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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD
--------------- TO
--------------- .
COMMISSION FILE NUMBER: 0-20815
AVIRON
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 77-0309686
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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297 NORTH BERNARDO AVENUE, MOUNTAIN VIEW, CALIFORNIA 94043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
(650) 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, $.001 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 $25.00 on March 13, 1998, the aggregate
market value of the voting stock held by non-affiliates of the Registrant was
$317,294,575.
On March 13, 1998, there were outstanding 16,094,350 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 4, 1998, which will
be filed with the Securities and Exchange Commission, are incorporated by
reference to the extent stated here.
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EXPLANATORY NOTE
This Amendment on Form 10-K/A is being filed solely to restate the
Company's 1996 and 1995 Financial Data schedules in accordance with Item 601 (c)
of Rule S-K due to the restatement of earnings per share in accordance with SFAS
No. 128.
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TABLE OF CONTENTS
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PART I..................................................................... 1
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 36
Item 3. Legal Proceedings........................................... 36
Item 4. Submission of Matters to a Vote of Security Holders......... 36
PART II.................................................................... 37
Item 5. Market for the Registrant's Common Stock and Related Stock
Matters..................................................... 37
Item 6. Selected Financial Data..................................... 38
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 38
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 42
Item 8. Financial Statements and Supplementary Data................. 42
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 42
PART III................................................................... 43
Item 10. Directors and Executive Officers of the Registrant.......... 43
Item 11. Executive Compensation...................................... 43
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 43
Item 13. Certain Relationships and Related Transactions.............. 43
PART IV.................................................................... 44
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 44
SIGNATURES................................................................. 46
POWER OF ATTORNEY.......................................................... 46
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
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PART I.
ITEM 1. BUSINESS
The following Business section contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Business Risks" and
elsewhere in this Form 10-K.
OVERVIEW
Aviron is a biopharmaceutical company whose focus is the prevention of
disease through innovative vaccine technology. The Company's goal is to become a
leader in the discovery, development, manufacture and marketing of vaccines
which are sufficiently cost effective to justify their use in immunization
programs targeting the general population. Aviron's vaccine programs are based
on both classical live virus vaccine attenuation techniques and the Company's
proprietary genetic engineering technologies. Live virus vaccines, such as those
for smallpox, polio, measles, mumps, rubella and chicken pox, have had a long
record of success in preventing, and in some cases eliminating, disease.
The Company's lead product candidate, a cold adapted influenza vaccine
delivered as an intranasal spray, has been tested in over 5,000 infants,
children, adults and elderly persons and has been shown to provide a high
protection rate against influenza with minimal adverse effects in a pivotal
Phase III clinical trial in children. Aviron is developing this live vaccine for
widespread annual use in children, healthy adults and high risk adults. The
Company has initiated Phase II clinical trials for a live intranasal vaccine for
Parainfluenza Virus Type 3 ("PIV-3") to protect against croup. The Company also
is developing a subunit vaccine for Epstein-Barr Virus ("EBV") to protect
against mononucleosis, in collaboration with SmithKline Beecham Biologicals,
S.A. ("SmithKline Beecham"), which entered Phase I clinical trials in Europe in
October 1997. Aviron is also using its proprietary Rational Vaccine Design
technologies to discover new live virus vaccines. Rational Vaccine Design
involves the addition of antigenic information to enhance the virus' stimulation
of the immune system, the deletion or modification of virulence proteins, or the
alteration of the virus' genetic control signals to slow down its replication.
The Company is applying these technologies to develop vaccine candidates for
diseases caused by Cytomegalovirus ("CMV"), Herpes Simplex Virus Type 2
("'HSV-2") and Respiratory Syncytial Virus ("RSV").
In July 1997, the National Institute of Allergy and Infectious Diseases
("NIAID") of the National Institutes of Health ("NIH") and the Company announced
the results of an initial analysis of the first stage of a pivotal Phase III
clinical trial of Aviron's live cold adapted intranasal influenza vaccine
involving 1,602 children. In this trial, the vaccine demonstrated a 93%
protection rate against culture-confirmed influenza in those children receiving
two doses of the vaccine, the primary endpoint of the study. Only 1% of the
children who received two doses experienced culture-confirmed influenza,
compared to 18% of those receiving placebo. These results were statistically
significant. The clinical investigators have submitted the findings of this
trial for publication in a peer-reviewed medical journal. The Company is
conducting the second stage of this Phase III clinical trial in 1,358 children
who participated in the first stage of this trial to collect immunogenicity
data, as well as additional safety and efficacy data. In 1996, the Company
completed a challenge efficacy study of this vaccine in 92 adults which
demonstrated an 85% protection rate compared to placebo, against
culture-confirmed influenza. These results were also statistically significant.
Previously, Aviron conducted Phase I/II clinical trials of this vaccine in
approximately 600 children and healthy adults.
BACKGROUND
Prevention Technology in the Era of Managed Care and Cost Containment
Market-based changes already underway in the United States health care
system are dramatically altering prospects for technologies which can be used to
manage disease or lower the cost of health care for patients in managed health
plans. Medical cost-containment efforts and the reorganization of United States
health care delivery into managed care systems are changing the basis of
competition for producers of health
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care products. Health maintenance organization ("HMO") enrollment was
approximately 62 million in the United States in 1996 and is growing rapidly.
Decision makers in the United States, such as HMO medical directors, clinical
practice committees, and government health authorities, are increasingly
evaluating whether preventive technologies are more cost effective than treating
disease once it is present. For example, vaccinations are widely used by managed
care organizations and in government programs. In determining whether to use
vaccine approved by the U.S. Food and Drug Administration ("FDA"), decision
makers consider whether it has been recommended by the Advisory Committee on
Immunization Practices ("ACIP") and whether it is cost effective.
Health care cost containment efforts are also evident in many of the
developed economies outside the United States. These efforts include physician
budgets in Germany and general practice schemes in the United Kingdom, where
doctors are given responsibility for the cost of their patients' overall care.
The Immune System and Vaccines
Infections occur when a pathogenic microorganism, such as a virus or
bacterium, invades body tissues and begins to replicate. The human immune system
responds with a battery of resources to contain and eliminate this threat. The
process begins when specialized cells recognize that molecules on the surface of
invading pathogens are foreign (antigens). Immune responses to contain and
eliminate the threat include:
- Antibodies: Antigens stimulate the immune system to produce specific
molecules (antibodies) which bind to and neutralize the virus or
bacterium.
- Cell-mediated response: An effective immune response typically also leads
to the multiplication of specific types of white blood cells (a
cell-mediated response) which have the ability to inactivate the pathogen
or to destroy infected cells, thereby limiting replication of the virus
or bacterium.
- Mucosal immunity: In addition to circulating antibodies and the
cell-mediated response, antibodies are produced in the mucous membranes,
such as those which line the nose and throat. Mucosal immunity is
important in protecting against pathogens which cause disease in the
respiratory, gastrointestinal and genitourinary systems, or which enter
the body through these portals.
Vaccines are designed to stimulate a person's immune system through one or
more of the above mechanisms to induce memory of specific antigens prior to the
invasion of a pathogen. This memory primes the immune system so that it can
inactivate the specific pathogen if encountered again. This memory may be
achieved through one of several techniques, including introduction of a live
attenuated (weakened) virus or bacterium, administration of an antigen fragment
(a subunit), or administration of an inactivated (killed) virus or bacterium.
History of Vaccines
The first successful vaccine against an infectious disease was created by
Edward Jenner who, in 1796, demonstrated that introduction of infected material
from a diseased cow could be used to protect humans from the deadly smallpox
virus. Smallpox vaccination programs based on this live virus vaccine were
gradually adopted by industrialized countries, and a concerted global effort by
public health authorities in this century succeeded in eradicating smallpox from
the human population in the 1970s.
Vaccines against two life-threatening bacterial diseases, diphtheria and
tetanus, came into use early in this century. These vaccines consist of
bacterial toxins which have been chemically inactivated. These are often
administered in combination with an inactivated pertussis bacterium vaccine to
prevent whooping cough. This combination is known as the "DTP" vaccine. Just
prior to World War II, a live attenuated virus vaccine was developed against
yellow fever, used primarily in protecting military personnel and those
traveling to areas where this disease is endemic. In the years after the war
following several widespread polio epidemics, Jonas Salk created the first
successful polio vaccine by growing the wild-type virus and inactivating it
before injection. Salk's vaccine was introduced into widespread use in the early
1950s, but was supplanted in the United States and many other countries by the
orally administered live attenuated polio virus vaccine developed by Albert
Sabin and first introduced in 1961. In the 1960s and 1970s, live attenuated
virus vaccines
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against measles, mumps and rubella (German measles) were successfully developed
and these vaccines are now recommended by the ACIP to be included in childhood
immunization programs.
After a period of almost two decades during which no new vaccines came into
widespread use, genetically-engineered subunit vaccines for hepatitis B were
introduced in the mid-1980s and are now part of the ACIP-recommended childhood
immunization program. In 1990, a vaccine for bacterial meningitis was also added
to this program. Two inactivated vaccines against the hepatitis A virus were
approved in the United States in 1995 and 1996. In 1995, the ACIP also
recommended that children be vaccinated against chicken pox, a virus belonging
to the herpes virus family, using an FDA-approved live virus vaccine.
Current challenges for vaccine innovation include providing effective
protection against the major infectious diseases for which no vaccines are
currently available and improving on current vaccines to achieve higher efficacy
or greater ease of administration.
Types of Vaccines
Live Virus Vaccines
Live virus vaccines expose the immune system to an attenuated form of the
virus which is sufficiently infectious to stimulate a lasting immune response to
the wild-type virus. All of the live virus vaccines in use today are strains
derived from natural infections of humans. Attenuation of live viruses,
including polio, yellow fever, measles, mumps and rubella, and chicken pox
vaccines was accomplished by "passaging," or propagating, these viruses
repeatedly in non-human cells. As a result of this process, these viruses may
acquire mutations that decrease the ability of the virus to cause disease in
humans. After an arbitrary number of passages, the mutated strain is tested for
attenuation in animal models, if available, or directly in human subjects.
Following assessment of safety and immunogenicity (stimulation of an immune
response) in a limited number of human subjects, larger-scale trials are used to
demonstrate efficacy in preventing naturally acquired infections.
The principal advantage of live virus vaccines is their ability to mimic
the natural disease-causing infection and therefore activate the same protective
mechanisms of the human immune system as the disease itself. This process
results in a balanced immune response activating all parts of the immune system,
including systemic and local antibodies as well as cell-mediated immunity. As a
result, live viruses are often considered to be more effective than other types
of vaccines in providing immunity to natural variations in the wild-type viruses
which cause disease. For example, the live polio vaccine is believed to be more
effective in eliminating wild-type polio virus than inactivated polio vaccines.
The basis of these advantages is that live vaccines typically present all of the
surface and internal antigens associated with the natural pathogen. Live virus
vaccines may also be easier to administer through their natural route of
infection, intranasally or orally, as in the case of the oral polio vaccine.
However, an attenuated live vaccine could cause disease resembling natural
infection, as might occur in people with an immune system impaired by a
congenital disease, HIV infection or drug treatment for cancer or organ
transplantation. To date, the live virus vaccines in widespread use rarely have
been associated with significant adverse events. For example, the 19 million
doses of live attenuated polio vaccine administered annually in the United
States are thought to be responsible for only eight to 10 cases of clinical
polio per year. To further reduce the number of these cases, the ACIP is
recommending that the inactivated polio vaccine may be administered, now that
wild-type polio has been virtually eradicated in the United States.
Live virus strains can change as they replicate in human hosts, and it is
possible that a vaccine virus could revert to the wild-type characteristics.
This reversion potential is a small but recognized problem for some of the
current live vaccines, including polio. Finally, there are two theoretical
concerns regarding live attenuated viruses. First, an attenuated vaccine virus
may exchange genetic information with wild-type strains after immunization, with
the resulting strain being more dangerous than either alone. Second, the DNA of
a live virus vaccine could integrate into the genome of the host and cause
cancer or other problems in the future.
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Inactivated and Subunit Virus Vaccines
Inactivated virus vaccines are produced by killing a virus using chemicals.
Some vaccines, such as the hepatitis A vaccine, are based on the whole,
inactivated virus. Other vaccines are the result of various degrees of
purification to concentrate certain surface glycoproteins (subunits) most
responsible for producing immunity. A different approach is used to make the
current hepatitis B vaccine, the first successful recombinant subunit vaccine.
For this vaccine, the tools of molecular biology were applied to clone and
express the dominant hepatitis surface glycoprotein in a yeast production
system. Inactivated and subunit vaccines offer the advantage of little or no
risk of infection from the vaccine itself, assuming the virus has been
adequately inactivated. Good manufacturing techniques also minimize the
possibility of contamination with other viruses or fragments of DNA which could
integrate into the recipient's genes.
The principal disadvantage of inactivated and subunit vaccines for many
viruses has been a lack of success in creating protective immunity. A successful
subunit vaccine requires knowledge of which specific antigens are responsible
for providing protection. Subunit and inactivated vaccines may produce
reasonable levels of circulating antibodies, but are less able to stimulate
antibodies in the mucosal sites of viral entry, such as the lining of the
respiratory, gastrointestinal or genitourinary tracts. To improve stimulation of
the cellular components of the immune system, adjuvants (non-specific immune
stimulants) are typically added to inactivated or subunit vaccines. Only alum
(an aluminum salt preparation) is approved for use as an adjuvant in the United
States. Several new adjuvants are in clinical testing and show promise for
boosting the immune response to subunit antigens. The mechanism by which
adjuvants work is still poorly understood, so each vaccine-adjuvant combination
must be evaluated in a trial and error process in animal models and clinical
trials. Finally, certain inactivated vaccines in clinical trials left recipients
more vulnerable to disease after vaccination, due to an unbalanced immune
response. For example, in trials of experimental inactivated vaccines against
RSV and measles, some children were shown to experience more severe, atypical
disease when they acquired the natural viral infection following vaccination.
Emerging Vaccine Technologies
Several companies and academic scientists have reported that direct
injection of DNA encoding viral antigens can be used to stimulate an immune
response. Although at an early stage, this approach shows promise. However, it
is not clear whether the sustained expression of viral antigens obtainable by
this approach is advantageous in eliciting a better immune response. In
addition, it is possible that the administered DNA may integrate into the genes
of the recipient and cause potential unwanted effects.
Another new technology for vaccination is based on genetic engineering to
modify one virus so that it carries antigens which may stimulate an immune
response to protect against other pathogens. For example, pox virus vector
strains, related to the virus used successfully to eradicate smallpox, have
shown usefulness in protecting dogs and cats against rabies. Other pox virus
vectors are being evaluated in experimental models of human malaria and, in a
hybrid regimen combining doses of a modified live virus, with a subunit HIV
vaccine to protect high risk individuals.
BUSINESS STRATEGY
Aviron's objective is to become a leader in the discovery, development,
manufacture and marketing of vaccines which are sufficiently cost effective to
justify their use in immunization programs targeting the general population. The
Company's strategy is to:
Develop Vaccines to Prevent Diseases That Merit Widespread
Immunization. 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 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.
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Apply Rational Vaccine Design Technologies 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 respiratory viruses related to influenza and chronic virus
infections related to herpes simplex virus, and potentially to the creation of
vectors used in gene therapy and the treatment of cancer. One advantage of
Rational Vaccine Design technology is that the design of engineered viruses
makes them less likely to revert to naturally occurring ("wild-type")
characteristics than classically derived vaccines.
Acquire Promising Products and Technologies. Aviron evaluates opportunities
to in-license or otherwise acquire rights to promising products and technologies
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
NIH, and to the PIV-3 vaccine from the NIH.
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 implementing
widespread vaccine programs based on its products in relation to potential cost
savings to governments and managed health care systems and intends to perform
rigorous cost-effectiveness analyses on its products.
Establish Collaborative Arrangements to Enhance Product Development
Efforts. Aviron intends to continue 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.
Establish Commercialization Capabilities. The Company intends to
participate in the marketing and selling of its cold adapted influenza vaccine
product in partnership with third parties. Aviron intends to enter into one or
more marketing collaborations with established pharmaceutical companies which
would enable it to penetrate the segmented vaccine market. No such collaboration
has been entered into to date. For marketing and sales outside the United
States, the Company intends to establish collaborative relationships with
companies having strong capabilities in local markets. Aviron has secured
production capacity through 2001 for the cold adapted influenza vaccine. In
order to secure future production capacity, Aviron may extend and expand its
existing arrangements, collaborate with other third parties, or establish its
own manufacturing facilities.
AVIRON'S TECHNOLOGY
Aviron's vaccine programs are based on both classical live virus vaccine
attenuation techniques and the Company's proprietary genetic engineering
technologies.
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-adaptation
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 donor
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 ("CDC") and the FDA. Updated strains are made by
mating the master donor strains with recent strains to obtain viruses with the
attenuated properties of the cold adapted master donor strain and the antigenic
properties of the current wild-type strain. This process is called
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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 University of Michigan and has extended this approach by the
introduction of Aviron's proprietary techniques. One such technique is reverse
genetics, which allows the direct introduction of genes from the expected
epidemic strain into the cold adapted master donor strains.
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 vectors 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:
- 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
has identified several vaccine candidates using this approach. 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. The Company plans to file an
Investigational New Drug application ("IND") for the testing of its
vaccine candidates.
- 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 RSV, and a
second-generation vaccine for influenza in the elderly. 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.
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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 Offering
Memorandum.
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STATUS OF CLINICAL DEVELOPMENT
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VACCINE RESEARCH PRECLINICAL PHASE I PHASE II PHASE III RIGHTS(1)
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INFLUENZA ------------------------------------------, Aviron
Intranasal cold adapted live
virus
- Children - Pivotal Phase III clinical trial(2)
-- Stage 1 completed
-- Stage 2 in progress
- Children with Asthma - Safety trial in progress
- Healthy Adults - Challenge efficacy trial completed(3)
- Safety and effectiveness trial in progress(4)
- High-Risk Adults - Safety trial in progress(5)
- Efficacy trial planned(6)
- Manufacturing - Manufacturing consistency lot trial completed
Consistency/Process
- Reverse genetics trial in progress(7)
PARAINFLUENZA VIRUS TYPE 3 -------------------------------, Aviron
Intranasal bovine live virus
- Infants - Phase II clinical trial in progress
EPSTEIN-BARR VIRUS ----------------------, SmithKline
Injectable recombinant Beecham/
subunit glycoprotein Aviron(8)
- Adolescents - Phase I clinical trial in progress
CYTOMEGALOVIRUS -----------, Aviron
Injectable genetically
engineered live virus
- Adolescents/Children - IND filing planned
HERPES SIMPLEX VIRUS TYPE 2 -----------, Aviron
Injectable genetically
engineered live virus
- Adolescents/Children - Preclinical(9)
RESPIRATORY SYNCYTIAL VIRUS -----, Aviron
Intranasal genetically
engineered live virus
- Infants - Research(10)
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(1) Commercial rights for Korea for most listed programs are licensed to
Sang-A. See "-- Collaborative Agreements."
(2) "Pivotal Phase III clinical trial -- Stage 1 completed, Stage 2 in
progress" means Aviron has completed a multi-center, double-blind,
placebo-controlled clinical trial for safety and efficacy in 1,602 healthy
children. Stage 2 has enrolled approximately 85% of the same patients to
collect immunogenicity data as well as additional safety and efficacy data.
(3) "Challenge efficacy trial completed" means Aviron has completed a
multi-center, double-blind, placebo-controlled clinical trial for safety,
immunogenicity and efficacy in 92 healthy adults.
(4) "Safety and effectiveness trial in progress" means Aviron is conducting a
multi-center, double-blind, placebo-controlled clinical trial to assess
safety and effectiveness in 4,561 healthy adults, measured by utilization
of health care services, absenteeism, and influenza-like illness. The
Company expects to receive limited data on the efficacy of the cold adapted
influenza vaccine from this trial given the primary pharmacoeconomic
endpoints of the trial.
(5) "Safety trial in progress" means Aviron is currently conducting a
double-blind, placebo-controlled clinical trial to evaluate the safety of
its vaccine when co-administered with inactivated vaccine in 200 elderly
high risk adults.
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(6) "Efficacy trial planned" means Aviron intends to conduct a clinical trial
to evaluate the efficacy of its vaccine when co-administered with
inactivated vaccine.
(7) "Reverse genetics process trial in progress" means Aviron is conducting a
multi-center, double-blind clinical trial to evaluate the safety of the
reverse genetics process of vaccine manufacture.
(8) Worldwide rights (except Korea) are licensed to SmithKline Beecham; Aviron
retains certain United States co-promotion rights. See "-- Collaborative
Agreements."
(9) "Preclinical" means Aviron is assessing specific vaccine candidates for
growth properties in cell culture and for attenuation and immunogenicity in
animal models.
(10) "Research" means Aviron is identifying vaccine candidates and approaches to
create new candidate strains.
Influenza
Every year in mid- to late-winter, influenza spreads across the globe,
infecting an average of approximately 10% to 20% of the United States
population. In the United States, 35 to 50 million cases of influenza occur
annually. Influenza cases are associated with symptoms lasting for at least
three to five days, an average of approximately three days of lost work or
missed school, and approximately 20,000 deaths each year. Field studies indicate
the attack rate ranges from a low of 10% in persons over age 65 to a high of 36%
in children aged one to 18. Children are also a major factor in spreading
influenza to other population segments, including those at high risk of
contracting the disease. At the peak of a typical epidemic, reportedly 9% to 22%
of all physician office visits are for flu-like symptoms. Over 90% of
influenza-related deaths occur in people over age 65, but children under age
five and women in the third trimester of pregnancy are also at higher risk for
serious complications. Several times during this century, influenza has appeared
as a much more serious pandemic. These major pandemics occur when the influenza
virus undergoes "antigenic shift" in which one influenza subtype is replaced by
a different strain for which the population has not developed antibodies and,
therefore, for which it is extremely susceptible to infection. The recent
appearance of an avian influenza strain in Hong Kong represents such a potential
threat.
The variability of certain components of the influenza virus requires that
the influenza vaccine be modified annually. The CDC and the World Health
Organization ("WHO") maintain a global network which generates data required to
select strains for the coming influenza season's vaccine and monitor the
occurrence of especially severe epidemics. Based on these data, the FDA and the
CDC discuss circulating influenza strains which are candidates for inclusion in
the following season's influenza vaccine. A similar process is undertaken in
Europe by the WHO and various national authorities. Currently available
inactivated influenza vaccines contain three strains of influenza virus (two
strains of influenza A and one strain of influenza B) and are therefore called
trivalent vaccines. Typically one or sometimes two of the strains in these
trivalent vaccines are recommended for updating annually. Current vaccines have
been variously reported to be 60% to 90% effective in preventing illness,
pneumonia, hospitalization and death due to complications from influenza.
The ACIP has identified the principal target groups for the current
influenza vaccine as those at increased risk for influenza-related
complications, including persons age 65 or older, residents of chronic-care
facilities, adults and children with chronic disorders of the pulmonary or
cardiovascular system, adults and children who have required regular medical
follow-up or hospitalization during the preceding year because of chronic
metabolic diseases or immunosuppression, children and teenagers receiving
long-term aspirin therapy and therefore at risk of developing Reye's syndrome,
and pregnant women. The next level of priority for vaccination identified by the
ACIP includes certain groups, such as health care personnel and household
members (including children), that may transmit influenza to high-risk persons.
Furthermore, the ACIP recommends that physicians administer influenza vaccine to
any person who wishes to reduce the chance of becoming ill with influenza.
The FDA estimates that over approximately 80 million influenza vaccine
doses were manufactured for use in the United States in 1997. According to the
CDC, 58% of the 34 million Americans over age 65 received the annual influenza
vaccine during the 1995 calendar year, up from less than approximately 25% a few
years earlier. The United States Department of Health and Human Services has set
a goal for administrating the influenza vaccine to at least 60% of Americans
over age 65, by the year 2000. The Company believes that a lower percentage of
high-risk individuals under age 65 were vaccinated in 1994, and that the
majority of influenza doses used in the United States are being administered to
healthy adults under
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age 65, many of whom participate in voluntary work place immunization programs.
Experts suggest that very few of the 70 million children in the United States
under age 18 receive the annual influenza vaccine.
In addition to the currently available vaccines, two oral drugs are
currently approved for use in the prevention and treatment of influenza A:
amantadine, which has been on the market for many years, and rimantidine, a
closely related compound which produces fewer side effects. Both agents have
been shown to be effective in reducing the severity of influenza A disease and
the number of days of disability, but are not effective against influenza B.
Both are also recommended for daily use during the influenza season by certain
high-risk persons for whom the influenza vaccine is contraindicated. However,
there is a concern that widespread prophylactic use could lead to emergence of
drug-resistant strains.
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. F. 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, many of which are coordinated with NIH-sponsored
investigators. Prior to Company-initiated trials, at least 90 clinical trials of
the cold adapted influenza vaccine technology were 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 is developing its cold adapted influenza vaccine for widespread
annual use in children and adults and for co-administration with the inactivated
vaccine for improved protection in high risk adults, including 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 two components of the virus.
Because Aviron's cold adapted influenza vaccine is delivered as a nasal spray,
rather than an injection, the Company believes it would provide a more
attractive 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 illness occurs in young
children. Children are also thought to be important in the spread of influenza
in the population. Aviron expects that initially the cold adapted intranasal
influenza vaccine will be delivered in physicians' offices and other locations
where the current injectable influenza vaccine is given. The Company 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 in pharmacies, schools, day care centers and in the workplace.
However, before delivery methods are established in these settings, the Company
will be required to demonstrate 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 is also 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 may
receive a vaccination if the intranasal alternative is available. The Company
believes that immunization programs based on its intranasal cold adapted
influenza vaccine may also decrease the nurse's time per vaccination compared to
the current influenza injection and therefore allow improved flexibility and
efficiency in the operation of workplace programs. In addition, the Company is
developing its vaccine for co-administration by nasal spray with the inactivated
influenza vaccine injection for high risk adults, including 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 ACIP and the American Association of
Pediatrics ("AAP") and other medical advisory bodies for use of the cold adapted
influenza vaccine in the appropriate population.
Aviron's Next-Generation Genetically Engineered Influenza Vaccine. The
Company is using its proprietary Rational Vaccine Design technology to engineer
future generations of influenza vaccines which are
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designed to meet the needs of various age groups in the population. The
Company's next 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 prevent the cold adapted influenza virus
from multiplying sufficiently to be used as an alternative to the currently
available vaccines in the elderly. To address this, 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
intranasal vaccine program for PIV-3 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
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 seen 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 clinical trials in almost 100 adults, children and infants. In
all age groups, the bPIV-3 vaccine appeared satisfactorily attenuated, safe and
genetically stable. Eighty-five percent of seronegative infants and children
(six to 60 months of age) were infected by the tested dose, and 61% of bPIV-3
recipients developed a rise in antibody to the human PIV-3 virus. The vaccine
strain infected 92% of infants younger than six months of age, even in the
presence of maternal PIV-3 antibodies. Infection with the bPIV-3 vaccine
stimulated an immune response to human PIV-3 in 42% of these young infants. In
October 1997, the Company initiated a Phase II clinical trial of bPIV-3 using
the existing bPIV-3 vaccine supply produced and tested for the NIAID. There can
be no assurance that this trial will be completed successfully, that future
clinical trials will be commenced or completed successfully or that the Company
will develop successfully and receive FDA approval of its bPIV-3 vaccine.
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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 infectious
mononucleosis is most common when 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. SmithKline Beecham began a Phase I clinical trial
in Europe of the subunit vaccine in October 1997 to evaluate safety and
immunogenicity. There can be no assurance that this trial will be completed
successfully, that the trial will not need to be repeated in the United States
or that FDA approval will be obtained for any future clinical trial or vaccine
candidate. 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 infection. 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 and potentially lifelong
custodial 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 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
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and tested by Aviron in a specialized animal model. The Company has selected
several vaccine candidates for testing in clinical trials for the prevention of
CMV disease. However, no assurance can be given that clinical trials will be
commenced or, if commenced, will be successful, or that the Company will develop
successfully and receive FDA approval of its CMV vaccine candidate. The Company
plans to file an IND for its CMV vaccine candidates once identified.
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 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, 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. One company recently reported a lack of efficacy in
Phase III clinical trials of a subunit vaccine. A second company is conducting a
Phase III clinical trial of a different subunit vaccine, and a third company has
announced initiation of clinical trials of a disabled virus which can undergo
only a single cycle of replication after injection.
Aviron has used its Rational Vaccine Design approach to create injectable
live attenuated vaccine candidates intended to prevent HSV-2 disease in
uninfected children and young adults. 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 technology, along with patents
covering strategies for more specific deletions, from ARCH Development
Corporation. Aviron has used this technology to create proprietary live vaccine
candidates using an HSV-2 backbone, which it has evaluated 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 is developing additional vaccine
candidates and intends to use the results of further animal studies to select
one or more candidates for evaluation in clinical trials. There can be no
assurance, however, that the Company will commence or successfully 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 a minority
interest in the outstanding equity securities of
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NeuroVir on a fully-diluted basis. Aviron is under no obligation to fund
development of this technology by NeuroVir.
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. The only prevention for RSV
currently available is passive administration of antibodies, although one
company is testing a cold adapted live attenuated RSV vaccine in infants.
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 has conducted and continues to conduct clinical trials to
evaluate safety and efficacy of its cold adapted influenza vaccine. To date, the
Company has tested the trivalent vaccine in over 5,000 children and adults.
While the Company believes that it can use previous trial data from others,
including NIH and Wyeth-Ayerst Laboratories, a division of American Home
Products ("Wyeth-Ayerst"), 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 trivalent vaccine
delivered through a nasal spray device. The Aviron clinical trials relate to the
safety and efficacy of the trivalent formulation as well as the safety of its
intranasal spray delivery method. Aviron enrolled a total of 647 patients in
Phase I/II clinical trials, 92 patients in a challenge study in adults in
collaboration with the NIH, and 1,602 children in a pivotal Phase III clinical
trial, approximately 85% of whom have returned for year 2 in a second stage of
the trial, and 5,758 adults and children in five additional safety and
effectiveness clinical trials. The Company's clinical trials are being designed
to support a planned Product License Application ("PLA") filing in mid-1998
seeking approval of cold adapted influenza vaccine in several target populations
which, subject to FDA approval, could allow commercialization of the vaccine in
the 1999/2000 influenza season. The estimated timing of filing of this PLA and
commercialization of the Company's influenza vaccine are forward-looking
statements subject to risks and uncertainties, and there can be no assurance
that such filing or such approval will not be delayed materially or that such
commercialization will occur as a result of certain factors, including those set
forth in "Business Risks -- Uncertainties Related to Clinical Trials,"
"-- Uncertainties Related to Early Stage of Development; Technological
Uncertainty."
Phase I and II Clinical Trials and Challenge Efficacy Trial
Aviron conducted a safety and immunogenicity study involving 239 healthy
adults at three university research centers. 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 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.
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Two hundred thirty-eight children between the ages of 18 months and five
years were enrolled at four Vaccine Treatment Evaluation Units ("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 all of the three strains were observed in the
subjects receiving the higher dose of 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 trivalent cold
adapted influenza vaccine, which are lower than the serum responses typically
observed following immunizations with the inactivated influenza vaccine.
Aviron's intranasal spray formulation of the live cold adapted influenza
vaccine also has been tested in a double-blind, placebo-controlled 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 <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.
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.
Phase III Clinical Trials in Children
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
initiated a two-year pivotal Phase III clinical trial to 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 receiving influenza prophylaxis for the first time. The Company
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 first stage of the study was
defined as protection of children from culture-confirmed influenza during
naturally occurring epidemics of influenza.
The data were unblinded in July 1997 following a single year of patient
accrual due to the adequate incidence of influenza in the study population. The
Company and NIAID announced that, based on an initial analysis of the first
stage of the Phase III trial, Aviron's live cold adapted intranasal vaccine for
influenza
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demonstrated a 93% protection rate against culture confirmed influenza in those
children receiving two doses, the primary endpoint of the study. Only 1% of
children receiving two doses experienced culture-confirmed influenza, compared
to 18% of those receiving the placebo. These results were statistically
significant. No serious adverse events attributable to the vaccine were seen in
any subjects to whom the vaccine was administered. There were no statistically
significant differences in other side effects between the vaccine and placebo
recipients, except for a slightly increased incidence of transient runny nose,
mild fever and decreased activity following immunization in children receiving
the live cold adapted influenza vaccine. The investigators described these
transient side effects as comparable to or milder than those observed following
many other childhood immunizations. The clinical investigators presented the
initial findings of this trial at a scientific conference in fall 1997 and have
submitted their findings for publication in a peer-reviewed medical journal. The
Company intends to submit a PLA to the FDA based on the data from this trial and
prior studies, and intends to supplement its PLA with additional data from the
second stage of this Phase III clinical trial, when the data are available, as
well as other trials.
The Company is currently conducting the second stage of its pivotal Phase
III clinical trial in 1,358 pediatric patients from the first stage of this
trial. The second stage of the clinical trial will collect immunogenicity data,
as well as additional safety and efficacy data after a single dose vaccination.
If there is adequate influenza illness in the subjects from the second year of
the trial, efficacy data from this trial is expected to be available for filing
in a PLA supplement in fall 1998. There can be no assurance that the results of
this trial will support the results of the recently completed first stage of
this trial. Failure to do so could have a material adverse effect on the
regulatory approval or labeling of the cold adapted intranasal influenza vaccine
and could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company enrolled 48 children with
moderate to severe asthma in a double-blind, placebo-controlled clinical trial
in the second half of 1997 which was intended to evaluate the safety of its cold
adapted influenza vaccine in this population.
Clinical Trials in Healthy Adults
The Company is currently conducting a clinical trial in 4,561 healthy
working adults to obtain additional safety data in this population and to assess
the impact of immunization on the frequency of influenza-like illness,
utilization of health care services, and absenteeism from work. These data are
intended to support models of the cost-effectiveness of immunization programs
based on the cold adapted influenza vaccine. The trial is designed to continue
for a second year if there is insufficient influenza-like illness in the
community for adequate statistical power. Many of the participants in this trial
self-administered the intranasal spray. The Company intends to submit safety
data from the trial being conducted during the 1997/1998 influenza season in its
PLA and to request FDA approval to market its vaccine in healthy adults based on
safety data from this trial, the challenge study, and prior trials. If there is
adequate influenza illness in the subjects from the first year of the trial,
data from this trial is expected to be available for filing in a PLA supplement
in fall 1998. However, there can be no assurance that the trial will be
successful or that the Company's PLA filings will be approved for healthy
adults. The Company expects to receive limited data on the efficacy of the cold
adapted influenza vaccine from this trial given the primary pharmacoeconomic
endpoints of the trial. There can be no assurance that data from this trial,
combined with data from the challenge and efficacy study and prior trials, will
be sufficient to support FDA approval of an indication for use of the vaccine in
adults even if the FDA were satisfied with the safety data submitted.
Clinical Trials in High Risk Adults
The Company is conducting a clinical trial for safety in 200 elderly high
risk adults for the use of an intranasal vaccine for co-administration with the
currently available injectable vaccine. Many of the participants in this trial
self-administered the intranasal spray. The Company intends to use this data to
support a label claim for safety for such co-administration in high risk adults,
including the elderly. As this trial is not designed to generate efficacy data
on use of the vaccine in high risk adults, there can be no assurance that data
from this trial, combined with data from the Company's other clinical trials and
prior trials, will be sufficient to support FDA approval of an indication for
use of the vaccine in high risk adults even
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if the FDA were satisfied with the safety data submitted. The Company is
planning a clinical trial for the 1998/1999 influenza season to obtain
additional data to determine the efficacy of co-administering its cold adapted
influenza vaccine with the injectable vaccine in elderly high risk adults.
Clinical Trials for Manufacturing Consistency and Process
In February 1998, Aviron reported positive results from a manufacturing
consistency lot trial designed to support a PLA submission. Aviron conducted a
randomized, double-blind, placebo-controlled trial in 500 children, designed to
evaluate the safety and immunogenicity of three new manufacturing lots of its
cold adapted influenza vaccine. The children were vaccinated between April and
September 1997. Preliminary analysis of patient diary cards and antibody
responses following two doses of the vaccine showed consistent safety and
immunogenicity for the different lots. Evidence that different lots of vaccine
can be manufactured at a consistent quality level is generally required by the
FDA prior to approval of such products for commercial sale and the Company
intends to submit data from this trial in its PLA filing. There can be no
assurance that the FDA will find these data sufficient to demonstrate
consistency of manufacture.
The Company is also conducting a double blind safety trial in 63 healthy
children and 386 healthy and high risk adults intended to evaluate the safety of
the cold adapted influenza vaccine when the manufacturing master seeds were
prepared using Aviron's proprietary reverse genetics technology, compared to the
classical process developed at the University of Michigan.
ADDITIONAL RESEARCH PROGRAM -- 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.
PRODUCTION AND MANUFACTURING
Cold Adapted Influenza Vaccine
Production of the cold adapted influenza vaccine requires the following
steps:
Master Virus Seed Production. After the FDA and the CDC select the
influenza strains to be included in the vaccine, Aviron creates the respective
master virus seeds for use in large-scale production. These contain the
hemagglutinin (HA) and neuraminidase (NA) genes of the expected epidemic strain
and six genes conferring the cold adapted, attenuated properties of the master
donor strain. Two processes are available for Aviron to make the master virus
seeds: classical reassortment and reverse genetics. In the classical
reassortment process, laboratory virus cells are simultaneously infected with
the expected epidemic strain and the cold adapted master donor strain, which
results in random genetic reassortments between the two strains. The specific
reassortment desired is isolated using monoclonal antibodies. This process takes
approximately four to six weeks and has been used by scientists at the
University of Michigan and Aviron to create over 20 different vaccine strains
that have been tested in human clinical trials. In the reverse genetics
approach, HA and NA genes are isolated from the expected epidemic strain and
introduced into the cold adapted master donor strain using Aviron's proprietary
reverse genetics technology. Potential advantages of this process are that it
may be somewhat faster and may offer lower risk of contamination than classical
reassortment. Aviron has conducted a clinical trial to evaluate safety of the
reverse genetics process compared to the classical reassortment process.
Bulk Monovalent Formulation Production. Under the Company's current
arrangement with Evans Medical Limited, a subsidiary of Medeva plc ("Evans"),
the master virus seeds for each vaccine strain are transferred to Evans in the
United Kingdom for large scale production of the bulk monovalent formulations of
the three vaccine strains, which involves infection, incubation and harvesting
from hen's eggs. The eggs used
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in this process are supplied by a third party that maintains flocks certified to
be free of specific pathogenic agents.
Trivalent Formulation Production. The bulk formulation is frozen and
transferred to Packaging Coordinators, Inc., a division of Cardinal Health, Inc.
("PCI") in Pennsylvania where the monovalent vaccine material is blended into
the trivalent formulation for filling into nasal spray devices, packaged and
labeled. A specialized facility is being constructed for this purpose at PCI for
use in commercial production and, subject to regulatory approval, commercial
shipments will be made from this facility.
The Company currently does not have facilities to manufacture the cold
adapted influenza vaccine and has no experience with clinical or commercial
manufacture of this potential product. All of the cold adapted vaccine material
used in the Company's early stage clinical trials has been supplied solely by
Evans pursuant to an agreement between the Company and Evans entered into in
November 1995 (the "Evans Clinical Agreement"). Pursuant to this agreement, the
Company has received timely and sufficient supplies for its clinical trials of
cold adapted influenza vaccine through three influenza seasons. Evans is one of
four companies licensed by the FDA to produce influenza vaccine for sale in the
United States and produces its own injectable inactivated influenza vaccine.
Under the Evans Clinical Agreement, Evans is producing and supplying the Company
with sufficient quantities of cold adapted influenza vaccine to conduct its
current clinical trials, subject to certain limitations. Under the Evans
Clinical Agreement, Evans is also collaborating with Aviron to develop a liquid
formulation of the cold adapted influenza vaccine requiring only refrigeration
rather than frozen storage. The Company believes that a liquid formulation will
be required to address markets outside the United States and Canada. The Company
granted Evans a right of first negotiation with respect to distribution rights
for the vaccine in Europe.
The Company initially plans to obtain commercial quantities of its cold
adapted influenza vaccine from Evans. Under an agreement between the Company and
Evans entered into in April 1997 (the "Evans Commercial Agreement"), Evans has
agreed to manufacture the Company's live cold adapted influenza vaccine in bulk
until December 31, 2001, so as to meet the Company's needs for bulk product
through the 2001/2002 influenza season. In October 1997, the Company entered
into a nonexclusive arrangement with PCI for blending, filling, packaging, and
labeling of its live cold adapted influenza vaccine for commercial sale in the
United States until October 2004. In the event of better than expected market
acceptance, the Company may be capacity-constrained on its supply of vaccine
through at least the 2000/2001 influenza season. In order to secure future
production capacity, Aviron may extend and expand its existing arrangements,
collaborate with other third parties, or establish its own manufacturing
facilities. Using an alternative supplier or building a proprietary facility
would require a substantial amount of funds and additional clinical trials and
testing. There can be no assurance that an alternative source of supply will be
established on a timely basis, or that the Company will have or be able to
obtain funds sufficient for building or equipping a new facility. As part of the
regulatory approval process, before commercial launch of the cold adapted
influenza vaccine, the Company will need to obtain, in addition to approval of a
PLA, approval of an Establishment License Application ("ELA") for its own
facility for creation of master virus seeds and for the PCI facility, and Evans
must obtain an ELA for its facility. Subsequent establishment of alternative or
proprietary sources of supply or manufacturing would require approval of a
subsequent ELA for each such facility.
The production of the Company's cold adapted influenza vaccine is subject
to the availability of a large number of specific pathogen-free hen eggs, for
which there are currently a limited number of suppliers. The Company has been
purchasing its egg requirements from a single supplier on a purchase order
basis, rather than pursuant to any long term contractual arrangement.
Contamination or disruption of this source of supply would adversely affect the
ability to manufacture the Company's cold adapted influenza vaccine. The
production of the cold adapted influenza vaccine is also subject to the
availability of the device for delivery of the vaccine intranasally. The Company
has been purchasing intranasal delivery devices from a single supplier on a
purchase order basis, rather than pursuant to any long term contractual
arrangement. There can be no assurance that these suppliers will provide timely
and adequate supply of these product components and raw materials. In addition,
the Company depends on the submission by the delivery device manufacturer of a
Device Master File application ("DMF") for separate review by regulatory
authorities; the Company will reference the DMF as part of the PLA submission
for the cold adapted influenza vaccine.
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The Company's current frozen formulation of the cold adapted influenza
vaccine is being designed to meet an acceptable level of stability for the U.S.
market initially targeted by the Company. There can be no assurances that the
Company will succeed in achieving adequate product stability for its live cold
adapted influenza vaccine. In addition to its current frozen formulation, the
Company is exploring alternative formulations and presentations for the vaccine
which may enable improved distribution and longer shelf life. There can be no
assurance that the Company will succeed in achieving adequate product stability
for the current frozen formulation of its live cold adapted influenza vaccines
that the Company's efforts to produce such alternative formulations will be
successful, or that such alternative formulations will actually enable improved
distribution and longer shelf life.
The production and marketing of influenza vaccine is highly seasonal.
Because most cases of influenza occur in winter, the majority of influenza
vaccinations in the Northern Hemisphere occur between September and December of
a given year. 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 determine circulating influenza
strains that will be included in the 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. As such, the Company must establish a dependable process by
which the vaccine may be modified and manufactured on a timely basis to include
different strains each year. If the Company were unable to develop an influenza
vaccine for a particular year that meets FDA and CDC guidelines, the Company
would receive no revenues from an influenza vaccine for that influenza season,
which would materially adversely affect the Company's business, financial
condition and results of operation, given the relatively fixed nature of its
operating expenses over the short term.Failure of one of the Company's suppliers
to deliver timely and sufficient supplies to the Company, if it caused the
Company to be unable to deliver vaccines during the peak demand period for the
influenza season, would have a disproportionately adverse effect on the
Company's financial results.
Other Products
In 1996, the Company completed construction of a pilot manufacturing
facility for its potential vaccine products other than the cold adapted
influenza vaccine. The Company currently does not have facilities to manufacture
any of its other potential products in commercial quantities and has no
experience with commercial manufacture of vaccine products. To manufacture its
other potential products for large-scale clinical trials or on a commercial
scale, the Company may be required to build a large-scale manufacturing
facility, which would require a significant amount of funds. The scale-up of
manufacturing for commercial production would require the Company to develop
advanced manufacturing techniques and rigorous process controls. 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 other potential products. The Company is
aware of only a limited number of manufacturers which it believes have the
ability and capacity to manufacture its other potential products 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 may be required to relinquish control of the manufacturing
process, which could adversely affect the Company's results of operations.
Furthermore, a third-party manufacturer also would 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 production of its potential products successfully, if
at all, or that if successful, the Company will be able to maintain such
production.
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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 of
purchasers that each group will represent in the future will depend on factors
such as legislative changes and the economy. The Company intends to participate
in the selling of its products to HMOs, large employers and state and federal
health care agencies, either directly or through a collaboration with another
company. Outside the United States, the Company plans to sell its 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.
Clinical trials of Aviron's cold adapted influenza vaccine have been
conducted to provide information regarding its use in three market segments:
children, healthy adults, and adults at high risk of influenza complications due
to age or to the presence of chronic medical conditions such as heart or lung
disease or diabetes. Use of influenza vaccines in these three segments is
subject to somewhat different market forces, and customers are accessed by
different channels of distribution.
Children
The current injectable influenza vaccine is often used in children at high
risk of influenza complications due to conditions such as asthma and congenital
heart disease, but public health authorities are concerned that coverage rates
are below optimal. There are approximately 70 million children under age 18 in
the United States. The current injectable vaccine is rarely used in healthy
children, although children have the highest attack rate of influenza and play a
major role in the spread of the influenza epidemic. Aviron's objective is to
develop a new market for influenza prophylaxis in healthy and high risk children
by offering an alternative to the injectable vaccine. Because the cold adapted
influenza vaccine is delivered as a nasal spray, rather than an injection, the
Company believes it would provide a more attractive way to immunize children on
an annual basis.
Healthy Adults
The Company believes that a large proportion of the current injectable
influenza vaccine used in the United States is being administered to healthy
adults, either via workplace-sponsored immunization programs or in programs
offered through clinics, pharmacies or other retail outlets. The Company
estimates that there are approximately 120 million adults in the United States
who are not at high risk for influenza complications. Aviron's objective is to
expand the current market for influenza prophylaxis by offering an alternative
for individuals who are deterred by the injectable route of delivery of the
current product. The Company believes that immunization programs based on its
intranasal cold adapted influenza vaccine may also decrease the nursing time per
vaccination compared to the current influenza injection and therefore allow
improved flexibility and efficiency in the operation of such programs. A
majority of the participants in the Company's clinical trials for adults
self-administered the intranasal spray.
High Risk Adults
The Company is planning a clinical trial in elderly high risk adults in the
1999/2000 influenza season to evaluate the effectiveness of its cold adapted
influenza vaccine when co-administered with the injectable influenza vaccine,
compared to the injectable influenza vaccine alone. If this trial is successful,
Aviron intends to market its cold adapted influenza vaccine to be used in
conjunction with the injectable influenza vaccine for adults over age 65
(approximately 34 million Americans) and for adults under age 65 with conditions
which put them at higher risk of influenza complications (approximately 20
million Americans).
Market Dynamics
The Company is currently engaged in a substantial market research program
intended to better define the relative importance of various factors on
influenza vaccine utilization such as physician endorsement, advertising,
pricing, reimbursement and location where immunizations are given. Primary care
physicians,
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including pediatricians, family practitioners, general practitioners, and
internists, are expected to play a major role in influencing decisions by
individuals to obtain influenza prophylaxis for themselves or their children and
the choice of type of immunization. For the cold adapted influenza vaccine to be
widely adopted, it will likely be necessary to engage the efforts of an
experienced pharmaceutical sales force, in addition to obtaining recommendations
for its use from advisory bodies such as the ACIP and the AAP. Aviron currently
has no direct sales or distribution capability nor does it intend to build a
large pharmaceutical sales force itself, but to obtain these services in
collaboration with one or more major pharmaceutical companies in the United
States and elsewhere. The Company is currently evaluating the capabilities of a
number of such potential partners and expects to conclude one or more agreements
as part of its commercialization strategy. While the Company believes there is
considerable interest from companies having the necessary capabilities, no
assurance can be given that it will be successful in negotiating an arrangement
in a timely fashion or that such an agreement will be on favorable terms to the
Company.
Access to customers other than individual physicians, including HMO
pharmacy and medical practice committees and government purchasers, requires a
diversity of sales efforts. The Company is evaluating whether it will develop a
specialized sales force to target certain types of customers and the
capabilities of large pharmaceutical companies for accessing other customers.
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 the cold adapted influenza and other 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 without a collaborative partner, significant additional expenditures,
management resources and time would be required to develop a marketing and sales
staff within the Company. In addition, the Company would also be competing with
other companies that currently have experienced and well-funded marketing and
sales operations.
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 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.
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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. Under the
terms of the SB Agreement, the Company granted SmithKline Beecham an exclusive
license to produce, use and sell non-live EBV vaccines incorporating the
Company's technology for prophylactic and therapeutic uses on a worldwide basis,
except in Korea. 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. The Company has
retained the right to co-market a monovalent formulation of the EBV vaccine in
the United States and to have SmithKline Beecham supply such vaccine.
SmithKline Beecham 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 first such milestone payment was
made in 1997. 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 on a country-by-country basis 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.
Sang-A Pharm. Co., Ltd.
In May 1995, the Company entered into a Development and License Agreement
with Sang-A Pharm. Co., Ltd. ("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, 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 Sang-A'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 South and
North Korea ("Korea").
Sang-A also 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.
In January 1997, the Hanbo Group, the Korea-based conglomerate that owns
Sang-A, declared bankruptcy. The Company is unable to predict what, if any,
long-term effect the bankruptcy of the Hanbo Group will have on Hanbo Group
subsidiaries, including Sang-A, and on the Company's agreement with Sang-A. In
March 1998, the Company entered into a Stock Repurchase Agreement with Sang-A
pursuant to which Sang-A has agreed not to sell any of its shares of Aviron
Common Stock prior to the closing of a
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proposed offering of up to $115 million of convertible subordinated notes due
2005 (the "Note Offering"). Contingent upon the closing of the Note Offering,
Aviron has agreed to repurchase 530,831 shares from Sang-A on the closing date
of the Note Offering at a purchase price equal to the greater of (i) $25 per
share, or (ii) the last reported bid price of the Company's Common Stock on the
Nasdaq National Market on the pricing date of the Note Offering.
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 NIAID 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 worldwide rights to certain intellectual property
and technology relating to the cold adapted influenza vaccine and proprietary
master donor strains of influenza viruses useful in the production of products
for vaccination against influenza and potentially for gene therapy and other
uses. Specifically, the Company obtained the exclusive right to develop,
manufacture, use, market and sell products incorporating any such intellectual
property or utilizing the master strains worldwide. 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 automatically converted into 264,746
shares of the Company's Common Stock at the time 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 at a price of $10.00 per share,
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.
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The Mount Sinai School of Medicine
In February 1993, the Company entered into a technology transfer agreement
with The Mount Sinai School of Medicine ("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. As of December 31,
1997, warrants to purchase 7,126 shares were 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. In 1996, warrants to purchase 3,124 shares were distributed by
Mount Sinai to certain inventors of the relevant technology, of which 1,874 were
exercised in 1997.
ARCH Development Corporation
In July 1992, the Company entered into a license agreement with ARCH
Development Corporation ("ARCH"), pursuant to which the Company obtained an
exclusive, worldwide commercialization license, with the right to sublicense, to
certain patent rights and related intellectual property and materials pertaining
to the herpes simplex viruses, EBV and various recombinant methods and
materials. In return for the rights granted to the Company under this agreement,
the Company will make payments to ARCH upon the achievement of certain
milestones in the development of products covered by the license and will pay
royalties to ARCH on net sales of such products. ARCH also granted the Company
certain rights to improvements and additional related technology. The term of
this agreement extends until the expiration of the last-to-expire patent rights
covered under the license. In connection with this agreement, ARCH purchased
40,000 shares of the Company's Common Stock. Subsequent to this agreement,
affiliates of ARCH made equity investments in Aviron, purchasing shares of the
Company's Series A, B and C Preferred Stock, which automatically converted into
a total of 222,799 shares of the Company's Common Stock upon the closing of the
Company's initial public offering. ARCH has recently asserted an interpretation
of the financial terms of this agreement with the Company, relating to the
license by Aviron of its EBV technology to SmithKline Beecham, which would
require the Company to pay ARCH one-half of any future or past payments
(including sub-license fees and milestone payments) received by Aviron under the
SB Agreement. The Company disputes ARCH's interpretation of the financial terms
of the agreement. No assurance can be given, however, that the Company's
interpretation will prevail. Failure of the Company to prevail could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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BUSINESS RISKS
This Form 10-K contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. When used
herein, the words "expects," "anticipates," "estimates," "intends," "plans" and
similar expressions are intended to identify such forward-looking statements.
The Company's actual results could differ materially from the results discussed
in the forward-looking statements. Factors that could cause or contribute to
such differences include those discussed below, as well as those discussed
elsewhere in this Form 10-K.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
In order to commercialize any of its products under development, the
Company must demonstrate with substantial evidence through clinical trials and
to the FDA's satisfaction that the product is safe and effective for use in the
indications for which approval is requested. The results from preclinical
testing and early clinical trials may not be predictive of results obtained in
large clinical trials. 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 people
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. If the Company's cold adapted
influenza vaccine is not shown to be safe and effective in Aviron's future
clinical trials, the resulting delays in obtaining regulatory approvals for this
vaccine, 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. A material incidence of adverse side effects during Aviron's
clinical trials could have a negative impact on the marketing of the product.
The Company's cold adapted influenza vaccine is a trivalent vaccine
delivered as a nasal spray that is based on technology licensed from the NIH and
the University of Michigan. Wyeth-Ayerst 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. Formulations of the vaccine have been the
subject of a number of clinical trials performed by the NIAID and others. 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 of its
cold adapted influenza vaccine from the FDA. The Company did not participate in
these trials and cannot be confident in the accuracy of the data collected. Very
few of the trials involved a trivalent vaccine delivered as a nasal spray, but
instead typically used formulations of monovalent or bivalent vaccine delivered
as nasal drops. The Company has performed and is in the process of performing
additional trials of its cold adapted influenza vaccine candidate to support its
application to the FDA. There can be no assurance that the data from these
third-party trials are 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.
In the case of the Company's cold adapted influenza vaccine, the Company is
seeking FDA approval for indications in children, healthy adults, and for
co-administration with the inactivated injectable vaccine in high risk adults,
including the elderly. As a result, the Company's clinical trials will need to
demonstrate to the FDA's satisfaction safety and efficacy of the vaccine in each
of these target populations. The data necessary to calculate the primary
endpoints in the Company's pivotal Phase III clinical trial of its live cold
adapted intranasal influenza vaccine in healthy children became available in
July 1997. There can be no assurance that the analysis of the data regarding the
primary endpoint announced by the Company and the conclusions drawn from this
analysis will not change in the course of regulatory review for licensing. Such
changes could have an adverse effect on the Company's product development
efforts and its prospects for regulatory approval of the vaccine. The Company is
conducting the second stage of its Phase III clinical trial in healthy children
during the 1997/98 influenza season. There can be no assurance that the results
of the second stage of this trial will support the results of the first stage of
this trial. Failure to do so could have an adverse effect on the regulatory
approval or labeling of the cold adapted intranasal influenza vaccine and could
have a material adverse effect
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on the Company's business, financial condition and results of operations. In
addition, the Company currently plans to submit safety data to support labeling
claims for use of the vaccine in healthy and high risk adults; however, the
Company plans to submit efficacy data on only a limited number of people for
these populations in its initial PLA filing. There can be no assurance that the
FDA will consider this data to be sufficient to support indications for use of
the vaccine in healthy or high risk adults. To the extent that the FDA does not
find such data submitted by the Company sufficient to support product approval
for one or more indications, the Company's commercialization of the vaccine may
be substantially delayed for one or more of its target populations. In this
connection, the Company could be required to commence and complete additional
clinical trials to generate additional safety and efficacy data to support
product approval for one or more of its target populations. See
"Business -- Influenza Clinical Trials."
The 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 people fitting the appropriate trial profile, preparing the modified vaccine
strain for certain influenza seasons, or manufacturing clinical trial materials.
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. 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 could have a material adverse effect on the Company's
business, financial condition and results of operations.
There can be no assurance that the Company's development efforts will be
successful, that required regulatory approvals, including those with respect to
IND, PLA and ELA applications, will be obtained or that any products, if
introduced, will be successfully marketed. See "Business -- Vaccine Products
Under Development."
NEED FOR ANNUAL REASSORTMENT; LACK OF MANUFACTURING EXPERIENCE; RELIANCE ON
CONTRACT MANUFACTURERS
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 CDC determine circulating influenza strains that
will be included in the following season's influenza vaccines. As a result,
manufacturers of vaccines, including Aviron, 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 them
available before the influenza season. 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.
The Company currently does not have facilities to manufacture the cold
adapted influenza vaccine and has no experience with clinical or commercial
manufacture of this potential product. All of the cold adapted vaccine material
used in the Company's early stage clinical trials has been supplied solely by
Evans pursuant to the Evans Clinical Agreement. Evans is one of four companies
licensed by the FDA to produce influenza vaccine for sale in the United States,
and produces its own injectable inactivated influenza vaccine that could compete
with the Company's cold adapted influenza vaccine. Under the Evans Clinical
Agreement, Evans also is collaborating with Aviron to develop a liquid
formulation of the cold adapted influenza vaccine requiring only refrigeration
rather than frozen storage. The Company believes that a liquid formulation will
be required to address markets outside the United States and Canada.
The Company initially plans to obtain any commercial quantities of its cold
adapted influenza vaccine product from Evans. Pursuant to the Evans Commercial
Agreement, Evans has agreed to manufacture the Company's needs for bulk product
through the 2001/2002 influenza season. In October 1997, the Company entered
into a nonexclusive arrangement with PCI for blending, filling, packaging and
labeling of its cold
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adapted influenza vaccine in the United States until October 2004. In the event
of better than expected market acceptance, the Company may be
capacity-constrained on its supply of vaccine through at least the 2000/2001
influenza season. In order to secure future production capacity, Aviron may
extend and expand its existing arrangements, collaborate with other third
parties, or establish its own manufacturing facilities. Using an alternative
supplier or building a proprietary facility would require a substantial amount
of funds and additional clinical trials and testing. There can be no assurance
that an alternative source of supply will be established on a timely basis, or
that the Company will have or be able to obtain funds sufficient for building or
equipping a new facility. In addition, as part of the regulatory approval
process, before commercial launch of the cold adapted influenza vaccine, the
Company will need to obtain approval of an ELA for its own facility and the PCI
facility, and Evans must obtain an ELA for its facility. Subsequent
establishment of alternative sources of supply or manufacturing would require
approval of a subsequent ELA for each such facility.
The production of the Company's cold adapted influenza vaccine is subject
to the availability of a large number of specific pathogen-free hen eggs, for
which there are currently a limited number of suppliers. The Company has been
purchasing its egg requirement from a single supplier on a purchase order basis,
rather than pursuant to any long term contractual arrangements. Contamination or
disruption of this source of supply would adversely affect the ability to
manufacture the Company's cold adapted influenza vaccine. The production of the
cold adapted influenza vaccine is also subject to the availability of the device
for delivery of the vaccine intranasally. The Company has been purchasing
intranasal delivery devices from a single supplier on a purchase order basis,
rather than pursuant to any long term contractual arrangements. There can be no
assurance that these suppliers will provide timely and adequate supplies of
these product components and raw materials. In addition, the Company depends on
the submission by the delivery device manufacturer of a DMF for separate review
by regulatory authorities. The Company will reference the DMF as part of the PLA
submission for the cold adapted influenza vaccine.
The production and marketing of influenza vaccine is highly seasonal.
Because most cases of influenza occur in winter, the majority of influenza
vaccinations in the Northern Hemisphere occur between September and December of
a given year. If the Company were unable to develop an influenza vaccine for a
particular year that meets FDA and CDC guidelines, the Company would receive no
revenues from an influenza vaccine for that influenza season, which would
materially adversely affect the Company's business, financial condition and
results of operation, given the relatively fixed nature of its operating
expenses over the short term. Failure of one of the Company's suppliers to
deliver timely and sufficient supplies to the Company, if it caused the Company
to be unable to deliver vaccines during the peak demand period for the influenza
season, would have a disproportionately adverse effect on the Company's
financial results.
The Company currently does not have facilities to manufacture any of its
other potential products in commercial quantities and has no experience with
commercial manufacture of vaccine products. To manufacture its other potential
products for large-scale clinical trials or on a commercial scale, the Company
may be required to build a large-scale manufacturing facility, which would
require a significant amount of funds. The scale-up of manufacturing for
commercial production would require the Company to develop advanced
manufacturing techniques and rigorous process controls. 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 other potential products. The Company is
aware of only a limited number of manufacturers which it believes have the
ability and capacity to manufacture its other potential products 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 may be required to relinquish control of the manufacturing
process, which could 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
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<PAGE> 30
Company, alone or with a third party, will be able to make the transition to
commercial production of its potential products successfully, if at all, or that
if successful, the Company will be able to maintain such production. See
"Business -- Production and Manufacturing."
STABILITY OF COLD ADAPTED INFLUENZA VACCINE
The Company's current frozen formulation of the cold adapted influenza
vaccine is being designed to meet an acceptable level of stability for the U.S.
market initially targeted by the Company. In addition to its current frozen
formulation, the Company is exploring alternative formulations and presentations
for the vaccine which may enable improved distribution and longer shelf life.
There can be no assurance that the Company will succeed in achieving adequate
product stability for the current frozen formulation of its live cold adapted
influenza vaccine, that the Company's efforts to produce such alternative
formulations will be successful, or that such alternative formulations will
actually enable improved distribution and longer shelf life.
UNCERTAINTY OF MARKET ACCEPTANCE
Even if the requisite regulatory approvals are obtained for the Company's
potential products, uncertainty exists as to whether such products will be
accepted in United States or foreign markets. The Company believes, for example,
that widespread use of the Company's proposed vaccines in the United States is
unlikely without positive recommendations from the ACIP, the AAP or the American
College of Physicians. There can be no assurance that such authorities will
recommend the use of the Company's proposed products. The lack of such
recommendations would have a material adverse effect on the Company's business,
financial condition and results of operations.
A number of additional factors may affect the rate and overall market
acceptance of Aviron's cold adapted influenza vaccine and any other products
which may be developed by the Company, including the safety and efficacy results
in the Company's clinical trials, the rate of adoption of Aviron's vaccines by
health care practitioners, the rate of vaccine acceptance by the target
population, the success of the CDC in selecting proper strains to be included in
each season's vaccine and the perceived effectiveness of influenza vaccines
generally, the timing of market entry relative to competitive products, the
availability of alternative technologies, the price of the Company's products
relative to alternative technologies, the means and frequency of administration
of such products, the availability of third-party reimbursement and the extent
of marketing and sales efforts by the Company, collaborative partners and
third-party distributors or agents retained by the Company. Side effects, such
as the runny nose, sore throat or fever seen in a minority of clinical trial
participants, or unfavorable publicity concerning Aviron's products or any
product incorporating live virus vaccines could have an adverse effect on the
Company's ability to obtain physician, patient or third-party payor acceptance
and efforts to sell the Company's products. The Company's current formulation of
the cold adapted influenza vaccine requires frozen storage, which may adversely
affect market acceptance in certain foreign countries where adequate freezer
capacity is not commonly available. There can be no assurance that physicians,
patients or third-party payors will accept new live virus vaccine products or
any of the Company's products as readily as other types of vaccines, or at all.
See "Business -- Vaccine Products Under Development."
LACK OF MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES
Primary care physicians, including pediatricians, family practitioners,
general practitioners, and internists, are expected to play a major role in
influencing decisions by individuals to obtain influenza prophylaxis for
themselves or their children and the choice of type of immunization. For the
cold adapted influenza vaccine to be widely adopted, it will likely be necessary
to engage the efforts of an experienced pharmaceutical sales force, in addition
to obtaining recommendations for the vaccine's use from advisory bodies such as
the ACIP and AAP. Aviron currently has no direct sales or distribution
capability nor does it intend to build a large pharmaceutical sales force
itself. Rather, the Company intends to obtain these services through
collaboration with one or more major pharmaceutical companies in the United
States and elsewhere. The Company is currently evaluating the capabilities of a
number of such potential partners and expects to conclude one or
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<PAGE> 31
more agreements as part of its commercialization strategy. No assurance can be
given that the Company will be successful in negotiating an arrangement in a
timely fashion or that such an agreement will be on favorable terms to the
Company.
The successful commercialization of the Company's products is dependent in
part upon the ability of the Company to maintain existing 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. The amount and timing of
resources devoted to these activities is not within the control of the Company.
There can be no assurance that any such agreements or arrangements will 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
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 sales and marketing staff within the Company. In addition,
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 sales and marketing
force or that any such force, if established, would be successful in gaining
market acceptance for any products that may be developed by the Company. See
"Business -- Marketing and Sales" and "-- Collaborative Agreements."
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, marketing and sales 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 anticipates that revenues from existing collaborations and
current balances of cash, cash equivalents and marketable securities, will
enable it to maintain its current and planned operations through 1998. The
estimate of the time period in which these capital resources will be sufficient
to meet the Company's capital requirements is a forward-looking statement that
is subject to risks and uncertainties and the amounts and timing of the
expenditures by the Company may vary materially depending on numerous factors,
such as the status of the Company's research and development efforts, the
regulatory approval process, technological advances, determinations as to
commercial potential, the terms of collaborative agreements entered into by the
Company, the status of competitive products and the possibility of the Company's
construction of a commercial manufacturing facility for its potential products.
In particular, if the Company were to construct and equip such a manufacturing
facility during this period, the Company anticipates that it would likely begin
to make substantial additional capital expenditures in the second half of 1998
and beyond, which may require the Company to seek additional funding. In
addition, the Company's research and development expenditures will vary as
projects are added, extended or terminated and as a result of variations in
funding from existing or future collaborative agreements. The Company is seeking
additional collaborative agreements with corporate partners and may seek
additional funding through public or private equity or debt financing. There can
be no assurance 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
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relinquish rights to certain of its technologies, product candidates or products
that the Company would otherwise seek to develop or commercialize itself, which
could materially adversely affect 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 recently 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 live vaccines for the prevention of
viral diseases such as influenza, parainfluenza 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 until at least the 1999/2000 influenza season, if at all.
The Company's estimate of the potential timing of commercialization of its
proposed products is a forward-looking statement that is subject to risks and
uncertainties and actual results may vary materially as a result of a number of
factors. Such factors include those described under "-- Uncertainties Related to
Clinical Trials," " -- Lack of Manufacturing Experience; Reliance on Contract
Manufacturers," and "-- Stability of Cold Adapted Influenza Vaccine." To achieve
profitability, the Company, alone or with others, must successfully identify,
develop, test, manufacture and market its products. There can be no assurance
that Aviron will succeed in the development and marketing of any product. Any
potential product requires significant additional investment, development,
preclinical testing and clinical trials prior to potential regulatory approval
and commercialization.
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, 1997, the Company had an
accumulated deficit of approximately $66.4 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, preclinical testing and
clinical trial activities expand. The Company's ability to achieve
profitability, or to refinance its obligations with respect to its indebtedness,
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
regulatory approvals or successfully identify, develop, test, manufacture and
market any product candidates, or that the Company will ever achieve product
revenues or profitability. There can be no assurance that the Company's
revenues, operating results, cash flow and capital resources if and once
generated will be sufficient for payment of its indebtedness in the future. In
the absence of such revenues, operating results, cash flow and capital resources
or in the event of any such delays or other problems, the Company could face
substantial liquidity problems and might be required to dispose of material
assets or operations to meet its debt service and other obligations, and there
can be no assurance as to the timing of such sales or the proceeds that the
Company could realize therefrom. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
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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 or its licensors' patents or
patent applications will issue or, if issued, will not be reexamined, reissued,
opposed, challenged, invalidated or circumvented, or that the rights granted
thereunder will provide proprietary protection or competitive advantages to the
Company.
In May 1996, American Cyanamid Company filed an opposition to the grant of
the Company's European patent with claims directed to chimeric negative strand
RNA viruses and to methods of engineering these viruses to express foreign
proteins and antigens. American Cyanamid Company primarily challenges the
breadth of the claims which the Company was granted. Although the Company is
responding to the opposition, no assurance can be given as to the scope of the
claims, if any, which the European Patent Office ultimately will find
patentable. Failure of the Company to prevail in the opposition would impede the
Company's ability to prevent competitors from using this technology in Europe.
The commercial success of Aviron additionally will depend, in part, upon
the Company 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 patent applications or patents may limit the scope of
claims issuing from the Company's patent applications, prevent certain claims
from being issued, or conflict in certain respects with claims made under the
Company's applications.
The Company is aware of patent applications that have been filed by others
that may pertain to certain aspects of the Company's programs or to its patents
or patent applications, including the patents related to the Company's RSV
vaccine under development. The Company is aware of a claim by a third party,
regarding inventorship of subject matter claimed in a United States patent
which, along with its related foreign counterpart patents and applications, is
licensed to the Company and which is directed to certain aspects of technology
relating to herpes viruses. This claim may also relate to a pending United
States patent application which is a continuation of the licensed patent. It is
presently unclear whether this claim of inventorship is valid, and, if valid, it
could affect ownership of the subject United States patent and patent
application as well as their foreign counterparts.
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.
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The patent laws of European and certain other foreign countries generally
do not allow for the issuance of patents for methods of treatment of the human
body. To the extent the Company's patent portfolio includes claims for methods
of treating humans, these methods may not be protectable in Europe and certain
other foreign countries.
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 and the NIH relies in part on trade secrets to protect the master
strains of the bPIV-3 virus. Aviron protects its proprietary technology and
processes, in part, by confidentiality agreements or material transfer
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. See "-- Lack of Patent
Protection of Cold Adapted Influenza Master Donor Strains."
LACK OF PATENT PROTECTION OF COLD ADAPTED INFLUENZA MASTER DONOR STRAINS
The Company has no issued patents covering the cold adapted influenza
master donor strains. The Company's rights to the master donor strains are
substantially based on an exclusive worldwide license of materials and know-how
from the University of Michigan, which owns the master donor strains from which
the Company's 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
has been issued any patents covering the cold adapted influenza vaccine. There
can be no assurance that a third party will not gain access by some means to
University of Michigan master donor strains, reproduce the Company's cold
adapted influenza vaccine or develop another live virus influenza vaccine which
might be comparable to Aviron's in terms of safety and effectiveness. See
"-- Uncertainty of Protection of Patents and Proprietary Rights; Dependence on
Trade Secrets."
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
regulations. Clinical testing must meet requirements for Institutional Review
Board oversight and informed consent, as well as FDA prior review, oversight and
Good Clinical Practice regulations. 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 either believes that the subjects participating in such trials are being
exposed to unacceptable health risks.
The Company understands that its vaccine products will be classified by the
FDA as "biologic products," as opposed to "drug products." The steps ordinarily
required before a biologic product may be marketed in the United States include
(a) preclinical testing and clinical trials; (b) the submission to the FDA of an
IND, which must become effective before clinical trials may commence; (c)
adequate and well-controlled clinical
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trials to establish the safety and efficacy of the drug; (d) the submission to
the FDA of a PLA, together with an ELA for each manufacturing facility; and (e)
FDA approval of the applications, including approval of all product labeling.
Preclinical testing includes laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of each product. The results of the preclinical tests are
submitted to the FDA as part of an IND and are reviewed by the FDA before the
commencement of clinical trials. Unless the FDA objects to an IND, the IND will
become effective 30 days following its receipt by the FDA. There can be no
assurance that submission of an IND will result in FDA authorization to commence
clinical trials or that the lack of an objection means that the FDA will
ultimately approve an application for marketing approval.
Before receiving FDA approval to market a product in accordance with the
above procedures, the Company will have to demonstrate that the product is safe
and effective. 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 and related labeling claims will be limited to those specific segments
of the population for which the product is safe and effective, as demonstrated
through clinical trials. Furthermore, approval may entail ongoing requirements
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 or maintain marketing
approval.
The Company believes that the approval process for vaccines may be longer
than for therapeutic products, since vaccines are administered to healthy
individuals. In addition, regulatory scrutiny may be particularly intense for
products, such as Aviron's cold adapted influenza vaccine, which are designed to
be given to healthy children.
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.
INTENSE COMPETITION AND RISK 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, sales, 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, and Evans, the supplier of the Company's cold adapted influenza
vaccine. Each of these companies sells the injectable inactivated influenza
vaccine in the United States, has significantly
32
<PAGE> 36
greater financial resources than Aviron and has established marketing and
distribution channels for such products. In addition the Company is aware of
efforts to develop improved inactivated injectable influenza vaccines by Chiron
(Chiron Biocine Division) and others; intranasally administered inactivated
vaccines by Swiss Serum and Vaccine Institute, Biovector Therapeutics, S.A. and
Virus Research Institute; a "naked DNA" vaccine by Merck Research Laboratories;
and a commercially available cold adapted influenza vaccine in Russia. Further,
the Company is aware of several large pharmaceutical companies that alone or
with partners are developing new drug therapies designed to relieve the symptoms
of influenza. 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"), and a cold adapted PIV-3 vaccine
developed with NIH support which is licensed to Wyeth-Ayerst.
New developments are expected to continue in the pharmaceutical,
biopharmaceutical and biotechnology industries and in academia, government
agencies and other research organizations. 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 its research,
development or commercialization expenses incurred in connection with any such
product. Many potential competitors have substantially greater financial,
technical, marketing and sales resources than the Company. 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.
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. The Company in-licensed its cold adapted influenza vaccine
from the NIAID and the University of Michigan. It has obtained rights to certain
recombinant negative strand RNA technology from Mount Sinai, and rights to the
herpes simplex viruses, EBV and various recombinant methods and materials from
ARCH. The Company has entered into agreements with SmithKline Beecham for the
development of its EBV vaccine, with Sang-A for clinical development,
manufacturing and development rights for certain products in Korea and certain
Asian countries (not including Japan), and has licensed from the NIAID rights
covering its PIV-3 vaccine. 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 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. ARCH has recently asserted an
interpretation of the financial terms of this agreement with the Company,
relating to the license by Aviron of its EBV technology to SmithKline Beecham,
which would require the Company to pay ARCH one-half of any
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<PAGE> 37
future or past payments (including sub-license fees and milestone payments)
received by Aviron under the SB Agreement. The Company disputes ARCH's
interpretation of the financial terms of the agreement. No assurance can be
given, however, that the Company's interpretation will prevail. Failure of the
Company to prevail in this matter could have a material adverse effect on the
Company's business, financial condition and results of operations.
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.
34
<PAGE> 38
EXECUTIVE OFFICERS
The executive officers of the Company are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
J. Leighton Read, M.D. ......................... 47 Chairman and Chief Executive Officer
Fred Kurland.................................... 48 Senior Vice President and Chief Financial
Officer
C. Jo White, M.D. .............................. 43 Senior Vice President, Medical Affairs
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
</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 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. and AxyS Pharmaceuticals, Inc., both of which
are biotechnology companies. 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.
Fred Kurland was appointed Senior Vice President and Chief Financial
Officer of the Company in January 1998. Prior to joining the Company, Mr.
Kurland was Vice President and Chief Financial Officer of Protein Design Labs,
Inc., a biotechnology company, from 1996 to 1998. From 1995 to 1996, Mr. Kurland
was Vice President and Chief Financial Officer at Applied Immune Sciences, a
biotechnology company, and from 1987 to 1995, he held a number of positions at
Syntex Corporation, a pharmaceutical company, most recently as Vice President
and Controller. Mr. Kurland, a Certified Public Accountant, holds a B.S. in
Business and Economics from Lehigh University, and an M.B.A. and a J.D. from the
University of Chicago.
C. Jo White, M.D., was appointed Senior Vice President, Medical Affairs in
September 1997. Prior to joining the Company in 1997, Dr. White was Vice
President of Clinical Development at North American Vaccine, Inc., a vaccine
manufacturing company. From 1996 to 1997, Dr. White was Vice President, Clinical
Development of PPD Pharmaco, a clinical research organization. From 1995 to
1996, Dr. White was a private consultant. From 1987 to 1995, she held various
positions with Merck Research Laboratories, a pharmaceutical company, most
recently as Senior Director, Vaccines. Dr. White holds a B.A. in Microbiology
from the University of Texas, and an M.D. from Baylor College of Medicine.
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 biopharmaceuticals
company, and from 1989 to 1992, he was Director, Regulatory Affairs and Quality
for WelGen Manufacturing Partnership (BW Manufacturing, Inc.), a division of
Burroughs Wellcome 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.
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<PAGE> 39
Paul M. Mendelman, M.D., has been Vice President, Clinical Research of the
Company since 1996. Dr. Mendelman also is currently consulting professor in the
Department of Pediatrics at the Stanford University School of Medicine. Prior to
joining the Company, Dr. Mendelman was Director, Clinical Research, Infectious
Diseases for Merck Research Laboratories, a pharmaceutical company, since 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 1996. Prior to joining the Company, Dr. Patzer 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.
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 6,667 square feet of space
to a subtenant. This sublease is on a month-to-month basis and may be extended
or renegotiated at Aviron's discretion. The Company also has a right of first
notice to lease an additional 80,000 square feet of space in buildings adjacent
to its current facility beginning in 1999. In addition, the Company is leasing
space pursuant to the PCI Agreement. Aviron believes that, assuming it is able
to lease all or a significant portion of this space, it will be able to meet its
facility needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
In July 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 were based on Chiron
proprietary information which was improperly conveyed to Aviron by a former
Chiron employee, and that the Company had engaged in unfair competition. In
September 1997, the Company and Chiron concluded an amicable settlement of the
litigation, under which Aviron agreed to pay a nominal amount in exchange for a
dismissal of the litigation and a general release by Chiron as to both Aviron
and its employee.
In May 1996, American Cyanamid Company filed an opposition to the grant of
the Company's European patent with claims directed to chimeric negative strand
RNA viruses and to methods of engineering these viruses to express foreign
proteins and antigens. American Cyanamid Company primarily challenges the
breadth of the claims which the Company was granted. Although the Company is
responding to the opposition, no assurance can be given as to the scope of the
claims, if any, which the European Patent Office ultimately will find
patentable. Failure of the Company to prevail in the opposition would impede the
Company's ability to prevent competitors from using this technology in Europe.
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, 1997.
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<PAGE> 40
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 set 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
commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996
Fourth Quarter ended December 31, 1996..................... $8.375 $ 6.875
1997
First Quarter ended March 31, 1997......................... 12.75 6.75
Second Quarter ended June 30, 1997......................... 15.25 8.00
Third Quarter ended September 30, 1997..................... 32.75 11.00
Fourth Quarter ended December 31, 1997..................... 28.50 18.75
</TABLE>
On March 12, 1998, there were 398 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
None.
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<PAGE> 41
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>
1993 1994 1995 1996 1997
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................................ $ -- $ -- $ 1,707 $ 1,625 $ 1,477
Operating Expenses:
Research and development.................... 2,073 4,216 10,220 14,997 24,254
General and administrative.................. 1,874 2,493 3,252 4,595 5,978
------- ------- -------- -------- --------
Total operating expenses............ 3,947 6,709 13,472 19,592 30,232
------- ------- -------- -------- --------
Loss from operations.......................... (3,947) (6,709) (13,472) (19,592) (28,755)
------- ------- -------- -------- --------
Interest income, net of interest expense...... 175 207 362 466 2,253
------- ------- -------- -------- --------
Net loss...................................... $(3,773) $(6,502) $(11,403) (17,501) $(26,502)
======= ======= ======== ======== ========
Basic and diluted net low per share........... $ (1.94)
========
Pro forma net loss per share(1)............... $ (1.70) $ (1.94)
======== ========
Shares used in computing basic and diluted net
loss per share(1)........................... 6,711 9,043 13,684
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
---- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investments....... $12,410 $ 6,449 $ 17,819 $ 17,872 $ 75,111
Working capital.............................. 12,155 5,877 16,775 16,411 54,580
Total assets................................. 13,206 7,789 19,878 21,592 85,325
Capital lease obligations, noncurrent........ -- 750 618 871 521
Deferred compensation........................ -- -- 180 1,099 588
Accumulated deficit.......................... (4,525) (11,060) (22,444) (39,935) (66,411)
Total stockholders' equity................... 12,893 6,362 17,537 17,947 75,742
</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.
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 $66.4 million as of December 31, 1997,
and it expects to incur substantial operating losses over at least the next
several years.
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<PAGE> 42
Aviron has financed its operations through proceeds from private placements
of Preferred Stock, two public offerings and a private placement of Common
Stock, revenue from its collaborative agreements, equipment lease financing and
investment income earned on cash, cash equivalents and marketable securities.
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.
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 Korea. The Company has retained the right to co-market a
monovalent formulation of the vaccine in the United States and to have
SmithKline Beecham supply such vaccine. SmithKline Beecham 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 first of which was paid to the Company in 1997. 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,
CMV, HSV-2 and RSV. However, the Company is under no obligation to develop any
product. Sang-A will make payments to the Company upon Sang-A'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.
In January 1997, the Hanbo Group, the conglomerate that owns Sang-A,
declared bankruptcy. The Company is unable to predict what, if any, long-term
effect the bankruptcy of the Hanbo Group will have on Hanbo Group subsidiaries,
including Sang-A, and on the Company's agreement with Sang-A.
In 1996 the Company initiated a two-year pivotal Phase III clinical trial
to evaluate its cold adapted influenza vaccine in children. The Company enrolled
1,602 children at 10 clinical sites, of which 1,314 were vaccinated with a
second dose 46 to 74 days after initial vaccination. In July 1997 the Company
and NIAID announced that, based on an initial analysis of the first stage of the
Phase III trial, Aviron's live cold adapted intranasal vaccine for influenza
demonstrated a 93% protection rate against culture confirmed influenza in those
children receiving two doses, the primary endpoint of the study. The clinical
investigators presented the initial findings of this trial at a scientific
conference in fall 1997 and have submitted the findings for publication in a
peer-reviewed medical journal. The Company intends to submit a PLA to the FDA
based on the data from this trial and prior studies, and will support its PLA
with additional data from the second stage of this Phase III clinical trial as
well as other trials.
The Company currently is evaluating the costs and benefits of developing
internal manufacturing capabilities or contracting for expanded or alternative
sources of supply from third-party manufacturers. In 1996, the Company completed
construction of a pilot manufacturing facility funded through its existing
capital lease line of credit. In April 1997, the Company entered into an
agreement with Evans for the commercial manufacture of bulk supplies of the
Company's live cold adapted influenza vaccine until December 31, 2001. In
October 1997, the Company entered into an agreement with PCI for the blending,
filling, packaging and labeling of its live cold adapted influenza vaccine in
the United States until October 2004. The agreements with Evans and PCI require
the Company to incur operating expenses upon signing and for the duration of the
agreements for facility space, utilities and insurance.
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<PAGE> 43
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. See "Business Risks."
RESULTS OF OPERATIONS
Years Ended December 31, 1997 and 1996
Revenues. Total revenues for the year ended December 31, 1997 were $1.5
million, compared to $1.6 million for the year ended December 31, 1996. Revenues
resulted from reimbursement for contract research from SmithKline Beecham in
1996 and 1997, and a milestone payment of $1.0 million from SmithKline Beecham
in 1997 for commencement of clinical trials for the EBV vaccine. The Company
expects to have little or no revenue from SmithKline Beecham in 1998.
Operating Expenses. Research and development expenses increased 62% to
$24.3 million in the year ended December 31, 1997 from $15.0 million for the
year ended December 31, 1996. These increases were primarily due to increases in
research and development staffing, expenses associated with clinical trials of
the Company's cold adapted influenza and PIV-3 vaccines and preclinical testing
associated with other programs. The Company expects these expenses to increase
in 1998 as clinical trials continue, and as development and pre-manufacturing
activities expand in preparation for potential commercialization.
General and administrative expenses increased 30% to $6.0 million in the
year ended December 31, 1997 from $4.6 million for the year ended December 31,
1996. These increases were incurred to support the Company's expanded research
and development functions, patent and legal expenses, activities associated with
becoming a public company and corporate development activities. The Company
expects these expenses to increase in 1998 due to premarketing and other
pre-commercialization activities and growth of the Company's administrative
infrastructure.
Net Interest Income. The Company's net interest income increased to $2.3
million in the year ended December 31, 1997, from $466,000 in the year ended
December 31, 1996. The increase in interest income reflects the effects of the
Company's increase in average cash, cash equivalent and investment balances in
1997.
Years Ended December 31, 1996 and 1995
Revenues. Total revenues for the year ended December 31, 1996 were $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 revenues 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
years 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.
40
<PAGE> 44
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 investment balances in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Aviron had cash, cash equivalents and marketable securities at December 31,
1997 of approximately $75.1 million. In order to preserve principal and maintain
liquidity, the Company's funds are invested primarily 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 from 1992 to 1995, an initial public
offering of its Common Stock in November 1996, a private sale of Common Stock in
March 1997, and a second public offering of Common Stock in August 1997. Through
December 31, 1997, the Company had raised approximately $139.8 million from such
sales net of offering expenses. Cash used in operations was $16.0 million and
$19.8 million for the years 1996 and 1997, respectively. Cash expended for
capital additions and to repay lease financing arrangements amounted to
approximately $1.2 million and $6.4 million for 1996 and 1997, respectively.
Capital expenditures increased in 1997 primarily as a result of the construction
of capital improvements at third-party manufacturing facilities. The Company
expects expenditures to be higher during 1998 as the Company develops its
products and expands its clinical trials and continues to make capital
improvements at third-party manufacturing facilities.
In March 1998, the Company entered into a Stock Repurchase Agreement with
Sang-A pursuant to which Sang-A has agreed not to sell any of its shares of
Aviron Common Stock prior to the closing of the Offering. Contingent upon the
closing of the Note Offering, Aviron has agreed to repurchase 530,831 shares
from Sang-A on the closing date of the Note Offering at a purchase price equal
to the greater of (i) $25 per share, or (ii) the last reported bid price of the
Company's Common Stock on the Nasdaq National Market on the pricing date of the
Note Offering.
The Company believes that its existing cash, cash equivalents and
marketable securities, together with the interest thereon, and revenues from
existing collaborations, will enable it to maintain its current and planned
operations through 1998. 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, the cost of constructing manufacturing facilities, should they be
deemed necessary, and product commercialization activities. In particular, if
the Company were to construct and equip such a manufacturing facility during
this period, the Company anticipates that it would likely begin to make
substantial additional capital expenditures in the second half of 1998 and
beyond, which may require the Company to seek additional funding. The Company is
seeking additional collaborative agreements 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.
INCOME TAXES
At December 31, 1997, the Company had a federal net operating loss
carryforward of approximately $66.3 million and research tax credits of
approximately $2.0 million which will expire at various dates between
41
<PAGE> 45
2007 and 2012 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. See Note 8 of Notes to
Financial Statements.
IMPACT OF YEAR 2000
The Company is in the process of performing its assessment of the impact of
year 2000 on its operations. Management is in the process of formalizing its
assessment procedures and developing a plan to address identified issues. The
Company has evaluated its financial and accounting systems and concluded that
they are not materially affected by the year 2000. It is unknown the extent, if
any, of the impact of the year 2000 on other systems and equipment. There can be
no assurance that all third parties will address the year 2000 issue in a timely
fashion if at all. Any significant year 2000 compliance problems of the Company,
its suppliers, its clinical research organizations, or its collaborative
partners could have a material adverse effect on the Company's business,
financial condition and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and notes thereto appear on pages F-2 to
F-17 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
42
<PAGE> 46
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 4, 1998, under the captions "Election of
Directions -- 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 4, 1998, 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 4, 1998, 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 4, 1998, under the caption "Certain Transactions,"
and is hereby incorporated by reference herein.
43
<PAGE> 47
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(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.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets at December 31, 1996 and 1997................ F-3
Statements of Operations for each of the three years in the
period ended December 31, 1997............................ F-4
Statement of Stockholders' Equity for each of the three
years in the period ended December 31, 1997............... F-5
Statements of Cash Flows for each of the three years in the
period ended December 31, 1997............................ 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
<TABLE>
<CAPTION>
ITEM DESCRIPTION
------ -----------
<C> <S>
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 or 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).
4.9 Common Stock Purchase Agreement between the Registrant and
Biotech Target, S.A., dated as of March 27, 1997(3).
4.10 Rights Agreement between the Registrant and BankBoston,
N.A., dated as of October 8, 1997(5).
+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).
</TABLE>
44
<PAGE> 48
<TABLE>
<CAPTION>
ITEM DESCRIPTION
------ -----------
<C> <S>
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).
+10.14 Biological Materials License Agreement between the
Registrant and the National Institutes of Health, dated May
31, 1996(1).
+10.15 Contract Manufacture Agreement between the Registrant and
Evans Medical Limited, dated as of April 16, 1997(4).
++10.16 Production Agreement between the Registrant and Packaging
Coordinators, Inc., dated as of October 31, 1997(6).
10.17 Facility Reservation Agreement between the Registrant and
Packaging Coordinators, Inc., dated as of October 31,
1997(6).
23.1 Consent of Ernst & Young LLP, Independent Auditors.(7)
24.1 Power of Attorney. See Signature Page.
27.1 Financial Data Schedules.
</TABLE>
- ---------------
+ Confidential treatment has been granted for portions of this exhibit.
++ Confidential treatment has been requested for portions of this exhibit.
* Compensatory Plan or Agreement
(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.
(3) Incorporated by reference to the correspondingly numbered exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997, File No. 0-20815, filed May 15, 1997.
(4) Incorporated by reference to the correspondingly numbered exhibit to the
Company's Current Report on Form 8-K, File No. 0-20815, dated April 16, 1997
and filed July 21, 1997.
(5) Incorporated by reference to the correspondingly numbered exhibit to the
Company's Current Report on Form 8-K, File No. 0-20815, dated October 8,
1997 and filed October 10, 1997.
(6) Incorporated by reference to the correspondingly numbered exhibit to the
Company's Registration Statement on Form S-3, File No. 333-41649, filed
December 10, 1997.
(7) Previously filed with this Form 10-K.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated October 8, 1997 on
October 10, 1997, File No. 0-20815, reporting on the adoption of a Share
Purchase Rights Plan.
45
<PAGE> 49
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 Amendment
to its Form 10-K to be signed on its behalf by the undersigned, thereunto duly
organized, on the 31st day March 1998.
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 Fred Kurland,
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ J. LEIGHTON READ, M.D. Chairman and Chief Executive March 31, 1998
- ----------------------------------------------------- Officer (Principal Executive
J. Leighton Read, M.D. Officer)
* Senior Vice President and Chief March 31, 1998
- ----------------------------------------------------- Financial Officer (Principal
Fred Kurland Financial and Accounting
Officer)
* Director March 31, 1998
- -----------------------------------------------------
Reid W. Dennis
* Director March 31, 1998
- -----------------------------------------------------
Paul H. Klingenstein
* Director March 31, 1998
- -----------------------------------------------------
Bernard Roizman, Sc.D.
* Director March 31, 1998
- -----------------------------------------------------
L. James Strand, M.D.
* Director March 31, 1998
- -----------------------------------------------------
Jane E. Shaw, Ph.D.
*By: /s/ J. LEIGHTON READ, M.D.
-------------------------------------------------
J. Leighton Read, M.D.
Attorney-in-fact
</TABLE>
46
<PAGE> 50
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets at December 31, 1996 and 1997................ F-3
Statements of Operations for each of the three years in the
period ended December 31, 1997............................ F-4
Statement of Stockholders' Equity for each of the three
years in the period ended December 31, 1997............... F-5
Statements of Cash Flows for each of the three years in the
period ended December 31, 1997............................ F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 51
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, 1996 and 1997, and the related statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. 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, 1996
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
February 13, 1998
F-2
<PAGE> 52
AVIRON
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 12,166 $ 15,239
Short-term investments.................................... 5,706 47,285
Accounts receivable....................................... 500 29
Prepaid expenses and other current assets................. 813 1,001
-------- --------
Total current assets.............................. 19,185 63,554
Long-term investments..................................... -- 12,587
Property and equipment, net............................... 2,319 7,582
Deposits and other assets................................. 88 1,602
-------- --------
TOTAL ASSETS................................................ $ 21,592 $ 85,325
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 695 $ 3,636
Accrued compensation...................................... 138 756
Accrued clinical trial costs.............................. 752 3,592
Accrued offering costs.................................... 474 --
Accrued expenses and other liabilities.................... 143 513
Current portion of capital lease obligations.............. 572 477
-------- --------
Total current liabilities......................... 2,774 8,974
Deferred rent............................................. -- 88
Capital lease obligations, noncurrent..................... 871 521
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; issuable in series; none outstanding at
December 31, 1996 and 1997............................. -- --
Common stock, $0.001 par value; 30,000,000 shares
authorized; 11,452,033 and 16,082,476 shares issued and
outstanding at December 31, 1996 and 1997,
respectively........................................... 11 16
Additional paid-in capital................................ 59,127 142,840
Notes receivable from stockholders........................ (157) (115)
Deferred compensation..................................... (1,099) (588)
Accumulated deficit....................................... (39,935) (66,411)
-------- --------
TOTAL STOCKHOLDERS' EQUITY.................................. 17,947 75,742
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 21,592 $ 85,325
======== ========
</TABLE>
See accompanying notes
F-3
<PAGE> 53
AVIRON
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
-------- ---------- -----------
<S> <C> <C> <C>
REVENUES:
License revenue...................................... $ 1,500 $ -- $ --
Contract revenue..................................... 207 1,625 1,477
-------- ---------- -----------
TOTAL REVENUES......................................... 1,707 1,625 1,477
OPERATING EXPENSES:
Research and development............................. 10,220 14,997 24,254
General and administrative........................... 3,252 4,595 5,978
-------- ---------- -----------
TOTAL OPERATING EXPENSES............................... 13,472 19,592 30,232
-------- ---------- -----------
LOSS FROM OPERATIONS................................... (11,765) (17,967) (28,755)
OTHER INCOME/EXPENSE:
Interest income...................................... 520 658 2,433
Interest expense..................................... (158) (192) (180)
-------- ---------- -----------
TOTAL OTHER INCOME, NET................................ 362 466 2,253
-------- ---------- -----------
NET LOSS............................................... $(11,403) $ (17,501) $ (26,502)
======== ========== ===========
BASIC AND DILUTED NET LOSS PER SHARE................... $ (1.94)
===========
PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE......... $ (1.70) $ (1.94)
======== ==========
Shares used in computing basic and diluted net loss per
share................................................ 6,710,718 9,042,921 13,683,586
======== ========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 54
AVIRON
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
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, 1994....... 21,666,667 $ 17,406 695,414 $ 16 $ -- $ -- $ --
Issuance of Series B convertible
preferred stock at $1.20 per
share for certain in-process
technology....................... 1,323,734 1,588 -- -- -- -- --
Issuance of Series C convertible
preferred stock at $1.35 per
share net of issuance costs of
$807............................. 16,041,570 20,850 -- -- -- -- --
Exercise of stock options.......... -- -- 62,892 31 -- -- --
Deferred compensation related to
the grant of certain stock
options.......................... -- -- -- 270 -- -- (270)
Amortization of deferred
compensation..................... -- -- -- -- -- -- 90
Change in net unrealized loss
available-for-sale investments... -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- --
----------- -------- ----------- ----- -------- ----- -------
BALANCE AT DECEMBER 31, 1995....... 39,031,971 $ 39,844 758,306 $ 317 -- -- (180)
Issuance of Series C convertible
preferred stock at $1.35 per
share............................ 136,326 184 -- -- -- -- --
Conversion of preferred stock to
common stock in conjunction with
Initial Public Offering and
reincorporation in Delaware...... (39,168,297) (40,028) 7,833,633 (309) 40,337 -- --
Issuance of common stock in initial
public offering net of offering
costs of $2,319.................. -- -- 2,152,800 2 14,902 -- --
Issuance of common stock in private
placement........................ -- -- 239,200 -- 1,914 -- --
Exercise of stock options and
warrants, net of cancellations... -- -- 468,094 1 335 (262) 48
Forgiveness of notes receivable
from stockholders................ -- -- -- -- -- 105 --
Deferred compensation related to
the grant of certain stock
options.......................... -- -- -- -- 1,639 -- (1,639)
Amortization of deferred
compensation..................... -- -- -- -- -- -- 672
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)
Issuance of common stock in private
placement, net of offering costs
of $59........................... -- -- 1,714,286 2 14,939 -- --
Issuance of common stock in
secondary public offering net of
offering costs of $4,766......... -- -- 2,690,000 3 67,979 -- --
Exercise of stock options, warrants
and purchase of shares through
employee stock purchase plan, net
of repurchases................... -- -- 226,157 -- 477 -- --
Deferred compensation recorded
relating to grant of certain
stock options.................... -- -- -- -- 218 -- (218)
Issuance of warrants in lieu of a
cash payment for services
rendered......................... -- -- -- -- 100 -- --
Amortization of deferred
compensation..................... -- -- -- -- -- -- 729
Change in net unrealized loss on
available-for-sale investments... -- -- -- -- -- -- --
Payment of notes receivable........ -- -- -- -- -- 42 --
Net loss........................... -- -- -- -- -- -- --
----------- -------- ----------- ----- -------- ----- -------
BALANCE AT DECEMBER 31, 1997....... -- $ -- 16,082,476 $ 16 $142,840 $(115) $ (588)
=========== ======== =========== ===== ======== ===== =======
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
----------- -------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1994....... $(11,060) $ 6,362
Issuance of Series B convertible
preferred stock at $1.20 per
share for certain in-process
technology....................... -- 1,588
Issuance of Series C convertible
preferred stock at $1.35 per
share net of issuance costs of
$807............................. -- 20,850
Exercise of stock options.......... -- 31
Deferred compensation related to
the grant of certain stock
options.......................... -- --
Amortization of deferred
compensation..................... -- 90
Change in net unrealized loss
available-for-sale investments... 19 19
Net loss........................... (11,403) (11,403)
-------- --------
BALANCE AT DECEMBER 31, 1995....... $(22,444) $ 17,537
Issuance of Series C convertible
preferred stock at $1.35 per
share............................ -- 184
Conversion of preferred stock to
common stock in conjunction with
Initial Public Offering and
reincorporation in Delaware...... -- --
Issuance of common stock in initial
public offering net of offering
costs of $2,319.................. -- 14,904
Issuance of common stock in private
placement........................ -- 1,914
Exercise of stock options and
warrants, net of cancellations... -- 122
Forgiveness of notes receivable
from stockholders................ -- 105
Deferred compensation related to
the grant of certain stock
options.......................... -- --
Amortization of deferred
compensation..................... -- 672
Change in net unrealized loss on
available-for-sale investments... 10 10
Net loss........................... (17,501) (17,501)
-------- --------
BALANCE AT DECEMBER 31, 1996....... (39,935) 17,947
Issuance of common stock in private
placement, net of offering costs
of $59........................... -- 14,939
Issuance of common stock in
secondary public offering net of
offering costs of $4,766......... -- 67,982
Exercise of stock options, warrants
and purchase of shares through
employee stock purchase plan, net
of repurchases................... -- 477
Deferred compensation recorded
relating to grant of certain
stock options.................... -- --
Issuance of warrants in lieu of a
cash payment for services
rendered......................... -- 100
Amortization of deferred
compensation..................... -- 729
Change in net unrealized loss on
available-for-sale investments... 26 26
Payment of notes receivable........ -- 42
Net loss........................... (26,502) (26,502)
-------- --------
BALANCE AT DECEMBER 31, 1997....... $(68,411) $ 75,742
======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 55
AVIRON
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(11,403) $(17,501) $(26,502)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 544 541 657
Acquired technology and patent rights..................... 1,588 -- --
Amortization of deferred compensation..................... 90 672 729
Changes in assets and liabilities:
Accounts receivable.................................. -- (500) 471
Prepaid expenses and other current assets............ (574) (134) (188)
Deposits and other assets............................ (86) 17 (1,514)
Accounts payable..................................... 211 383 2,963
Accrued expenses and other liabilities............... 514 724 3,542
Deferred revenue..................................... 208 (208) --
-------- -------- --------
Net cash used in operating activities....................... (8,908) (16,006) (19,842)
Cash flows from investing activities:
Purchases of investments.................................. (9,493) (10,342) (74,028)
Maturities of short-term investments...................... 8,722 10,933 19,888
Expenditures for property and equipment................... (238) (651) (5,767)
-------- -------- --------
Net cash used in investing activities....................... (1,009) (60) (59,907)
Cash flow from financing activities:
Proceeds from capital lease line of credit................ -- -- --
Principal payments on capital lease obligation............ (384) (528) (578)
Proceeds from issuance of:
Series C convertible preferred stock................. 20,850 184 --
Common stock......................................... 31 17,044 83,400
-------- -------- --------
Net cash provided by financing activities................... 20,497 16,700 82,822
Net increase in cash and cash equivalents................... 10,580 634 3,073
Cash and cash equivalents at beginning of year.............. 952 11,532 12,166
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 11,532 $ 12,166 $ 15,239
======== ======== ========
Supplemental schedule of non-cash financing and investing
activities:
Issuance of common stock for certain technology and
patent rights........................................ $ 1,588 $ -- $ --
Equipment acquired under lease line of credit.......... 365 933 153
Deferred compensation related to grant of certain stock
options, less cancellations.......................... 270 1,591 218
Common stock issued in exchange for notes receivable,
less cancellations................................... -- 262 --
Warrant issued in lieu of payment of legal fees........ -- -- 100
Forgiveness of notes receivable........................ -- 105 --
</TABLE>
See accompanying notes.
F-6
<PAGE> 56
AVIRON
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Aviron (the "Company") was incorporated in the State of California in April
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.
The Company anticipates working on a number of long-term development
projects which 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.
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.
Concentration of Credit Risk
Cash, cash equivalents and investments are financial instruments that
potentially subject the Company to concentrations of credit risk. The Company
primarily invests in U.S. government obligations, notes of U.S. corporations,
certificates of deposit, commercial paper and foreign government securities. By
policy, the Company limits the amount of credit exposure to any one entity or
financial institution and to any one type of investment other than securities
issued by the U.S. government.
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
$4,668,000 and $4,641,576 in money market funds at December 31, 1996 and 1997,
respectively.
Investments
The Company's entire 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, if any, 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. Property and equipment at December 31,
1997 includes $5,130,150 of construction in progress. No depreciation has been
charged for these assets during 1997 because such assets have not been placed in
service. Leasehold improvements are amortized on a straight-line basis over the
shorter of their useful lives or the term of the lease.
F-7
<PAGE> 57
AVIRON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition
Collaborative research revenue is earned 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
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"). SFAS 128
requires the presentation of basic earnings (loss) per share and diluted
earnings (loss) per share, if more dilutive, for all periods presented.
In accordance with SFAS 128, basic net loss per share has been computed
using the weighted-average number of shares of common stock outstanding during
the period. The Company also adopted the provisions of Securities and Exchange
Commission Staff Accounting Bulletin No. 98 which resulted in the removal of
certain shares which had been included in the calculation in periods prior to
the Company's initial public offering. Diluted net loss per share has not been
presented separately as, given the Company's net loss position, the result would
be anti-dilutive.
Pro forma basic net loss per share as presented in the Statement of
Operations for 1995 and 1996 has been computed as described above and also gives
effect to the conversion of the convertible Preferred Stock that automatically
converted upon completion of the Company's initial public offering (using the
as-if converted method) from the original date of issuance.
A reconciliation of shares used in the calculation of basic and pro forma
basic net loss per share follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net loss per share....................... $(11,403,000) $(17,501,000) $(26,502,000)
============ ============ ============
Basic
Weighted average shares of common stock
outstanding............................ 548,512 2,405,885 13,683,586
============ ============ ============
Basic net loss per share................. $ (20.79) $ (7.27) $ (1.94)
============ ============ ============
Pro Forma Basic
Weighted average shares of common stock
outstanding............................ 548,512 2,405,885
Adjusted to reflect the effect of the
conversion of Preferred Stock.......... 6,162,206 6,637,036
------------ ------------
Shares used in computing pro forma basic
net loss per share..................... 6,710,718 9,042,921
============ ============
Pro forma basic net loss per share....... $ (1.70) $ (1.94)
============ ============
</TABLE>
Had the Company been in a net income position, diluted earnings per share
would have been presented and would have included, the shares used in the
computation of basic net loss per share as well as an additional 648,599,
503,986, and 427,613 shares for the years ended December 31, 1995, 1996 and 1997
related to outstanding options and warrants not included above (as determined
using the treasury stock method).
F-8
<PAGE> 58
AVIRON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
New Accounting Pronouncements
In June 1997, the Financial Accounting Standard Board issued Statements of
Financial Accounting Standard No. 130 ("SFAS 130"), "Reporting Comprehensive
Income" and Financial Accounting Standard No. 131 ("SFAS 131"), "Disclosure
about Segments of an Enterprise and Related Information," which will be required
to be adopted by the Company in fiscal 1998. Adoption of these statements is not
expected to have a significant impact on the Company's financial position,
results of operations and cash flows.
2. LICENSE AGREEMENTS
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 totaling as
much as $2.6 million as certain milestones are met. No benchmark payments were
made or were due through 1997. 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.
During 1997, ARCH asserted an interpretation of the financial terms of the
agreement with the Company relating to the license for Epstein-Barr virus
technology. The assertion would require the Company to pay ARCH one-half of any
future or past payments (including sublicense fees and milestone payments)
received by the Company under its agreement with SmithKline Beecham (see Note
3). As of December 31, 1997, the Company had received $3,352,000 from SmithKline
Beecham. The Company disputes ARCH's interpretation of the financial terms of
the agreement. No assurance can be given, however, that the Company's
interpretation will prevail. Failure of the Company to prevail could have a
material adverse effect on the Company's business, financial condition or
results of operations.
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 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. 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; 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; and the
remaining warrants were canceled. Warrants expire in 2000 and 2001,
respectively. As of December 31, 1997 only warrants covering 1,874 shares at
$4.50 a share had been exercised. 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 which 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
F-9
<PAGE> 59
AVIRON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 and will issue a warrant 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. As of December 31, 1997, the Company had funded $657,000 of
research at the University of Michigan related to this agreement and has no
further obligations to fund research.
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 in vaccines, to NeuroVir Research Inc. ("NeuroVir"), 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, 1997, the Company owned approximately
17% 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.
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 funded the Company's development of the EBV vaccine through
the third quarter of 1997. For the years ended December 31, 1995, 1996 and 1997,
the Company recognized $125,000, $1,625,000 and $1,477,000 respectively of
development revenue pursuant to the agreement. The revenue received and
recognized in 1997 includes a $1,000,000 milestone payment related to the
initiation of clinical trials by SmithKline Beecham. Development costs incurred
in 1995, 1996 and 1997 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 January 1997, the Hanbo Group declared bankruptcy. Hanbo
Group is the conglomerate that owns Sang-A. The Company is unable to predict
what, if any, long-term effect the bankruptcy of Hanbo Group will have on Hanbo
Group subsidiaries, including Sang-A, and on the Company's agreement with
Sang-A.
F-10
<PAGE> 60
AVIRON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS
Investments consist of the following (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
As of December 31, 1996:
Corporate commercial paper.................... $ 8,087 $ -- $ (2) $ 8,085
U.S. corporate obligations.................... 2,001 1 -- 2,002
U.S. government agency obligations............ 1,001 -- -- 1,001
Municipal bonds............................... 999 -- -- 999
Foreign government securities................. 933 (3) 930
------- ---- ----- -------
$13,021 $ 1 $ (5) $13,017
======= ==== ===== =======
As of December 31, 1997:
Certificates of deposit....................... $ 8,129 $ 1 $ (1) $ 8,129
Corporate commercial paper.................... 11,586 -- (5) 11,581
U.S. Corporate obligations.................... 42,471 38 (10) 42,499
U.S. government agency obligations............ 2,050 -- -- 2,050
Municipal bonds............................... 2,018 2 -- 2,020
Foreign government securities................. 4,190 1 (1) 4,190
------- ---- ----- -------
$70,444 $ 42 $ (17) $70,469
======= ==== ===== =======
</TABLE>
Included in the above table as of December 31, 1997 are U.S. corporate
obligations, commercial paper and U.S. government agency obligations with fair
values of $7,311,000 and $10,597,000 at December 31, 1996 and 1997,
respectively, which have been classified as cash equivalents in the accompanying
balance sheet. In 1996 all securities had maturities of one year or less. In
1997 all securities had maturities of one year or less except for $12,587,000
which had maturities no greater than two years.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- ------
<S> <C> <C>
Laboratory equipment...................................... $ 1,984 $2,315
Computer equipment........................................ 459 732
Office equipment.......................................... 157 330
Leasehold improvements.................................... 971 1,085
Construction in progress.................................. -- 5,029
------- ------
3,571 9,491
Less accumulated depreciation and amortization............ (1,252) (1,909)
------- ------
$ 2,319 $7,582
======= ======
</TABLE>
Included in property and equipment at December 31, 1996 and 1997 are assets
with a cost of $2,806,000 and $2,874,000, respectively, and accumulated
amortization of $1,106,000 and $1,679,000, respectively, which have been
financed pursuant to the lease line of credit.
F-11
<PAGE> 61
AVIRON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LEASE ARRANGEMENTS
The Company has a lease line of credit that bears interest based on an
average of the three-year and five-year indices of U.S. Treasury Notes (14% at
December 31, 1997). Outstanding balances under the line are secured by the
related equipment purchased.
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, 1995, 1996 and 1997 was $413,000, $728,000 and $904,000 respectively.
The Company entered into an operating lease agreement for a portion of
facilities owned by the Company's contract manufacturer for cold adapted
influenza vaccine. The agreement expires upon the earlier of December 31, 2001
or three years following initial product commercial sales. Net expense for the
year ended December 31, 1997 was $829,675.
In October 1997, the Company entered into a 7 year operating lease
agreement for a facility to be used in the manufacturing, packaging and storage
of its products. The facility is owned by a contract manufacturer who will
provide services to the Company. The lease includes an option allowing the
Company to extend the lease beyond the initial term. The agreement requires the
Company to pay certain operating costs including a portion of utilities and
insurance. The agreement provides for the deferral of 40% of the base monthly
rental for a 2 year period. The Company is required to deposit and maintain the
deferred amount in an escrow account. The agreement also requires the lessor to
provide a $1,000,000 improvement allowance for construction and improvements to
the facility. The Company will repay $500,000 of the improvement allowance to
the lessor through a additional charge per unit of production. The $500,000 is
presently deposited in an escrow account. Rent expense for the year ending
December 31, 1997 was $220,000, which includes $88,000 of deferred rent.
At December 31, 1997, 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,
1998............................................... $ 585 $ 2,943
1999............................................... 456 2,948
2000............................................... 111 3,503
2001............................................... 9 2,281
2002............................................... -- 2,334
Thereafter......................................... -- 5,356
------ -------
1,161 $19,365
====== =======
-------
Less amounts representing interest................... (163)
------
998
Less current portion................................. (477)
------
$ 521
======
</TABLE>
F-12
<PAGE> 62
AVIRON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY
Common Stock
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, 1996 and 1997, 186,220 and 92,100 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.
Warrants
Outstanding warrants to purchase common stock are as follows at December
31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE PRICE EXPIRATION
- ---------------- -------------- -------------
<S> <C> <C>
16,666 $ 2.00 January 2000
3,126 $ 4.50 December 1999
4,000 $ 4.50 May 2000
29,750 $10.00 November 2001
</TABLE>
Employee Stock Purchase Plan
The Company has adopted an Employee Stock Purchase Plan under which
employees can purchase shares of the Company's common stock based on a
percentage of their compensation but not greater than 15 percent of their
earnings. The purchase price per share must be equal to the lower of 85% of the
market value at the beginning or end of the applicable offering period. A total
of 200,000 shares of common stock are reserved for issuance under the plan. As
of December 31, 1997, 46,388 shares had been issued under the Plan.
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.
The Company's Plans had 763,062 shares available to grant options to
employees and directors at December 31, 1997. Most of the options granted have
10 year terms and vest ratably over 50 months of continued employment.
F-13
<PAGE> 63
AVIRON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In addition, the Company has issued non-qualified stock options outside of
the 1992 Plan.
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of year.... 369,287 $0.50 613,038 $0.50 611,936 $ 1.60
Granted............................. 309,000 $0.67 640,080 $2.73 441,780 $16.08
Exercised........................... (62,892) $0.50 (452,781) $1.13 (141,032) $ 0.70
Forfeited........................... (2,357) $0.50 (188,401) $2.97 (26,865) $ 2.70
-------- ----- --------- ----- --------- ------
Outstanding -- end of year.......... 613,038 $0.50 611,936 $1.60 885,819 $ 8.86
======== ========= =========
Weighted-average fair value of
options granted during year....... $ 0.29 $ 1.38 $ 11.07
</TABLE>
Prior to December 31, 1997, 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.
The Company has recognized deferred compensation for certain options
granted in 1995, 1996 and 1997. Total deferred compensation of $2,127,000
recorded through December 31, 1997 is being amortized over the vesting period of
such options on an accelerated basis. A portion of these options vested
immediately upon grant.
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 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 prices 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, 1997 have been segregated for
additional disclosure as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- --------------------------
WEIGHTED- WEIGHTED- OPTIONS WEIGHTED-
OPTIONS AVERAGE AVERAGE CURRENTLY AVERAGE
OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT EXERCISE
RANGE OF EXERCISE PRICES DEC. 31, 1997 CONTRACTUAL LIFE PRICE DEC. 31, 1997 PRICE
------------------------ -------------- ---------------- -------------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$0.25-$1.00................ 164,276 6.6 $ 0.48 128,263 $ 0.47
$1.01-$5.00................ 223,896 8.5 $ 1.25 84,474 $ 1.25
$5.01-$8.00................ 66,535 8.8 $ 7.30 31,463 $ 7.29
$8.01-$20.00............... 227,830... 9.0 $10.04 36,010 $ 9.79
$20.01-27.13............... 203,280 9.5 $23.19 11,800 $22.88
</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 ("SFAS 123")
requires use of option valuation models
F-14
<PAGE> 64
AVIRON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
that were not developed for use in valuing employee stock options. Under APB 25,
if 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 SFAS 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,
1996 and 1997: risk free interest rate of 6.07%, 5.94% and 6.80%, respectively;
volatility factors of the expected market price of the Company's common stock of
.73 for 1995 and 1996 and .80 for 1997; no expected dividends; and a
weighted-average expected life of the option of 5 years.
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 single measure of the fair value of
its employee stock options and shares issued pursuant to 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 1997
-------- -------- --------
<S> <C> <C> <C>
Pro forma net loss................................. $(11,418) $(17,595) $(27,733)
Pro forma net loss per share (basic)............... $ (1.70) $ (1.95) $ (2.03)
</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.
Share Purchase Rights
In October 1997, the Company's Board of Directors adopted a Share Rights
Plan. The Share Purchase Rights Plan provides for the distribution of certain
rights to acquire shares of the Company's Series A Junior Participating
Preferred Stock, par value $0.001 (the "Rights") as a dividend for each share of
Common Stock held of record as of October 23, 1997. The Rights are triggered and
become exercisable upon the occurrence of either the (i) date of a public
announcement of the acquisition of 20% or more beneficial ownership of the
Company's Common Stock by a person or group (an "Acquiring Person"), or (ii) ten
business days (or such later time as may be set by the Board of Directors) after
a public announcement of a tender or exchange offer for 20% or more beneficial
ownership of the Company's Common Stock by an Acquiring Person. If the Rights
are triggered, each Right effectively provides its holder, the right to purchase
shares of Common Stock at a 50% discount from the market price at that time,
upon payment of an exercise price of $150 per Right.
F-15
<PAGE> 65
AVIRON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Reserved Shares
As of December 31, 1997, the Company has reserved shares of common stock
for future issuance as follows:
<TABLE>
<S> <C>
Options:
Outstanding............................................... 885,819
Available for grant....................................... 763,062
Employee Stock Purchase Plan................................ 153,612
Warrants.................................................... 53,542
---------
1,856,035
=========
</TABLE>
8. INCOME TAXES
As of December 31, 1997, the Company had a federal net operating loss
carryforward of approximately $66,300,000. The net operating loss carry forward
will expire at various dates beginning from 2007 through 2012, 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>
1996 1997
-------- --------
<S> <C> <C>
Net operating loss carryforwards....................... $ 13,200 $ 23,000
Capitalized research and development expenses.......... 1,100 2,700
Research tax credits (expire 2007-2012)................ 1,100 2,000
Other -- Net........................................... 500 500
-------- --------
Net deferred tax assets................................ 15,900 28,200
Valuation allowance.................................... (15,900) (28,200)
-------- --------
$ -- $ --
======== ========
</TABLE>
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 $4,450,000, $7,050,000 and $12,300,000 in 1995, 1996
and 1997, respectively.
Approximately $900,000 of the valuation allowance for deferred tax assets
relates to benefits of stock option deductions which, when recognized, will be
allocated directly to contributed capital.
9. RELATED PARTY TRANSACTIONS
In 1995, the Company made unsecured loans to officers totaling $100,000
which bear interest at 7.75% and are due in April 2000. In 1997 the Company made
two additional unsecured loans to officers totalling $200,000, which bear
interest at 7.75% and are due in February and July 2001, respectively. As of
December 31, 1997, the unpaid balance was $220,000.
A former 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, $115,000 during 1996 and paid an additional $11,000 commission as
of December 31, 1997 all in connection with the Sang-A transaction (see Note 3).
The former officer received no direct compensation from the transaction.
F-16
<PAGE> 66
AVIRON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
In September 1997, the Company and Chiron concluded an amicable settlement of
the litigation, under which Aviron agreed to pay a nominal amount in exchange
for a dismissal of the litigation and a general release by Chiron as to both
Aviron and its employee.
11. SUBSEQUENT EVENTS (UNAUDITED)
On March 12, 1998, the Company's Board of Directors approved an offering
(the "Note Offering") of $100 million of convertible subordinated notes due
2005, convertible at any time 90 days following the issuance through maturity.
In March 1998, the Company entered into a Stock Repurchase Agreement with
Sang-A pursuant to which Sang-A has agreed, contingent on the closing of the
above mentioned Note Offering, not to sell any of its shares of Aviron Common
Stock prior to the closing of the Note Offering and Aviron has agreed to
repurchase 530,831 shares from Sang-A on the closing date of the Note Offering
at a purchase price equal to the greater of (i) $25 per share, or (ii) the last
reported bid price of the Company's Common Stock on the Nasdaq National Market
on the pricing date of the Note Offering.
F-17
<PAGE> 67
EXHIBIT INDEX
<TABLE>
<CAPTION>
ITEM DESCRIPTION
------ -----------
<C> <S>
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 or 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).
4.9 Common Stock Purchase Agreement between the Registrant and
Biotech Target, S.A., dated as of March 27, 1997(3).
4.10 Rights Agreement between the Registrant and BankBoston,
N.A., dated as of October 8, 1997(5).
+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).
+10.14 Biological Materials License Agreement between the
Registrant and the National Institutes of Health, dated May
31, 1996(1).
+10.15 Contract Manufacture Agreement between the Registrant and
Evans Medical Limited, dated as of April 16, 1997(4).
</TABLE>
<PAGE> 68
<TABLE>
<CAPTION>
ITEM DESCRIPTION
------ -----------
<C> <S>
++10.16 Production Agreement between the Registrant and Packaging
Coordinators, Inc., dated as of October 31, 1997(6).
10.17 Facility Reservation Agreement between the Registrant and
Packaging Coordinators, Inc., dated as of October 31,
1997(6).
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. See Signature Page.
27.1 Financial Data Schedules.
</TABLE>
- ---------------
+ Confidential treatment has been granted for portions of this exhibit.
++ Confidential treatment has been requested for portions of this exhibit.
* Compensatory Plan or Agreement
(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.
(3) Incorporated by reference to the correspondingly numbered exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997, File No. 0-20815, filed May 15, 1997.
(4) Incorporated by reference to the correspondingly numbered exhibit to the
Company's Current Report on Form 8-K, File No. 0-20815, dated April 16, 1997
and filed July 21, 1997.
(5) Incorporated by reference to the correspondingly numbered exhibit to the
Company's Current Report on Form 8-K, File No. 0-20815, dated October 8,
1997 and filed October 10, 1997.
(6) Incorporated by reference to the correspondingly numbered exhibit to the
Company's Registration Statement on Form S-3, File No. 333-41649, filed
December 10, 1997.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated October 8, 1997 on
October 10, 1997, File No. 0-20815, reporting on the adoption of a Share
Purchase Rights Plan.
<PAGE> 1
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, Employee
Stock Purchase Plan, 1996 Non-Employee Directors' Stock Option Plan and the
Non-Plan Option Grants of Aviron, of our report dated February 13, 1998, with
respect to the financial statements of Aviron included in the Annual Report
(Form 10-K) for the year ended December 31, 1997.
/s/ ERNST & YOUNG LLP
Palo Alto, California
March 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,239
<SECURITIES> 59,872
<RECEIVABLES> 29
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 63,554
<PP&E> 9,491
<DEPRECIATION> 1,909
<TOTAL-ASSETS> 85,325
<CURRENT-LIABILITIES> 8,974
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 75,726
<TOTAL-LIABILITY-AND-EQUITY> 85,325
<SALES> 0
<TOTAL-REVENUES> 1,477
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 30,232
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 180
<INCOME-PRETAX> (28,755)
<INCOME-TAX> 0
<INCOME-CONTINUING> (28,755)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,502)
<EPS-PRIMARY> (1.94)
<EPS-DILUTED> (1.94)
</TABLE>
<TABLE> <S> <C>
<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>
<RESTATED>
<MULTIPLIER> 1,000
<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> (1.94)
<EPS-DILUTED> (1.94)
</TABLE>
<TABLE> <S> <C>
<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>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 11,532
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,498
<PP&E> 1,987
<DEPRECIATION> 712
<TOTAL-ASSETS> 19,878
<CURRENT-LIABILITIES> 1,723
<BONDS> 0
0
39,844
<COMMON> 317
<OTHER-SE> (22,628)
<TOTAL-LIABILITY-AND-EQUITY> 19,878
<SALES> 0
<TOTAL-REVENUES> 1,707
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,472
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 158
<INCOME-PRETAX> (11,403)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,403)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,403)
<EPS-PRIMARY> (1.70)
<EPS-DILUTED> (1.70)
</TABLE>
