Company's private placement of Series C Preferred Stock and $1.9 million in
the Company's initial public offering of Common Stock.
On January 23, 1997, Hanbo Steel Industry Company (Hanbo Steel) was
declared bankrupt. Hanbo Steel is a subsidiary of the Hanbo Group, the
conglomerate that owns Sang-A. The Company is unable to predict what, if any,
effect the bankruptcy of Hanbo Steel will have on other Hanbo Group
subsidiaries, including Sang-A. Given that Sang-A has no outstanding financial
obligations to the Company, and that future Korean sales of Company products are
not expected to be a major part of the Company's anticipated revenues, the
Company believes that it is unlikely that the bankruptcy of Hanbo Steel will
have a material impact on the Company.
National Institute of Allergy and Infectious Diseases - Cold Adapted Influenza
Vaccine
Following a competitive application process, the Company entered into a
CRADA in March 1995 with the National Institute of Allergy and Infectious
Diseases of the NIH to conduct clinical trials of the Company's cold adapted
influenza vaccine. Wyeth-Ayerst licensed certain rights to the vaccine from the
NIH in 1991 and was developing it for sale in collaboration with the NIH until
relinquishing its rights in 1993. Aviron has obtained from the NIH and the
University of Michigan exclusive rights to trial results and data from the work
at the VTEUs and Wyeth-Ayerst. The NIH has agreed to support the trials by
enrolling subjects in its network of VTEUs. In addition, the Company acquired
exclusive commercial rights to data generated from all previous clinical trials
conducted by the NIH and Wyeth-Ayerst using the vaccine. The term of the CRADA
will not exceed five years without a written amendment by the parties. Either
party may terminate the CRADA for material breach.
University of Michigan
In February 1995, the Company entered into a materials transfer and
intellectual property agreement (the "Michigan Agreement") with the University
of Michigan. Pursuant to the Michigan Agreement, the University of Michigan
granted the Company exclusive rights to certain intellectual property and
technology, relating to a cold adapted influenza vaccine and proprietary donor
strains of influenza viruses useful in the production of products for
vaccination against influenza and potentially for gene therapy and other uses
(the "Master Strains"). Specifically, the Company obtained the exclusive right
to develop, manufacture, use, market
14.
<PAGE>
and sell products incorporating any such intellectual property or utilizing the
Master Strains in all countries of the world. In consideration for the rights
granted to the Company, the Company: (i) made an initial cash payment to the
University of Michigan; (ii) agreed to pay a royalty to the University of
Michigan on net sales of products subject to the license; (iii) entered into a
sponsored research agreement with the University of Michigan for a period of
at least two years; and (iv) issued to the University of Michigan 1,323,734
shares of Series B Preferred Stock, which were converted into 264,746 shares
of Common Stock upon the effective date of the Company's initial public
offering. In addition, in the event that Aviron receives approval to
commercially market a product based on the University of Michigan technology,
the Company has agreed to issue a warrant to the University of Michigan to
purchase shares of the Company's Common Stock, for a number of shares to be
based on 1.25% of the Common Stock outstanding on the date of the first
commercial sale of the product incorporating the University of Michigan
technology.
Pursuant to the Michigan Agreement, the Company is required to grant to the
University of Michigan an irrevocable, royalty-free license for research
purposes, or for transfer to a subsequent licensee should the Michigan Agreement
be terminated, to (i) all improvements developed by the Company, its affiliates
or sublicensees, whether or not patentable; relating to delivery mechanisms and
processes for administration and manufacturing of products, as well as packaging
storage and preservation processes for the Master Strains, and (ii) all new
technical information acquired by the Company, its affiliates or sublicensees
relating to the Master Strains and products.
The term of the Michigan Agreement is until the later of the last to expire
of the University of Michigan patents licensed to the Company or 20 years from
the date of first commercial sale of a product incorporating the Michigan
technology. The Company has the further right to terminate for any reason upon
12 months notice to the University of Michigan.
The Mount Sinai School of Medicine
In February 1993, the Company entered into a technology transfer agreement
with The Mount Sinai School of Medicine of the City University of New York
("Mount Sinai"). Under this agreement, Mount Sinai assigned to the Company all
of its rights, title and interest in and to certain patents and patent
applications, as well as all associated know-how and other technical information
relating to recombinant negative strand RNA virus expression systems and
vaccines, attenuated influenza viruses and certain other technology. Mount
Sinai also granted the Company (i) an option to acquire any improvements to the
inventions disclosed in the assigned patents and patent applications thereafter
developed by Mount Sinai and (ii) a right of first negotiation for a license or
assignment to certain additional related technology. In consideration for the
rights granted to the Company, the Company issued to Mount Sinai 35,000 shares
of the Company's Common Stock. The Company also issued to Mount Sinai four
warrants to purchase up to a total of 45,000 shares of the Company's Common
Stock, each exercisable for a term of five years commencing upon the occurrence
of certain milestone events. Warrants to purchase 9,000 shares are currently
exercisable at a per share exercise price of $4.50. Warrants to purchase 29,750
shares became exercisable at the effective date of the Company's initial public
offering at a per share exercise price of $10.00. Warrants to purchase the
remaining 6,250 shares were terminated on the effective date of the Company's
initial public offering according to their terms.
ARCH Development Corporation
In July 1992, the Company entered into an exclusive license agreement with
ARCH Development Corporation ("ARCH") to acquire the rights to use or sublicense
certain technology and make, use or sell certain licensed products. The
agreement calls for the Company to make certain payments to ARCH as certain
development milestones are met. No benchmark payments were made or were due
through 1996. If commercialization is achieved, the Company will be required to
pay ARCH royalties based on net sales of the licensed products. Further, if the
Company were to sublicense the technology, it would be required to pay ARCH
royalties on net sales of the sublicensee and, under certain circumstances, up
to 50% of the license fee paid by the sublicensee. The term of the agreement
extends until the expiration of the last-to-expire patent rights covered by the
license. In conjunction with this license agreement, ARCH purchased 40,000
shares of the Company's Common Stock. Subsequent to this agreement, affiliates
of ARCH purchased shares of the
15.
<PAGE>
Company's Series A, B and C Preferred Stock, which were automatically converted
to 222,799 shares of Common Stock upon the closing of the Company's initial
public offering.
BUSINESS RISKS
UNCERTAINTIES RELATED TO CLINICAL TRIALS
Before obtaining required regulatory approvals for the commercial sale of
any of its products under development, the Company must demonstrate through
preclinical testing and clinical trials that each product is safe and effective
for use in each target indication. The results from preclinical testing and
early clinical trials may not be predictive of results obtained in later
clinical trials and large-scale testing. Companies in the pharmaceutical,
biopharmaceutical and biotechnology industries have suffered significant
setbacks in various stages of clinical trials, even in advanced clinical trials
after promising results had been obtained in earlier trials. The Company's
vaccines are intended for use primarily in healthy individuals. To obtain
regulatory approval the Company must demonstrate safety and efficacy in healthy
people which likely will require a lengthier process and involve a larger number
of trials and patients than would be customary for clinical trials of
therapeutics for disease management. There can be no assurance that the
Company's clinical trials will demonstrate sufficient safety and efficacy to
obtain the requisite regulatory, approvals or will result in marketable
products. In addition, the Company's clinical trial data for its cold-adapted
influenza vaccine suggest that a repeat or booster dose may be required in young
children to demonstrate efficacy due to the children's lack of previous exposure
to influenza virus. If the Company's cold adapted influenza vaccine is not
shown to be safe and effective in Aviron's clinical trials (including its
current pivotal Phase III clinical trial), the resulting delays in developing
this and other vaccine candidates and conducting related preclinical testing and
clinical trials, as well as the need for additional financing, would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's cold adapted influenza vaccine is based on technology
licensed from the NIH and the University of Michigan. Wyeth-Ayerst Laboratories
("Wyeth-Ayerst"), a division of American Home Products Corporation, licensed
certain rights to the vaccine in 1991 and was developing it for sale in
collaboration with the NIH until relinquishing its rights in 1993. In addition,
Kaketsuken, a Japanese research foundation ("Kaketsuken"), licensed certain
rights to the vaccine in 1993 and was developing it for sale in Japan until
relinquishing such rights in 1996. Formulations of the vaccine have been the
subject of a number of clinical trials performed by Wyeth-Ayerst, the NIAID of
the NIH and Kaketsuken. The Company has reviewed the data from these trials and
believes that it can submit such data in partial support of its application for
regulatory approval from the FDA. The Company did not participate in these
trials and cannot be confident in the accuracy of the data collected. Although
a large proportion of this data was positive, a number of trials included
results that were not. Very few of the trials involved a trivalent vaccine
delivered through nasal spray. There can be no assurance that the data from
these third-party trials is accurate, that the Company will be able to obtain
favorable results from its own trials, or that the Company can complete these
trials on a timely basis, or at all. See "-- Influenza Clinical Trials."
To date, none of the data announced by the Company from its clinical trials
has been submitted for publication in peer reviewed journals. Moreover, the
data necessary to calculate the primary endpoints in the Company's Phase II
challenge study of its live cold adapted intranasal influenza vaccine only
became available in September 1996. There can be no assurance that the analysis
of the data announced by the Company and the conclusions drawn from this
analysis will not change as a result of further study by the Company or in the
course of peer review for publication or regulatory review for licensing. Such
changes could have an adverse effect on the Company's product development
efforts or its prospects for regulatory approval of the product involved.
The rate of completion of the Company's clinical trials may be delayed by
many factors. For example, delays may be encountered in enrolling a sufficient
number of patients fitting the appropriate trial profile, preparing the modified
vaccine strain for certain influenza seasons, or manufacturing clinical thai
materials.
16.
<PAGE>
The Company's late-stage clinical trials of its live cold adapted influenza
vaccine must be conducted during the influenza season and must be commenced
early enough in the approximately five-month season so that subjects may be
vaccinated well in advance of a challenge by the wild-type virus. Were the
influenza season to commence earlier than anticipated, the number of subjects
that could participate in a particular study might be reduced in that season due
to the subjects' possible exposure to wild-type influenza virus. Additionally,
there is a risk that there will not be enough natural influenza in the
community, in a given influenza season to achieve statistically significant
results from clinical trials. As a result, the Company would be required to
gather data in the next influenza season, which will not occur for another year
in that community, thus delaying the Company's development program. There can
be no assurance that delays in, or termination of, clinical trials will not
occur. Any delays in, or termination of, the Company's clinical trial efforts
would have a material adverse effect on the Company's business, financial
condition and results of operations.
UNCERTAINTIES RELATED TO EARLY STAGE OF DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY
Aviron commenced its operations in April 1992 and until October 1995 was a
development stage company. All of the Company's product candidates are in the
research or development stage. With the exception of two in-licensed product
candidates, none of the Company's proposed products has yet been approved for
clinical trials. To date, the Company has had no revenue from product sales and
all of its resources have been dedicated to the development of vaccines. There
can be no assurance that product revenues will be realized on a timely basis, if
ever.
The development of safe and effective vaccines for the prevention of viral
diseases such as influenza, herpes simplex and other target diseases is highly
uncertain and subject to numerous risks. Potential products that appear to be
promising at early stages of development may not reach the market for a number
of reasons. Potential products may be found ineffective or cause harmful side
effects during preclinical testing or clinical trials, fail to receive necessary
regulatory approvals, be difficult to manufacture on a large scale, be
uneconomical, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of third parties. Aviron has not yet
requested or received the regulatory approvals that are required to market its
products. Aviron does not expect that any of its proposed products will be
ready for commercialization for the next few years, if at all.
The Company's cold adapted influenza vaccine involves a complex development
process. If the Company were to successfully develop an influenza vaccine, its
composition would require annual modification. Influenza viruses have a high
mutation rate and the surface antigens of influenza viruses that induce
protective immunity are variable from year to year. Each spring, the FDA and
the CDC select circulating influenza strains that will be included in the
following season's influenza vaccines. As a result, manufacturers of vaccines
must modify their influenza vaccines each year to include the selected strains
in a form that meets FDA guidelines within an approximately six-month period in
order to make it available before the influenza season. Even if the Company is
able to develop an influenza vaccine for a particular year, it must also
establish a dependable process by which the vaccine may be modified and
manufactured on a timely basis to include additional strains each year. If the
Company were unable to develop an influenza vaccine for a particular year that
meets FDA and CDC guidelines and establish a manufacturing process for the
vaccine, its business, financial condition and results of operations would be
materially adversely affected. No assurance can be given that delays in
preparing vaccines for use in clinical trials or commercial sales will not be
encountered. In addition, there can be no assurance that the Company's
development efforts will be successful, that required regulatory approvals,
including those with respect to Investigational New Drug ("IND") applications,
will be obtained or that any products, if introduced, will be successfully
marketed. See "Business -- Vaccine Products Under Development."
17.
<PAGE>
NEED FOR FUTURE FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL
The Company's operations to date have consumed substantial and increasing
amounts of cash. The negative cash flow from operations is expected to continue
and to accelerate in the foreseeable future. The development of the Company's
technology and proposed products will require a commitment of substantial funds
to conduct the costly and time-consuming research, preclinical testing and
clinical trials necessary to develop and optimize such technology and proposed
products, to establish manufacturing and marketing capabilities and to bring any
such products to market. The Company's future capital requirements will depend
upon many factors, including continued scientific progress in the research and
development of the Company's technology and vaccine programs, the size and
complexity of these programs, the ability of the Company to establish and
maintain collaborative arrangements, progress with preclinical testing and
clinical trials, the time and costs involved in obtaining regulatory approvals,
the cost involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims or trade secrets, and product commercialization activities.
The Company is actively seeking additional collaborative agreements with
corporate partners and may seek additional funding through public or private
equity or debt financing. There can be no assurance that any additional
collaborative agreements will be entered into or that additional financing will
be available on acceptable terms, if at all. If additional funds are raised by
issuing equity securities, further dilution to stockholders may result. If
adequate funds are not available, the Company may be required to delay, reduce
the scope of, or eliminate one or more of its research or development programs
or to obtain funds through collaborative arrangements with others that may
require the Company to relinquish rights to certain of its technologies, product
candidates or products that the Company would otherwise seek to develop or
commercialize itself. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
UNCERTAINTY OF FUTURE PROFITABILITY; ACCUMULATED DEFICIT
The Company has experienced significant and increasing operating losses
since its inception in April 1992. As of December 31, 1996, the Company had an
accumulated deficit of approximately $40 million. Aviron has not received any
product revenue to date and does not expect to generate revenues from the sale
of products for several years, if at all. The Company expects to incur
significant and increasing operating losses over at least the next several years
as the Company's research and development efforts and preclinical testing and
clinical trial activities expand. The Company's ability to achieve
profitability depends in part upon its ability, alone or with others, to
complete development of its proposed products, to obtain required regulatory
approvals and to successfully manufacture and market such products. To the
extent that the Company is unable to obtain third-party funding for expenses,
the Company expects that its increased expenses will result in increased losses
from operations. There can be no assurance that Aviron will obtain required
regulator approvals or successfully identify, develop, test, manufacture and
market any product candidates, or that the Company will ever achieve product
revenues or profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS; DEPENDENCE ON TRADE
SECRETS
The Company's success will depend in part on its ability, to maintain its
technology, licenses, maintain trade secrets, obtain patents and operate without
infringing the proprietary, rights of others, both in the United States and in
other countries. Since patent applications in the United States are maintained
in secrecy until patents issue and since publication of discoveries in the
scientific or patent literature often lag behind actual discoveries, the Company
cannot be certain that it was the first to make the inventions covered by each
of its pending patent applications or that it was the first to file patent
applications for such inventions. The patent positions of biotechnology and
pharmaceutical companies can be highly uncertain and involve complex legal and
factual questions, and therefore the breadth of claims allowed in biotechnology
and pharmaceutical patents, or their enforceability, cannot be predicted. There
can be no assurance that any of the Company's patents or
18.
<PAGE>
patent applications will issue or, if issued, will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
proprietary protection or competitive advantages to the Company.
The commercial success of Aviron also will depend, in part, upon the
Company's not infringing patents issued to others. A number of pharmaceutical
companies, biotechnology, companies, universities and research institutions have
filed patent applications or received patents in the areas of the Company's
programs. Some of these applications or patents may limit or preclude the
Company's applications, or conflict in certain respects with claims made under
the Company's applications.
The Company is aware of pending patent applications that have been filed by
others that may pertain to certain aspects of the Company's programs or its
issued or pending patent applications. If patents have been or are issued to
others containing preclusive or conflicting claims and such claims are
ultimately determined to be valid, the Company may be required to obtain
licenses to these patents or to develop or obtain alternative technology. No
assurance can be given that patents have not been issued, or will not be issued,
to third parties that contain preclusive or conflicting claims with respect to
the cold adapted influenza vaccine or any of the Company's other programs. The
Company's breach of an existing license or failure to obtain a license to
technology required to commercialize its products may have a material adverse
effect on the Company's business, financial condition and results of operations.
Litigation, which could result in substantial costs to the Company, may also be
necessary to enforce any patents issued to the Company or to determine the scope
and validity of third-party proprietary rights. If competitors of the Company
prepare and file patent applications in the United States that claim technology
also claimed by the Company, the Company may have to participate in interference
proceedings declared by the United States Patent and Trademark Office to
determine priority of invention, which could result in substantial cost to the
Company, even if the eventual outcome is favorable to the Company. An adverse
outcome could subject the Company to significant liabilities to third parties
and require the Company to license disputed rights from third parties or to
cease using such technology.
The Company also relies on trade secrets to protect its technology,
especially where patent protection is not believed to be appropriate or
obtainable. Certain of the Company's licensors also rely on trade secrets to
protect technology which has been licensed to Aviron, and as a result, the
Company is dependent on the efforts of such licensors to protect such trade
secrets. For example, the University of Michigan relies, in part, on trade
secrets to protect the master strains of the cold adapted influenza virus used
by the Company. Aviron protects its proprietary technology and processes, in
part, by confidentiality agreements with its employees, consultants,
collaborators and certain contractors. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets or those of its licensors
will not otherwise become known or be independently discovered by competitors.
To the extent that Aviron or its consultants or research collaborators use
intellectual property owned by others in their work for the Company, disputes
may also arise as to the rights in related or resulting know-how and inventions.
On July 1, 1996, Chiron Corporation ("Chiron") filed a complaint against the
Company in San Mateo County, California, Superior Court, alleging that certain
of Aviron's patent applications relating to its EBV program are based on Chiron
proprietary information which was improperly conveyed to Aviron by a former
Chiron employee, and that the Company has engaged in unfair competition. See "-
- - Lack of Patent Protection of Cold-Adapted Influenza Technology" and "Legal
Proceedings."
LACK OF PATENT PROTECTION OF COLD ADAPTED INFLUENZA TECHNOLOGY
The Company has no issued patents on the technology related to its cold
adapted influenza vaccine. The Company's rights to this technology are based on
an exclusive worldwide license of materials and know-how from the University of
Michigan, which owns the master strains from which the vaccine is derived, and
on an exclusive license of know-how and clinical trial data from the NIH.
Neither the University of Michigan nor the NIH rely on patents for ownership of
the rights licensed to Aviron. There can be no assurance that a third party
will not reproduce the Company's cold adapted influenza vaccine or that a third
party will not develop another live-virus influenza vaccine which might be
comparable to Aviron's in terms of safety and effectiveness. See "-- Dependence
on Trade Secrets."
19.
<PAGE>
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVALS
The production and marketing of the Company's products and its ongoing
research and development activities are subject to extensive regulation by
numerous government authorities in the United States and other countries. Prior
to marketing in the United States, any product developed by the Company must
undergo rigorous preclinical testing and clinical trials and an extensive
regulatory approval process implemented by the FDA under the Food, Drug and
Cosmetic Act. Satisfaction of such regulatory requirements, which includes
demonstrating that the product is both safe and effective, typically takes
several years or more depending upon the type, complexity and novelty of the
product and requires the expenditure of substantial resources. This process may
be more demanding for vaccines intended for use in healthy people compared to
therapeutics used for treatment of people with diseases. Preclinical studies
must be conducted in compliance with the FDA's Good Laboratory Practice ("GLP")
regulations. Clinical testing must meet requirements for Institutional Review
Board ("IRB") oversight and informed consent, as well as FDA prior review,
oversight and good clinical practice requirements. The Company has limited
experience in conducting and managing the clinical trials necessary to obtain
regulatory approval. Furthermore, the Company or the FDA may suspend clinical
trials at any time if it believes that the subjects participating in such trials
are being exposed to unacceptable health risks.
Before receiving FDA approval to market a product, the Company will have to
demonstrate that the product is safe and effective and represents an improved
form of health management compared to existing approaches. Data obtained from
preclinical testing and clinical trials are susceptible to varying
interpretations which could delay; limit or prevent regulatory approvals. In
addition, delays or rejections may be encountered based upon 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. Similar delays may also be encountered in foreign
countries. There can be no assurance that even after such time and
expenditures, regulatory approval will be obtained for any products developed by
the Company. If regulatory approval of a product is granted, such approval will
be limited to those specific segments of the population for which the product is
effective, as demonstrated through clinical trials. Furthermore, approval may
entail ongoing require ments for post-marketing studies. Even if such
regulatory approval is obtained, a marketed product, its manufacturer and its
manufacturing facilities are subject to continual review and periodic
inspections. The regulatory standards for manufacturing are currently being
applied stringently by the FDA. Discovery of previously unknown problems with a
product, manufacturer or facility may result in restrictions on such product or
manufacturer, including costly recalls or even withdrawal of the product from
the market. There can be no assurance that any product developed by the Company
alone or in conjunction with others will prove to be safe and efficacious in
clinical trials and will meet all of the applicable regulatory requirements
needed to receive marketing approval.
Outside the United States, the Company's ability to market a product is
contingent upon receiving marketing authorization from the appropriate
regulatory authorities. The requirements governing the conduct of clinical
trials, marketing authorization, pricing and reimbursement vary widely from
country to country. At present, foreign marketing authorizations are applied
for at a national level, although within the European Union (the "EU"),
procedures are available to companies wishing to market a product in more than
one EU member state. If the regulatory authorities are satisfied that adequate
evidence of safety, quality and efficacy has been presented, a marketing
authorization will be granted. This foreign regulatory, approval process
includes all of the risks associated with FDA approval set forth above.
DEPENDENCE ON COLLABORATIVE AGREEMENTS
The Company's strategy for the development, clinical trials, manufacturing
and commercialization of certain of its products includes maintaining and
entering into various collaborations with corporate partners, licensors,
licensees and others. There can be no assurance that the Company will be able
to maintain existing collaborative agreements, negotiate collaborative
arrangements in the future on acceptable terms, if at all, or that any such
collaborative arrangements will be successful. To the extent that the Company
is not able to maintain or establish such arrangements, the Company would be
required to undertake product development and
20.
<PAGE>
commercialization activities at its own expense, which would increase the
Company's capital requirements or require the Company to limit the scope of its
development and commercialization activities. In addition, the Company may
encounter significant delays in introducing its products into certain markets or
find that the development, manufacture or sale of its products in such markets
is adversely affected by the absence of such collaborative agreements.
The Company cannot control the amount and timing of resources which its
collaborative partners devote to the Company's programs or potential products,
which may vary because of factors unrelated to the potential products. If any
of the Company's collaborative partners breach or terminate their agreements
with the Company or otherwise fail to conduct their collaborative activities in
a timely manner, the preclinical or clinical development or commercialization of
product candidates or research programs will be delayed, and the Company would
be required to devote additional resources to product development and
commercialization, or terminate certain development programs. These
relationships generally may be terminated at the discretion of the Company's
collaborative partners, in some cases with only limited notice to the Company.
The termination of collaborative arrangements could have a material adverse
effect on the Company's business, financial condition and results of operations.
There also can be no assurance that disputes will not arise in the future with
respect to the ownership of rights to any technology developed with third
parties. These and other possible disagreements between collaborators and the
Company could lead to delays in the collaborative research, development or
commercialization of certain product candidates, or could result in litigation
or arbitration, which would be time consuming and expensive, and would have a
material adverse effect on the Company's business, financial condition and
results of operations.
In addition, Aviron's collaborative partners may develop, either alone or
with others, products that compete with the development and marketing of the
Company's products. Competing products of the Company's collaborative partners
may result in their withdrawal of support with respect to all or a portion of
the Company's technology, which would have a material adverse effect on the
Company's business, financial condition and results of operations. See "--
Collaborative Agreements."
INTENSE COMPETITION AND RISE OF TECHNOLOGICAL OBSOLESCENCE
The Company operates in a rapidly evolving field. Any product developed by
the Company would compete with existing and new drugs and vaccines being created
by pharmaceutical, biopharmaceutical and biotechnology companies. If the
Company were able to successfully develop its vaccines, it would be competing
with larger companies that have already introduced vaccines and have
significantly greater marketing, manufacturing, financial and managerial
resources. For example, with respect to its cold adapted influenza vaccine, the
Company will be competing against larger companies such as Pasteur Merieux
Connaught, Wyeth-Ayerst, Parke-Davis Group ("Parke-Davis"), a subsidiary of
Warner-Lambert Company, and Evans. Each of these companies sell the injectable
inactivated influenza vaccine in the United States, have significantly greater
financial resources than Aviron and have established marketing and distribution
channels for such products. The Company is also aware of several companies that
are marketing or are in late-stage development of products to prevent CMV or HSV
disease, including Glaxo Wellcome plc ("Glaxo"), SmithKline Beecham and Chiron
Biocine Corporation. In addition, the Company is aware of the use in Russia of
a cold adapted influenza vaccine, research programs by some of the competitors
listed above, among others, to develop more effective influenza vaccines and a
cold adapted PIV-3 vaccine developed with NIH support which may be licensed to a
large vaccine company.
New developments are expected to continue in both the pharmaceutical and
biotechnology industries and in academia. Other companies may succeed in
developing products that are safer, more effective or less costly than any that
may be developed by the Company. Such companies may also be more effective than
the Company in the production and marketing of their products. Furthermore,
rapid technological development by competitors may result in the Company's
products becoming obsolete before the Company is able to recover it research,
development or commercialization expenses incurred in connection with any such
product. Many potential competitors have substantially greater financial,
technical and marketing resources than the Company.
21.
<PAGE>
Some of these companies also have considerable experience in preclinical
testing, clinical trials and other regulatory approval procedures. Moreover,
certain academic institutions, government agencies and other research
organizations are conducting research in areas in which the Company is working.
These institutions are becoming increasingly aware of the commercial value of
their findings and are becoming more active in seeking patent protection and
licensing arrangements to collect royalties for the use of technology that they
have developed. These institutions may also market competitive commercial
products on their own or through joint ventures.
Aviron believes that competition in the markets it is addressing will
continue to be intense. The vaccine industry is characterized by intense price
competition, and the Company anticipates that it will face this and other forms
of competition. There can be no assurance that pharmaceutical,
biopharmaceutical and biotechnology companies will not develop more effective
products than those of the Company or will not market and sell their products
more effectively than the Company, which would have a material adverse effect on
the Company's business, financial condition and results of operations.
22.
<PAGE>
EXECUTIVE OFFICERS
The executive officers and corporate secretary of the Company as of
December 31, 1996 are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- ---------------------------------------
<S> <C> <C>
J. Leighton Read, M.D........... 45 Chairman and Chief Executive Officer
Vera Kallmeyer, M.D., Ph.D...... 37 Chief Financial Officer and Vice
President,
Corporate Development
Martin L. Bryant, M.D., Ph.D.... 48 Vice President, Research
Victor Jegede, Ph.D............. 52 Vice President, Technical Affairs
Paul M. Mendelman, M.D.......... 49 Vice President, Clinical Research
Eric J. Patzer, Ph.D............ 47 Vice President, Development
Alan C. Mendelson............... 48 Secretary
</TABLE>
____________________
J. Leighton Read, M.D., a founder of the Company, has been Chairman and
Chief Executive Officer of the Company since 1992 and was Chief Financial
Officer of the Company from 1992 until October 1996. In 1989, he co-founded
Affymax N.V. with Dr. Alejandro Zaffaroni, serving initially as its Executive
Vice President and Chief Operating Officer and later, from 1990 to 1991, as
President of the Pharma Division and as a Managing Director of the parent
company. From 1991 to 1993, Dr. Read was a principal with Interhealth Limited,
an investment partnership. Prior to 1989, Dr. Read held appointments at the
Harvard Medical School and School of Public Health, where his research dealt
with techniques for assessing the cost effectiveness of pharmaceutical products.
He has served on the boards of a number of private biotechnology companies and
is currently on the board of CV Therapeutics, Inc., a biotechnology company. Dr.
Read holds a B.S. in Biology and Psychology from Rice University and an M.D.
from the University of Texas Health Science Center at San Antonio.
Vera Kallmeyer, M.D., Ph.D., has been Vice President, Corporate Development
of the Company since 1994 and was elected Chief Financial Officer in October
1996. From 1993 to 1994, Dr. Kallmeyer was Vice President, Healthcare
Banking/Biotech at Flemings, a London-based merchant bank. From 1990 to 1993,
she was an Associate in Investment Banking at Wasserstein Perella and Company.
In 1994, she co-founded Pacific Futures, an investment advisory business located
in Hong Kong, for which she currently serves as Senior Advisor. Dr. Kallmeyer
holds an M.D. and a Ph.D. in Pediatric Cardiology from Ludwig-Alexander
University in Erlangen, Germany, and an M.B.A. from Stanford University. She
has also studied at the Harvard Medical School and the Royal Postgraduate
Medical School in London. Dr. Kallmeyer serves on the board of directors of
NeuroVir Research Inc., a private biotechnology company.
Martin L. Bryant, M.D., Ph.D., has been Vice President, Research of the
Company since 1995. Dr. Bryant also currently is Consulting Associate Professor
of Pediatrics, Microbiology and Immunology at the Stanford University School of
Medicine and Adjunct Associate Professor of Molecular Microbiology at the
Washington University School of Medicine. From 1991 to 1995, he was Director,
Infectious Disease Research for G.D. Searle & Co./Monsanto, a pharmaceutical
company. From 1990 to 1991, he was an Instructor in Pediatric Infectious
Diseases at the Washington University School of Medicine. Dr. Bryant holds a
B.A. in Chemistry from Duke University, an M.A. in Chemistry from San Diego
State University, and an M.D. and a Ph.D. from the University of Southern
California.
Victor Jegede, Ph. D., has been Vice President, Technical Affairs of the
Company since 1995. From 1992 to 1994, Dr. Jegede was Vice President, Regulatory
Affairs and Quality for Creative BioMolecules, Inc., a bio-pharmaceuticals
company, and from 1989 to 1992, he was Director, Regulatory Affairs and Quality
for WelGen Manufacturing Partnership (BW Manufacturing, Inc.), a division of
Burroughs Welcome
23.
<PAGE>
Manufacturing, Inc., a pharmaceutical manufacturer. Dr. Jegede holds a B.S. and
an M.S. in Biology and a Ph.D. in Bacteriology from Boston College.
Paul M. Mendelman, M.D., has been Vice President, Clinical Research of the
Company since May 1996. Prior to joining the Company, Dr. Mendelman was
Director, Clinical Research, Infectious Diseases for Merck Research
Laboratories, a pharmaceutical company, since September 1991. From 1983 to 1991,
Dr. Mendelman was Clinical Instructor, Assistant Professor and then Associate
Professor of Pediatrics at the University of Washington. Dr. Mendelman holds a
B.S. and an M.D. from Ohio State University and is a fellow of the American
Academy of Pediatrics.
Eric J. Patzer, Ph.D., has been Vice President, Development of the Company
since May 1996. Prior to joining the Company, Dr. Patzer had held various
positions with Genentech, Inc, a pharmaceutical company, since 1981, most
recently as Vice President, Development. Dr. Patzer holds a B.S. in Mechanical
Engineering from The Pennsylvania State University and a Ph.D. in Microbiology
from the University of Virginia.
Alan C. Mendelson has served as Secretary of the Company since 1992. He
has been a partner of Cooley Godward LLP, counsel to the Company, since 1980 and
served as Managing Partner of its Palo Alto office from 1990 to 1995 and from
September 1996 to the present. Mr. Mendelson also served as Acting General
Counsel to Cadence Design Systems, Inc., an electronic design automation
software company, from 1995 to 1996. He is a director of Acuson Corporation,
CoCensys, Inc., Elexsys International, Inc. and Isis Pharmaceuticals, Inc. Mr.
Mendelson holds a B.A. from the University of California at Berkeley and a J.D.
from the Harvard Law School.
ITEM 2. PROPERTIES.
Aviron leases approximately 52,800 square feet of office and laboratory
space in Mountain View, California. The Company has leased this facility
through October 2005 and has two options to extend the lease for successive
five-year terms. The Company currently subleases approximately 13,000 square
feet of space to three subtenants. One sublease for 4,700 square feet runs
through March 1998 and may be extended or re-negotiated at Aviron's discretion;
one sublease for 6,667 square feet runs through December 1997 and may be
extended or re-negotiated at Aviron's discretion; the third sublease is
renewable on a month-to-month basis. The Company believes that this facility is
adequate to meet its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
On July 1, 1996, Chiron Corporation (Chiron) filed a complaint against the
Company in San Mateo County, California, Superior Court, alleging that certain
of Aviron's patent applications relating to its EBV program are based on Chiron
proprietary information which was improperly conveyed to Aviron by a former
Chiron employee, and that the Company has engaged in unfair competition. The
complaint seeks unspecified monetary damages and seeks to impose a constructive
trust, for Chiron's benefit, over the affected patent applications, an exclusive
assignment by the Company to Chiron of such patent applications and an
injunction against the Company from disclosing, using or applying such alleged
proprietary information. Aviron believes that the allegations in the Chiron
complaint are without merit and intends to vigorously defend itself against such
action. Aviron does not utilize the alleged Chiron proprietary information in
any of its potential products currently under development. Even if Chiron were
to prevail in this action, the Company believes that it is uncertain that a
court would grant a constructive trust over the specified patent applications,
which include many claims (including certain rights the Company licensed to
SmithKline Beecham) not relating to the alleged Chiron proprietary technology.
Were a court to grant a constructive trust over such patent applications, it
could adversely impact the Company's agreement with SmithKline Beecham. There
can be no assurance that Chiron will not ultimately prevail in this action or
that it will not obtain the remedies it is seeking. In addition, the Company
expects that the legal costs incurred in defending itself against this action
could be substantial.
24.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1996.
25.
<PAGE>
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCK MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "AVIR." Public trading of the Common Stock commenced on November 5,
1996. Prior to that, there was no public market for the Common Stock. The
following table sets forth for the periods indicated the high and low price per
share of the common stock on the Nasdaq National Market. These prices represent
quotations among dealers without adjustments for retail mark-ups, mark-downs or
commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED HIGH LOW
DECEMBER 31, 1996 ----- ------
- -----------------------------------------
<S> <C> <C>
Fourth Quarter ended December 31, 1996 $9.00 $6.875
</TABLE>
On March 12, 1997, there were 184 holders of record of the Company's common
stock.
The Company has never paid cash dividends on its Common Stock. The Company
presently intends to retain earnings for use in the operation and expansion of
its business and therefore does not anticipate paying any cash dividends in the
foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
In March 1996, the Company sold 136,326 shares of Series C Preferred Stock
to Sang-A Pharm Co., Ltd. ("Sang-A") in a private placement. The price was
$1.35 per share, which was equal to the price paid by other investors in the
Series C Preferred Stock of the Company. The sales were made in reliance on
Section 4(2) and Regulation D of the Securities Act of 1933, as amended. No
underwriter or placement agent was involved in the March 1996 sales of shares to
Sang-A. The shares of Series C Preferred Stock were converted to 27,265 shares
of Common Stock in November 1996 at the closing of the Company's initial public
offering of Common Stock.
In November and December 1996, the Company sold 222,222 and 16,978 shares
of its Common Stock, respectively, to Sang-A in private placements. The sales
were made at the time of the closing of the initial public offering and the
exercise by the underwriters of a portion of their overallotment option,
respectively. Both sales were made pursuant to Sang-A's pre-existing obligation
to purchase 10% of the shares sold in the public offering. The sales were made
at the public offering price of $8.00 per share. No underwriter or placement
agent was involved in the sale of shares to Sang-A. The sales were made in
reliance on Section 4(2) of the Securities Act of 1933, as amended.
In December 1996, the Board of Directors of the Company approved the
issuance to Cooley Godward LLP of a warrant to purchase 16,600 shares of the
Company's Common Stock at an exercise price of $2.00 per share, in lieu of
$100,000 of legal fees. The warrant, which was issued in January 1997, is
exercisable until January 2000. No underwriter or placement agent was involved
in the warrant issuance. The warrant issuance was made in reliance on Section
4(2) of the Securities Act of 1933, as amended.
26.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operation" and the Financial Statements and Notes thereto included elsewhere in
this Form 10-K.
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
APRIL 15, 1992
(DATE OF INCEPTION) TO
DECEMBER 31, 1992 1993 1994 1995 1996
----------------------- ------- ----------- ------------ -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Total revenues.......................... $ --- $ --- $ --- $ 1,707 $ 1,625
Operating expenses:
Research and development.............. 320 2,073 4,216 10,220 14,997
General and administrative............ 470 1,874 2,493 3,252 4,595
------ ------- -------- -------- --------
Total operating 790 3,947 6,709 13,472 19,592
expenses............................ ------ ------- -------- -------- --------
Loss from operations.................... (790) (3,947) (6,709) (11,765) (17,967)
------ ------- -------- -------- --------
Interest income, net of interest
------ ------- ---------- ----------- ----------
expense............................... 37 175 207 362 466
------ ------- -------- -------- --------
Net loss................................ $ (753) $(3,772) $ (6,502) $(11,403) (17,501)
====== ======= ======== ======== ========
Pro forma net loss per $ (1.24) $ (1.84)
share(1)............................... ======== ========
Shares used in computing pro
forma net loss per share(1)........... 9,165 9,528
DECEMBER 31,
------------------------------------------------------------
1992 1993 1994 1995 1996
------ ------- -------- -------- --------
(in thousands)
BALANCE SHEET DATA:
Cash, cash equivalents and short- $1,492 $12,410 $ 6,449 $ 17,819 $ 17,872
term investments.......................
Working capital......................... 1,355 12,155 5,877 16,775 16,411
Total assets............................ 1,901 13,206 7,789 19,878 21,592
Capital lease obligations, noncurrent... --- --- 750 618 871
Deferred compensation................... --- --- --- 180 1,099
Accumulated deficit..................... (753) (4,525) (11,060) (22,444) (39,935)
Total stockholders' equity.............. 1,722 12,893 6,362 17,537 17,947
</TABLE>
- ----------------------------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
method used to determine the number of shares used to compute pro forma per
share amounts.
27.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Business -- Business Risks"
elsewhere in this Form 10-K.
OVERVIEW
Since its inception in April 1992, Aviron has devoted substantially all of
its resources to its research and development programs. To date, Aviron has not
generated any revenues from the sale of products and does not expect to generate
any such revenues for at least several years, if at all. Aviron has incurred
cumulative net losses of approximately $40 million as of December 31, 1996, and
it expects to incur increasing operating losses for a number of years.
Aviron has financed its operations through proceeds from a public offering
of Common Stock in November 1996, private placements of Preferred Stock, revenue
from its collaborative agreements, including reimbursement of certain of
Aviron's research and development expenses, equipment lease financing and
investment income earned on cash and cash equivalent balances and short-term
investments.
The Company expects its research and development expenditures to increase
substantially over the next several years as the Company expands its research
and development efforts and preclinical testing and clinical trials with respect
to certain of its programs. In addition, general and administrative expenses
are expected to continue to increase as the Company expands its operations and
incurs the additional expenses associated with operating as a public company.
In October 1995, the Company signed an agreement with SmithKline Beecham
defining a collaboration on the Company's Epstein-Barr virus (EBV) vaccine
technology (the SB Agreement). Under the terms of the SB Agreement, the Company
granted SmithKline Beecham an exclusive license to produce,use and sell EBV
vaccines incorporating the Company's technology for prophylactic and therapeutic
uses on a worldwide basis, except in South and North Korea (together, Korea).
The Company has retained the right to co-promote a monovalent formulation of the
vaccine in certain markets in the United States and to have SmithKline Beecham
supply such vaccine. SmithKline Beecham has agreed to fund research and
development at the Company related to the EBV vaccine, in specified minimum
amounts, during the first two years of the SB Agreement. SmithKline Beecham
made an initial upfront payment to the Company in 1995 and agreed to make
additional payments upon the achievement of certain product development
milestones. The Company is entitled to royalties from SmithKline Beecham based
on net sales of the vaccine. No assurance can be given, however, that the
Company will receive any additional payments from SmithKline Beecham or that
SmithKline Beecham will not terminate its agreement with the Company.
In May 1995, the Company entered into a Development and License Agreement
with Sang-A. The Company granted to Sang-A exclusive clinical development,
manufacturing and marketing rights in Korea for specified products developed by
Aviron, including vaccines for influenza (cold adapted and recombinant), EBV,
cytomegalovirus (CMV), herpes simplex virus type 2 (HSV-2) and respiratory
syncytial virus (RSV). However, the Company is under no obligation to develop
any product. Sang-A also will make payments to the Company upon the Company's
meeting certain regulatory milestones for each product in Korea and will pay a
royalty to the Company on net sales of such products in Korea. No assurance can
be given, however, that the Company will receive any payments from Sang-A or
that Sang-A will not terminate its agreement with the Company.
On July 1, 1996, Chiron filed a complaint against the Company alleging
misappropriation of trade secrets with respect to certain of Aviron's patent
applications related to its EBV program. The Company believes that the
allegations in the complaint are without merit and intends to defend itself
vigorously against
28.
<PAGE>
such action. However, the Company expects that the legal costs incurred in
defending itself against this action could be substantial. See "Legal
Proceedings."
The Company currently is evaluating the costs and benefits of developing
internal manufacturing capabilities or contracting with third-party
manufacturers. In April 1996, the Company completed construction of a pilot
manufacturing facility funded through its existing capital lease line of credit;
however, if the Company decides to establish its own commercial-scale
manufacturing facility, it would require a significant amount of funds.
The Company's business is subject to significant risks, including but not
limited to the risks inherent in its research and development efforts, including
preclinical testing and clinical trials, uncertainties associated both with
obtaining and enforcing its patents and with the patent rights of others, the
lengthy, expensive and uncertain process of seeking regulatory approvals,
uncertainties regarding government reforms and product pricing and reimbursement
levels, technological change and competition, manufacturing uncertainties and
dependence on third parties. Even if the Company's product candidates appear
promising at an early stage of development, they may not reach the market for
numerous reasons. Such reasons include the possibilities that the products will
be found unsafe or ineffective during clinical trials, will fail to receive
necessary regulatory approvals, will be difficult to manufacture on a large
scale, will be uneconomical to market or will be precluded from
commercialization by proprietary rights of third parties.
RESULTS OF OPERATIONS
Years Ended December 31, 1996 and 1995
Revenues
Total revenue for the year ended December 31, 1996 was $1.6 million,
compared to $1.7 million for the year ended December 31, 1995. Revenues in 1996
resulted primarily from reimbursement for contract research from SmithKline
Beecham, and in 1995 from license revenue from SmithKline Beecham.
Operating Expenses
Research and development expenses increased 47% to $15.0 million in the
year ended December 31, 1996 from $10.2 million for the year ended December 31,
1995. Included in research and development expenses for the year ended December
31, 1995 is a one-time charge of $1.6 million relating to Aviron's agreement
with the University of Michigan for a license. Without the one-time charge,
research and development expenses increased 74% between the year ended December
31, 1996 and 1995. These increases were primarily due to increases in research
and development staffing, expenses associated with clinical trials of the
Company's cold adapted influenza vaccine and preclinical testing associated with
other programs.
General and administrative expenses increased 41% to $4.6 million in the
year ended December 31, 1996 from $3.3 million for the year ended December 31,
1995. These increases were incurred to support the Company's expanded research
and development facilities, patent and legal expenses, activities associated
with becoming a public company and corporate development activities.
Net Interest Income
The Company's net interest income increased to $466,000 in the year ended
December 31, 1996, from $362,000 in the year ended December 31, 1995. The
increase in interest income reflects the effects of the Company's increase in
average cash and short term investment balances in 1996.
29.
<PAGE>
Years Ended December 31, 1995 and 1994
Revenues
Total revenue for 1995 was $1.7 million, and no revenue was earned in the
year ended December 31, 1994. Revenue in the year ended December 31, 1995
resulted primarily from the Company's license and development agreement with
SmithKline Beecham. See "Business--Collaborative Agreements--SmithKline Beecham
Biologicals S.A."
Operating Expenses
Research and development expenses increased 142% to $10.2 million in the
year ended December 31, 1995 from $4.2 million in the year ended December 31,
1994. These increases were primarily due to increases in research and
development staffing, licensing fees (including the one-time charge relating to
Aviron's agreement with the University of Michigan discussed above), and
expenses associated primarily with clinical trials of its cold adapted influenza
vaccine and preclinical testing associated with the herpes simplex virus
program. General and administrative expenses increased 30% to $3.3 million in
the year ended December 31, 1995 from $2.5 million in the year ended December
31, 1994. These increases were incurred to support the Company's expanded
research and development efforts and facilities, patent and legal expenses, and
corporate development activities.
Net Interest Income
The Company's net interest income increased 75% to $362,000 in the year
ended December 31, 1995, from $207,000 in the year ended December 31, 1994. The
increase in 1995 reflects the effect of the Company's higher average cash and
cash equivalents and short-term investment balances, offset by increased
interest expense related to capital lease obligations.
LIQUIDITY AND CAPITAL RESOURCES
Aviron had cash, cash equivalents and short-term investments at December
31, 1996 of approximately $17.9 million. In order to preserve principal and
maintain liquidity, the Company's funds are invested in United States Treasury
obligations, highly rated corporate obligations and other short-term
investments.
The Company has financed its operations since inception primarily through
private placements of Preferred Stock and an initial public offering of its
Common Stock in November 1996. Through December 31, 1996, the Company had
raised approximately $59.1 million from such sales net of offering expenses.
Cash used in operations was $8.9 million and $16.0 million, for the years 1995
and 1996, respectively. Cash expended for capital additions and to repay lease
financing arrangements amounted to approximately $622,000 and $1,179,000 for
1995 and 1996, respectively. Capital expenditures have increased in 1996
primarily as a result of the construction of a pilot manufacturing facility.
The Company expects expenditures for research and development, clinical trials
and general administrative expenditures to be higher during 1997 as the Company
develops its products and expands its clinical trials.
The Company believes that the proceeds of its initial public offering, and
the concurrent sale of shares to Sang-A, together with the interest thereon,
revenues from existing collaborations and existing cash, cash equivalents and
short-term investments, will enable it to maintain its current and planned
operations at least through 1997. The Company's future cash requirements will
depend on numerous factors, including continued scientific progress in the
research and development of the Company's technology and vaccine programs, the
size and complexity of these programs, the ability of the Company to establish
and maintain collaborative arrangements, progress with preclinical testing and
clinical trials, the time and costs involved in obtaining regulatory approvals,
the cost involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims, and product commercialization activities. The Company is seeking
additional collaborative agreements
30.
<PAGE>
with corporate partners and may seek access to the public or private equity
markets. There can be no assurance, however, that any such agreements will be
entered into or that they will reduce the Company's funding requirements or that
additional funding will be available. The Company expects that additional
equity or debt financings will be required to fund its operations. There can be
no assurance that such funds will be available on favorable terms, if at all.
If adequate funds are not available, the Company may be required to delay,
reduce the scope of, or eliminate one or more of its research or development
programs or to obtain funds through collaborative agreements with others that
may require the Company to relinquish rights to certain of its technologies,
product candidates or products that the Company would otherwise seek to develop
or commercialize itself, which would materially adversely affect the Company's
business, financial condition and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's financial statements and notes thereto appear on pages F-2 to
F-19 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
31.
<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item will be contained in the Company's
definitive Proxy Statement with respect to the Company's Annual Meeting of
Stockholders, to be held on June 5, 1997, under the captions "Election of
Directors--Nominees," and "Security Ownership of Certain Beneficial Owners and
Management--Compliance with the Reporting Requirement of Section 16(a)," and is
hereby incorporated by reference herein. The information relating to executive
officers of the Company is contained in Part I, Item 1 of this report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be contained in the Company's
definitive Proxy Statement with respect to the Company's Annual Meeting of
Stockholders, to be held June 5, 1997, under the caption "Executive
Compensation," and is hereby incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item will be contained in the Company's
definitive Proxy Statement with respect to the Company's Annual Meeting of
Stockholders, to be held June 5, 1997, under the captain "Security Ownership of
Certain Beneficial Owners and Management," and is hereby incorporated by
reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item will be contained in the Company's
definitive Proxy Statement with respect to the Company's Annual Meeting of
Stockholders, to be held June 5, 1997, under the caption "Certain Transactions,"
and is hereby incorporated by reference herein.
32.
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
(a) (1) Index to Financial Statements
The Financial Statements required by this item are submitted in a separate section
beginning on
page F-1 of this report
PAGE
----
<S> <C> <C>
Report of Ernst & Young LLP, Independent Auditors................................... F-2
Balance Sheets at December 31, 1995 and 1996........................................ F-3
Statements of Operations for each of the three years in the period ended
December 31, 1996.................................................................. F-4
Statement of Stockholders' Equity for each of the three years in the period ended
December 31, 1996.................................................................. F-5
Statements of Cash Flows for each of the three years in the period ended
December 31, 1996.................................................................. F-6
Notes to Financial Statements....................................................... F-7
</TABLE>
(2) Index to Financial Statements Schedules
All schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or in the
notes thereto.
(3) Exhibits
ITEM DESCRIPTION
---- -----------
3.1 Bylaws of the Registrant.(2)
3.2 Restated Certificate of Incorporation of the Registrant.(2)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen Stock Certificate(1).
4.3 Warrant for Series A Preferred Stock, issued to The Mount Sinai
School of Medicine of the City of New York(1).
4.4 Warrant for Series A Preferred Stock, issued to The Mount Sinai
School of Medicine of the City of New York(1).
4.5 Warrant for Series A Preferred Stock, issued to The Mount Sinai
School of Medicine of the City of New York(1).
4.6 Warrant for Series A Preferred Stock, issued to The Mount Sinai
School of Medicine of the City of New York(1).
4.7 Warrant for Series C Preferred Stock, issued to Raymond, James
& Associates(1).
4.8 Investors Rights Agreement, dated July 18, 1995, among the
Registrant and the investors named therein(1).
+10.1 License Agreement between the Registrant and ARCH
Development Corporation, dated July 1, 1992(1).
+10.2 Technology Transfer Agreement between the Registrant and The
Mount Sinai School of Medicine of the City University of New
York, dated February 9, 1993(1).
+10.3 Materials Transfer and Intellectual Property Agreement
between the Registrant and the Regents of the University of
Michigan, dated February 24, 1995(1).
10.4 Stock Transfer Agreement between the Registrant and the
Regents of the University of Michigan, dated February 24,
1995(1).
33.
<PAGE>
+10.5 Development and License Agreement between the Registrant and
Sang-A Pharm. Co., Ltd., dated May 3, 1995(1).
+10.6 Cooperative Research and Development Agreement between the
Registrant and the National Institutes of Health, dated May 30,
1995(1).
+10.7 Heads of Agreement between the Registrant and SmithKline
Beecham Biologicals S.A., dated October 8, 1995(1).
+10.8 Manufacturing and Development Agreement between the
Registrant and Evans Medical Limited, dated November 7,
1995(1).
10.9 1996 Equity Incentive Plan(1).
10.10 1996 Non-Employee Directors' Stock Option Plan(1).
10.11 1996 Employee Stock Purchase Plan(1).
10.12 Industrial Lease between the Registrant and the Vanni
Business Park General Partnership, dated August 29, 1995(1).
+10.13 First Amendment to License Agreement between the Registrant
and ARCH Development Corporation, dated March 15, 1996(1).
+10.14 Biological Materials License Agreement between the
Registrant and the National Institutes of Health, dated May 31,
1996(1).
11.1 Statement regarding Computation of Pro Forma Net Loss Per
Share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. See Signature Page.
27.1 Financial Data Schedules.
---------------------------
+ Confidential treatment has been granted for portions of this
exhibit.
(1) Incorporated by reference to the correspondingly numbered exhibit
to the Company's Registration Statement on Form S-1, File No.
333-05209, filed June 5, 1996, as amended.
(2) Incorporated by reference to the correspondingly numbered exhibit
to the Company's Quarterly Report on Form 10-Q, File No. 0-20815,
for the quarter ended September 30, 1996, filed December 20,
1996.
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended December
31, 1996.
34.
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly organized, on the 25th day of March 1997.
AVIRON
By: /s/ J. Leighton Read, M.D.
-----------------------------
J. Leighton Read, M.D.
Chairman and Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints J. Leighton Read, M.D. and Vera
Kallmeyer, M.D., Ph.D., or either of them, his or her attorney-in-fact, each
with the power of substitution, for him or her in any and all capacities, to
sign any amendments to this Report, and to file the same, with exhibits thereto
and other documents in connections therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-in-
fact, or his or her substitute or substitutes, may do or cause to be done by
virtue hereof.
In accordance with the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates stated.
35.
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/ J. Leighton Read, M.D. Chairman and Chief Executive Officer March 25, 1997
- ----------------------------------- (Principal Executive Officer)
J. Leighton Read, M.D.
/S/ Vera Kallmeyer, M.D., Ph.D. Chief Financial Officer and Vice President, March 25, 1997
- ----------------------------------- Corporate Development
Vera Kallmeyer, M.D., Ph.D. (Principal Financial and Accounting Officer)
- ----------------------------------- Director
Reid W. Dennis
/S/ Paul H. Klingenstein Director March 25, 1997
- -----------------------------------
Paul H. Klingenstein
/S/ Bernard Roizman, Sc.D. Director March 25, 1997
- -----------------------------------
Bernard Roizman, Sc.D.
/S/ L. James Strand, M.D. Director March 25, 1997
- -----------------------------------
L. James Strand, M.D.
/S/ Jane E. Shaw, Ph.D. Director March 25, 1997
- -----------------------------------
Jane E. Shaw, Ph.D.
</TABLE>
36.
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
PAGE
----
Report of Ernst & Young LLP, Independent Auditors.............. F-2
Balance Sheets at December 31, 1995 and 1996................... F-3
Statements of Operations for each of the three years
in the period ended December 31, 1996........................ F-4
Statement of Stockholders' Equity for each of the three years
in the period ended December 31, 1996........................ F-5
Statements of Cash Flows for each of the three years
in the period ended December 31, 1996........................ F-6
Notes to Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Aviron
We have audited the accompanying balance sheets of Aviron as of December
31, 1995 and 1996, and the related statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aviron at December 31, 1995
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
February 14, 1997
F-2
<PAGE>
AVIRON
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
ASSETS 1995 1996
----------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 11,532 $ 12,166
Short-term investments 6,287 5,706
Accounts receivable - 500
Prepaid expenses and other current assets 679 813
-------- --------
Total current assets 18,498 19,185
Property and equipment, net 1,275 2,319
Deposits and other assets 105 88
-------- --------
TOTAL ASSETS $ 19,878 $ 21,592
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 312 $ 695
Accrued compensation 130 138
Accrued clinical trial costs 545 752
Accrued offering costs - 474
Accrued expenses and other liabilities 108 143
Deferred revenue 208 -
Current portion of capital lease obligations 420 572
-------- --------
TOTAL CURRENT LIABILITIES 1,723 2,774
Capital lease obligations 618 871
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 43,000,000 and 5,000,000
shares authorized at December 31, 1995 and 1996 respectively,
issuable in series; none outstanding at December 31, 1996;
39,031,971 issued and outstanding at December 31, 1995 39,844 -
Common Stock, $0.001 par value; 53,000,000 and 30,000,000
shares authorized at December 31, 1995 and 1996, respectively,
758,306 and 11,452,033 shares issued and outstanding
at December 31, 1995 and 1996, respectively 317 11
Additional paid-in capital - 59,127
Notes receivable from stockholders - (157)
Deferred compensation (180) (1,099)
Accumulated deficit (22,444) (39,935)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 17,537 17,947
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,878 $ 21,592
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
AVIRON
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
------------- ----------- ---------
<S> <C> <C> <C>
REVENUES:
License revenue $ - $ 1,500 $ -
Contract revenue - 207 1,625
-------- -------- ---------
TOTAL REVENUES - 1,707 1,625
OPERATING EXPENSES:
Research and development 4,216 10,220 14,997
General and administrative 2,493 3,252 4,595
-------- -------- ---------
TOTAL OPERATING EXPENSES 6,709 13,472 19,592
-------- -------- ---------
LOSS FROM OPERATIONS (6,709) (11,765) (17,967)
OTHER INCOME/EXPENSE:
Interest income 306 520 658
(99) (158) (192)
Interest expense
-------- -------- ---------
TOTAL OTHER INCOME, NET 207 362 466
-------- -------- ---------
NET LOSS $(6,502) $(11,403) $(17,501)
======== ======== =========
PRO FORMA NET LOSS PER SHARE $(1.24) $(1.84)
========= =========
Shares used in computing pro forma net loss per share 9,165 9,528
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
AVIRON
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
PREFERRED STOCK COMMON STOCK
------------------------------------------- ----------------------
ADDITIONAL
PAID-IN NOTES DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 21,666,667 $ 17,406 685,550 13 - - -
- --------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options - - 9,864 3 - - -
Net unrealized loss on - - - - - - -
available-for-sale
investments
Net loss - - - - - - -
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 21,666,667 17,406 695,414 16 - - -
- --------------------------------------------------------------------------------------------------------------------------------
Issuance of Series B 1,323,734 1,588 - - - - -
convertible preferred stock
at $1.20
per share for certain
in-process technology
Issuance of Series C 16,041,570 20,850 - - - - -
convertible preferred stock
at $1.35
per share net of issuance
costs of $807
Exercise of stock options - - 62,892 31 - - -
Deferred compensation - - - 270 - - (270)
related to the grant of
certain
stock options
Amortization of deferred - - - - - - 90
compensation
Change in net unrealized - - - - - - -
loss on available-for-sale
investments
Net loss - - - - - - -
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 39,031,971 $ 39,844 758,306 317 - - $ (180)
- --------------------------------------------------------------------------------------------------------------------------------
Issuance of Series C 136,326 184 - - - - -
convertible preferred stock
at $1.35
per share
Conversion of preferred (39,168,297) (40,028) 7,833,633 (309) 40,337 - -
stock to common stock in
conjunction with Initial
Public Offering
Issuance of common stock in - - 2,152,800 2 14,902 - -
Initial Public Offering net
of offering costs of $2,319
Issuance of common stock in - - 239,200 - 1,914 - -
private placement
Exercise of stock options - - 468,094 1 335 (262) 48
and warrants, net of
cancellations
Forgiveness of notes - - - - - 105 -
receivable from stockholders
Deferred compensation - - - - 1,639 - (1,639)
related to the grant of
certain
stock options
Amortization of deferred - - - - - - 672
compensation
Change in net unrealized - - - - - - -
loss on available-for-sale
investments
Net loss - - - - - - -
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 - $ - 11,452,033 $ 11 $59,127 ($157) ($1,099)
================================================================================================================================
<CAPTION>
Total
Accumulated Stockholders'
Deficit Equity
<S> <C> <C>
- -----------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 (4,525) 12,894
- -----------------------------------------------------------
Exercise of stock options - 3
Net unrealized loss on (33) (33)
available-for-sale
investments
Net loss (6,502) (6,502)
- ------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 (11,060) 6,362
- ------------------------------------------------------------
Issuance of Series B - 1,588
convertible preferred stock
at $1.20
per share for certain
in-process technology
Issuance of Series C - 20,850
convertible preferred stock
at $1.35
per share net of issuance
costs of $807
Exercise of stock options - 31
Deferred compensation - -
related to the grant of
certain
stock options
Amortization of deferred - 90
compensation
Change in net unrealized 19 19
loss on available-for-sale
investments
Net loss (11,403) (11,403)
- -----------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 ($22,444) $17,537
- -----------------------------------------------------------
Issuance of Series C - 184
convertible preferred stock
at $1.35
per share
Conversion of preferred - -
stock to common stock in
conjunction with Initial
Public Offering
Issuance of common stock in - 14,904
Initial Public Offering net
of offering costs of $2,319
Issuance of common stock in - 1,914
private placement
Exercise of stock options - 122
and warrants, net of
cancellations
Forgiveness of notes - 105
receivable from stockholders
Deferred compensation - -
related to the grant of
certain
stock options
Amortization of deferred - 672
compensation
Change in net unrealized 10 10
loss on available-for-sale
investments
Net loss (17,501) (17,501)
- -----------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 ($39,935) $17,947
===========================================================
</TABLE>
See accompanying notes
F-5
<PAGE>
AVIRON
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1995 1996
------------ ---------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .............................................................. $ (6,502) $(11,403) $(17,501)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ....................................... 416 544 541
Acquired technology and patent rights ............................... -- 1,588 --
Amortization of deferred compensation ............................... -- 90 672
Changes in assets and liabilities:
Accounts receivable ................................................ -- -- (500)
Prepaid expenses and other current assets .......................... (46) (574) (134)
Deposits and other assets .......................................... (4) (86) 17
Accounts payable ................................................... (39) 211 383
Accrued expenses and other liabilities ............................. 96 514 724
Deferred revenue ................................................... -- 208 (208)
-------- -------- --------
Net cash used in operating activities ................................. (6,079) (8,908) (16,006)
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments ................................. (9,755) (9,493) (10,342)
Maturities of short-term investments ................................ 11,579 8,722 10,933
Expenditures for property and equipment ............................. (260) (238) (651)
-------- -------- --------
Net cash provided by (used in) investing activities ................... 1,564 (1,009) (60)
-------- -------- --------
Net cash provided by (used in) financing activities:
Proceeds from capital lease line of credit .......................... 620 -- --
Principal payments on capital lease obligation ...................... (212) (384) (528)
Proceeds from issuance of:
Series C convertible preferred stock ............................... -- 20,850 184
Common stock ....................................................... 3 31 17,044
-------- -------- --------
Net cash provided by financing activities ............................. 411 20,497 16,700
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .................. (4,104) 10,580 634
Cash and cash equivalents at beginning of year ........................ 5,056 952 11,532
-------- -------- --------
Cash and cash equivalents at end of year .............................. $ 952 $ 11,532 $ 12,166
======== ======== ========
Supplemental schedule of non-cash financing and investing
activities:
Issuance of common stock for certain technology and patent rights$ .. -- $ 1,588 $ --
Equipment acquired under line of credit ............................. 648 365 933
Deferred compensation related to grant of certain stock options, less
cancellations ....................................................... -- 270 1,591
Common stock issued in exchange for notes receivable, less
cancellations ....................................................... -- -- 262
Forgiveness of notes receivable ...................................... -- -- 105
</TABLE>
See accompanying notes
<PAGE>
AVIRON
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Aviron (the "Company") was incorporated in the State of California on April
15, 1992 and was reincorporated in the State of Delaware in November 1996. The
Company was organized to develop and commercialize cost-effective forms of
disease prevention and treatment based on live virus vaccines. Prior to October
1995, the Company was considered to be in the development stage.
The Company anticipates working on a number of long-term development
projects which will involve experimental and unproven technology. The projects
may require many years and substantial expenditures to complete, and may
ultimately be unsuccessful. Therefore, the Company will need to obtain
additional funds from outside sources to continue its research and development
activities, fund operating expenses, pursue regulatory approvals and build
production, sales and marketing capabilities, as necessary. Management believes
sufficient capital is available to achieve planned business objectives including
supporting preclinical development and clinical testing, through at least 1997.
For periods thereafter, the Company intends to raise additional capital through
the issuance of equity or debt securities or through additional alliances with
corporate partners. If adequate funds are not available, the Company may be
required to delay, reduce the scope of, or eliminate one or more of its
development programs or obtain funds through collaborative arrangements with
others that may require the Company to relinquish rights to certain of its
technologies, product candidates or products that the Company would otherwise
seek to develop or commercialize itself.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents. Cash equivalents include
$5,181,000 and $4,668,000 in money market funds at December 31, 1995 and 1996,
respectively.
F-7
<PAGE>
SHORT-TERM INVESTMENTS
The Company's entire short-term investment portfolio is currently classified
as available-for-sale and is carried at fair value based on quoted market prices
with the unrealized gains and losses included in stockholders' equity. The
amortized cost of debt securities classified as available-for-sale is adjusted
for amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. Realized gains or losses and
declines in value judged to be other-than-temporary are included in other
income. The cost of securities sold is based on the specific identification
method. The Company has not experienced any significant realized gains or losses
on its investments.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the respective assets
which range from three to seven years. Leasehold improvements are amortized on a
straight-line basis over the shorter of their useful lives or the term of the
lease.
REVENUE RECOGNITION
Collaborative research revenue earned is based on research expenses
incurred. Amounts received in advance of services to be performed are recorded
as deferred revenue until the related expenses are incurred. Milestone payments
are recognized as revenue in the period earned.
STOCK COMPENSATION
The Company accounts for stock options granted to employees using the
intrinsic-value method and thus recognizes no compensation expense for options
granted with exercise prices equal to the fair value of the Company's common
stock on the date of the grant.
NET LOSS PER SHARE
Except as noted below, historical net loss per share is computed using the
weighted average number of common shares outstanding. Common equivalent shares
are excluded from the computation as their effect is antidilutive, except that,
pursuant to the Securities and Exchange Commission Staff Accounting Bulletins,
common and common equivalent shares issued during the period beginning 12 months
prior to the initial filing of the proposed public offering at prices
substantially below the assumed public offering price have been included in the
calculation as if they were outstanding for all periods presented (using the
treasury stock method and the assumed public offering price for stock options
and warrants and the if-converted method for convertible preferred stock). Net
loss per share calculated on this basis is as follows:
F-8
<PAGE>
<TABLE>
Years ended December 31
---------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net loss per share $ (1.41) $ (2.48) $ (3.29)
Shares used in calculating net loss per share 4,597,207 4,607,021 5,312,826
</TABLE>
The pro forma net loss per share has been computed as described above and
also gives effect to the conversion of convertible preferred shares that
occurred automatically upon completion of the Company's initial public offering
from the original date of issuance.
REVERSE STOCK SPLIT
In May 1996, the Company filed restated Articles of Incorporation in
California to effect a one-for-five reverse stock split of all outstanding
shares of common stock, common stock options and warrants. The conversion ratio
of all outstanding shares of convertible preferred stock were adjusted such that
each preferred share converts into .20 shares of common stock. All common share
and per share data in the accompanying financial statements has been adjusted
retroactively to give effect to the reverse stock split.
2 LICENSE AGREEMENTS
ARCH DEVELOPMENT CORPORATION
On July 1, 1992, the Company entered into an exclusive license agreement
with ARCH Development Corporation ("ARCH") to acquire the rights to use or
sublicense certain technology and make, use or sell certain licensed products.
The agreement calls for the Company to make certain payments to ARCH totaling as
much as $2.6 million as certain milestones are met. No benchmark payments were
made or were due through 1996. If commercialization is achieved, the Company
will be required to pay ARCH royalties based on net sales of the licensed
products. Further, if the Company were to sublicense the technology, it would be
required to pay ARCH royalties on net sales of the sublicensee and, under
certain circumstances, up to 50% of the license fee paid by the sublicensee. In
conjunction with this license agreement, the Company sold 40,000 shares of
common stock to ARCH at $0.005 per share in 1992. Subsequent to this agreement,
affiliates of ARCH purchased shares of the Company's Series A, B and C preferred
stock, which were automatically converted to 222,799 shares of common stock upon
the closing of the Company's initial public offering.
THE MOUNT SINAI SCHOOL OF MEDICINE
In 1993, the Company entered into a technology transfer agreement with The
Mount Sinai School of Medicine of the City University of New York ("Mount
Sinai") to acquire certain patent rights and technical information. Pursuant to
the agreement, the Company issued to Mount
F-9
<PAGE>
Sinai 35,000 shares of common stock which resulted in a charge to research and
development expense of $8,750, and warrants to purchase, in the aggregate,
225,000 shares of Series A preferred stock. The warrants become exercisable upon
the occurrence of specific milestones and expire five years from such date or on
the day preceding the sale of the Company. Upon the closing of the Company's
initial public offering, warrants previously exercisable for 45,000 shares of
Series A preferred stock became exercisable for 9,000 shares of common stock at
$4.50 per share. Upon the closing of the initial public offering, warrants
covering an additional 148,750 shares of Series A preferred stock became
exercisable for 29,750 shares of common stock at $10.00 per share. The remaining
warrants were canceled. The Company is also required to reimburse Mount Sinai
for costs incurred in connection with the maintenance and protection of certain
patents.
UNIVERSITY OF MICHIGAN
In February 1995, the Company signed a license agreement with the University
of Michigan. The license agreement gives the Company a worldwide license to the
University of Michigan's inventions and discoveries related to a cold adapted
influenza vaccine, including the ability to develop, use, sublicense,
manufacture and sell products and processes claimed in the patent rights. Under
the arrangement, the Company paid the University of Michigan and expensed a
$100,000 fee and issued shares of Series B preferred stock which converted into
264,746 shares of common stock upon the closing of the Company's initial public
offering, resulting in a charge to research and development expense of
$1,588,481. Upon commercialization of the vaccine product, the license agreement
provides that the Company will pay royalties based on net revenues as well as
issuing warrants to purchase 1.25% of the Company's then total outstanding
common stock at an exercise price equal to $10.00 per share. The warrant will be
exercisable for five years after its issuance date. In conjunction with the
license agreement, the Company signed a research agreement with the University
of Michigan which obligates the Company to fund approximately $530,000 of
specific research projects. As of December 31, 1996, the Company had funded
$441,000 for research under this agreement. The Company had also paid the
University of Michigan $110,000 for other research services.
NEUROVIR RESEARCH, INC.
In July 1996, the Company licensed certain of its patent rights covering or
relating to the use of HSV-2 for treatment of cancer and for gene therapy, but
excluding use of vaccines, to NeuroVir Research Inc., a private Canadian
corporation. In exchange, the Company received 458,334 shares of common stock,
3,208,332 shares of preferred stock and a warrant to purchase 1,000,000 shares
of common stock. At December 31, 1996, the Company owned 27% of NeuroVir's
outstanding capital stock. The Company's investment has a carrying value of zero
and Aviron is under no obligation to provide any funding to NeuroVir. As no
market exists for NeuroVir's capital stock, it is not practicable to determine
the fair value of shares held by the Company.
F-10
<PAGE>
3 DEVELOPMENT AGREEMENTS
SMITHKLINE BEECHAM BIOLOGICALS S.A.
In October 1995, the Company signed an agreement with SmithKline Beecham
Biologicals S.A. ("SmithKline Beecham") which grants SmithKline Beecham
exclusive worldwide (excluding Korea) rights to produce and market any
prophylactic and therapeutic Epstein-Barr Virus ("EBV") vaccines under the
Company's patents. Under the Agreement, SmithKline Beecham paid the Company a
$1,500,000 nonrefundable licensing fee which was recognized as revenue in 1995
and is required to make additional benchmark payments as certain milestones are
met. Upon commercialization, SmithKline Beecham will pay the Company a royalty
based on net sales (by country). In conjunction with the licensing rights,
SmithKline Beecham will fund the Company's development of the EBV vaccine for a
minimum of two years based on approved budgeted amounts. For the years ended
December 31, 1995 and 1996, the Company recognized $125,000 and $1,625,000
respectively of development revenue pursuant to the agreement. Research costs
incurred in 1995 and 1996 under this arrangement approximated development
revenue recognized.
SANG-A PHARM. CO., LTD.
In May 1995, the Company signed a development and licensing agreement with
Sang-A Pharm. Co., Ltd. ("Sang-A"), a Korean pharmaceutical company. The
agreement covers a wide range of vaccine products and grants Sang-A the
exclusive rights and licenses to such products in South and North Korea
("Korea"). Under the terms of the agreement, Sang-A will conduct all clinical
development work necessary for approval in Korea at its expense, and is required
to make payments based on certain milestones and, upon commercialization of each
product, to pay royalties based on net revenues. The agreement also gives Sang-A
the first right of refusal to supply a percentage of Aviron's products in
selected countries.
In connection with this agreement, Sang-A purchased shares of Series C
preferred stock which converted into 853,096 shares of common stock upon the
closing of the Company's initial public offering. In connection with the
initial public offering, Sang-A purchased an additional 239,200 shares of common
stock.
F-11
<PAGE>
4 INVESTMENTS
At December 31, 1995 and 1996, the Company's short-term investments
consisted of the following debt securities, all of which had maturities of one
year or less (in thousands) and are classified as available for sale:
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
As of December 31, 1995:
U.S. Treasury securities and obligations $ 1,025 $2 $ (4) $ 1,023
of U.S. government agencies
U.S. corporate commercial paper 3,705 -- -- 3,705
U.S. corporate obligations 1,571 -- (12) 1,559
------- -- ---- -------
$ 6,301 $2 $(16) $ 6,287
======= == ==== =======
As of December 31, 1996:
U.S. Municipal Bonds $ 999 $ -- -- $ 999
U.S. government agency obligation 1,001 -- -- 1,001
U.S. corporate commercial paper 8,087 -- (2) 8,085
U.S. corporate obligations 2,001 1 -- 2,002
Foreign Government Securities 933 (3) 930
------- -- ---- -------
$13,021 $1 $ (5) $13,017
======= == ==== =======
</TABLE>
Included in the above table as of December 31, 1996 are U.S. corporate
obligations, commercial paper and U.S. government agency obligations with a fair
value of $7,311,000 which are classified as cash equivalents in the accompanying
balance sheet.
F-12
<PAGE>
5 PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1995 1996
------- --------
<S> <C> <C>
Laboratory equipment $1,512 $ 1,984
Computer equipment 323 459
Office equipment 90 157
Leasehold improvements 62 971
------ -------
$1,987 $ 3,571
Less accumulated depreciation
and amortization (712) (1,252)
------ -------
$1,275 $ 2,319
====== =======
</TABLE>
6 LEASE ARRANGEMENTS
In April 1994, the Company entered into a lease line of credit that bears
interest based on an average of the three-year and five-year indices of U.S.
Treasury bonds (14% at December 31, 1996). Outstanding balances under the line
are secured by the related equipment purchased. On September 9, 1996, a $250,000
lease line extension was granted to the Company with terms and conditions
similar to the original lease line; the extension will expire March 31, 1997.
At December 31, 1996, $194,000 of the line was available.
In connection with this financing arrangement, the Company issued warrants
to purchase shares of the Company's Series B preferred stock. These warrants
were exercised in exchange for 34,513 shares of common stock prior to the
initial public offering of the Company's common stock. As of December 31, 1996,
all of the warrants had been exercised.
Included in property and equipment at December 31, 1995 and 1996 are assets
with a cost of $1,826,000 and $2,806,000, respectively, and accumulated
amortization of $689,000 and $1,106,000, respectively, which have been financed
pursuant to the lease line of credit.
The Company has entered into an operating lease agreement for office and
research facilities which expires in 2005 and includes an option allowing the
Company to extend the lease for two additional five-year terms. The agreement
requires the Company to pay operating costs, including property taxes,
utilities, insurance and maintenance. Rent expense for the years ended December
31, 1994, 1995 and 1996 was $168,000, $413,000, and $728,000 respectively.
F-13
<PAGE>
At December 31, 1996, the Company's aggregate commitments under such
arrangements are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Lease Operating
Obligations Lease
--------------------- ---------
<S> <C> <C>
Years ending December 31,
1997 $ 735 $ 866
1998 536 919
1999 406 924
2000 61 950
2001 - 961
Thereafter - 3,949
------ ------
1,738 $8,569
------
Less amounts representing interest (295)
------
1,443
Less current portion (572)
------
$ 871
======
</TABLE>
7 STOCKHOLDERS' EQUITY
COMMON STOCK
During June and July 1992, 648,000 shares of common stock were issued to the
Company's founders, consultants and a licensor of technology at $0.005 per
share. These shares are subject to certain transfer restrictions. Certain of
these shares, until vested, are subject to repurchase at $0.005 per share
(adjusted to reflect any stock splits or stock dividends) on termination of
employment. In addition, certain shares of common stock issued to members of
management in 1995 and 1996 through exercises of stock options are subject to
repurchase by the Company at $0.50-$2.50 per share. The above shares vest over
periods specified by the Board of Directors. At December 31, 1995 and December
31, 1996, 101,700 and 186,220 shares remain subject to the Company's right of
repurchase, respectively.
PREFERRED STOCK
Concurrent with the closing of the Company's initial public offering in
November 1996, all outstanding shares of preferred stock converted into
7,833,633 shares of common stock of the Company.
In November 1995, in conjunction with the private placement of Series C
preferred stock, the Company issued to the placement agent warrants to purchase
352,536 shares of the Company's Series C preferred stock. These warrants have an
exercise price of $1.62 per share and will expire in November 2000. As of the
closing of the initial public offering of the Company's common stock, the
warrant became exercisable for 70,507 shares of common stock
F-14
<PAGE>
with an exercise price of $8.10 per share. As of December 31, 1996, none of the
warrants had been exercised.
WARRANT
In addition to the warrants to purchase 38,750 shares of common stock issued
to Mount Sinai (see Note 2), in December 1996, the Company's Board of Directors
approved the issuance of a warrant to purchase 16,666 shares of common stock to
the Company's attorneys, at an exercise price of $2.00 per share, in lieu of
$100,000 of legal fees, which were included in accrued offering costs at
December 31, 1996. The warrant was not issued by the Company until January 1997.
The Company has reserved shares of common stock for issuance upon exercise of
these warrants.
STOCK OPTIONS
On September 15, 1992, the board of directors adopted the 1992 Stock Option
Plan (the "1992 Plan"). In March 1996, the Company amended and restated the 1992
Plan as the 1996 Equity Incentive Plan (the "1996 Plan"). Total shares of
common stock reserved for future issuance under the 1996 Plan were increased to
1,750,000. The 1996 Plan provides for the grant of incentive and nonstatutory
stock options to employees and consultants of the Company and became effective
in November 1996 upon the closing of the initial public offering.
In March 1996, the Company adopted the 1996 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") under which 200,000 shares of common stock
are reserved for issuance pursuant to nonstatutory stock options. The Directors'
Plan became effective upon the closing of the initial public offering. At
December 31, 1996, the Company granted 13,775 options to directors at $7.00 per
share in accordance with the terms of the Plan.
The Company's Plans have 1,147,977 shares available to grant options to
employees and directors at December 31, 1996. All options granted have 10 year
terms and vest and become fully exercisable at the end of 50 months of continued
employment.
In addition, the Company has issued non-qualified stock options outside of
the 1992 Plan.
F-15
<PAGE>
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------------------------- --------------------------- ----------------------------
Options Weighted Ave Options Weighted Ave Options Weighted Ave
Exercise Price Exercise Price Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of 337,917 $0.30 369,287 $0.50 613,038 $0.50
year
Granted 71,230 $0.50 309,000 $0.67 640,080 $2.73
Exercised (9,864) $0.25 (62,892) $0.50 (452,781) $1.13
Forfeited (29,996) $0.37 (2,357) $0.50 (188,401) $2.97
------- ------- -------
Outstanding-end of year 369,287 $0.50 613,038 $0.50 611,936 $1.60
======= ======= =======
Exercisable at end of year 347,893 $0.67 216,030 $0.59
Weighted-average fair
value of options granted
during year $0.29 $1.38
</TABLE>
During the year ended December 31, 1996, officers of the Company exercised
options granted outside the Plan for 168,000 shares by signing promissory notes
amounting to $310,000 which bear interest at 5.73% subject to the Company's
right of repurchase which lapses over fifty months. In April 1996, due to an
executive's termination, the Company repurchased 19,200 unvested common shares
by canceling a promissory note amounting to $48,000.
For certain options granted during 1995 and 1996, the Company recognized as
deferred compensation the excess of the deemed value for financial reporting
purposes of the common stock issuable upon the exercise of such options over the
aggregate exercise price of such options. Total deferred compensation of
$1,862,000 (less cancellations) recorded through December 31, 1996 is being
amortized over the vesting period of such options on an accelerated basis. A
portion of these options vested immediately upon grant. During the year ended
December 31, 1996, the Company granted options (including options outside the
Plan) with exercise prices of $1.75 to $2.50 and recorded related deferred
compensation of approximately $1,591,000.
In August 1996, as a result of uncertainty about the Company's ability to
complete its initial public offering as anticipated, the Board of Directors
agreed to cancel all outstanding options which had been granted previously with
exercise prices of $2.50 per share, and issue new options to these optionholders
with exercise prices of $1.25 per share in exchange for a
F-16
<PAGE>
three month delay in the vesting of such options. As a result of this
transaction, the Company recognized an additional $311,000 of deferred
compensation for financial reporting purposes. For those employees who had early
exercised their options at $2.50 per share in exchange for notes receivable, the
Board of Directors agreed to forgive one-half of the notes receivable amount
such that the effective exercise price for these options was $1.25 per share,
and to reimburse such employees for any tax resulting from such forgiveness.
The options outstanding at December 31, 1996 have been segregated into three
ranges for additional disclosure as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------------------
Options Weighted-
Options Weighted-average Weighted- Currently average
Outstanding at Remaining Average Exercisable at Exercise
Range of Exercise Prices Dec. 31, 1996 Contractual Life Exercise Price Dec. 31, 1996 Price
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.25-$1.00 273,736 8.5 $0.46 186,448 $0.43
$1.00-$5.00 267,475 9.8 1.25 28,094 1.25
$5.00-$7.50 70,725 9.8 7.35 1,488 7.50
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net loss and net loss per share is required
by Statement 123, which also requires that the information be determined as if
the Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair market value method of that statement. The
fair value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average assumptions for
1995 and 1996: risk free interest rate of 6.07% for 1995 and 5.94% for 1996;
volatility factors of the expected market price of the Company's common stock of
.7327; no expected dividends; and a weighted-average expected life of the option
of 1.5 years from the vested date.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options and employee stock purchase plans
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair market value estimate, in management's opinion, the existing models do not
necessarily provide a reliable
F-17
<PAGE>
single measure of the fair value of its employee stock options and the employee
stock purchase plan.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for net loss per share
information):
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Pro forma net loss $(11,418) $(17,595)
Pro forma net loss per share $ (1.25) $ (1.91)
</TABLE>
Since Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1999.
EMPLOYEE STOCK PURCHASE PLAN
In March 1996, the Company also adopted the Employee Stock Purchase Plan
(the "Purchase Plan"). A total of 250,000 shares of common stock are reserved
for issuance under the Purchase Plan. The Purchase Plan permits eligible
employees to purchase common stock through payroll deductions at a price equal
to the lower of 85% of the fair market value of the Company's common stock at
the beginning or end of the applicable offering period. The Purchase Plan became
effective in November 1996 upon the closing of the initial public offering. No
shares had been issued under the Purchase Plan at December 31, 1996.
8 INCOME TAXES
As of December 31, 1996, the Company had a federal net operating loss
carryforward of approximately $37,700,000. The net operating loss carryforward
will expire at various dates beginning from 2007 through 2011, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "ownership change" provisions of the
Internal Revenue Code of 1986.
Significant components of the Company's deferred tax assets as of December
31 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
-------- ---------
<S> <C> <C>
Net operating loss carryforward $ 7,100 $ 13,200
Capitalized research and development expenses 1,060 1,100
Research tax (expire 2007-2011) credit 550 1,100
Other - Net 140 500
------- --------
Net deferred tax assets 8,850 15,900
Valuation allowance (8,850) (15,900)
------- --------
$ -- $ --
======= ========
</TABLE>
F-18
<PAGE>
Because of the Company's lack of earnings history, the net deferred tax
asset has been fully offset by a valuation allowance. The valuation allowance
increased by approximately $2,600,000 and $4,450,000 in 1994 and 1995,
respectively.
9 RELATED PARTY TRANSACTIONS
In 1995, the Company made unsecured loans to officers totalling $100,000
which bear interest at 7.75% and are due in April 2000. As of December 31, 1996,
the unpaid balance was $80,000.
An officer of the Company is a shareholder in an investment advisory
business which was paid a commission by the Company of approximately $334,000
during 1995 and earned an additional $115,000 commission as of December 31, 1996
both in connection with the Sang-A transaction (see Note 3). The officer
received no direct compensation from the transaction.
10 LITIGATION
On July 1, 1996, Chiron Corporation ("Chiron") filed a complaint against the
Company in San Mateo County, California, Superior Court, alleging that certain
of Aviron's patent applications relating to its EBV program are based on Chiron
proprietary information which was improperly conveyed to Aviron by a former
Chiron employee, and that the Company has engaged in unfair competition. The
complaint seeks unspecified monetary damages and seeks to impose a constructive
trust, for Chiron's benefit, over the affected patent applications, an exclusive
assignment by the Company to Chiron of such patent applications and an
injunction against the Company from disclosing, using or applying such alleged
proprietary information. Aviron believes that the allegations in the Chiron
complaint are without merit and intends to vigorously defend itself against such
action. Aviron does not utilize the alleged Chiron proprietary information in
any of its potential products currently under development. Even if Chiron were
to prevail in this action, the Company believes that it is uncertain that a
court would grant a constructive trust over the specified patent applications,
which include many claims (including certain rights the Company licensed to
SmithKline Beecham) not relating to the alleged Chiron proprietary technology.
Were a court to grant a constructive trust over such patent applications, it
could adversely impact the Company's agreement with SmithKline Beecham. There
can be no assurance that Chiron will not ultimately prevail in this action or
that it will not obtain the remedies it is seeking. In addition, the Company
expects that the legal costs incurred in defending itself against this action
could be substantial.
F-19
<PAGE>
EXHIBIT INDEX
NO. OF EXHIBIT DESCRIPTION
-------------- -----------
3.1 Bylaws of the Registrant(2).
3.2 Restated Certificate of Incorporation of the Registrant(2).
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen Stock Certificate(1).
4.3 Warrant for Series A Preferred Stock, issued to The Mount
Sinai School of Medicine of the City of New York(1).
4.4 Warrant for Series A Preferred Stock, issued to The Mount
Sinai School of Medicine of the City of New York(1).
4.5 Warrant for Series A Preferred Stock, issued to The Mount
Sinai School of Medicine of the City of New York(1).
4.6 Warrant for Series A Preferred Stock, issued to The Mount
Sinai School of Medicine of the City of New York(1).
4.7 Warrant for Series C Preferred Stock, issued to Raymond, James
& Associates(1).
4.8 Investors Rights Agreement, dated July 18, 1995, among the
Registrant and the investors named therein(1).
+10.1 License Agreement between the Registrant and ARCH Development
Corporation, dated July 1, 1992(1).
+10.2 Technology Transfer Agreement between the Registrant and The
Mount Sinai School of Medicine of the City University of New
York, dated February 9, 1993(1).
+10.3 Materials Transfer and Intellectual Property Agreement between
the Registrant and the Regents of the University of Michigan,
dated February 24, 1995(1).
10.4 Stock Transfer Agreement between the Registrant and the
Regents of the University of Michigan, dated February 24,
1995(1).
+10.5 Development and License Agreement between the Registrant and
Sang-A Pharm. Co., Ltd., dated May 3, 1995(1).
+10.6 Cooperative Research and Development Agreement between the
Registrant and the National Institutes of Health, dated May
30, 1995(1).
+10.7 Heads of Agreement between the Registrant and SmithKline
Beecham Biologicals S.A., dated October 8, 1995(1).
+10.8 Manufacturing and Development Agreement between the Registrant
and Evans Medical Limited, dated November 7, 1995(1).
10.9 1996 Equity Incentive Plan(1).
10.10 1996 Non-Employee Directors' Stock Option Plan(1).
10.11 1996 Employee Stock Purchase Plan(1).
10.12 Industrial Lease between the Registrant and the Vanni Business
Park General Partnership, dated August 29, 1995(1).
+10.13 First Amendment to License Agreement between the Registrant
and ARCH Development Corporation, dated March 15, 1996(1).
<PAGE>
NO. OF EXHIBIT DESCRIPTION
-------------- -----------
+10.14 Biological Materials License Agreement between the
Registrant and the National Institutes of Health, dated May
31, 1996(1).
11.1 Statement regarding Computation of Pro Forma Net Loss Per
Share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. See Signature Page.
27.1 Financial Data Schedules.
+ Confidential treatment has been granted for portions of this exhibit.
(1) Incorporated by reference to the correspondingly numbered exhibit to the
Company's Registration Statement on Form S-1, File No. 333-05209, filed
June 5, 1996, as amended.
(2) Incorporated by reference to the correspondingly numbered exhibit to the
Company's Quarterly Report on Form 10-Q, File No. 0-20815, for the quarter
ending September 30, 1996, filed December 20, 1996.
<PAGE>
EXHIBIT 11.1
STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
----------------------------------------------
<S> <C> <C> <C>
Net loss...................................................................... $(17,501,000) $(11,403,000) $(6,502,000)
==============================================
Weighted average shares of Common Stock outstanding........................... 2,641,194 701,662 687,474
Shares related to staff accounting bulletin topic 4D:
Stock options and warrants.................................................. 202,763 270,351 270,351
Common Stock................................................................ 42,185 399,429 403,803
Convertible Preferred Stock (Series C)...................................... 2,426,684 3,235,579 3,235,579
----------------------------------------------
Shares used in computing net loss per share................................... 5,312,826 4,607,021 4,597,207
Net loss per share............................................................ $ (3.29) $ (2.48) $(1.41)
==============================================
Calculation of shares outstanding for computing pro forma net loss per
share:
Shares used in computing net loss per share................................. 5,312,826 4,607,021
Adjusted to reflect the effect of the assumed conversion of
Preferred Stock from the date of issuance.................................... 4,214,895 4,557,921
-------------------------------
Shares used in computing pro forma net loss per share......................... 9,527,721 9,164,942
Pro forma net loss per share.................................................. $ (1.84) $ (1.24)
===============================
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8, No. 333-17029) pertaining to the 1996 Equity Incentive Plan, Employe
Stock Purchase Plan, 1996 Non-Employee Directors' Stock Option Plan and the Non-
Plan Option Grants of Aviron, of our report dated February 14, 1997, with
respect to the financial statements of Aviron included in the Annual Report
(Form 10-K) for the year ended December 31, 1996.
Palo Alto, California
March 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH
FLOWS QUALIFIED INCLUDED IN THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS AND NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,166
<SECURITIES> 0
<RECEIVABLES> 500
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,185
<PP&E> 3,571
<DEPRECIATION> (1,252)
<TOTAL-ASSETS> 21,592
<CURRENT-LIABILITIES> 2,774
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> (41,191)
<TOTAL-LIABILITY-AND-EQUITY> 21,592
<SALES> 0
<TOTAL-REVENUES> 1,625
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 19,592
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 192
<INCOME-PRETAX> (17,501)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,501)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,501)
<EPS-PRIMARY> (1.84)
<EPS-DILUTED> 0
</TABLE>
