AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 19, 2000
REGISTRATION NO. 333-92921
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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VICAL INCORPORATED
(Exact name of registrant as specified in its charter)
--------------------------
DELAWARE 93-0948554
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9373 TOWNE CENTRE DRIVE, SUITE 100
SAN DIEGO, CA 92121
(858) 646-1100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------------
ALAIN B. SCHREIBER, M.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
VICAL INCORPORATED
9373 TOWNE CENTRE DRIVE, SUITE 100
SAN DIEGO, CA 92121
(858) 646-1100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
THOMAS E. SPARKS, JR., ESQ. LANCE W. BRIDGES, ESQ.
JOHN L. DONAHUE, ESQ. ADAM C. LENAIN, ESQ.
ALAN G. SMITH, ESQ. COOLEY GODWARD LLP
PILLSBURY MADISON & SUTRO LLP 4365 EXECUTIVE DRIVE, SUITE 1200
P.O. BOX 7880 SAN DIEGO, CALIFORNIA 92121
SAN FRANCISCO, CALIFORNIA 94120
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
--------------------------
CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION FEE
SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) OFFERING PRICE (3)
Common Stock, $0.01 par value..... 2,875,000 shares $37.50 $107,812,500 $28,462.50
(1) Includes 375,000 shares that the underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c), based upon the average of the high and low price
reported on the Nasdaq National Market on January 18, 2000.
(3) Of this amount, $15,691 was previously paid in connection with the initial
filing of the registration statement.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION. DATED JANUARY 19, 2000.
2,500,000 Shares
[LOGO]
Common Stock
------------------
This is an offering of 2,500,000 shares of common stock of Vical
Incorporated. All of the 2,500,000 shares of common stock are being sold by
Vical.
The common stock is listed on the Nasdaq National Market under the symbol
"VICL." The last reported sale price of the common stock on January 18, 2000,
was $35.75 per share.
SEE "RISK FACTORS" ON PAGE 6 TO READ ABOUT FACTORS YOU SHOULD CONSIDER
BEFORE BUYING SHARES OF THE COMMON STOCK.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
Per Share Total
--------- -----
Initial price to public................................ $ $
Underwriting discount.................................. $ $
Proceeds, before expenses, to Vical.................... $ $
To the extent that the underwriters sell more than 2,500,000 shares of
common stock, the underwriters have the option to purchase up to an additional
375,000 shares from Vical at the initial price to public less the underwriting
discount.
------------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.
GOLDMAN, SACHS & CO.
ROBERTSON STEPHENS
SG COWEN
FIRST UNION SECURITIES, INC.
------------------------
Prospectus dated , 2000.
GRAPHICS' DESCRIPTIONS FOR EDGAR
[Numerous Product Opportunities Graphic, Inside Front Cover]
Header: Vical's Naked DNA Technology Offers Numerous Product
Opportunities.
Description: Graphic illustration of the gene-based drug candidates
identifying their use in DNA Vaccine, Immunotherapy and DNA
Therapeutics for Infectious Diseases, Oncology and Protein
Delivery, respectively.
[Stages of Clinical Trial Graphic, Inside Back Cover]
Header: Advanced Clinical Trials With Multiple Cancer Therapies
Description: Graphic illustration of the various stages of clinical
trials of Vical's products Allovectin-7, Leuvectin, Vaxid
and gp100 vaccine for various cancer diseases.
[Naked DNA Technology Graphic, Inside Back Cover]
Header: Vical's Naked DNA Technology
Description: Graphic illustration of the process by which Vical's Naked
DNA Technology enters the target cell and expresses the
desired protein.
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER BEFORE DECIDING TO INVEST IN OUR COMMON
STOCK. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK
FACTORS" SECTION, THE FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS AND
THE DOCUMENTS INCORPORATED BY REFERENCE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "UNDERWRITING."
OUR BUSINESS
OVERVIEW
We develop biopharmaceutical products based on our patented naked DNA gene
transfer technologies for the prevention and treatment of life-threatening
diseases. We currently focus our development on innovative cancer therapies
designed to induce an immune response against cancer cells without causing
serious side effects. We have retained all rights to our internally developed
cancer product candidates. Our lead candidates, ALLOVECTIN-7 and LEUVECTIN, are
both in late-stage clinical trials for multiple indications.
We also license our technologies to pharmaceutical companies for the
development of applications typically outside our focus such as vaccines for
infectious diseases and optimized delivery of therapeutic proteins. These
strategic collaborations provide us with the opportunity to receive royalties
and profit sharing, if products are successfully developed and commercialized.
In addition, proceeds from these license agreements help fund development of our
product candidates.
TARGET MARKETS
We focus on developing cancer therapies which may offer safer and more
cost-effective treatments than are currently available. Our development programs
address a number of cancers which in aggregate threaten the lives of millions of
people worldwide. The high public and patient awareness of the need for improved
therapies, coupled with the limited efficacy of existing treatments such as
chemotherapy, provides Vical with an attractive market.
Potential applications of our naked DNA gene delivery technology include DNA
therapeutics for cancer, DNA vaccines for infectious diseases and DNA
therapeutic protein delivery for other types of disease. We also believe a
significant potential exists for a number of veterinary applications.
OUR TECHNOLOGIES
We pioneered and continue to develop naked DNA gene delivery technologies.
Our DNA technologies are protected by a number of patents. Our approach involves
the design and construction of stable, closed loops of DNA. These DNA segments
contain genes that promote production of desired proteins for periods ranging
from weeks to several months. We believe the potential benefits of our
technology include:
- BROAD APPLICABILITY. Our naked DNA gene delivery technology may be
useful in developing novel treatments for cancer, DNA vaccines to
prevent or treat infectious diseases and methods to efficiently deliver
human and animal therapeutic proteins.
- CONVENIENCE. Our naked DNA therapeutics are intended to be administered
like conventional pharmaceuticals on an outpatient basis.
- SAFETY. Our product candidates contain no viral components which may
cause unwanted immune responses, infections, or malignant and permanent
changes in the cell's genetic makeup.
3
- EASE OF MANUFACTURING. Our product candidates are manufactured using
conventional fermentation techniques and standard purification
procedures.
- COST-EFFECTIVENESS. Our naked DNA gene delivery technology may prove to
be more cost-effective than therapies which require genetic
modification and controlled propagation of viral vectors. The DNA, once
introduced into the body, is intended to stimulate the production of a
therapeutic protein over a prolonged period of time, which may be more
cost-effective than administering the protein itself.
OUR PRODUCT CANDIDATES
We have several unpartnered cancer product candidates in clinical trials:
- ALLOVECTIN-7 for the treatment of metastatic melanoma, in Phase III and
Phase II registration trials, and head and neck cancer, in Phase II,
- LEUVECTIN, for the treatment of kidney cancer, Phase II, and prostate
cancer, Phase II,
- VAXID, for the prevention of recurrence of B-cell lymphoma, Phase I/II,
and
- a DNA vaccine for the treatment of metastatic melanoma, Phase I/II.
OUR COLLABORATIVE PARTNERS
We have established relationships, through the licensing of our technology,
with a number of corporate partners and collaborators, including:
- Merck, in the fields of infectious disease vaccines and cardiovascular
disease,
- Two divisions of Aventis S.A., formerly Rhone-Poulenc S.A.,
- Aventis Pasteur, formerly Pasteur Merieux Connaught, in the
field of infectious disease vaccines,
- Aventis Pharma, formerly Rhone-Poulenc Rorer
Pharmaceuticals, Inc., in the field of neurodegenerative
disorders,
- Pfizer, in the field of animal health therapeutics,
- Merial, a joint venture between Merck and Rhone Merieux, in the field
of animal health vaccines,
- Centocor, a wholly-owned subsidiary of Johnson & Johnson, in the field
of cancer vaccines, and
- Boston Scientific, in the field of cardiovascular disease.
OUR HISTORY
We were incorporated in Delaware in 1987. Our offices are located at 9373
Towne Centre Drive, Suite 100, San Diego, California 92121-3088, and our
telephone number is (858) 646-1100.
THE OFFERING
Common stock offered by us................... 2,500,000 shares
Common stock to be outstanding after the
offering................................... 18,698,723 shares
Use of Proceeds.............................. For research and development and general
corporate purposes. See "Use of Proceeds."
Nasdaq National Market Symbol................ VICL
The above information is based on shares outstanding as of September 30,
1999.
4
SUMMARY FINANCIAL INFORMATION
See Note 1 of Notes to Audited Financial Statements for an explanation of
the method used to determine the number of shares used in computing per share
data below.
NINE MONTHS
FISCAL YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues:
License/royalty revenue.......... $4,509 $5,402 $5,679 $6,477 $5,044 $4,617 $3,770
Contract revenue................. 1,005 900 1,061 1,326 876 371 1,992
---------- ---------- ---------- ---------- ---------- ---------- ----------
5,514 6,302 6,740 7,803 5,920 4,988 5,762
Operating expenses:
Research and development......... 8,336 8,997 11,318 11,936 12,054 9,311 10,866
General and administrative....... 2,615 2,902 3,168 3,733 3,650 2,836 3,201
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses........... 10,951 11,899 14,486 15,669 15,704 12,147 14,067
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss from operations............... (5,437) (5,597) (7,746) (7,866) (9,784) (7,159) (8,305)
Interest income.................... 1,159 1,687 2,773 2,447 2,465 1,879 1,688
Interest expense................... 80 73 108 192 162 126 97
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss........................... $(4,358) $(3,983) $(5,081) $(5,611) $(7,481) $(5,406) $(6,714)
========== ========== ========== ========== ========== ========== ==========
Basic and diluted net loss per
share............................ $(0.34) $(0.29) $(0.33) $(0.36) $(0.47) $(0.34) $(0.42)
========== ========== ========== ========== ========== ========== ==========
Shares used in computing basic and
diluted net loss per share....... 12,831,585 13,504,790 15,382,848 15,484,952 15,797,585 15,786,838 16,114,024
The balance sheet data excludes 3,114,744 shares of common stock reserved
but unissued under our stock plans under which options to purchase an aggregate
of 1,930,229 shares of common stock at an average exercise price of $13.29 per
share were outstanding at September 30, 1999. In the "As Adjusted" column below,
we have adjusted the balance sheet data to give effect to receipt of the net
proceeds from the sale in this offering of 2,500,000 shares of common stock at
an assumed public offering price of $ per share, after deducting the
estimated underwriting discount and estimated offering expenses.
SEPTEMBER 30, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- ------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............ $38,935
Working capital............................................. 36,421
Total assets................................................ 43,880
Long-term obligations, less current portion................. 712
Total stockholders' equity.................................. 38,855
5
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, TOGETHER WITH ALL
OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, BEFORE DECIDING WHETHER TO
INVEST IN OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR
BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE HARMED. IN THIS
CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL
OR PART OF YOUR INVESTMENT.
NONE OF OUR PRODUCTS HAVE BEEN APPROVED FOR SALE. IF WE DO NOT DEVELOP
COMMERCIALLY SUCCESSFUL PRODUCTS, WE MAY BE FORCED TO CURTAIL OR CEASE
OPERATIONS.
Very little data exists regarding the safety and efficacy of DNA
therapeutics. All of our potential products are either in research or
development. We must conduct a substantial amount of additional research and
development before any U.S. or foreign regulatory authority will approve any of
our products. Results of our research and development activities may indicate
that our potential products are unsafe or ineffective. In this case, regulatory
authorities will not approve them. Even if approved, our products may not be
commercially successful. If we fail to develop and commercialize our products,
we will not be successful.
WE HAVE A HISTORY OF NET LOSSES. WE EXPECT TO CONTINUE TO INCUR NET LOSSES AND
WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
We have not sold any products and do not expect to sell any products for the
next several years. For the period from our inception to September 30, 1999, we
have incurred cumulative net losses totaling approximately $44.5 million.
Moreover, our negative cash flow and losses from operations will continue and
increase for the foreseeable future. We may never generate sufficient product
revenue to become profitable. We also expect to have quarter-to-quarter
fluctuations in revenues, expenses and losses, some of which could be
significant.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE. IF ADDITIONAL CAPITAL IS NOT
AVAILABLE, WE MAY HAVE TO CURTAIL OR CEASE OPERATIONS.
We will need to raise more money to continue the research and development
necessary to bring our products to market and to establish manufacturing and
marketing capabilities. We plan to seek additional funds through public and
private stock offerings, arrangements with corporate partners, borrowings under
lease lines of credit or other sources. If we cannot raise more money we will
have to reduce our capital expenditures, scale back our development of new
products, reduce our workforce and license to others products or technologies
that we otherwise would seek to commercialize ourselves. The amount of money we
will need will depend on many factors, including:
- the progress of our research and development programs,
- the scope and results of our preclinical studies and clinical trials,
- the time and costs involved in:
- obtaining necessary regulatory approvals,
- filing, prosecuting and enforcing patent claims,
- scaling up our manufacturing capabilities, and
- the commercial arrangements we may establish.
6
THE REGULATORY APPROVAL PROCESS IS EXPENSIVE, TIME CONSUMING AND UNCERTAIN WHICH
MAY PREVENT US FROM OBTAINING REQUIRED APPROVALS FOR THE COMMERCIALIZATION OF
OUR PRODUCTS.
Testing of the potential drugs we develop is regulated by numerous
governmental authorities in the United States and other countries. The
regulations are evolving and uncertain. The regulatory process can take many
years and require us to expend substantial resources. For example:
- the U.S. Food and Drug Administration, the FDA, has not established
guidelines concerning the scope of clinical trials required for DNA
therapeutics,
- the FDA has not indicated how many patients it will require to be
enrolled in clinical trials to establish the safety and efficacy of DNA
therapeutics, and
- current regulations are subject to substantial review by various
governmental agencies.
Therefore, U.S. or foreign regulations could prevent or delay regulatory
approval of our products or limit our ability to develop and commercialize our
products. Delays could:
- impose costly procedures on our activities,
- diminish any competitive advantages that we attain, and
- negatively affect our ability to receive royalties.
We believe that the FDA and comparable foreign regulatory bodies will
regulate separately each product containing a particular gene depending on its
intended use. Presently, to commercialize any product we must sponsor and file a
regulatory application for each proposed use. We then must conduct clinical
studies to demonstrate the safety and efficacy of the product necessary to
obtain FDA approval. The results obtained so far in our clinical trials may not
be replicated in our on-going or future trials. This may prevent any of our
potential products from receiving FDA approval.
We use recombinant DNA molecules in our product candidates, and therefore we
also must comply with guidelines instituted by the National Institutes of
Health, the NIH, and its Recombinant DNA Advisory Committee. The NIH could
restrict or delay the development of our products.
ADVERSE EVENTS IN THE FIELD OF GENE THERAPY MAY NEGATIVELY IMPACT REGULATORY
APPROVAL OR PUBLIC PERCEPTION OF OUR PRODUCTS.
The recent death of a patient undergoing a viral-based gene therapy has been
widely publicized. This death and other adverse events in the field of gene
therapy that may occur in the future could result in greater governmental
regulation of our non-viral naked DNA technology and potential regulatory delays
relating to the testing or approval of our potential products. For example, as a
result of this death, the Recombinant DNA Advisory Committee of the NIH may
become more active in reviewing the clinical trials or proposed clinical trials
of all companies involved in gene therapy. It is uncertain what effect such
increased scrutiny will have on our product development efforts or clinical
trials.
The commercial success of our potential products will depend in part on
public acceptance of the use of gene therapies for the prevention or treatment
of human diseases. Public attitudes may be influenced by claims that gene
therapies are unsafe and our naked DNA therapeutics may not gain the acceptance
of the public or the medical community. Negative public reaction to gene therapy
in general could result in greater government regulation and stricter labeling
requirements of gene therapies, including our naked DNA therapeutics, and could
cause a decrease in the demand for any products we may develop.
7
OUR PATENTS AND PROPRIETARY RIGHTS MAY NOT PROVIDE US WITH ANY BENEFIT AND THE
PATENTS OF OTHERS MAY PREVENT US FROM COMMERCIALIZING OUR PRODUCTS.
Patents may not issue from any of our current applications. Moreover, if
patents do issue, governmental authorities may not allow claims sufficient to
protect our technology. Finally, others may challenge or seek to circumvent or
invalidate patents that are issued to us or to licensors of our technology. In
that event, the rights granted under patents may be inadequate to protect our
proprietary technology or to provide any commercial advantage.
Our core DNA delivery technology is covered by a patent issued in Europe
which is being opposed by several companies under European patent procedures. If
we are not successful in this opposition proceeding we may lose part or all of
our proprietary protection on our potential products in Europe.
Others may have or may receive patents which contain claims applicable to
our products. These patents may impede our ability to commercialize products.
THE LEGAL PROCEEDINGS TO OBTAIN PATENTS AND LITIGATION OF THIRD-PARTY CLAIMS OF
INTELLECTUAL PROPERTY INFRINGEMENT COULD REQUIRE US TO SPEND MONEY AND COULD
IMPAIR OUR OPERATIONS.
Our success will depend in part on our ability to obtain patent protection
for our products and processes both in the United States and in other countries.
The patent positions of biotechnology and pharmaceutical companies, however, can
be highly uncertain and involve complex legal and factual questions. Therefore,
it is difficult to predict the breadth of claims allowed in the biotechnology
and pharmaceutical fields.
We also rely on protecting our proprietary technology in part through
confidentiality agreements with our corporate collaborators, employees,
consultants and certain contractors. These agreements may be breached and we may
not have adequate remedies for any breach. In addition, our trade secrets may
otherwise become known or independently discovered by our competitors.
Protecting intellectual property rights can be very expensive. Litigation
may be necessary to enforce a patent issued to us or to determine the scope and
validity of third-party proprietary rights. Moreover, if a competitor were to
file a patent application claiming technology also invented by us, we would have
to participate in an interference proceeding before the U.S. Patent and
Trademark Office or in a foreign counterpart to determine the priority of the
invention. We may be drawn into interferences with third parties or may have to
provoke interferences ourselves to unblock third party patent rights so as to
allow us or our licensees to commercialize products based on our technology.
Litigation could result in substantial costs and the diversion of management's
efforts regardless of the results of the litigation. An unfavorable result in
litigation could subject us to significant liabilities to third parties, require
disputed rights to be licensed or require us to cease using some technology.
Our products and processes may infringe, or be found to infringe on, patents
not owned or controlled by us. We do not know whether any patents held by others
will require us to alter our products or processes, obtain licenses, or stop
activities. If relevant claims of third-party patents are upheld as valid and
enforceable, we could be prevented from practicing the subject matter claimed in
the patents, or may be required to obtain licenses or redesign our products or
processes to avoid infringement. A number of genetic sequences or proteins
encoded by genetic sequences that we are investigating are, or may become,
patented by others. As a result, we may have to obtain licenses to test, use or
market these products. Our business will suffer if we are not able to obtain
licenses at all or on terms commercially reasonable to us and we may not be able
to redesign our products or processes to avoid infringement.
8
COMPETITION AND TECHNOLOGICAL CHANGE MAY MAKE OUR POTENTIAL PRODUCTS AND
TECHNOLOGIES LESS ATTRACTIVE OR OBSOLETE.
We compete with companies, including major pharmaceutical and biotechnology
firms, that are pursuing other forms of treatment or prevention for the diseases
we target. We also may experience competition from companies that have acquired
or may acquire technology from universities and other research institutions. As
these companies develop their technologies, they may develop proprietary
positions which may prevent us from successfully commercializing products.
Some of our competitors are established companies with greater financial and
other resources than we have. Other companies may succeed in developing products
earlier than we do, obtaining FDA approval for products more rapidly than we do,
or developing products that are more effective than those we propose to develop.
While we will seek to expand our technological capabilities to remain
competitive, research and development by others will seek to render our
technology or products obsolete or noncompetitive or result in treatments or
cures superior to any therapy developed by us. Additionally, consumers may not
prefer therapies developed by us over existing or newly developed therapies.
THE METHOD OF ADMINISTRATION OF SOME OF OUR POTENTIAL PRODUCTS CAN CAUSE ADVERSE
EVENTS IN PATIENTS, INCLUDING DEATH.
Some of our potential products are designed to be injected directly into
malignant tumors. There are medical risks inherent in direct tumor injections.
For example, in clinical trials of our potential products, attending physicians
have punctured patients' lungs in less than one percent of procedures, requiring
hospitalization. In addition, a physician administering our product in an
investigator-sponsored clinical trial inadvertently damaged tissue near the
heart of a patient which may have precipitated the patient's death. These events
are reported as adverse events in our clinical trials and illustrate the medical
risks related to direct injection of tumors. These risks may adversely impact
market acceptance of some of our products.
COMMERCIALIZATION OF SOME OF OUR POTENTIAL PRODUCTS DEPENDS ON COLLABORATIONS
WITH OTHERS. IF OUR COLLABORATORS ARE NOT SUCCESSFUL OR IF WE ARE UNABLE TO FIND
COLLABORATORS IN THE FUTURE, WE MAY NOT BE ABLE TO DEVELOP THESE PRODUCTS.
Our strategy for the research, development and commercialization of some of
our product candidates requires us to enter into contractual arrangements with
corporate collaborators, licensors, licensees and others. Our success depends
upon the performance by these collaborators of their responsibilities under
these arrangements. Some collaborators may not perform their obligations as we
expect or we may not derive any revenue from these arrangements.
We have collaborative agreements with several pharmaceutical companies. We
do not know whether these companies will successfully develop and market any
products under their respective agreements. Moreover, some of our collaborators
are also researching competing technologies to treat the diseases targeted by
our collaborative programs. We may be unsuccessful in entering into other
collaborative arrangements to develop and commercialize our products.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, WE MAY NOT BE ABLE TO PURSUE COLLABORATIONS OR DEVELOP OUR OWN
PRODUCTS.
We are highly dependent on the principal members of our scientific,
manufacturing, marketing and management personnel, the loss of whose services
might significantly delay or prevent the achievement of our objectives. We face
competition from other companies, academic institutions, government entities and
other organizations in attracting and retaining personnel.
9
WE MAY NOT BE ABLE TO MANUFACTURE PRODUCTS ON A COMMERCIAL SCALE.
We have limited experience in manufacturing our product candidates in
commercial quantities. We may be dependent initially on corporate partners,
licensees or others to manufacture our products commercially. We also will be
required to comply with extensive regulations applicable to manufacturing
facilities. We may be unable to enter into any arrangement for the manufacture
of our products.
WE HAVE NO MARKETING OR SALES EXPERIENCE, AND IF WE ARE UNABLE TO DEVELOP OUR
OWN SALES AND MARKETING CAPABILITY, WE MAY NOT BE SUCCESSFUL IN COMMERCIALIZING
OUR PRODUCTS.
Our current strategy is to market our proprietary cancer products directly
in the United States, but we currently do not possess pharmaceutical marketing
or sales capabilities. In order to market and sell our proprietary cancer
products, we will need to develop a sales force and a marketing group with
relevant pharmaceutical experience, or make appropriate arrangements with
strategic partners to market and sell these products. Developing a marketing and
sales force is expensive and time consuming and could delay any product launch.
Our inability to successfully employ qualified marketing and sales personnel and
develop our sales and marketing capabilities will harm our business.
HEALTH CARE REFORM AND RESTRICTIONS ON REIMBURSEMENT MAY LIMIT OUR RETURNS ON
POTENTIAL PRODUCTS.
Our ability to earn sufficient returns on our products will depend in part
on the extent to which reimbursement for our products and related treatments
will be available from:
- government health administration authorities,
- private health coverage insurers,
- managed care organizations, and
- other organizations.
If we fail to obtain appropriate reimbursement, it could prevent us from
successfully commercializing our potential products.
There are efforts by governmental and third party payors to contain or
reduce the costs of health care through various means. We expect that there will
continue to be a number of legislative proposals to implement government
controls. The announcement of proposals or reforms could impair our ability to
raise capital. The adoption of proposals or reforms could impair our business.
Additionally third party payors are increasingly challenging the price of
medical products and services. If purchasers or users of our products are not
able to obtain adequate reimbursement for the cost of using our products, they
may forego or reduce their use. Significant uncertainty exists as to the
reimbursement status of newly approved health care products, and whether
adequate third party coverage will be available.
WE USE HAZARDOUS MATERIALS IN OUR BUSINESS. ANY CLAIMS RELATING TO IMPROPER
HANDLING, STORAGE OR DISPOSAL OF THESE MATERIALS COULD BE TIME CONSUMING AND
COSTLY.
Our research and development processes involve the controlled storage, use
and disposal of hazardous materials, biological hazardous materials and
radioactive compounds. We are subject to federal, state and local regulations
governing the use, manufacture, storage, handling and disposal of materials and
waste products. Although we believe that our safety procedures for handling and
disposing of these hazardous materials comply with the standards prescribed by
law and
10
regulation, the risk of accidental contamination or injury from hazardous
materials cannot be completely eliminated. In the event of an accident, we could
be held liable for any damages that result, and any liability could exceed the
limits or fall outside the coverage of our insurance. We may not be able to
maintain insurance on acceptable terms, or at all. We could be required to incur
significant costs to comply with current or future environmental laws and
regulations.
WE MAY HAVE SIGNIFICANT PRODUCT LIABILITY EXPOSURE.
We face an inherent business risk of exposure to product liability and other
claims in the event that our technologies or products are alleged to have caused
harm. These risks are inherent in the development of chemical and pharmaceutical
products. Although we currently maintain product liability insurance, we may not
have sufficient insurance coverage and we may not be able to obtain sufficient
coverage at a reasonable cost. Our inability to obtain product liability
insurance at an acceptable cost or to otherwise protect against potential
product liability claims could prevent or inhibit the commercialization of any
products developed by us or our collaborators. We also have liability for
products manufactured by us on a contract basis for third parties. If we are
sued for any injury caused by our technology or products, our liability could
exceed our total assets.
OUR STOCK PRICE COULD CONTINUE TO BE HIGHLY VOLATILE AND YOU MAY NOT BE ABLE TO
RESELL YOUR SHARES AT OR ABOVE THE PRICE YOU PAID FOR THEM.
The market price of our common stock, like that of many other life sciences
companies, has been highly volatile and is likely to continue to be highly
volatile. The following factors, among others, could have a significant impact
on the market price of our common stock:
- the results of our preclinical studies and clinical trials or those of
our collaborators or competitors or for DNA therapeutics in general,
- evidence of the safety or efficacy of our potential products or the
products of our competitors,
- the announcement by us or our competitors of technological innovations
or new products,
- governmental regulatory actions,
- changes or announcements in reimbursement policies,
- developments with our collaborators,
- developments concerning our patent or other proprietary rights or those
of our competitors, including litigation,
- concern as to the safety of our potential products,
- period-to-period fluctuations in our operating results,
- market conditions for life science stocks in general, and
- changes in estimates of our performance by securities analysts.
IF WE, OUR STRATEGIC PARTNERS OR OUR SUPPLIERS FAIL TO REMEDY YEAR 2000 ISSUES,
OUR PRODUCT DEVELOPMENT PROGRAMS COULD BE INTERRUPTED AND OUR BUSINESS AND
OPERATING RESULTS COULD BE HARMED.
If we, our strategic partners, or our suppliers of goods and services fail
to remedy any Year 2000 issues, our business operations and development programs
could be interrupted. If our strategic partners or suppliers fail to maintain
systems it could cause us to incur significant
11
expenses to remedy any problems, or otherwise seriously damage our business. Any
of the following events could affect our operations:
- if a strategic partner were unable to obtain our clinical materials or
services,
- if a strategic partner were unable to manage its clinical trials or
research and development activities,
- if a strategic partner were unable to pay any amounts owed to us, and
- if a supplier were unable to manufacture and ship materials to us or
provide requested contract services.
We cannot predict whether an interruption is likely to occur, the duration
of any interruption or the effect that an interruption would have on our future
operations. We cannot guarantee that we will be able to identify and correct all
Year 2000 problems on a timely basis. Similarly, we cannot guarantee that
unknown or unanticipated Year 2000 issues will not arise. As a result, Year 2000
compliance efforts may involve significant time and expense and the occurrence
of unknown, unanticipated or unremediated Year 2000 problems which could harm
our business and operating results.
OUR ANTI-TAKEOVER PROVISIONS COULD DISCOURAGE POTENTIAL TAKEOVER ATTEMPTS AND
MAKE ATTEMPTS BY STOCKHOLDERS TO CHANGE MANAGEMENT MORE DIFFICULT.
The approval of two-thirds of our voting stock is required to approve some
transactions and to take some stockholder actions, including the calling of a
special meeting of stockholders and the amendment of any of the anti-takeover
provisions contained in our certificate of incorporation. Further, pursuant to
the terms of our stockholder rights plan adopted in March 1995, we have
distributed a dividend of one right for each outstanding share of common stock.
These rights will cause substantial dilution to the ownership of a person or
group that attempts to acquire us on terms not approved by our board of
directors and may have the effect of deterring hostile takeover attempts.
12
FORWARD-LOOKING STATEMENTS
The statements incorporated by reference or contained in this prospectus
discuss our future expectations, contain projections of our results of
operations or financial condition, and include other "forward-looking"
information within the meaning of Section 27A of the Securities Act of 1933, as
amended. Our actual results may differ materially from those expressed in
forward-looking statements made or incorporated by reference in this prospectus.
Forward-looking statements that express our beliefs, plans, objectives,
assumptions or future events or performance may involve estimates, assumptions,
risks and uncertainties. Therefore, our actual results and performance may
differ materially from those expressed in the forward-looking statements.
Forward-looking statements often, although not always, include words or phrases
such as the following:
- "will likely result,"
- "are expected to,"
- "will continue,"
- "is anticipated,"
- "estimate,"
- "intends,"
- "plans,"
- "projection," and
- "outlook."
You should not unduly rely on forward-looking statements contained or
incorporated by reference in this prospectus. Actual results or outcomes may
differ materially from those predicted in our forward-looking statements due to
the risks and uncertainties inherent in our business, including risks and
uncertainties in:
- clinical trial results,
- obtaining and maintaining regulatory approval,
- market acceptance of and continuing demand for our products,
- the attainment of patent protection for any of these products,
- the impact of competitive products, pricing and reimbursement policies,
- our ability to obtain additional financing to support our operations,
- the continuation of our corporate collaborations, and
- changing market conditions and other risks detailed below.
You should read and interpret any forward-looking statements together with
the following documents:
- our most recent Annual Report on Form 10-K,
- our Quarterly Reports on Form 10-Q,
- the risk factors contained in this prospectus under the caption "Risk
Factors," and
- our other filings with the Securities and Exchange Commission.
Any forward-looking statement speaks only as of the date on which that
statement is made. We will not update any forward-looking statement to reflect
events or circumstances that occur after the date on which such statement is
made.
13
USE OF PROCEEDS
The net proceeds to us from the sale of the 2,500,000 shares of common stock
offered hereby are estimated to be $ assuming a public offering
price of $ per share and after deducting the estimated underwriting
discount and estimated offering expenses. The net proceeds to us would increase
to $ if the underwriters exercise their over-allotment option in full.
We currently anticipate using substantially all of the net proceeds of this
offering for research and development, including preclinical and clinical
studies. The balance of the net proceeds will be used for general corporate
purposes. The cost, timing and amount of funds required for such uses by us
cannot be precisely determined at this time and will be based on competitive
developments, the rate of our progress in research and development, the results
of preclinical studies and clinical trials, the timing of regulatory approvals,
payments under collaborative agreements and the availability of alternate
methods of financing. Our board of directors has broad discretion in determining
how the proceeds of this offering will be applied.
Proceeds may also be used to acquire businesses, technology or products that
complement our business. No transactions of this type are being negotiated as of
the date of this prospectus. Pending use, the net proceeds will be invested in
investment grade, interest-bearing securities.
14
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is traded on the Nasdaq National Market, under the symbol
"VICL." The following table sets forth, for the periods indicated, the high and
low sale prices for the common stock as reported by Nasdaq.
HIGH LOW
-------- --------
1998
1st Quarter.............................................. $18.00 $12.00
2nd Quarter.............................................. 19.00 14.00
3rd Quarter.............................................. 17.88 7.19
4th Quarter.............................................. 18.00 8.00
1999
1st Quarter.............................................. $17.00 $10.00
2nd Quarter.............................................. 13.50 9.13
3rd Quarter.............................................. 16.66 10.88
4th Quarter.............................................. 30.125 13.13
2000
1st Quarter (through January 18, 2000)................... $36.375 $25.750
On January 18, 2000, the closing sale price of our common stock as reported
by Nasdaq was $35.75 per share. As of September 30, 1999, there were
approximately 554 holders of record of the common stock.
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain our earnings, if any, for research and development
activities and, therefore, do not anticipate paying any cash dividends in the
foreseeable future.
15
CAPITALIZATION
The following table sets forth our capitalization at September 30, 1999, and
as adjusted to give effect to our receipt of the net proceeds from the sale of
2,500,000 shares of common stock offered hereby:
SEPTEMBER 30, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
Long-term obligations, less current portion................. $ 712 $ 712
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 authorized,
none outstanding........................................ -- --
Common stock, $0.01 par value; 40,000,000 authorized,
16,198,723 issued and outstanding, 18,698,723 issued and
outstanding, as adjusted................................ 162 187
Additional paid-in capital................................ 83,259
Accumulated other comprehensive loss...................... (116) (116)
Accumulated deficit....................................... (44,450) (44,450)
-------- --------
Total stockholders' equity................................ 38,855
-------- --------
Total capitalization........................................ $ 39,567 $
======== ========
- ------------------------
- See Note 5 of Notes to Audited Financial Statements and Note 4 of Notes to
Interim Financial Statements for a description of our long-term
obligations.
- The number of shares in the table above excludes 3,114,744 shares of
common stock reserved but unissued under our stock plans under which
options to purchase an aggregate of 1,930,229 shares of common stock were
outstanding at September 30, 1999. See Note 6 of Notes to Audited
Financial Statements.
16
SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to our statements
of operations for each of the years in the three-year period ended December 31,
1998, and with respect to the balance sheets at December 31, 1998 and 1997, are
derived from the audited financial statements that have been examined by Arthur
Andersen LLP, independent public accountants, which are included elsewhere in
this prospectus and are qualified by reference to such financial statements. The
selected financial data set forth below for the nine months ended September 30,
1999 and 1998, are derived from our unaudited financial statements included
elsewhere in this prospectus, and in the opinion of management, includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and of the results of operations for
such interim periods. Operating results for the nine months ended September 30,
1999, are not necessarily indicative of results for the full fiscal year or any
future interim period. The statement of operations for the two years ended
December 31, 1995, and the balance sheet data at December 31, 1996, 1995 and
1994, are derived from audited financial statements not included in this
prospectus. The data set forth below should be read in conjunction with the
financial statements and related notes included elsewhere in this prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
NINE MONTHS
FISCAL YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
License/royalty revenue.......... $ 4,509 $ 5,402 $ 5,679 $ 6,477 $ 5,044 $ 4,617 $ 3,770
Contract revenue................. 1,005 900 1,061 1,326 876 371 1,992
---------- ---------- ---------- ---------- ---------- ---------- ----------
5,514 6,302 6,740 7,803 5,920 4,988 5,762
Operating expenses:
Research and development......... 8,336 8,997 11,318 11,936 12,054 9,311 10,866
General and administrative....... 2,615 2,902 3,168 3,733 3,650 2,836 3,201
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses........... 10,951 11,899 14,486 15,669 15,704 12,147 14,067
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss from operations............... (5,437) (5,597) (7,746) (7,866) (9,784) (7,159) (8,305)
Interest income.................... 1,159 1,687 2,773 2,447 2,465 1,879 1,688
Interest expense................... 80 73 108 192 162 126 97
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss........................... $ (4,358) $ (3,983) $ (5,081) $ (5,611) $ (7,481) $ (5,406) $ (6,714)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Basic and diluted net loss per
share............................ $ (0.34) $ (0.29) $ (0.33) $ (0.36) $ (0.47) $ (0.34) $ (0.42)
========== ========== ========== ========== ========== ========== ==========
Weighted average shares used in
computing net loss per share..... 12,831,585 13,504,790 15,382,848 15,484,952 15,797,585 15,786,838 16,114,024
DECEMBER 31,
---------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------------
(IN THOUSANDS) (UNAUDITED)
BALANCE SHEET DATA:
Cash, cash equivalents, and marketable securities....... $27,339 $52,528 $46,846 $45,555 $40,184 $38,935
Working capital......................................... 25,956 51,541 46,315 44,856 38,398 36,421
Total assets............................................ 30,324 55,118 52,440 50,691 44,844 43,880
Long-term obligations, less current portion............. 527 339 1,617 1,232 801 712
Total stockholders' equity.............................. 27,852 53,264 48,365 47,194 40,824 38,855
- ------------------------------
- The basic and diluted net loss per share numbers were computed on the
basis described in Note 1 of Notes to Audited Financial Statements. We
have never paid cash dividends on our common stock and do not anticipate
paying any cash dividends in the foreseeable future.
- See Note 5 of Notes to Audited Financial Statements and Note 4 of Notes to
Interim Financial Statements for a description of our long-term
obligations.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We were incorporated in April 1987 and have devoted substantially all of our
resources since that time to our research and development programs. We focus our
resources on the development of our naked DNA direct gene transfer and related
technologies. We are developing our ALLOVECTIN-7, LEUVECTIN and VAXID cancer
product candidates internally, while developing vaccine product candidates for
infectious diseases primarily in collaboration with corporate partners Merck,
and Aventis Pasteur, formerly Pasteur Merieux Connaught. We have a license
agreement allowing Centocor to use our naked DNA technology to develop and
market gene-based vaccines for the potential treatment of types of cancer. We
have an agreement with Boston Scientific for the use of our technology in
catheter-based intravascular gene delivery. We have an agreement with Aventis
Pharma, formerly Rhone-Poulenc Rorer, to use our gene delivery technology to
deliver neurological proteins for neurodegenerative diseases. We also have
agreements with Pfizer for use of our technology for DNA-based delivery of
therapeutic proteins in animal health applications and with Merial for use of
our technology for DNA vaccines in animal infectious disease targets.
To date, we have not received revenues from the sale of products. We expect
to incur substantial operating losses for at least the next several years, due
primarily to the expansion of our research and development programs and the cost
of preclinical studies and clinical trials. As of September 30, 1999, our
accumulated deficit was approximately $44.5 million.
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues of $1.2 million were recorded for the quarter ended September 30,
1999. License revenue primarily represented recognition of deferred license fees
of $0.3 million from Merial, and royalty and other revenue of $0.2 million.
Contract revenue recognized was $0.7 million, and was primarily from a contract
with the Office of Naval Research for the development work on a potential naked
DNA vaccine to prevent malaria. This multi-year grant could provide total
funding of up to $2.7 million through 2000, of which $2.2 million was recognized
as revenue through September 30, 1999.
We had revenues of $1.7 million for the quarter ended September 30, 1998.
License revenue primarily consisted of a license fee of $1.1 million related to
a license and option agreement with Boston Scientific for the development of
vascular DNA therapeutics, recognition of deferred license fees of $0.3 million
from the Merial license agreement and royalty revenue of $0.2 million. In
addition, for the quarter ended September 30, 1998, we recognized net contract
revenue of $0.2 million.
Revenues for the nine months ended September 30, 1999, were $5.8 million. In
addition to the revenue recognized in the third quarter of 1999, revenue for the
nine months ended September 30, 1999, also included $1.0 million of license fees
and $1.2 million of equity premium pursuant to January 1999 agreements with
Pfizer, recognition of deferred license fees of $0.5 million from Merial,
royalty and other revenue of $0.6 million and contract revenue of $1.3 million
primarily from the Office of Naval Research.
Revenues for the nine months ended September 30, 1998, were $5.0 million,
and in addition to the revenue recognized in the third quarter of 1998, also
included license payments of $2.2 million from Centocor under a license and
option agreement and reimbursement of certain costs, recognition of deferred
license fees from Aventis Pasteur and Merial and royalty revenue totaling
$0.9 million, and $0.2 million of contract revenues, mostly from Aventis
Pasteur.
18
Our total operating expenses for the quarter ended September 30, 1999, were
$4.6 million compared with $4.0 million for the second quarter of 1998. Total
operating expenses for the nine months ended September 30, 1999, were
$14.1 million compared with $12.1 million for the same period in 1998.
Research and development expenses increased to $3.5 million for the three
months ended September 30, 1999, from $3.2 million for the same period in 1998.
For the nine months ended September 30, 1999, research and development expenses
were $10.9 million compared with $9.3 million in the same period of 1998. The
increase in research and development expenses for the three-month and nine-month
periods was generally due to increased preclinical and clinical trial costs, and
personnel-related costs. The increases for the three-month and nine-month
periods ended September 30, 1999 were partially offset by lower license payments
to third parties.
General and administrative expenses increased to $1.1 million for the three
months ended September 30, 1999, from $0.9 million for the same period in 1998.
General and administrative expenses for the nine months ended September 30,
1999, increased to $3.2 million from $2.8 million for the same period in 1998.
The increase primarily is attributable to increased personnel costs.
Investment income for the three-month and nine-month periods ended
September 30, 1999, was $0.5 million and $1.7 million, respectively. Investment
income for the three-month and nine-month periods ended September 30, 1998, was
$0.6 million and $1.9 million, respectively. The decreases primarily are a
result of lower investment balances and lower rates of return on investments.
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
We had revenues of $5.9 million for the year ended December 31, 1998,
compared with $7.8 million in 1997 and $6.7 million in 1996. License revenues in
1998 consisted of $2.2 million from Centocor for an agreement covering
technology for the potential treatment of some types of cancer, $1.1 million
from an agreement with Boston Scientific for the development of catheter-based
vascular DNA therapeutics, recognition of $0.9 million of deferred license fees
from a further extension of the license and option agreement with Merial,
royalty revenues of $0.7 million and $0.2 million of other license revenue.
Contract revenues in 1998 consisted principally of $0.7 million from an
agreement with the Office of Naval Research for the development work on a
potential DNA vaccine to prevent malaria. This agreement is a multi-year
agreement which could provide up to an additional $2.0 million in revenues
through 2000. Contract revenue in 1998 also included $0.2 million of
reimbursements from Aventis Pasteur and other sources.
We had revenues of $7.8 million for the year ended December 31, 1997,
compared with $6.7 million in 1996. Revenues in 1997 were composed of research
and license revenue of $2.0 million from a 1997 Merck agreement covering certain
growth factors; the equity premium of $1.0 million on the investment Merck made
in 1997 in our common stock under an amendment to the 1991 collaborative
agreement; $2.4 million for the Aventis Pasteur collaboration; $1.0 million for
the 1997 collaborative agreement with Aventis Pharma for neurodegenerative
disease targets; and other agreements which totaled $1.4 million. In
November 1997, we amended our 1991 agreement with Merck and granted Merck rights
to develop and market therapeutic vaccines against human immunodeficiency virus,
HIV, and hepatitis B virus, HBV. Under the November 1997 amendment, Merck made
an investment of $5.0 million for approximately 262,000 shares of our common
stock. The price per share reflected a twenty-five percent premium over the
trading price of the common stock. The premium on the investment was reflected
in revenue in 1997. The Aventis Pasteur revenue represented contract revenue of
$1.1 million as payment for clinical and preclinical work and license revenue of
$1.3 million, of which $1.0 million was for a milestone payment for the start
19
of the malaria clinical trial and the balance was the recognition of deferred
license fees. Revenues in 1996 resulted from research and license revenue from:
the Aventis Pasteur collaboration in the amount of $2.7 million, the 1991 Merck
agreement in the amount of $1.5 million, a collaboration with Genzyme
Corporation in the amount of $1.3 million, and several other agreements in the
amount of $1.2 million. Revenue from the Aventis Pasteur agreement in 1996 was
primarily the result of Aventis Pasteur's payment of licensing and option fees,
and the addition of a new option, as well as the payment of fees for our
performance of clinical and preclinical work. The Merck revenue resulted from
milestone payments due under the 1991 Merck agreement. The Genzyme collaboration
income was the result of Genzyme exercising its option to license our technology
for the treatment of cystic fibrosis as well as payments for our performance of
research and preclinical work.
Research and development expense increased to $12.1 million in 1998 from
$11.9 million in 1997 and $11.3 million in 1996. The increases in research and
development expense were generally due to expansion of our research and
development activities. The increase in 1998 principally was due to increased
clinical trial costs and additional royalty expense for license agreements. The
increase in expenses in 1997 compared to 1996 included increased clinical and
preclinical efforts which resulted in increases to staffing, increased
facilities-related costs and increased expenditures on laboratory supplies.
Clinical trials expense increased to $1.9 million during 1998 from $1.6 million
in 1997. This increase was due to the commencement of the Phase II and
Phase III clinical trials of ALLOVECTIN-7 for melanoma. Clinical trials expense
increased to $1.6 million during 1997 from $1.2 million in 1996 primarily due to
the commencement of the malaria clinical trial and increased clinical trials
activity on LEUVECTIN. During 1996, we incurred expenses of approximately
$1.2 million with the commencement and progression of the multi-center
Phase I/II and Phase II clinical trials of LEUVECTIN and ALLOVECTIN-7
respectively. Research and development expense is expected to increase in 1999
and thereafter as our preclinical and clinical trial activities increase.
General and administrative expense decreased to $3.6 million in 1998 from
$3.7 million in 1997 due to lower insurance and facilities expenses. The
increase to $3.7 million in 1997 from $3.2 million during 1996 was due primarily
to additional staffing and related expenses. General and administrative expenses
are expected to continue to increase as research and development activities
expand.
Interest income increased to $2.5 million in 1998 from $2.4 million in 1997
due to higher rates of return on investments. Interest income of $2.4 million
during 1997 declined from the $2.8 million in 1996, due to lower investment
balances as we redeemed investments to fund operating expenses. Interest expense
decreased during 1998 due to lower capital lease obligations, lower balance of
bank note payable and lower interest rates on the newer capital lease
obligations. Interest expense increased in 1997 compared to the previous year
due to increased capital lease obligations to finance equipment needs and the
addition of a debt instrument in 1996.
YEAR 2000 ISSUES
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer programs
or hardware that have date-sensitive software or embedded chips may recognize a
date using 00 as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations causing disruptions of operations for any
company using such computer programs or hardware, including, among other things,
a temporary inability to process data or engage in normal business activities.
As a result, many companies' computer systems may need to be upgraded or
replaced in order to avoid Year 2000 issues.
20
STATE OF READINESS
We have completed our assessment of any potential Year 2000 issues for our
internal computer applications, including embedded control systems in equipment,
to determine whether they will function for the Year 2000 and beyond and what
modifications would be required to ensure their continuing functionality. We
implemented a new financial and accounting system and related hardware to meet
our growing needs into the near future. This new system is Year 2000 compliant.
We performed backups of the existing and previous versions of the computer
system so that in the event our new financial and accounting system and related
hardware do not function properly we can continue to operate under the old
system. Given the relatively small size of our systems and the predominantly new
hardware, software and operating systems, we do not anticipate any significant
Year 2000 problems.
We are unable to control whether systems operated by our strategic partners
or our suppliers of goods and services are Year 2000 compliant. The failure of
systems operated by our strategic partners or suppliers could cause us to incur
significant expenses to remedy any problems, or otherwise seriously damage our
business. We have communicated with strategic partners and suppliers to assess
the risk of Year 2000 issues. Based on these results, we do not expect any
material Year 2000 issues regarding our dealings with our strategic partners or
suppliers. We do not believe that Year 2000 issues will have a material impact
on our business, financial condition or results of operations.
BUDGET
Our costs for Year 2000 compliance have been immaterial.
REASONABLY LIKELY WORST CASE SCENARIO
If we, our strategic partners, or our suppliers of goods and services fail
to remedy any Year 2000 issues, the reasonably likely worst case scenario would
be the interruption of our product development programs, which could have a
material adverse effect on our business, financial condition and results of
operations. We are unable to estimate the duration and extent of any such
interruption, or estimate the effect such interruption may have on our future
results of operations. However, we believe that the impact of any Year 2000
issue on our product development programs will be limited to the collection or
communication of new data. We do not expect that any historical data will be
affected.
CONTINGENCY PLANS
We have adopted contingency measures to ensure the uninterrupted operation
of our business, including:
- the maintenance of a Year 2000-compliant backup accounting system,
- tape backup and paper archive copies of critical data, and
- availability of information systems staff to correct any isolated problems
on January 1, 2000.
Additionally, most of our computer systems will be shut down between
December 31, 1999, and January 2, 2000. This will allow the information systems
staff to immediately identify and address any issues during systems startup on
January 3, 2000.
21
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through
private placements of preferred and common stock, three public offerings of
common stock and revenues from collaborative agreements. As of September 30,
1999, we had working capital of approximately $36.4 million compared with
$38.4 million at December 31, 1998. Cash and marketable securities totaled
approximately $38.9 million at September 30, 1999, compared with $40.2 million
at December 31, 1998. In November 1999, we entered into an unsecured line of
credit agreement with a bank to provide financing for leasehold improvements.
Under the terms of the agreement, we may borrow up to $1.0 million through
May 1, 2000.
We expect to incur substantial additional research and development expenses
and general and administrative expenses, including continued increases in
personnel costs, costs related to preclinical testing and clinical trials,
outside services and facilities. Our future capital requirements will depend on
many factors, including continued scientific progress in our research and
development programs, the scope and results of preclinical testing and clinical
trials, the time and costs involved in obtaining regulatory approvals, the costs
involved in filing, prosecuting and enforcing patent claims, competing
technological and market developments, the cost of manufacturing and scale-up,
and commercialization activities and arrangements. We intend to seek additional
funding through research and development relationships with suitable potential
corporate collaborators or through public or private financing. Additional
funding may not be available on favorable terms or at all.
If additional funding is not available, we anticipate that, including the
estimated net proceeds of this offering, our available cash and existing sources
of funding will be adequate to satisfy our operating needs through at least
2002.
22
BUSINESS
OVERVIEW
We develop biopharmaceutical products based on our patented naked DNA gene
transfer technologies for the prevention and treatment of life-threatening
diseases. We currently focus our development on innovative cancer therapies to
induce an immune response against cancer cells without causing serious side
effects. We have retained all rights to our internally developed cancer product
candidates. Our lead immunotherapy product candidate, ALLOVECTIN-7, is in Phase
III and Phase II registration trials for patients with advanced metastatic
malignant melanoma, an aggressive form of skin cancer, and in a Phase II
clinical trial for patients with persistent or recurrent cancer of the head and
neck. Our second immunotherapy product candidate, LEUVECTIN, is in Phase II
clinical trials for patients with advanced metastatic kidney cancer and for
high-risk patients with locally confined prostate cancer. VAXID, a cancer
vaccine intended to prevent recurrence of low-grade, non-Hodgkin's B-cell
lymphoma, is in a Phase I/II clinical trial. We are supporting clinical testing
of a cancer vaccine for the treatment of advanced metastatic melanoma in a
collaboration with the National Cancer Institute, NCI.
We enter into collaborations with major pharmaceutical companies to leverage
our technologies primarily for non-cancer applications such as vaccines for
infectious diseases and optimized delivery of therapeutic proteins. We have
established relationships through the license of our technology with a growing
number of corporate partners and collaborators including:
- Merck and Co., Inc.,
- Two divisions of Aventis S.A., formerly Rhone-Poulenc S.A.,
- Aventis Pasteur, formerly Pasteur Merieux Connaught,
- Aventis Pharma, formerly Rhone-Poulenc Rorer
Pharmaceuticals, Inc.,
- Pfizer Inc,
- Merial, the animal health joint venture between Merck and Rhone
Merieux,
- Centocor, a wholly-owned subsidiary of Johnson & Johnson, and
- Boston Scientific Corporation.
HISTORICAL APPROACHES TO GENE DELIVERY
A typical living cell in the body contains thousands of different proteins
essential to cellular structure, growth, and function. Proteins are produced by
the cell according to a set of genetic instructions encoded by DNA, which
contains all the information necessary to control the cell's biological
processes.
DNA is organized into segments called genes, with each gene containing the
information required to produce a specific protein. Production of the protein
encoded by a particular gene is known as gene expression. The improper
expression of even a single gene can severely alter a cell's normal function,
frequently resulting in a disease. Gene delivery is an approach to the treatment
and prevention of diseases in which genes are introduced into cells to direct
the production of specific proteins which have a desired biological effect.
Historically, gene delivery was accomplished by inserting the desired gene
into a delivery vehicle, or vector. The most common vectors were viruses that
had been genetically disabled so that they could not reproduce and infect other
cells. Gene delivery approaches using viruses suffer several drawbacks that may
limit their widespread usefulness, including adverse immune responses and
inflammation that may inhibit the activity of the virus-based therapy and
prevent repeated
23
administration. In addition, viruses can induce permanent changes in the
patient's genetic makeup, which may lead to cancer. Some gene delivery product
candidates under development at competing companies use viral vectors, but many
of the newer formulations are using non-viral or synthetic vectors such as
lipids or polymers.
OUR NAKED DNA TECHNOLOGY
The key discovery leading to our patented naked DNA direct gene delivery
technology was that some muscle tissues can absorb genetic material directly,
without the use of viral components, and subsequently express a desired protein
for periods ranging from weeks to several months. Our naked DNA gene delivery
approach involves the design and construction of plasmids, DNA segments whose
ends are attached together to form a highly stable closed loop. These plasmids
contain the gene encoding the protein of interest as well as short segments of
DNA that control the rate and location of protein expression. Plasmids can be
manufactured through conventional fermentation and purification techniques.
Since the initial discovery of the naked DNA technology, our researchers have
improved the design of our plasmids to provide dramatic increases in efficiency
of gene delivery and expression. In addition, we are developing other synthetic
technologies to deliver DNA directly into some non-muscle tissues, including the
use of lipid molecules that facilitate direct absorption of DNA into cells.
A narrow definition of "naked DNA" includes only pure plasmid DNA. A broader
definition includes plasmid DNA formulated with agents such as lipids or
polymers. We call ourselves "The Naked DNA Company-TM-" because all of our
product candidates are based on these synthetic, non-viral gene delivery
methods, and because we own exclusive, broad rights to the naked DNA gene
delivery technologies through our series of core patents.
Our naked DNA gene delivery approach may offer novel treatment alternatives
for diseases that are currently poorly addressed. Benefits of our gene delivery
technology may include:
- BROAD APPLICABILITY. Our naked DNA gene delivery technology may be
useful in developing novel treatments for cancer, DNA vaccines to
prevent or treat infectious diseases and methods to efficiently deliver
human and animal therapeutic proteins.
- CONVENIENCE. Our naked DNA therapeutics are intended to be
administered like conventional pharmaceuticals on an outpatient basis.
- SAFETY. Our product candidates contain no viral components which may
cause unwanted immune responses, infections, or malignant and permanent
changes in the cell's genetic makeup.
- EASE OF MANUFACTURING. Our product candidates are manufactured using
conventional fermentation techniques and standard purification
procedures.
- COST-EFFECTIVENESS. Our naked DNA gene delivery technology may prove
to be more cost-effective than therapies which require genetic
modification and controlled propagation of viral vectors. The DNA, once
introduced into the body, is intended to stimulate the production of a
therapeutic protein over a prolonged period of time, which may be more
cost-effective than administering the protein itself.
Potential applications of our naked DNA gene delivery technology include DNA
therapeutics for cancer, in which the expressed protein is an immune system
stimulant or cancer-killing agent, DNA vaccines for infectious diseases, in
which the expressed protein is an antigen, and DNA therapeutic protein delivery,
in which the expressed protein is a therapeutic agent.
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BUSINESS STRATEGY
There are three basic elements to our business strategy:
INDEPENDENTLY DEVELOP CANCER THERAPEUTICS
We currently focus our resources on the independent development of
cancer therapeutics. The large and rapidly growing market for cancer
products is poorly addressed by existing treatment alternatives. In
addition, this market is well-suited to a development-stage company with
limited resources such as Vical because:
- Clinical testing usually can be conducted in a small number of patients
and benefits can be detected and verified in reasonably short periods
of time,
- Testing occurs in patients with advanced, life-threatening diseases
with limited treatment alternatives, which may expedite the regulatory
approval process,
- Product acceptance is driven by objective clinical data, potentially
reducing marketing costs, and
- Treatment decisions are made at regional cancer centers by oncologists
who can be served by a small, specialized sales force.
We intend to retain significant participation in the commercialization
of our proprietary cancer products, although we may choose to enlist the
support of a marketing partner to accelerate market penetration.
EXPAND THE APPLICATIONS OF OUR TECHNOLOGY THROUGH STRATEGIC COLLABORATIONS
Our naked DNA technology can potentially be applied to the treatment or
prevention of a wide range of diseases in addition to cancer. In markets
that would require large-scale development, high-capacity manufacturing or
mass marketing, we have chosen to establish partnerships with major
pharmaceutical companies. These companies have the resources necessary to
develop and commercialize products for these markets. The resulting
collaborations typically provide us with upfront and milestone payments
during product development, as well as the potential for ongoing royalties
from product sales. Our collaborations to date have involved multiple
applications for DNA vaccines and DNA therapeutic protein delivery.
DEVELOP FUTURE PRODUCT OPPORTUNITIES
We are actively pursuing the development of future products, refinement
of our plasmids and lipids, the exploration of alternative gene delivery
technologies, and the evaluation of potential enhancements to our core naked
DNA technologies. We also seek and develop additional applications of our
technologies by testing new approaches to disease control or prevention.
These efforts could lead to further independent product development or to
additional licensing opportunities. In addition, we continually evaluate
compatible technologies or products that may be of potential interest for
in-licensing or acquisition.
PRODUCT DEVELOPMENT
The following table summarizes the status of our independent and
collaborative product development programs and identifies corporate partners
where relevant.
In the table below:
- "Research" indicates research related to identification and synthesis
of lead compounds.
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- "Preclinical" indicates that a specific compound is undergoing
toxicology testing and manufacturing scale-up, among other things, in
preparation for filing an application for an Investigational New Drug,
IND.
In Phase I, trials are conducted with a small number of healthy volunteers
to determine the safety profile, the pattern of drug distribution and
metabolism. In Phase II, trials are conducted with a larger group of patients
afflicted with a target disease in order to determine preliminary efficacy,
optimal dosages and expanded evidence of safety. In the case of products for
life-threatening diseases, the initial human testing is generally done in
patients rather than in healthy volunteers. Since these patients are already
afflicted with the target disease, it is possible that these studies may provide
results traditionally obtained in Phase II trials. Such trials are frequently
referred to as "Phase I/II" trials. In Phase III, large scale, multi-center,
comparative trials are conducted with patients afflicted with a target disease
in order to provide enough data for the statistical proof of safety and efficacy
required by the FDA and other regulatory authorities.
PROJECT TARGET INDICATION(S) DEVELOPMENT STATUS DEVELOPMENT RIGHTS
- ------- -------------------- ------------------ ------------------
CANCER
ALLOVECTIN-7 Melanoma, Phase III Vical
Head and neck cancer Phase II Vical
LEUVECTIN Renal cell carcinoma Phase II Vical
Prostate cancer Phase II Vical
VAXID B-cell lymphoma Phase I/II Vical
gp100 Melanoma Phase I/II Vical/NCI
Therapeutic DNA vaccines Various cancers Preclinical/Phase I Centocor
INFECTIOUS DISEASES
Preventive DNA vaccines Influenza Phase I Merck
Malaria Phase I Aventis Pasteur, formerly
Pasteur Merieux Connaught
Hepatitis B, hepatitis C, Research/preclinical Merck
human immunodeficiency
virus, human papilloma
virus, herpes simplex,
tuberculosis
Cytomegalovirus, Research/preclinical Aventis Pasteur, formerly
HELICOBACTER PYLORI, Pasteur Merieux Connaught
Lyme disease,
respiratory syncitial
virus,
varicella zoster
Therapeutic DNA vaccines Hepatitis B, human Research/preclinical Merck
immunodeficiency virus,
human papilloma virus
OTHER DISEASES
Therapeutic protein DNA Cardiovascular diseases Research/preclinical Merck
Therapeutic protein DNA Neurodegenerative diseases Research/preclinical Aventis Pharma, formerly
Rhone-Poulenc Rorer
Catheter-based DNA therapy Cardiovascular diseases Research/preclinical Boston Scientific
VETERINARY
Preventive DNA vaccines Various Research Merial
Therapeutic protein DNA Various Research/preclinical Pfizer
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DNA THERAPEUTICS FOR CANCER
Cancer is a group of diseases in which certain cells grow uncontrolled by
the body's normal self-regulatory mechanisms. Surgery is the most effective
therapy for locally confined cancers. But surgery is not practical or curative
for invasive or metastatic disease that has spread beyond a few locations.
Radiation therapy can shrink or eliminate individual tumors, but cannot
effectively treat widespread metastases. In addition, high doses of radiation
can destroy the healthy underlying tissue. Chemotherapy seeks to control cancer
by killing rapidly dividing cells. However, a number of non-malignant cells in
the body, such as bone marrow cells, also rapidly divide and are highly
susceptible to chemotherapy. Thus, doses sufficient to eradicate the cancer
often cause life-threatening side effects. None of these conventional approaches
can eliminate all cancer cells in advanced disease, so recurrence after
treatment is common.
A therapeutic approach that selectively kills tumor cells would be far
superior to currently available therapies. One approach would be to generate a
specific immune response targeting cancer cells without damaging other normal
tissues. It is generally believed that the immune system can selectively
recognize cancer cells as abnormal and destroy them. However, the vast majority
of cancers arise spontaneously in patients with an otherwise normal immune
system. This observation suggests that cancer cells somehow escape the normal
immune defense mechanisms or that the killer T-cell response produced by cancer
patients is not powerful enough to kill all of the abnormal cells. A variety of
methods can augment the immune response against tumor cells, including the
systemic administration of natural immune-enhancing proteins such as
interleukin-2, IL-2, and interferon-alpha either alone or in combination with
other agents. These methods have shown encouraging results in some patients with
some tumor types. However, systemic administration of these agents requires
large and frequent doses that also cause serious side effects.
Our scientists are developing novel gene-based cancer immunotherapies to
address the shortcomings of existing therapies. These immunotherapeutic product
candidates are summarized below.
ALLOVECTIN-7
ALLOVECTIN-7 is a DNA/lipid complex containing the human gene encoding
HLA-B7 antigen which is found infrequently in the human population. ALLOVECTIN-7
is designed to be injected directly into a tumor, where malignant cells absorb
it and express the HLA-B7 antigen. This antigen alerts the immune system to the
presence of foreign tissue, inducing the type of powerful immune response seen
in organ transplant rejection. In addition, the treatment may trigger an immune
response against additional tumor cells, both locally and systemically, by
enabling the immune system to recognize other features of the tumor cells.
ALLOVECTIN-7 is currently in advanced clinical testing for patients with
metastatic melanoma and for patients with persistent or recurrent tumors of the
head and neck.
METASTATIC MELANOMA
Melanoma is a skin cancer found predominantly in Caucasians, particularly in
fair-skinned individuals who have experienced repeated sunburn. According to
American Cancer Society, ACS, statistics, 44,200 new cases of melanoma will be
diagnosed in the U.S. and 7,300 patients will die from this disease in 1999. NCI
estimates that about 480,000 Americans currently suffer from malignant melanoma.
If detected when the disease is still limited to one site, known as stage I and
II, melanoma usually can be treated successfully by surgery. If untreated, the
disease frequently spreads to the lymph glands, lungs, liver, brain and other
organs. Stage III is defined as metastatic disease limited to one region and is
treated with a combination of surgery and chemotherapy. Stage IV disease
involves advanced regional or any distant tumors and treatment normally includes
27
some combination of chemotherapy, radiotherapy, and surgery. The five-year
survival of patients with stage III and stage IV disease is 59 percent and 12
percent, respectively. In patients whose disease continues to progress after
they have received all available treatments, the average survival is seven to
nine months.
We believe ALLOVECTIN-7 will provide an effective, well-tolerated
alternative or supplement to available therapies. In multi-center Phase I/II and
Phase II trials, ALLOVECTIN-7 was well-tolerated, and provided durable
reductions in overall tumor burden or maintained stable disease in some
patients. Combined results from three Phase I/II trials, summarized in May 1998
at the Annual Meeting of the American Society of Clinical Oncology, included
seven out of 36 evaluable patients, or 19 percent, who had achieved clinical
partial or complete responses with a duration of at least eight months. We
believe results from two Phase II melanoma trials indicated the potential
efficacy of ALLOVECTIN-7 in treating melanoma patients, and suggested a negative
correlation between disease spread and such potential efficacy. Among the 50
evaluable patients with widespread advanced disease affecting multiple internal
organs, combined results from the two Phase II trials included:
- two patients who had achieved a clinical response lasting two to 12 months
and continuing at the time of the announcement, and
- ten patients who had achieved stable disease lasting two to 11 months and
continuing at the time of the announcement.
In patients with soft-tissue metastases in lymph nodes, lungs or tissues located
directly beneath the skin, combined Phase II results included four of 23
evaluable patients, or 17 percent, who had achieved clinical partial responses
with an average duration of 11 months. We believe the latter results compare
favorably to available clinical data on other FDA-approved biological agents
such as interferon-alpha and interleukin-2.
Updated data from the Phase I/II and Phase II trials, were presented in
December 1999 at the Eighth International Gene Therapy of Cancer Conference. Of
90 evaluable end-stage patients, 24, or 26 percent, demonstrated clinical
benefit. Tumor regression was noted more often in patients with soft-tissue
metastatic disease than in patients with multiple-internal organs affected. In
the 32 patient soft-tissue subgroup 12 patients, or 37 percent, demonstrated
clinical benefit. The median time to disease progression was 24 weeks in
patients who responded to ALLOVECTIN-7, compared with nine weeks in all
patients. The median length of survival was 99 weeks for responders compared
with 38 weeks in all patients.
Side effects from ALLOVECTIN-7 were primarily mild with the most common
complaint being temporary pain at the injection site. No serious side effects
related to ALLOVECTIN-7 were reported in these trials.
This side-effect profile for ALLOVECTIN-7 compares favorably with available
clinical data on other FDA-approved biological agents. Treatment with
interferon-alpha or interleukin-2 frequently causes serious side effects
requiring hospitalization, and occasionally causes life-threatening or fatal
complications.
Based on this promising data, and following discussions with the FDA, we
began registration trials in May 1998. These trials are ongoing in multiple
centers across the United States. In our Phase II trial we are actively
recruiting patients with soft-tissue metastatic melanoma who have exhausted
conventional therapies. For our Phase III trial we are actively recruiting
patients that have metastatic melanoma and who have not received chemotherapy.
The objective of this trial is to compare treatment with dacarbazine, the only
chemotherapeutic agent approved by the FDA for metastatic melanoma, to treatment
with a combination of dacarbazine plus ALLOVECTIN-7. Positive results from
either or both of these trials could allow us to apply to the FDA for approval
to market ALLOVECTIN-7. We announced in December 1999 that we would continue to
recruit patients as
28
planned in our two ongoing registration trials with ALLOVECTIN-7 in patients
with metastatic melanoma, based on the recommendations of an independent Drug
Safety Review Board.
HEAD AND NECK CANCER
Head and neck cancer describes any of several types of localized tumors
affecting the oral cavity, the pharynx or larynx. Head and neck cancers occur
more frequently in men than in women, and most often in men over age 40. Risk
factors vary with the particular location, but can include use of tobacco and
excessive consumption of alcohol. The ACS estimates that, in 1999, 41,400 new
cases of head and neck cancers will occur and that 12,300 individuals will die
from this disease. NCI estimates that about 345,000 Americans currently suffer
from head and neck cancer. Most head and neck cancers are treated by surgical
removal and/or localized radiation therapy, with widely ranging degrees of
success depending on the number of tumors, their size, and their specific
location. In advanced disease, standard treatment may be preceded by systemic
chemotherapy to improve outcomes, or followed by systemic chemotherapy to attack
remaining cancer cells, most often with a combination of agents. The five-year
survival rate for head and neck cancer patients, if treated, varies from more
than 80 percent for localized, accessible disease to less than 20 percent for
widespread malignancies not curable by surgery.
Treatment with ALLOVECTIN-7 in a Phase I/II and an early Phase II study
yielded encouraging results, reported in May 1998 at the Annual Meeting of the
American Society of Clinical Oncology, that included both partial and complete
responses. Of the 11 patients treated in an investigator-sponsored Phase I/II
clinical trial, four achieved complete or partial responses lasting at least
five months. Preliminary results for 23 evaluable patients in a Vical-sponsored
multi-center Phase II trial yielded one clinical complete response lasting four
months and continuing, and 10 patients with stable disease after two to four
months and continuing. A multi-center Phase II study is ongoing.
LEUVECTIN
LEUVECTIN is a DNA/lipid complex designed for direct injection into a tumor.
LEUVECTIN contains the gene encoding IL-2. Systemic IL-2 protein therapy is the
only FDA-approved treatment for metastatic kidney disease, but its
administration is associated with serious toxicity in the majority of patients.
The LEUVECTIN kidney cancer program seeks to match IL-2's efficacy without major
adverse events. We expect that LEUVECTIN, when injected into tumors, will cause
the malignant cells to produce IL-2. Local expression of IL-2 may stimulate the
patient's immune system to attack and destroy the tumor cells. Because LEUVECTIN
delivers IL-2 locally rather than throughout the body, it may provide efficacy
comparable to the protein treatment with fewer side effects. LEUVECTIN is being
tested in Phase II clinical trials for patients with kidney cancer and prostate
cancer.
KIDNEY CANCER
The most common type of kidney cancer, renal cell carcinoma, occurs more
frequently in males than in females, and predominantly in people over 35. The
greatest single risk factor is cigarette smoking. Other risk factors include
exposure to asbestos, cadmium, or gasoline, and the use of some former pain
medications containing phenacetin. According to ACS statistics, 29,900 new cases
of kidney cancer will be diagnosed in the U.S. and 11,600 patients will die from
the disease in 1999. NCI estimates that about 200,000 Americans currently suffer
from kidney cancer. Primary kidney cancer frequently spreads to adjacent tissues
and ultimately to other internal organs, most often the lungs, bone, brain or
liver. About 30 percent of patients have metastatic disease when first
diagnosed. Treatment of regional metastatic kidney cancer involves surgical
removal of the affected kidney and surrounding tissue, and frequently is
combined with radiation therapy to alleviate pain. There are few treatment
alternatives for metastatic kidney cancer and where surgery cannot be curative
the five year survival rate is less than 10 percent.
29
Initial results from Phase I/II and Phase II testing in kidney cancer
indicated that LEUVECTIN was well-tolerated and effective in delivering the IL-2
protein, with a favorable risk-benefit profile in these patients. A multi-center
Phase II study initiated in May 1998 is ongoing. Initial results from the Phase
II trial were reported in May 1999 at the Annual Meeting of the American Society
of Clinical Oncology. Four of the 22 evaluable patients, or 18 percent,
experienced significant tumor reductions of 25 percent or more, including one
patient who experienced 90 percent and 100 percent reductions in two
non-injected tumors. Twelve additional patients, or 55 percent, had
stabilization of the injected tumor for six to 28 weeks and continuing at the
time of the meeting. Six of the 22 patients, or 27 percent, experienced clinical
stable disease for five to seven months and continuing at the time of the
meeting. Side effects from the LEUVECTIN treatment were primarily mild, with the
most common complaint being flu-like symptoms of chills, low-grade fever, body
aches and fatigue. The only serious side effects reported were two incidents of
severe pain at the injection site. Both were resolved with pain medication
during brief hospital stays.
PROSTATE CANCER
Prostate cancer is the most frequently diagnosed type of cancer and is the
second leading cause of cancer fatalities among men in the United States. Men
over age 65 account for over 75 percent of all diagnoses and African Americans
are at significantly greater risk than Caucasians. According to ACS statistics,
179,300 new cases of prostate cancer will be diagnosed in the U.S. and 37,000
patients will die from this disease in 1999. NCI estimates that more than one
million American men currently suffer from prostate cancer. Early detection is
increasing the number of annual diagnoses and improving overall survival rates.
All patients diagnosed while the disease is confined to the prostate gland have
a five-year survival rate. If the disease is discovered after it spreads to
connective tissue, lymph nodes, or other internal organs, survival rates
decline. Treatment options include "watchful waiting" for older patients with no
symptoms or with other more serious illnesses, radiation therapy or cryosurgery,
and surgical removal of the prostate gland and/or affected lymph nodes. Symptoms
may also be relieved by hormone therapy or surgery.
A Phase I/II pilot trial tested LEUVECTIN in patients with prostate cancer.
The data indicated that the treatment was safe and well-tolerated, that it may
stimulate an immune response against the disease, and that it may result in an
increased time to disease progression. Results of the trial were presented in
May 1999 at the Annual Meeting of the American Urological Association. In eight
of 12 patients scheduled for surgery, pre-surgical serum PSA levels decreased
significantly after treatment with LEUVECTIN. Three patients were diagnosed with
metastatic disease at the time of the surgery and were therefore excluded from
the trial. All nine patients who remained in the trial after surgery maintained
negligible PSA levels after 11 to 18 months and continuing at the time of the
meeting. In seven of nine patients with progressive disease following radiation
therapy, serum PSA levels decreased significantly after treatment with
LEUVECTIN. In four of five patients receiving a second treatment course of
LEUVECTIN, the rate of increase in PSA levels was reduced considerably. On the
basis of these data, we initiated two multi-center Phase II clinical trials in
June 1999.
CANCER VACCINES
In collaboration with Stanford University Medical Center, we are developing
a naked DNA vaccine, VAXID, against low-grade, non-Hodgkin's, B-cell lymphoma.
Non-Hodgkin's B-cell lymphoma is a disease in which cells in the lymph nodes or
other lymphatic tissue grow abnormally. Low-grade non-Hodgkin's B-cell lymphoma
exhibits a slow growth rate and excellent initial response to current
treatments. However, a regular pattern of relapse to a widespread, aggressive
lymphoma occurs for which no curative therapy has been identified. According to
ACS statistics, 56,800 new cases of B-cell lymphoma will be diagnosed in the
U.S. and 25,700 patients will die from this disease in 1999. NCI estimates that
about 300,000 Americans currently suffer from B-cell lymphoma.
30
VAXID contains a patient-specific gene encoding a characteristic molecule of
cancerous B-cells. Preclinical studies showed that the injection into mice of a
DNA vaccine that encoded a gene specific to the B-cell lymphoma resulted in
strong and specific immune responses and significant protection against
subsequent tumor challenge. We believe that immunization of post-chemotherapy
patients with VAXID could result in the elimination of residual disease and the
prevention of the relapse of disease. An initial Phase I/II study of VAXID is
ongoing.
In collaboration with the NCI we are supporting the development of another
DNA vaccine which may cause cells to produce a modified melanoma-related protein
known as gp100. This protein is expected to trigger an immune response against
melanoma tumor cells. In earlier studies, the NCI tested a vaccine using
portions of the modified protein in combination with IL-2 protein therapy. These
data indicated a 42 percent response rate in end-stage melanoma patients after
treatment with systemic IL-2 and the gp100 protein. This study is being repeated
with a gp100 naked DNA vaccine provided by us. We believe a DNA vaccine may be
more generally applicable and may provide advantages in manufacturing and
administration.
DNA VACCINES FOR INFECTIOUS DISEASES
According to the World Health Organization, infectious and parasitic
diseases cause approximately one-third of all deaths worldwide, making it the
leading cause of death. Most deaths from infectious diseases are caused by acute
lower respiratory infections, tuberculosis, neonatal diarrhea, AIDS and malaria.
Vaccines are generally recognized as the most cost-effective approach for
infectious disease health care. However, the technical limitations of
conventional vaccine approaches have constrained the development of effective
vaccines for many diseases.
Our naked DNA vaccine technology may overcome two deficiencies of
traditional preventive vaccine approaches, which are the inability to counteract
the random changes in the strains of various infectious agents and the need for
safe formulations that boost an antibody response or that cause sufficient
killer T-cell responses, known as adjuvants. We believe our potential vaccine
products should be simpler to manufacture than vaccines that are made using
cumbersome and labor-intensive techniques involving difficult tissue culture
procedures and live viruses.
Our scientists have shown in animal experiments that the intramuscular
injection of plasmid DNA encoding a protein common to all strains of the
influenza virus stimulates both antibody and killer T-cell responses against the
virus itself and virus-infected cells. The immune response is potent, specific
and requires no adjuvants. For over a year following vaccination, treated
animals demonstrated higher survival rates than untreated control animals when
challenged with various strains of inhaled influenza virus. This observed
cross-strain protection, if reproducible in humans, will offer a key advantage
compared with conventional vaccines. Thus, our direct gene delivery technology
may be universal, not requiring frequent re-design or product modification for
each new viral strain.
Only a few years ago, DNA vaccines were an unproven novelty with limited
acceptance in the scientific community. Today, numerous scientific publications
have documented the efficacy of DNA vaccines in providing potent immune
responses or protective immunity against viruses, bacteria and parasites in
dozens of species from fish to primates, including human volunteers. Additional
studies have extended these findings to other models of infectious diseases for
which there are no approved vaccines, such as HIV, herpes and malaria.
Because of the large-scale development programs, manufacturing capacity and
distribution channels required to successfully market a vaccine, we believe
collaborations with major pharmaceutical companies are the most effective way to
apply our patented technology in the emerging DNA vaccine field. We have
long-standing, active partnerships with two of the three largest vaccine
manufacturers in the world, Merck and Aventis Pasteur. These relationships are
31
summarized below. Further details can be found in "--Collaboration and Licensing
Agreements--Corporate Partners."
MERCK
We have licensed our naked DNA vaccination technology to Merck for a total
of seven preventive vaccine targets:
- - hepatitis B virus, HBV, - herpes simplex virus, HSV,
- - hepatitis C virus, HCV, - influenza virus, and
- - human immunodeficiency virus, HIV, - tuberculosis, TB.
- - human papilloma virus, HPV,
In addition, Merck also has a license covering three therapeutic vaccine
targets, HBV, HIV and HPV.
In August 1999, Merck disclosed its plans to initiate a clinical trial with
a naked DNA vaccine to prevent AIDS. This candidate vaccine product is being
developed by Merck under the license agreement with us. In November 1999, we
received a $2.0 million payment from Merck which extends Merck's exclusive
license to develop and market therapeutic vaccines against HIV and HBV.
AVENTIS PASTEUR, FORMERLY PASTEUR MERIEUX CONNAUGHT
We also have a license and option agreement with Aventis Pasteur, formerly
Pasteur Merieux Connaught, for a total of six preventive vaccine targets:
- - cytomegalovirus, CMV, - malaria,
- respiratory syncytial virus, RSV,
- - HELICOBACTER PYLORI, and
- - Lyme disease, - varicella zoster virus, VZV.
We are collaborating with Aventis Pasteur and the U.S. Naval Medical
Research Center, NMRC, to develop a DNA vaccine against malaria. There is no
effective vaccine against malaria. This is a severe infectious disease
characterized by fever, headache and joint pain, which if untreated can lead to
death. Infection normally occurs when the parasite enters a victim's bloodstream
during a mosquito bite. Each year, 300 to 500 million people worldwide are
treated for malaria and more than one million die from the disease, according to
the World Health Organization.
In July 1997, in collaboration with Aventis Pasteur, we began a Phase I
trial of an experimental vaccine against the parasite that causes malaria. NMRC
conducted the clinical trial with approximately twenty volunteers. Trial
results, reported in the October 16, 1998, issue of SCIENCE, indicated that
subjects immunized with a potential malaria DNA vaccine developed dose-related
killer T-cell immune responses. As a result of these encouraging data, further
clinical development is planned.
DNA THERAPEUTIC PROTEIN DELIVERY
Our naked DNA direct gene delivery technology also may permit the
development of alternatives to therapeutic protein administration for diseases.
Major shortcomings of some therapeutic proteins include their short duration of
action and the potential side effects associated with high levels of circulating
protein after intravenous administration. We believe that direct injection into
muscles of genes that encode the protein of interest may enable the muscle cells
to act as protein factories causing a sustained release of low levels of the
therapeutic proteins, reducing side effects and the need for repeated dosing.
Our technology may be most suitable for the delivery of proteins that are
required in small amounts over prolonged periods of time.
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Much attention is being focused on the emerging field of angiogenesis, which
involves inducing the growth of new blood vessels to replace those blocked by
disease. DNA-based delivery of growth factors has been successfully demonstrated
in human trials. Other potential applications, still being tested in animal
models, could involve the delivery of proteins that maintain nerve cell function
for treating certain neurodegenerative diseases, or the delivery of biologically
active compounds such as insulin to treat diabetes or erythropoietin to treat
certain forms of anemia.
In 1997, we licensed our patented naked DNA technology to Merck for the
delivery of certain angiogenic growth factors that may be useful in
cardiovascular applications such as coronary artery disease and peripheral
vascular disease. Coronary artery disease, a narrowing of the blood vessels
supplying the heart, can lead to severe chest pain and heart attack. Coronary
artery disease is the single largest cause of death in the United States.
Peripheral vascular disease affects the blood vessels in the limbs, most
commonly narrowing of the blood vessels of the lower extremities for which
therapy is very limited.
In 1998, we licensed our catheter-based intravascular gene delivery
technology, with potential angiogenesis applications, to Boston Scientific.
We licensed our naked DNA gene delivery technology to Rhone-Poulenc Rorer,
now Aventis Pharma, in 1997 for the delivery of neurologically active proteins
that may be applicable in treating neurodegenerative diseases such as
Alzheimer's, Parkinson's and Lou Gehrig's diseases.
VETERINARY APPLICATIONS
Prior to its development for human therapy, our naked DNA gene delivery
technology was extensively tested in animals. Research scientists have published
numerous papers detailing favorable results in many species and covering a broad
range of disease indications. Animal health encompasses two distinct market
segments: livestock, or animals bred and raised for food or other products; and
companion animals, or pets. Serving the animal health markets requires highly
efficient manufacturing and specialized distribution channels. Consequently, we
have licensed our naked DNA technology to leading animal health pharmaceutical
companies for development and commercialization.
DNA VACCINES FOR VETERINARY INFECTIOUS DISEASES
We entered into a corporate alliance in March 1995 relating to DNA vaccines
in the animal health area with Merial, a joint venture between Merck and Rhone
Merieux. Merial has options to acquire exclusive licenses to our gene delivery
technologies to develop and commercialize DNA-based vaccines to prevent
infectious diseases in domesticated animals. Through September 30, 1999, we had
received $3.2 million under this agreement. In December 1999, Merial paid us
$1.6 million for the initial exercise of options under the agreement. If Merial
exercises additional license options and markets these vaccines, cash payments
and royalties on sales would be due to us.
VETERINARY DNA THERAPEUTIC PROTEIN DELIVERY
In January 1999, we entered into a collaborative research, license, and
option agreement granting Pfizer rights to use our patented naked DNA gene
delivery technologies to deliver certain therapeutic proteins for animal health
applications. Pfizer made an initial investment of $6.0 million in our common
stock, paid an initial fee of $1.0 million, and agreed to fund our research
totaling $1.5 million for the first three years of the collaboration. We may
receive milestone payments and royalties if products are successfully developed
under the agreement. In addition, we may manufacture products resulting from the
collaboration for Pfizer.
33
INTELLECTUAL PROPERTY
Patents and other proprietary rights are essential to our business. We file
patent applications to protect our technology, inventions, and improvements to
our inventions that we consider important to the development of our business.
We also rely upon trade secrets, know-how, continuing technological
innovations and licensing opportunities to develop and maintain our competitive
position. We have filed or participated as licensee in the filing of more than
35 patent applications in the United States and have made over 280 additional
counterpart foreign filings in foreign countries relating to our technology. Our
patent applications seek to cover naked DNA gene delivery for immunization and
to deliver therapeutic proteins to patients, specific gene sequences and
formulations of gene-based product candidates, methods for producing
pharmaceutical-grade DNA and the composition of matter of several families of
lipid molecules and their uses in gene delivery. Many of these patents have been
issued by the U.S. Patent and Trademark Office. Several other applications are
still pending in the United States, and corresponding foreign applications have
been filed.
We and our exclusive licensors have received numerous U.S. and foreign
patents covering various aspects of our proprietary technology. Most of these
patents are recently issued and have considerable patent life remaining. These
patents are described as follows:
- CORE DNA DELIVERY TECHNOLOGY. We have received issued U.S. patents
covering our core DNA therapeutics technology, including patents on
methods of administering gene sequences for the purposes of expressing
therapeutic proteins or for inducing immune responses. Other issued
patents specifically cover the administration of genes into blood vessels
and the heart. Patent coverage of our core DNA delivery technology has
also been obtained in Europe.
- CORE LIPID TECHNOLOGY. We have received issued U.S. patents covering
numerous examples of cationic lipid compounds that are used to facilitate
delivery of DNA therapeutics to some tissues. These patented compounds
include the lipids contained in our lead product candidates, ALLOVECTIN-7
and LEUVECTIN. Patent protection of these key lipids also has been
obtained in Europe and Japan.
- SPECIFIC DNA THERAPEUTICS. We have supplemented the broad patent coverage
described above with patents covering specific product applications of our
technology. To date, we have received patents issued in the U.S. covering
the DNA components of ALLOVECTIN-7 and LEUVECTIN.
- DNA PROCESS TECHNOLOGY. As a result of our pioneering efforts to develop
the use of pure DNA as a therapeutic agent, we have also led the
development of manufacturing processes for producing pharmaceutical-grade
DNA. We have received issued U.S. patents covering various steps involved
in the process of economically producing pure plasmid DNA for
pharmaceutical use.
Two of our allowed U.S. patent applications and one U.S. patent application
that we have licensed have been suspended from issuance by the United States
Patent & Trademark Office pending possible interference proceedings with one or
more parties unknown to us. The suspension may be lifted or the application(s)
may be drawn into interference.
According to European patent procedures, issued patents may be opposed by
parties interested in challenging the scope or validity of the issued claims. A
European patent covering our core DNA delivery technology is currently being
opposed by several companies under these procedures. We intend to vigorously
defend our patent position in these proceedings. An
34
unfavorable result in these opposition proceedings could cause us to lose part
or all of our proprietary protection on our potential products in Europe.
Some components of our gene-based product candidates are, or may become,
patented by others. As a result, we may be required to obtain licenses to
conduct research, to manufacture or to market such products. Licenses may not be
available on commercially reasonable terms, or at all.
See "--Risk Factors--Our Patents and Proprietary Rights May Not Provide Us
With Any Benefit and the Patents of Others May Prevent Us From Commercializing
Our Products" and "The Legal Proceedings to Obtain Patents and Litigation of
Third-Party Claims of Intellectual Property Infringement Could Require Us to
Spend Money and Could Impair Our Operations."
COMMERCIALIZATION AND MANUFACTURING
Because of the broad potential applications of our technology, we intend to
develop and commercialize products both on our own and through corporate
partners. We intend to develop and market products to well-defined specialty
markets, such as oncology, infectious diseases and other life-threatening
diseases. Where appropriate, we intend to rely on strategic marketing and
distribution partners for manufacturing and marketing products.
We believe our DNA plasmids can be produced in commercial quantities through
conventional fermentation and purification techniques. The separation and
purification of plasmid DNA is a relatively straightforward procedure because of
the inherent biochemical differences between plasmid DNA and the majority of
other bacterial components. In addition, our lipid formulations consist of
components that are synthesized chemically using traditional, readily scaleable,
organic synthesis procedures.
We produce and supply our product for all of our clinical trials and intend
to produce sufficient supplies for additional clinical investigations. We may
also choose to have outside organizations manufacture our product candidates for
expanded clinical trials under close supervision utilizing our proprietary
processes.
COLLABORATION AND LICENSING AGREEMENTS
We have entered into various arrangements with corporate, academic and
government collaborators, licensors, licensees and others. In addition to the
agreements summarized below, we conduct ongoing negotiations with potential
corporate partners.
CORPORATE PARTNERS
MERCK & CO., INC. In May 1991, we entered into a research collaboration and
license agreement with Merck to develop vaccines utilizing our intramuscular
delivery technology to prevent infection and disease in humans. In connection
with the 1991 agreement, we granted Merck a worldwide exclusive license to
preventive vaccines using our technology against seven human infectious diseases
including influenza, HIV, herpes simplex, HBV, HCV, HPV and tuberculosis. Merck
has the right to terminate this agreement without cause on 90 days written
notice.
In addition, Merck has rights to therapeutic uses of preventive vaccines
developed under the 1991 agreement. In December 1995 and November 1997, Merck
acquired additional rights to develop and market therapeutic vaccines against
HPV, HIV and HBV. Under the November 1997 amendment, Merck made an investment of
$5.0 million for approximately 262,000 shares of our common stock.
35
In September 1997, we also entered into an option and license agreement
granting Merck the rights to use our naked DNA technology to deliver certain
growth factors. The agreement resulted in an initial payment to us of
$2.0 million. Merck has the right to terminate this agreement without cause on
90 days written notice.
In connection with these agreements, Merck has paid us $19.1 million as of
September 30, 1999. In November 1999, we received a $2.0 million payment from
Merck which extends Merck's exclusive license to develop and market therapeutic
vaccines against HIV and HBV. Merck is obligated to pay additional fees if
research milestones are achieved and royalties on net sales if any products are
developed and marketed. For some indications we may have an opportunity to co-
promote product sales.
AVENTIS PASTEUR, FORMERLY PASTEUR MERIEUX CONNAUGHT. In September 1994, we
entered into a research, option and license agreement with the vaccine
manufacturer Pasteur Merieux Connaught, now Aventis Pasteur, granting Aventis
Pasteur options to acquire licenses for the use of our proprietary DNA delivery
and technologies for developing vaccines against CMV, RSV, Lyme disease,
HELICOBACTER PYLORI and malaria. In April 1996, varicella zoster was added.
Aventis Pasteur has exercised its option to acquire several of these licenses.
Aventis Pasteur is obligated to make milestone and royalty payments to us if any
products are developed and marketed. In July 1997, Aventis Pasteur paid us
$1.0 million as a milestone payment upon initiation of a Phase I trial of an
experimental vaccine against the parasite that causes malaria. Through
September 30, 1999, we had received $7.8 million under this agreement.
PFIZER INC. In January 1999, we entered into a collaborative research and
option agreement with Pfizer to develop and market DNA-based delivery of
therapeutic proteins for animal health applications. Pfizer has an option to
obtain an exclusive royalty bearing license to our technology for these
applications. The option expires in January 2002. Under the agreement, Pfizer
made an investment of $6.0 million for approximately 318,000 shares of our
common stock. Pfizer also paid us a $1.0 million up-front license fee, and is
obligated to pay us $1.5 million for research and development over the first
three years of the agreement.
MERIAL. We entered into a corporate alliance in March 1995 relating to DNA
vaccines in the animal health area with Merial, a joint venture between Merck
and Rhone Merieux. Merial has options to take exclusive licenses to our DNA
delivery technologies to develop and commercialize DNA-based vaccines to prevent
infectious diseases in domesticated animals. Through September 30, 1999, we had
received $3.2 million under this agreement. In December 1999, Merial paid us
$1.6 million for the initial exercise of options under the agreement. If Merial
exercises additional license options and markets these vaccines, cash payments
and royalties on sales would be due to us. Merial has the right to terminate
this agreement without cause on 30 days written notice.
AVENTIS PHARMA, FORMERLY RHONE-POULENC RORER PHARMACEUTICALS, INC. In
October 1997, we entered into an agreement with Rhone-Poulenc Rorer
Pharmaceuticals, Inc., now Aventis Pharma, granting Aventis Pharma an exclusive
worldwide license to use our naked DNA delivery technology to deliver certain
neurologically active proteins for potential treatment of neurodegenerative
diseases. Under the terms of the agreement, we received $1.0 million in 1997.
This agreement provides for us to receive additional payments based upon
achievement of milestones and royalty payments on product sales.
CENTOCOR, INC. In February 1998, we entered into an exclusive license and
option agreement allowing Centocor, Inc., recently acquired by Johnson &
Johnson, to use our naked DNA technology to develop and market certain DNA-based
vaccines for the potential treatment of some types of cancer. We received an
initial payment of $2.0 million plus reimbursement of $0.2 million of
36
patent costs. We may receive additional payments based upon achievement of
milestones and royalty payments on product sales.
BOSTON SCIENTIFIC CORPORATION. In April 1997, we entered into a sublicense
agreement with Cardiogene Therapeutics, Inc., formerly known as Genocor, Inc.,
for the development of catheter-based intravascular gene delivery technology
under our license agreement with the University of Michigan described below.
Boston Scientific Corporation has subsequently acquired Cardiogene Therapeutics'
rights under this agreement. We received $1.1 million in October 1998 under this
agreement. The agreement provides for us to receive royalty payments on any
related product sales.
Under the Merck, Aventis Pasteur, Merial, Aventis Pharma, Centocor and
Pfizer agreements, if we were to receive milestone or royalty payments, we would
be required to pay up to 10 percent of some of these payments to Wisconsin
Alumni Research Foundation. Under the Boston Scientific agreement, if we were to
receive milestone or royalty payments, we would be required to pay up to 25
percent of some of these payments to the University of Michigan. See "--Research
Institutions--Wisconsin Alumni Research Foundation."
RESEARCH INSTITUTIONS
OFFICE OF NAVAL RESEARCH. In September 1998, we entered into an agreement
with the Office of Naval Research for the development work on a potential
multi-gene DNA vaccine to prevent malaria. This agreement could provide total
funding of up to $2.7 million through 2000, of which $2.2 million was recognized
as revenue through September 30, 1999.
THE UNIVERSITY OF MICHIGAN. In October 1992, we entered into a license
agreement with the University of Michigan and obtained the exclusive license to
technology for delivering gene-based products into cancer cells and blood
vessels by catheters. In April 1997, we entered into a sublicense agreement, the
rights under which are currently held by Boston Scientific Corporation, for the
development of catheter-based intravascular gene delivery technology.
WISCONSIN ALUMNI RESEARCH FOUNDATION, WARF. Under a 1989 research
agreement, scientists at the University of Wisconsin, Madison, and our
scientists co-invented a core technology related to intramuscular naked DNA
administration. In 1991, we licensed from WARF its interest in that technology.
We paid WARF an initial license fee and agreed to pay WARF a royalty on sales of
any products incorporating the licensed technology and a percentage of up-front
license payments from third parties.
COMPETITION
The field of gene-based drug development is new and rapidly evolving, and it
is expected to continue to undergo significant and rapid technological change.
Rapid technological development could result in our potential products or
technologies becoming obsolete before we recover a significant portion of our
related research, development and capital expenditures. We may experience
competition both from other companies in the field and from companies which have
other forms of treatment for the diseases we are targeting.
We are aware of several development-stage and established enterprises,
including major pharmaceutical and biotechnology firms, which are exploring
gene-based drugs or are actively engaged in gene delivery research and
development. These include Avigen, Targeted Genetics Corp., Transgene SA and
Valentis Inc. We may also experience competition from companies that have
acquired or may acquire technology from companies, universities and other
research institutions. As these companies develop their technologies, they may
develop proprietary positions which may materially and adversely affect us.
37
In addition, a number of companies are developing products to address the
same disease indications that we are targeting. For example, Maxim
Pharmaceuticals, Inc. and Corixa Corp. are conducting advanced clinical trials
for the treatment of melanoma. As another example, Aventis, Onyx
Pharmaceuticals, Inc. and ImClone Systems Incorporated are conducting clinical
trials of their products to treat head and neck cancer. If these or any other
companies develop products with efficacy or safety profiles significantly better
than our products, we may not be able to commercialize our products and sales of
any of our commercialized products could be harmed.
Some competitors and potential competitors have substantially greater
product development capabilities and financial, scientific, marketing and human
resources we do. Other companies may develop products earlier, obtain FDA
approvals for products more rapidly, or develop products that are more effective
than those under development by us. We will seek to expand our technological
capabilities to remain competitive; however, research and development by others
may render our technology or products obsolete or noncompetitive or result in
treatments or cures superior to ours.
Our competitive position will be affected by the disease indications
addressed by our potential products and those of our competitors, the timing of
market introduction for these potential products and the stage of development of
other technologies to address these disease indications. For us and our
competitors, proprietary positions, the ability to complete clinical trials on a
timely basis and with the desired results, and the ability to obtain timely
regulatory approvals to market these potential products are likely to be
significant competitive factors. Other important competitive factors will
include the efficacy, safety, reliability, availability and price of potential
products and the ability to fund operations during the period between
technological conception and commercial sales.
GOVERNMENT REGULATION
Any products we develop will require regulatory clearances prior to clinical
trials and additional regulatory clearances prior to commercialization. New
human DNA therapeutics are expected to be subject to extensive regulation by the
FDA and comparable agencies in other countries. The precise regulatory
requirements with which we will have to comply are uncertain at this time due to
the novelty of the DNA-based products and therapies currently under development.
We believe that our potential products will be regulated either as biological
products or as drugs. Drugs are subject to regulation under the Federal Food,
Drug and Cosmetic Act, and biological products, in addition to being subject to
provisions of that Act, are regulated under the Public Health Service Act. Both
statutes and related regulations govern, among other things, the testing,
manufacturing, safety, efficacy, labeling, storage, record keeping, advertising
and other promotional practices. FDA approval or other clearances must be
obtained before clinical testing, and before manufacturing and marketing of
biologics or drugs.
FDA approval is required prior to marketing a pharmaceutical product in the
United States. To obtain this approval the FDA requires clinical trials to
demonstrate the safety, efficacy, and potency of the product candidates.
Clinical trials are the means by which experimental drugs or treatments are
tested in humans. New therapies typically advance from laboratory, research,
testing through animal, preclinical, testing and finally through several phases
of clinical, human, testing. Upon successful completion of clinical trials,
approval to market the therapy for a particular patient population may be
requested from the FDA in the United States and/or its counterparts in other
countries.
Clinical trials are normally done in three phases. In Phase I, trials are
conducted with a small number of patients or healthy volunteers to determine the
safety profile, the pattern of drug distribution and metabolism and early
evidence on effectiveness. In Phase II, trials are conducted with a larger group
of patients afflicted with a target disease in order to determine preliminary
38
efficacy, optimal dosages and expanded evidence of safety. In Phase III, large
scale, multi-center, comparative trials are conducted with patients afflicted
with a target disease in order to provide enough data for the statistical proof
of safety, efficacy, and potency required by the FDA and other regulatory
authorities. For life-threatening diseases, initial human testing generally is
done in patients rather than healthy volunteers. These studies may provide
results traditionally obtained in Phase II trials and are referred to as
"Phase I/II" trials.
Obtaining FDA approval has been a costly and time-consuming process.
Generally, in order to gain FDA pre-market approval, preclinical studies must be
conducted in the laboratory and in animal model systems to gain preliminary
information on an agent's efficacy and to identify any major safety concerns.
The results of these studies are submitted as a part of an application for an
Investigational New Drug, IND, which the FDA must review and allow before human
clinical trials can start. The IND includes a detailed description of the
clinical investigations.
A company must sponsor and file an IND for each proposed product and must
conduct clinical studies to demonstrate the safety, efficacy and potency that
are necessary to obtain FDA approval. The FDA receives reports on the progress
of each phase of clinical testing, and it may require the modification,
suspension, or termination of clinical trials if an unwarranted risk is
presented to patients. Human DNA therapeutics are a new category of
therapeutics, and the clinical trial period may be lengthy or the number of
patients may be numerous in order to establish safety, efficacy and potency.
After completion of clinical trials of a new product, FDA marketing approval
must be obtained. If the product is regulated as a biologic, a Biologic License
Application, BLA, is required. If the product is classified as a new drug, a New
Drug Application, NDA, is required. The NDA or BLA must include results of
product development activities, preclinical studies and clinical trials in
addition to detailed manufacturing information.
Applications submitted to the FDA are subject to an unpredictable and
potentially prolonged approval process. The FDA may ultimately decide that the
application does not satisfy its criteria for approval or require additional
preclinical or clinical studies. Even if FDA regulatory clearances are obtained,
a marketed product is subject to continual review, and later discovery of
previously unknown problems or failure to comply with the applicable regulatory
requirements may result in restrictions on the marketing of a product or
withdrawal of the product from the market as well as possible civil or criminal
sanctions. Before marketing clearance is secured, the manufacturing facility
will be inspected for current Good Manufacturing Practices, GMP, compliance by
FDA inspectors. The manufacturing facility must satisfy current GMP requirements
prior to marketing clearance. In addition, after marketing clearance is secured,
the manufacturing facility will be inspected periodically for GMP compliance by
FDA inspectors, and, if the facility is located in California, by inspectors
from the Food and Drug Branch of the California Department of Health Services.
In addition to the FDA requirements, the NIH has established guidelines for
research involving recombinant DNA molecules. These guidelines apply to all
recombinant DNA research which is conducted at or supported by the NIH,
including proposals to conduct clinical research involving DNA therapeutics. The
NIH review of clinical trial proposals is a public process and usually involves
review and approval by the Recombinant DNA Advisory Committee of the NIH.
In both domestic and foreign markets, sales of any approved products will
depend on reimbursement from third party payers, such as government and private
insurance plans. Third party payers are increasingly challenging the prices
charged for medical products and services. If we succeed in bringing one or more
products to market, these products may not be considered cost-effective,
reimbursement may not be available, or reimbursement policies may adversely
affect our ability to sell our products on a profitable basis.
39
We also are subject to various federal, state and local laws, regulations
and recommendations relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with our research.
The extent of government regulation which might result from any future
legislation or administrative action cannot be accurately predicted.
HUMAN RESOURCES
As of September 30, 1999, we had 108 full-time employees, 22 of whom hold
degrees at the doctorate level. Of these employees, 80 are engaged in, or
directly support, research and development activities, and 28 are in
administrative and business development positions. A significant number of our
management and professional employees have prior experience with pharmaceutical
and biotechnology companies. None of our employees is covered by collective
bargaining agreements, and our management considers relations with our employees
to be good.
FACILITIES
We lease approximately 43,000 square feet of manufacturing, research
laboratory and office space in an established commercial neighborhood in
northern San Diego, California at three sites and with three leases. The leases
terminate in 2004. We have the option to renew these three leases for an
additional five-year period.
Within our existing facilities, we have manufactured sufficient quantities
of pharmaceutical-grade product to supply our previous and ongoing clinical
trials, including the current registration trials. In addition, we have
manufactured preclinical and clinical supplies of DNA for our corporate
partners, for government agencies and for numerous academic researchers. We
believe that the build-out of unfinished space in our facilities will be
sufficient to accommodate manufacturing of initial production quantities of our
most advanced product candidates.
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MANAGEMENT
Our executive officers and directors are as follows:
NAME AGE POSITION
- ---- -------- -------------------------------------------------
Alain B. Schreiber, M.D................... 44 President, Chief Executive Officer and Director
Deirdre Y. Gillespie, M.D................. 43 Executive Vice President and Chief Business
Officer
Martha J. Demski.......................... 47 Vice President, Chief Financial Officer,
Treasurer and Secretary
Jon A. Norman, Ph.D....................... 51 Vice President, Research
George J. Gray............................ 53 Vice President, Operations
Robert H. Zaugg, Ph.D..................... 50 Vice President, Business Development
R. Gordon Douglas, Jr., M.D.(2)(4)........ 65 Chairman of the Board of Directors
M. Blake Ingle(1)(3)...................... 57 Director
Patrick F. Latterell(1)(3)................ 41 Director
Gary A. Lyons(1)(3)....................... 48 Director
Dale A. Smith(2)(4)....................... 67 Director
Philip M. Young(2)(4)..................... 59 Director
- ------------------------
(1) Member of Compensation Committee of the Board of Directors.
(2) Member of Audit Committee of the Board of Directors.
(3) Member of Stock Plan Committee of the Board of Directors.
(4) Member of the Nominating Committee of the Board of Directors.
ALAIN B. SCHREIBER, M.D., has been our President, Chief Executive Officer
and a director since May 1992. Prior to joining us, Dr. Schreiber held various
executive level positions at Rhone-Poulenc Rorer Inc. from July 1985 to April
1992, lastly as Senior Vice President of Discovery Research. From October 1982
to June 1985, Dr. Schreiber served as Biochemistry Department Head at Syntex
Corp. Dr. Schreiber is a director of Spiros Development Corp. II Inc. and is
also an appointed adviser for foreign trade of the Belgian Foreign Trade Counsel
in the United States. He received his undergraduate degree and M.D. from the
Free University of Brussels, after which he was awarded a fellowship in
immunology at the Weizmann Institute.
DEIRDRE Y. GILLESPIE, M.D., joined us as Executive Vice President and Chief
Business Officer in March 1998. Prior to joining us, Dr. Gillespie served as
Vice President of Business Development for 3-Dimensional Pharmaceuticals, Inc.
From 1991 to 1996, she held various management positions with the Dupont Merck
Pharmaceutical Co. From 1986 to 1990, Dr. Gillespie directed clinical research
activities for Sandoz Pharma AG. Dr. Gillespie received a B.Sc. in Pharmacology
and Therapeutics and an M.D. from London University. Dr. Gillespie received her
M.B.A. from the London Business School with a specialization in marketing and
international management.
MARTHA J. DEMSKI joined us as Chief Financial Officer in December 1988 and
currently serves as Vice President, Chief Financial Officer, Treasurer and
Secretary. From August 1977 until joining us, Ms. Demski held various positions
with Bank of America, lastly as Vice President/Section Head of the Technology
Section. She also served as an adviser to Bank of America on a statewide basis
regarding the biotechnology industry in California. Ms. Demski received a B.A.
from Michigan State University and an M.B.A. in Finance and Accounting from The
University of Chicago Graduate School of Business.
JON A. NORMAN, PH.D., joined us in January 1993 as Vice President, Research.
From 1986 until joining us, Dr. Norman was the Group Leader/Section Head for the
Departments of Pharmacology and Biochemistry at Bristol-Myers Squibb
Corporation. He was a Senior Research
41
Scientist at Ciba-Geigy Corporation from 1981 to 1986. Dr. Norman received his
B.A. and M.A. from the University of California at Santa Barbara and his Ph.D.
in Biochemistry from the University of Calgary, after which he was awarded a
fellowship at the Friederich Miescher Institute in Basel, Switzerland.
GEORGE J. GRAY joined us in October 1992 as Vice President, Operations.
Prior to that time he was at Rhone-Poulenc Rorer Inc. where he held various
positions since 1975, lastly as Director, Discovery Research Ventures, US/UK
from January 1990 to October 1992, and prior to that as Director, Project
Management from January 1988 to December 1989. Mr. Gray received a B.A. from
George Washington University.
ROBERT H. ZAUGG, PH.D., joined us in July 1991 as the Senior Director,
Business Development and has served as the Vice President of Business
Development since January 1994. Prior to joining us, Dr. Zaugg served as
Director of Business Development & Licensing for Triton Biosciences from 1988 to
1991 and in various business development positions with Sandoz Pharmaceuticals
Corporation from 1982 to 1988. He holds a B.A. from the University of California
at Los Angeles, a Ph.D. in Biochemistry from Northwestern University and an
M.B.A. from New York University. He was awarded a post-doctoral fellowship in
immunology at the Massachusetts Institute of Technology.
R. GORDON DOUGLAS, JR., M.D., is Chairman of our Board of Directors and has
been one of our directors since May 1999. Dr. Douglas retired in April 1999 from
Merck & Co., Inc., where he had been President of Merck Vaccines since 1991, and
a member of the Merck Management Committee. Prior to joining Merck in 1989,
Dr. Douglas was a physician and academician. His teaching and administrative
affiliations included Baylor College of Medicine, University of Rochester School
of Medicine, and Cornell University Medical College. His medical practice
included affiliations with The New York Hospital, Memorial Sloan-Kettering
Cancer Center, The Rockefeller University Hospital and North Shore University
Hospital. He has served as a visiting professor at a number of medical schools
and as a consultant to several pharmaceutical and biomedical companies. Dr.
Douglas is a graduate of Princeton University and Cornell University Medical
College. He received his medical staff training at The New York Hospital and
Johns Hopkins Hospital and is Board Certified in Internal Medicine. He is a
member of the Institute of Medicine, the Association of American Physicians, the
Infectious Diseases Society of America and numerous other organizations.
M. BLAKE INGLE, PH.D., has been one of our directors since June 1996.
Dr. Ingle is a partner in Inglewood Ventures. From 1993 to 1996 Dr. Ingle was
Chief Executive Officer of Canji Inc., a privately held gene therapy company
acquired by Schering Plough in 1996, and he served from 1995 to 1996 as Acting
Chief Executive Officer of Telios Pharmaceuticals, Inc., subsequently acquired
by Integra Life Sciences. Dr. Ingle previously worked with Bayer. From 1980 to
1993, Dr. Ingle held a variety of positions with IMCERA Group, Inc.,
subsequently Mallinckrodt, Inc., including Chief Scientific Officer, Chief
Financial Officer and President of its Pittman Moore division and most recently
as President and Chief Executive Officer of IMCERA Group, Inc. Dr. Ingle also
serves as a member of the Board of Directors of Corvas International, Inc., Inex
Pharmaceuticals and Burnham Institute. He received his B.S. degree from Fort
Lewis College and his M.S. and Ph.D. from Colorado State University.
PATRICK F. LATTERELL has been one of our directors since February 1992. He
has been a General Partner with Venrock Associates since 1989. From 1985 to
1989, he was a General Partner at Rothschild Ventures Inc., "Rothschild," where
he was responsible for Rothschild's healthcare ventures. Prior to joining
Rothschild, Mr. Latterell was Manager of Corporate Development with Syntex
Corporation from 1983 through 1985. Mr. Latterell currently serves as a director
of several privately held biomedical companies. He received S.B. degrees in
Biological Sciences and
42
Economics from the Massachusetts Institute of Technology and an M.B.A. from the
Stanford University Graduate School of Business.
GARY A. LYONS has been one of our director since March 1997. He has been
President, Chief Executive Officer and Director of Neurocrine Biosciences, Inc.
since 1993. From 1983 to 1993, Mr. Lyons held various executive positions at
Genentech, Inc., including Vice President of Business Development, Vice
President of Sales, and Director of Sales and Marketing. From 1973 to 1983,
Mr. Lyons worked with American Critical Care, serving as Director of Sales from
1980 to 1983. Mr. Lyons holds a B.A. in Marine Biology from the University of
New Hampshire and an M.B.A. from Northwestern University, JL Kellogg Graduate
School of Management.
DALE A. SMITH has been one of our directors since August 1995. From 1979
until his retirement in July 1995, Mr. Smith was Group Vice President of Baxter
International Inc., where he was responsible for the biotechnology group and
various corporate research groups including applied sciences, blood substitutes,
venture technology and Baxter International Inc.'s European research center.
Currently he serves as a business advisor to several companies and as a Board
Member of Cerus Corporation. Mr. Smith holds a B.A. in Business Administration
from the University of Washington, Seattle.
PHILIP M. YOUNG has been one of our directors since February 1992. He has
been a general partner of U.S. Venture Partners, a venture capital firm, since
April 1990. Mr. Young is a director of The Immune Response Corporation, Zoran
Corporation, 3Dfx Interactive, Inc. and several privately held companies. He
received a B.M.E. from Cornell University, an M.S. from George Washington
University and an M.B.A. from the Harvard Business School.
43
UNDERWRITING
Vical and the underwriters for the offering (the "Underwriters")named below
have entered into an underwriting agreement with respect to the shares being
offered. Subject to certain conditions, each underwriter has severally agreed to
purchase the number of shares indicated in the following table. Goldman, Sachs &
Co., FleetBoston Robertson Stephens Inc., SG Cowen Securities Corporation, and
First Union Securities, Inc. are the representatives of the underwriters.
Underwriters Number of Shares
------------ ----------------
Goldman, Sachs & Co.........................................
FleetBoston Robertson Stephens Inc..........................
SG Cowen Securities Corporation.............................
First Union Securities, Inc.................................
---------
Total................................................... 2,500,000
=========
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 375,000
shares from Vical to cover such sales. They may exercise that option for 30
days. If any shares are purchased pursuant to this option, the underwriters will
severally purchase shares in approximately the same proportion as set forth in
the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by Vical. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase 375,000 additional shares.
Paid by Vical
No Exercise Full Exercise
----------- -------------
Per Share................................................... $ $
Total....................................................... $ $
Shares sold by the underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial price to public. Any such securities
dealers may resell any shares purchased from the underwriters to certain other
brokers or dealers at a discount of up to $ per share from the initial price to
public. If all the shares are not sold at the initial price to public, the
representatives may change the offering price and the other selling terms.
Vical has agreed with the underwriters not to dispose of or hedge any of
Vical's common stock or securities convertible into or exchangeable for shares
of common stock during the period from the date of this prospectus continuing
through the date 90 days after the date of this prospectus, except with the
prior written consent of the representatives. This agreement does not apply to
any existing employee benefit plans.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
44
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected in the over-the-
counter market or otherwise.
Vical estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$500,000.
Vical has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Pillsbury Madison & Sutro LLP, San Francisco, California. A member of
Pillsbury Madison & Sutro LLP owns 12,755 shares of common stock. Cooley Godward
LLP, San Diego, California, is acting as counsel for the underwriters in
connection with certain legal matters relating to the sale of the common stock
offered hereby.
EXPERTS
The audited financial statements included in this prospectus and elsewhere
in the registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report, with respect to
such financial statements, and are included in this prospectus in reliance upon
the authority of Arthur Andersen LLP as experts in accounting and auditing in
giving said report.
The statements in this prospectus under the captions "Risk Factors--Our
Patents and Proprietary Rights May Not Provide Us With Any Benefit and the
Patents of Others May Prevent Us From Commercializing Products; The Legal
Proceedings to Obtain Patents and Litigation of Third-Party Claims of
Intellectual Property Infringement Could Require Us to Spend Money and Could
Impair Our Operations," and "Business--Intellectual Property," have been
reviewed and approved by Sterne, Kessler, Goldstein & Fox P.L.L.C., (SKGF)
patent counsel for Vical, as experts on such matters, and are included herein in
reliance upon that review and approval with the exception that, because a number
of matters were or are handled by different patent counsel, SKGF cannot confirm
that Vical has filed or participated as licensee in the filing of more than 35
patent applications in the United States and more than 280 additional
counterpart foreign filings in Foreign countries.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the reporting requirements of the Securities Exchange Act
of 1934 and in accordance file annual and quarterly reports, proxy statements
and other information with the Securities and Exchange Commission. These
reports, proxy statements and other information may be inspected and copies of
these materials may be obtained upon payment of fees at the public reference
facilities maintained by the Commission at 450 Fifth Street, NW, Washington,
D.C. 20549, as well as the regional offices of the Commission located at 500
West Madison Street, Chicago, Illinois, and Seven World Trade Center, New York,
New York. You may obtain information on the operation of the public reference
facilities by calling the Commission at 1-800-SEC-0330. In addition, we are
required to file electronic versions of these materials with the Commission
through the Commission's Electronic Data Gathering, Analysis and Retrieval
(EDGAR) system. The Commission maintains a World Wide Web site at
http://www/sec/gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. Our common stock is quoted on the Nasdaq National Market, and
reports and
45
other information concerning us may be inspected at the National Association of
Securities Dealers, Inc. at 1725 K Street, NW, Washington, D.C. 20006-1500.
We have filed with the Commission a registration statement on Form S-3 under
the Securities Act of 1933 with respect to the common stock offered in this
prospectus. This prospectus does not contain all of the information set forth in
the registration statement and the exhibits and schedules thereto. For further
information with respect to us and our common stock, you should read the
registration statement and its exhibits and schedules. Statements contained in
this prospectus as to the contents of any contract or any other document are not
necessarily complete and, in each instance, reference is made to the copy of
such contract or document filed as an exhibit to the registration statement,
each such statement being qualified in all respects by such reference. Copies of
the registration statement, including all exhibits thereto, may be obtained from
the Commission's principal office in Washington, D.C. upon the payment of the
fees prescribed by the Commission, or may be examined without charge at the
offices of the Commission described above. Copies of these materials may also be
obtained from the EDGAR database.
INCORPORATION BY REFERENCE
The Commission allows us to incorporate by reference information into this
prospectus. This means we can disclose important information to you by referring
you to another document filed separately with the Commission. The information
incorporated by reference is deemed to be part of this prospectus, except for
any information superseded by information contained directly in this prospectus.
This prospectus incorporates by reference the documents set forth below that we
have previously filed with the Commission. These documents contain important
information about us and our financial condition.
The following documents previously filed with the Commission are hereby
incorporated by reference into this prospectus:
- our Annual Report on Form 10-K for the year ended December 31, 1998 (File
No. 0-21088),
- our Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999,
June 30, 1999, and September 30, 1999,
- the description of our common stock contained in our registration
statement on Form 8-A filed on January 8, 1993, and
- the description of the rights to purchase Series A Participating Preferred
Stock $0.01 par value set forth in the registration statement on Form 8-A
filed on March 23, 1995.
All documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act subsequent to the date of this prospectus and prior to the
completion of the offering of the common stock will be deemed to be incorporated
by reference into this prospectus and to be part of this prospectus from the
date of filing of these documents.
Any statement contained in a document incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this prospectus and the
registration statement of which it is a part to the extent that a statement
contained herein or in any other subsequently filed document which is also
incorporated herein modifies or replaces such statement. Any statement so
modified or superseded shall not be deemed, in its unmodified form, to
constitute a part of this prospectus or such registration statement.
We will provide without charge to each person to whom a copy of the
prospectus has been delivered, and who makes a written or oral request, a copy
of any and all of the information that has been incorporated by reference in the
registration statement (other than exhibits unless such exhibits are
specifically incorporated by reference therein). Requests should be submitted in
writing or by telephone to Investor Relations, Vical Incorporated, at our
offices located at 9373 Towne Centre Drive, Suite 100, San Diego, CA 92121-3088,
telephone (858) 646-1100.
46
VICAL INCORPORATED
INDEX TO FINANCIAL STATEMENTS
PAGE
AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................. F-2
Balance Sheets as of December 31, 1998 and 1997........... F-3
Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996..................................... F-4
Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996........................ F-5
Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996..................................... F-6
Notes to Financial Statements............................. F-7
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Interim Balance Sheets as of September 30, 1999 and
December 31, 1998....................................... F-18
Interim Statements of Operations for the Three Months and
Nine Months ended September 30, 1999 and 1998........... F-19
Interim Statements of Cash Flow for the Nine Months ended
September 30, 1999 and 1998............................. F-20
Notes to Interim Financial Statements..................... F-21
F-1
VICAL INCORPORATED
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Vical Incorporated:
We have audited the accompanying balance sheets of Vical Incorporated, a
Delaware corporation, as of December 31, 1998 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, 1998. 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 Vical Incorporated as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Diego, California
February 8, 1999
F-2
VICAL INCORPORATED
BALANCE SHEETS
DECEMBER 31,
---------------------------
1998 1997
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents (Note 2)........................ $ 13,567,817 $ 12,157,149
Marketable securities--available-for-sale (Note 2)........ 26,615,939 33,397,482
Receivables and other..................................... 1,432,711 1,566,532
------------ ------------
Total current assets........................................ 41,616,467 47,121,163
------------ ------------
Property and Equipment (Note 5):
Equipment................................................. 5,139,944 4,966,955
Leasehold improvements.................................... 1,558,554 1,587,554
------------ ------------
6,698,498 6,554,509
Less--accumulated depreciation and amortization........... (4,992,121) (4,334,224)
------------ ------------
1,706,377 2,220,285
------------ ------------
Patent costs, net of accumulated amortization of $126,638
and $74,063 (Note 1)...................................... 1,387,936 1,247,059
Other assets................................................ 133,385 102,500
------------ ------------
$ 44,844,165 $ 50,691,007
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses (Note 4)............ $ 2,281,252 $ 1,424,603
Current portion of capital lease obligations (Note 5)..... 473,466 448,261
Current portion of notes payable (Note 5)................. 213,773 213,773
Deferred revenue (Note 3)................................. 250,000 178,261
------------ ------------
Total current liabilities................................... 3,218,491 2,264,898
------------ ------------
Long-Term Obligations:
Long-term obligations under capital leases (Note 5)....... 747,807 911,794
Notes payable (Note 5).................................... 53,443 320,660
------------ ------------
Total long-term obligations................................. 801,250 1,232,454
------------ ------------
Commitments (Note 5)
Stockholders' Equity (Note 6):
Preferred stock, $.01 par value--5,000,000 shares
authorized--none outstanding............................ -- --
Common stock, $.01 par value--40,000,000 shares
authorized--15,866,544 and 15,731,316 shares issued and
outstanding in 1998 and 1997, respectively.............. 158,665 157,313
Additional paid-in capital................................ 78,332,483 77,267,971
Accumulated other comprehensive income (Note 2)........... 69,440 24,028
Accumulated deficit....................................... (37,736,164) (30,255,657)
------------ ------------
Total stockholders' equity.................................. 40,824,424 47,193,655
------------ ------------
$ 44,844,165 $ 50,691,007
============ ============
See accompanying notes.
F-3
VICAL INCORPORATED
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenues (Note 3):
Contract revenue................................... $ 875,773 $ 1,325,925 $ 1,060,557
License/Royalty revenue............................ 5,044,607 6,477,244 5,679,542
----------- ----------- -----------
5,920,380 7,803,169 6,740,099
----------- ----------- -----------
Expenses:
Research and development........................... 12,054,367 11,936,068 11,317,908
General and administrative......................... 3,649,841 3,733,290 3,168,331
----------- ----------- -----------
15,704,208 15,669,358 14,486,239
----------- ----------- -----------
Loss from operations................................. (9,783,828) (7,866,189) (7,746,140)
Other income (expense):
Interest income.................................... 2,465,545 2,447,139 2,772,845
Interest expense................................... (162,224) (192,181) (107,296)
----------- ----------- -----------
Net loss............................................. $(7,480,507) $(5,611,231) $(5,080,591)
=========== =========== ===========
Net loss per share (basic and diluted--Note 1)....... $ (0.47) $ (0.36) $ (0.33)
=========== =========== ===========
Weighted average shares used in computing net loss
per share.......................................... 15,797,585 15,484,952 15,382,848
=========== =========== ===========
See accompanying notes.
F-4
VICAL INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
---------------------- PAID-IN DEFERRED COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION INCOME DEFICIT EQUITY
---------- --------- ----------- -------------- --------------- ------------- --------------
BALANCE, December 31,
1995.................. 15,364,265 $153,643 $72,728,484 $(158,427) $ 104,176 $(19,563,835) $53,264,041
Stock option
exercises........... 32,317 323 175,988 -- -- -- 176,311
Deferred
compensation........ -- -- -- 158,427 -- -- 158,427
Unrealized loss on
marketable
securities arising
during holding
period..............
Reclassification of
realized gain
included in net
loss................
Unrealized gain (loss)
on marketable
securities.......... -- -- -- -- (152,961) -- (152,961)
Net loss.............. -- -- -- -- -- (5,080,591) (5,080,591)
---------- -------- ----------- --------- --------- ------------ -----------
BALANCE, December 31,
1996.................. 15,396,582 153,966 72,904,472 -- (48,785) (24,644,426) 48,365,227
Issuance of common
stock at $15.28 per
share (Note 3)...... 261,812 2,618 3,992,143 -- -- -- 3,994,761
Stock option
exercises........... 72,922 729 371,356 -- -- -- 372,085
Unrealized gain on
marketable
securities arising
during holding
period..............
Reclassification of
realized loss
included in net
loss................
Unrealized gain (loss)
on marketable
securities.......... -- -- -- -- 72,813 -- 72,813
Net loss.............. -- -- -- -- -- (5,611,231) (5,611,231)
---------- -------- ----------- --------- --------- ------------ -----------
BALANCE, December 31,
1997.................. 15,731,316 157,313 77,267,971 -- 24,028 (30,255,657) 47,193,655
Stock option
exercises........... 135,228 1,352 1,064,512 -- -- -- 1,065,864
Unrealized gain on
marketable
securities arising
during holding
period..............
Reclassification of
realized gain
included in net
loss................
Unrealized gain (loss)
on marketable
securities.......... -- -- -- -- 45,412 -- 45,412
Net loss.............. -- -- -- -- -- (7,480,507) (7,480,507)
---------- -------- ----------- --------- --------- ------------ -----------
BALANCE, December 31,
1998.................. 15,866,544 $158,665 $78,332,483 $ -- $ 69,440 $(37,736,164) $40,824,424
========== ======== =========== ========= ========= ============ ===========
TOTAL
COMPREHENSIVE
LOSS
---------------
BALANCE, December 31,
1995..................
Stock option
exercises...........
Deferred
compensation........
Unrealized loss on
marketable
securities arising
during holding
period.............. $ (136,199)
Reclassification of
realized gain
included in net
loss................ (16,762)
-----------
Unrealized gain (loss)
on marketable
securities.......... (152,961)
Net loss.............. (5,080,591)
-----------
BALANCE, December 31,
1996.................. (5,223,552)
===========
Issuance of common
stock at $15.28 per
share (Note 3)......
Stock option
exercises...........
Unrealized gain on
marketable
securities arising
during holding
period.............. 87,763
Reclassification of
realized loss
included in net
loss................ (14,950)
-----------
Unrealized gain (loss)
on marketable
securities.......... 72,813
Net loss.............. (5,611,231)
-----------
BALANCE, December 31,
1997.................. (5,538,418)
===========
Stock option
exercises...........
Unrealized gain on
marketable
securities arising
during holding
period.............. 57,041
Reclassification of
realized gain
included in net
loss................ (11,629)
-----------
Unrealized gain (loss)
on marketable
securities.......... 45,412
Net loss.............. (7,480,507)
-----------
BALANCE, December 31,
1998.................. $(7,435,095)
===========
See accompanying notes.
F-5
VICAL INCORPORATED
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
OPERATING ACTIVITIES:
Net loss............................................ $(7,480,507) $(5,611,231) $(5,080,591)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 920,695 939,956 620,033
Compensation expense related to stock
purchases..................................... -- -- 158,427
Write-off of abandoned patent application
costs......................................... 94,800 80,994 3,247
Changes in operating assets and liabilities:
Receivables and other............................. 133,821 359,463 (1,397,906)
Accounts payable and accrued expenses............. 856,649 614,219 282,087
Deferred revenue.................................. 71,739 (1,013,043) 512,137
----------- ----------- -----------
Net cash used in operating activities............... (5,402,803) (4,629,642) (4,902,566)
----------- ----------- -----------
INVESTING ACTIVITIES:
Marketable securities............................... 6,826,955 912,645 10,963,363
Capital expenditures................................ (34,292) (418,507) (980,709)
Other assets........................................ (1,885) 210,400 221,288
Patent expenditures................................. (288,252) (280,778) (269,682)
----------- ----------- -----------
Net cash provided from investing activities......... 6,502,526 423,760 9,934,260
----------- ----------- -----------
FINANCING ACTIVITIES:
Principal payments under capital lease
obligations....................................... (487,702) (506,205) (414,176)
Proceeds from (payments on) notes payable........... (267,217) (106,887) 641,320
Issuance of common stock, net....................... 1,065,864 4,366,846 176,311
----------- ----------- -----------
Net cash provided from financing activities......... 310,945 3,753,754 403,455
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... 1,410,668 (452,128) 5,435,149
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR...... 12,157,149 12,609,277 7,174,128
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR............ $13,567,817 $12,157,149 $12,609,277
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid....................................... $ 167,622 $ 184,191 $ 107,296
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital leases............. $ 348,920 $ 434,416 $ 1,200,022
See accompanying notes.
F-6
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Vical Incorporated (the "Company"), a Delaware corporation, was incorporated
in 1987 and has devoted substantially all of its resources since that time to
its research and development programs. The Company is focusing its resources on
the development of its direct gene transfer and related technologies.
All of the Company's potential products are in research and development. No
revenues have been generated from the sale of any of such products, nor are any
such revenues expected for at least the next several years. The products
currently under development by the Company will require significant additional
research and development efforts, including extensive preclinical and clinical
testing and regulatory approval, prior to commercial use. There can be no
assurance that the Company's research and development efforts will be successful
and that any of the Company's potential products will prove to be safe and
effective in clinical trials. Even if developed, these products may not receive
regulatory approval or be successfully introduced and marketed at prices that
would permit the Company to operate profitably. The Company expects to continue
to incur substantial losses and not generate positive cash flow from operations
for at least the next several years. No assurance can be given that the Company
can generate sufficient product revenue to become profitable or generate
positive cash flow from operations at all or on a sustained basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Equipment is stated at cost and depreciated over the estimated useful lives
of the assets (3-5 years) using the straight-line method. Leasehold improvements
are stated at cost and amortized over the shorter of the life of the lease or
the remaining useful life of the asset using the straight-line method.
PATENT COSTS
The Company capitalizes certain costs related to patent applications.
Accumulated costs are amortized over the estimated economic lives of the patents
using the straight-line method, commencing at the time the patents are issued.
Costs related to patent applications are written off to expense at the time such
costs are deemed to have no continuing value.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are expensed as incurred.
F-7
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE UNDER COLLABORATIVE AGREEMENTS
Revenue under collaborative agreements is generally recognized over the term
of the agreement or on the achievement of certain milestones. Advance payments
received in excess of amounts earned are classified as deferred revenue.
NET LOSS PER SHARE
Basic and diluted net loss per share for each of the three years in the
period ended December 31, 1998, has been computed using the weighted average
number of shares of common stock outstanding during the periods pursuant to
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Diluted loss per share does not include any stock options as the effect would be
antidilutive. See Note 6 for information on the number of options outstanding
and the weighted average exercise price at December 31, 1998, 1997 and 1996.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes."
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments such as accounts receivable,
accounts payable and accrued expenses reasonably approximate fair value because
of the short maturity of these items. The Company believes the carrying amounts
of the Company's notes payable and obligations under capital leases approximate
fair value because the interest rates on these instruments change with, or
approximate, market interest rates.
COMPREHENSIVE INCOME
The Company has implemented Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), "Reporting Comprehensive Income." This statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Accordingly,
in addition to reporting net income (loss) under the current rules, the Company
was required to display the impact of any unrealized gain or loss on marketable
securities as a component of comprehensive income and to display an amount
representing total comprehensive income for each period presented. The Company
has presented the required information in the Statements of Stockholders'
Equity.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee issued AICPA
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). This statement provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. The statement identifies characteristics of internal use
software and assists in determining when computer software is for internal use.
SOP 98-1 is
F-8
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
effective for fiscal years beginning after December 15, 1998, with earlier
application permitted. The Company has not determined the impact of the adoption
of SOP 98-1 as this is highly dependent upon the nature, timing and extent of
future internal use software development.
The Company has adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
and, has determined that it operates in one business segment dedicated to
research in gene delivery technology.
2. CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company invests its excess cash in debt instruments of financial
institutions, corporations with strong credit ratings, and in U.S. government
obligations. The Company has established guidelines relative to diversification
and maturities that maintain safety and liquidity. These guidelines are
periodically reviewed and modified to take advantage of trends in yields and
interest rates. Cash equivalents are short-term, highly liquid investments with
original maturities of less than three months. Cash equivalents at December 31,
1998 and 1997, consist primarily of $11,671,743 and $12,080,473, respectively,
in commercial paper, federal agency discount notes and money market funds.
The Company has adopted Statement of Financial Accounting Standards No. 115
("SFAS 115"), "Accounting for Certain Investments in Debt and Equity
Securities," which requires that the Company's marketable securities be
classified as available-for-sale and that unrealized holding gains or losses are
recorded as a separate component of stockholders' equity. Realized gains or
losses, calculated based on the specific identification method, were not
material for the years ended December 31, 1998, 1997 and 1996.
At December 31, 1998, marketable securities consisted of the following:
AMORTIZED COST MARKET VALUE UNREALIZED GAIN
-------------- ------------ ---------------
U.S. Government Obligations...... $ 5,508,897 $ 5,529,915 $21,018
Commercial Paper................. 21,037,602 21,086,024 48,422
----------- ----------- -------
Total Marketable Securities...... $26,546,499 $26,615,939 $69,440
=========== =========== =======
Approximately 60%, 36% and 4% of these securities mature within one, two and
three years, respectively, of December 31, 1998.
At December 31, 1997, marketable securities consisted of the following:
AMORTIZED COST MARKET VALUE UNREALIZED GAIN
-------------- ------------ ---------------
U.S. Government Obligations...... $12,978,062 $12,982,090 $ 4,028
Commercial Paper................. 20,395,392 20,415,392 20,000
----------- ----------- -------
Total Marketable Securities...... $33,373,454 $33,397,482 $24,028
=========== =========== =======
F-9
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. SIGNIFICANT CONTRACTS AND LICENSE AGREEMENTS
MERCK & CO., INC.
The Company has entered into three separate agreements with Merck &
Co., Inc. ("Merck") which provide Merck with certain exclusive rights to develop
and commercialize vaccines using the Company's "naked" DNA technology for
certain disease targets. The 1991 and 1997 agreements are for human vaccine
targets and the 1992 agreement is for animal vaccine targets. Prior to 1996,
Merck exercised its options to seven preventive human infectious disease
vaccines using the Company's naked DNA technology pursuant to the 1991
agreement. In 1996, the Company received a $1,000,000 payment from Merck upon
the initiation of a Phase I clinical trial of an experimental DNA vaccine
against influenza virus, one of the seven infectious disease targets covered by
the agreement. Also in 1996, Vical accrued a $500,000 payment from Merck in
conjunction with the issuance of the patent technology covering the agreement.
The payment was subsequently received in 1997. In November 1997, the Company and
Merck amended the 1991 agreement and granted Merck certain rights to develop and
market therapeutic vaccines against the human immunodeficiency virus (HIV) and
hepatitis B virus (HBV). Under the amended agreement, Merck made an investment
of $5,000,000 for approximately 262,000 shares of the Company's common stock
including a twenty-five percent premium over the average per share closing price
for the twenty trading days prior to the date of the agreement. The premium of
$1,000,000 on the investment was reflected in revenue in 1997 and the balance of
the investment, net of costs to issue the shares of stock, was reflected in
common stock and additional paid-in capital.
The September 1997 agreement between the Company and Merck granted Merck the
rights to use the Company's naked DNA technology to deliver certain growth
factors as potential treatments for a range of applications including
revascularization. The agreement resulted in an initial payment to the Company
of $2,000,000. Through December 31, 1998, the Company had received a total of
$19,130,000 (including the payment for the investment for common stock) under
these agreements of which $0, $3,000,000, and $1,500,000 was recognized as
revenue in 1998, 1997, and 1996, respectively. All three agreements provide for
the Company to receive additional payments based upon achievement of certain
defined milestones and royalty payments based on net product sales.
PASTEUR MERIEUX CONNAUGHT
In September 1994, the Company entered into an agreement with Pasteur
Merieux Connaught ("PMC") that includes a research collaboration and options for
PMC to take exclusive licenses to Vical's naked DNA vaccine technology for each
of five vaccine targets. In order to maintain the options, PMC will be required
to pay Vical option fees as specified in the agreement. In addition, Vical was
paid an annual research fee through September 1997 by PMC for expenses incurred
in performing certain preclinical work as defined in the agreement. PMC renewed
options and exercised an option in 1995. In 1996, PMC exercised three options,
extended one option, and added a new option. In 1997, PMC paid the Company
$1,000,000 as a milestone payment under the agreement because the Company and
PMC began a Phase I clinical trial of an experimental vaccine against the
parasite that causes malaria. The Company and PMC are sponsoring the trial which
is being conducted by the U.S. Naval Medical Research Institute and the U.S.
Army Medical Research Institute of Infectious Diseases. Through December 31,
1998, Vical has received $7,816,000 of which $239,000, $2,399,000, and
$2,746,000, was recognized as revenue in 1998,
F-10
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. SIGNIFICANT CONTRACTS AND LICENSE AGREEMENTS (CONTINUED)
1997, and 1996, respectively. The agreement provides for the Company to receive
additional payments based upon achievement of certain defined milestones and
royalty payments based on net product sales.
RHONE-POULENC RORER PHARMACEUTICALS, INC.
In October 1997, the Company and Rhone-Poulenc Rorer Pharmaceuticals. Inc.
("RPR") entered into an agreement granting RPR an exclusive worldwide license to
use the Company's naked DNA gene delivery technology to develop certain gene
therapy products for potential treatment of neurodegenerative diseases. Under
the terms of the agreement, the Company received $1,000,000 which was recognized
as revenue in 1997. This agreement provides for the Company to receive
additional payments based upon achievement of certain defined milestones and
royalty payments based on net product sales.
CENTOCOR, INC.
In February 1998, the Company signed an agreement allowing Centocor, Inc.
("Centocor") to use Vical's naked DNA technology to develop and market
gene-based vaccines for the potential treatment of certain types of cancer. The
agreement resulted in a payment to Vical of $2,200,000, which was recognized as
revenue in 1998. The payment represented an initial payment of $2,000,000 under
the license agreement and reimbursement of $200,000 of patent costs. The Company
may receive further payments plus royalties if Centocor successfully develops
products using the Vical technology. The agreement grants to Centocor exclusive
worldwide licenses and options to license Vical's naked DNA technology to
deliver certain antigens to induce immune responses against the associated
cancer cells.
BOSTON SCIENTIFIC CORPORATION
In September 1998, the Company and Boston Scientific Corporation entered
into a license and option agreement for the development of catheter-based
intravascular gene delivery technology. The Company received $1,100,000 which
was recognized as revenue in 1998. The agreement also provides for the Company
to receive royalty payments on net product sales.
NAVAL MEDICAL RESEARCH INSTITUTE
In September 1998, the Company signed a cooperative agreement with the
Office of Naval Research for funding of up to $2,700,000 to develop a multi-gene
malaria DNA vaccine and test its ability to protect humans against malaria. The
Company recognized $697,000 of contract revenue under this agreement in 1998.
OTHER RESEARCH AND LICENSING AGREEMENTS
The Company also received revenue under research and licensing agreements
with other entities including the U.S. government of which approximately
$1,585,000, $1,404,000, and $2,494,000, was recognized as revenue during the
years ended December 31, 1998, 1997, and 1996, respectively. Included in these
amounts is revenue recognized for a corporate alliance
F-11
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. SIGNIFICANT CONTRACTS AND LICENSE AGREEMENTS (CONTINUED)
entered into in March 1995 relating to DNA vaccines in the animal health area
with Merial (a joint venture between Merck and Rhone Merieux), a leading
manufacturer and marketer of animal health products worldwide. The agreement
includes options for Merial to take exclusive licenses to Vical's naked DNA
vaccine technology and the cytofectin technology to develop and commercialize
certain gene-based products for use in the prevention of infectious diseases in
domesticated animals. In 1996, the agreement was extended to March 1998. In
1997, a patent milestone payment was made to the Company pursuant to the
agreement. In 1998 a payment was made to the Company and the agreement was
extended to March 1999. If Merial exercises its license options, cash payments
and royalties on net sales would be due to the Company.
In 1996, the Company received $1,100,000 and recognized revenue of
$1,300,000, under a 1993 agreement with Genzyme Corporation. This agreement was
for the exercise of an option to obtain exclusive worldwide license rights
related to the use of the Company's lipid technology in the treatment of cystic
fibrosis. No cash was received and no revenue was recognized under this
agreement in 1998 or 1997. Under a U.S. government agreement that commenced in
the first quarter of 1996 and ended June 30, 1997, the Company and the Naval
Medical Research Institute were awarded a grant that provided $1,000,000 to
support further development of a malaria vaccine based on Vical's naked DNA
vaccine technology. In December 1996, the Company also recognized $92,000 of
revenue under an agreement which expired in December 1996 with Baxter
International, Inc.
Under separate agreements, the Company is obligated to pay third parties
10 percent of certain payments received by the Company under the Merck, PMC,
RPR, Merial, Centocor, Boston Scientific Corporation and Pfizer, Inc. (see
"Note 10--Subsequent Event") agreements.
4. OTHER FINANCIAL DATA
Accounts payable and accrued expenses consisted of the following at
December 31, 1998 and 1997:
1998 1997
---------- ----------
Employee compensation.............................. $ 692,716 $ 678,588
Accounts payable................................... 768,796 327,617
Accrued clinical trials costs...................... 492,914 310,891
Other accrued liabilities.......................... 326,826 107,507
---------- ----------
$2,281,252 $1,424,603
========== ==========
F-12
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
5. COMMITMENTS
LEASES
The Company leases its office and research facilities and certain equipment
under operating and capital leases. The minimum annual rents on the office and
research facilities are subject to increases based on changes in the Consumer
Price Index subject to certain minimum and maximum annual increases. The Company
is also required to pay taxes, insurance and operating costs under the
facilities leases. The equipment capital leases are secured by substantially all
equipment of the Company.
OPERATING
LEASES CAPITAL LEASES
---------- --------------
Years ended December 31,
1999............................................ $1,076,700 $ 566,014
2000............................................ 460,788 538,482
2001............................................ 116,241 186,781
2002............................................ -- 84,896
2003............................................ -- --
---------- ----------
Total minimum lease payments...................... $1,653,729 1,376,173
==========
Less amount representing interest................. (154,900)
----------
Present value of capital lease payments........... 1,221,273
Less current portion.............................. (473,466)
----------
Long-term obligations under capital leases........ $ 747,807
==========
Rent expense for the years ended December 31, 1998, 1997, and 1996, was
$998,195, $969,899, and $807,713, respectively.
Cost and accumulated depreciation of equipment under capital leases were as
follows:
ACCUMULATED
COST DEPRECIATION NET
---------- ------------ ----------
December 31, 1998...................... $2,163,877 $1,109,781 $1,054,096
December 31, 1997...................... 2,312,876 1,066,488 1,246,388
NOTES PAYABLE
The Company has a term loan which bears interest at the bank's prime rate
(8.25% at December 31, 1998) plus .5%, or the Company may alternatively choose
to have its borrowings bear interest at the LIBOR rate plus 3.25%. The term loan
is secured by any Company deposits at the bank, however, the Company is not
required to, and does not, maintain any deposits at the bank. The term loan has
a fifteen-month remaining amortization period. At December 31, 1998, the loan
balance was $267,216, including $213,773 reflected in current liabilities.
F-13
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
5. COMMITMENTS (CONTINUED)
RESEARCH AND LICENSE AGREEMENTS
In 1998 and 1997, the Company continued research and exclusive license
agreements with various universities for continuing research and license rights
to technology related to gene therapy. The agreements generally grant the
Company the right to commercialize any product derived from specified
technology. Fees paid and future obligations on these agreements are not
significant.
6. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company's certificate of incorporation, as amended, authorizes the
issuance of up to 5,000,000 preferred shares. No shares of preferred stock were
outstanding at December 31, 1998 or 1997.
COMMON STOCK
The Company's certificate of incorporation, as amended, authorizes the
issuance of up to 40,000,000 common shares. Common stock shares totaling
15,866,544, and 15,731,316 were outstanding at December 31, 1998 and 1997,
respectively.
STOCK PLAN AND DIRECTORS OPTION PLAN
The Company has a stock plan ("Stock Incentive Plan of Vical Incorporated")
under which 2,450,000 shares of common stock are reserved for issuance to
employees, non-employee directors and consultants of the Company. The plan
provides for the grant of incentive and nonstatutory stock options and the
direct award or sale of shares. The exercise price of stock options must equal
at least the fair market value on the date of grant. The maximum term of options
granted under the plan is ten years. Except for annual grants to directors which
vest at the next annual meeting, options generally vest 25% on the first
anniversary of the date of grant, with the balance vesting quarterly over the
remaining three years. The plan has also limited the number of options that may
be granted to any plan participant in a single calendar year to 300,000 shares.
The Company also has a directors stock option plan ("Directors Plan") that
provides for the issuance to non-employee directors of up to 210,000 shares of
the Company's common stock, of which options for 202,500 shares have been
granted. The initial grant to a director of options under this plan generally
vests 25% on the first anniversary of the date of grant, with the balance
vesting quarterly over the remaining three years. In 1997, the stockholders
approved an amendment to the Stock Incentive Plan of Vical Incorporated allowing
non-employee directors to receive grants under that plan and, accordingly, it is
not anticipated that there will be any future grants under the Directors Plan.
F-14
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes stock option transactions for the Company's
stock option plans for the years ended December 31, 1998, 1997 and 1996:
WEIGHTED AVE. WEIGHTED AVE.
SHARES EXERCISE PRICE FAIR VALUE OF GRANTS
--------- -------------- --------------------
OUTSTANDING, DECEMBER 31, 1995................... 749,912 $ 7.60
Granted........................................ 456,350 $15.99 $11.95
Exercised...................................... (32,317) $ 5.48
Forfeited...................................... (14,264) $10.97
---------
OUTSTANDING, DECEMBER 31, 1996................... 1,159,681 $10.92
Granted........................................ 403,845 $14.14 $10.17
Exercised...................................... (72,922) $ 5.10
Forfeited...................................... (48,106) $13.25
---------
OUTSTANDING, DECEMBER 31, 1997................... 1,442,498 $12.04
Granted........................................ 580,875 $15.56 $11.12
Exercised...................................... (135,228) $ 7.88
Forfeited...................................... (73,100) $13.99
---------
OUTSTANDING, DECEMBER 31, 1998................... 1,815,045 $13.39
=========
The following table summarizes information about stock options outstanding
under the Company's stock option plans at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------- -------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AS OF 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/98 EXERCISE PRICE
- --------------------- -------------- ---------------- -------------- -------------- --------------
0$.1600 - $13.2500... 457,284 6.1 $ 7.50 376,850 $ 6.75
1$3.3750 - $15.0000.. 455,050 7.8 $14.00 241,363 $13.82
1$5.1875 - $15.5000.. 582,238 9.1 $15.36 96,838 $15.20
1$5.6250 - $20.5000.. 320,473 8.5 $17.40 129,778 $18.39
--------- -------
0$.1600 - $20.5000... 1,815,045 7.9 $13.39 844,829 $11.53
The number of shares and weighted average price of options exercisable at
December 31, 1998, 1997 and 1996 were 844,829 shares at $11.53, 688,126 shares
at $9.90, and 487,750 shares at $6.82, respectively.
The Company has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's stock option plans been
determined consistent with the provisions of SFAS 123, the
F-15
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. STOCKHOLDERS' EQUITY (CONTINUED)
Company's net loss and loss per share would have increased to the pro forma
amounts indicated below:
1998 1997 1996
----------- ---------- ----------
Net loss--as reported................. $ 7,480,507 $5,611,231 $5,080,591
Net loss--pro forma................... $11,645,607 $8,878,712 $6,497,447
Net loss per share--as reported....... $ .47 $ .36 $ .33
Net loss per share--pro forma......... $ .74 $ .57 $ .42
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants: risk free interest rates of 5.09% (1998), 5.99%
(1997) and 6.57% (1996) and, expected volatility of 71% (1998), 70% (1997) and
74% (1996). An expected option life of 5 years and a dividend rate of zero is
assumed for all years presented.
Because SFAS 123 has not been applied to options granted prior to
January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
7. RELATED PARTIES
Included in other assets at December 31, 1998 and 1997, is the long-term
portion of notes receivable, representing amounts due from certain officers and
employees of the Company. Imputed interest is applied at the applicable federal
rate. The loan agreements allow for the notes to be forgiven under certain
circumstances over the next three years. The long-term portion is $60,000 and
$25,000 at December 31, 1998 and 1997, respectively. The current portion,
included in receivables and other, is $55,000 and $25,000 at December 31, 1998
and 1997, respectively.
8. INCOME TAXES
As of December 31, 1998, the Company has available net operating loss
carryforwards of approximately $36,700,000 and research and development credit
carryforwards of approximately $1,700,000 to reduce future federal income taxes,
if any. These carryforwards expire through 2018 and are subject to review and
possible adjustment by the Internal Revenue Service.
The Tax Reform Act of 1986 limits a company's ability to utilize certain net
operating loss and tax carryforwards in the event of cumulative change in
ownership in excess of 50%, as defined. The Company has completed numerous
financings that have resulted in a change in ownership in excess of 50%, as
defined. The utilization of net operating loss and tax credit carryforwards may
be limited due to these ownership changes.
The Company has a deferred tax asset of approximately $17,400,000 related
primarily to its net operating loss and tax credit carryforwards. A valuation
allowance has been recognized to offset the entire amount of the deferred tax
asset as realization of such asset is uncertain.
F-16
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
9. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution savings plan under section 401(k) of
the Internal Revenue Code. The plan covers substantially all employees. The
Company matches employee contributions made to the plan according to a specified
formula. The Company's matching contributions totaled approximately $95,000,
$94,000, and $78,000, in 1998, 1997, and 1996, respectively.
10. SUBSEQUENT EVENT
In January 1999, Pfizer Inc. entered into a license and option agreement and
a stock purchase agreement with the Company. Under the terms of the agreements
Pfizer Inc. paid the Company $1,000,000 in license fees and $6,000,000 for the
purchase of approximately 318,000 shares of common stock at $18.87 per share,
reflecting a 25% premium. The license fee and the $1,200,000 premium on the
purchase of stock will be recognized as revenue in 1999, and the balance of the
common stock investment, net of any cost to issue the shares of stock, will be
reflected in common stock and additional paid-in capital in 1999.
11. SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of the unaudited quarterly results of operations
for the years ended December 31, 1998 and 1997 (in thousands, except per share
amounts):
QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
1998
Revenues..................................... $ 2,732 $ 560 $ 1,696 $ 932
Research and development costs............... 3,095 3,058 3,158 2,743
Total operating costs and expenses........... 4,062 4,072 4,012 3,558
Net loss..................................... (721) (2,935) (1,750) (2,075)
Net loss per common share (basic and
diluted)................................... (.05) (.19) (.11) (.13)
Shares used in per share calculation......... 15,753 15,789 15,817 15,892
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
1997
Revenues..................................... $ 1,126 $ 867 $ 3,480 $ 2,330
Research and development costs............... 2,794 2,797 3,319 3,026
Total operating costs and expenses........... 3,691 3,678 4,247 4,054
Net loss..................................... (2,002) (2,267) (225) (1,117)
Net loss per common share (basic and
diluted)................................... (.13) (.15) (.01) (.07)
Shares used in per share calculation......... 15,423 15,448 15,458 15,609
F-17
VICAL INCORPORATED
BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 11,186,838 $ 13,567,817
Marketable securities--available-for-sale................. 27,748,337 26,615,939
Receivables and other..................................... 1,797,903 1,432,711
------------ ------------
Total current assets.................................... 40,733,078 41,616,467
------------ ------------
Property and Equipment:
Equipment................................................. 5,468,711 5,139,944
Leasehold improvements.................................... 1,646,023 1,558,554
------------ ------------
7,114,734 6,698,498
Less--accumulated depreciation and amortization......... (5,487,129) (4,992,121)
------------ ------------
1,627,605 1,706,377
------------ ------------
Patent costs, net of accumulated amortization............... 1,371,529 1,387,936
Other assets................................................ 147,377 133,385
------------ ------------
Total Assets............................................ $ 43,879,589 $ 44,844,165
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses..................... $ 2,881,079 $ 2,281,252
Current portion of capital lease obligations.............. 613,460 473,466
Current portion of notes payable.......................... 106,887 213,773
Deferred revenue.......................................... 710,637 250,000
------------ ------------
Total current liabilities............................... 4,312,063 3,218,491
------------ ------------
Long-Term Obligations:
Long-term obligations under capital leases................ 712,360 747,807
Notes payable............................................. -- 53,443
------------ ------------
Total long-term obligations............................. 712,360 801,250
------------ ------------
Stockholders' Equity:
Preferred stock, $0.01 par value--5,000,000 shares
authorized--none outstanding............................ -- --
Common stock, $0.01 par value--40,000,000 shares
authorized--16,198,723 and 15,866,544 shares issued and
outstanding at September 30, 1999 and December 31, 1998,
respectively............................................ 161,987 158,665
Additional paid-in capital................................ 83,259,509 78,332,483
Accumulated other comprehensive income (loss)............. (116,123) 69,440
Accumulated deficit....................................... (44,450,207) (37,736,164)
------------ ------------
Total stockholders' equity.............................. 38,855,166 40,824,424
------------ ------------
Total Liabilities and Stockholders' Equity.............. $ 43,879,589 $ 44,844,165
============ ============
See accompanying notes.
F-18
VICAL INCORPORATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Revenues:
License/royalty revenue............. $ 495,024 $ 1,536,992 $ 3,770,731 $ 4,617,138
Contract revenue.................... 733,817 158,834 1,991,750 370,694
----------- ----------- ----------- -----------
1,228,841 1,695,826 5,762,481 4,987,832
----------- ----------- ----------- -----------
Expenses:
Research and development............ 3,514,247 3,157,774 10,866,310 9,310,700
General and administrative.......... 1,066,402 854,716 3,201,137 2,836,114
----------- ----------- ----------- -----------
4,580,649 4,012,490 14,067,447 12,146,814
----------- ----------- ----------- -----------
Loss from operations.................. (3,351,808) (2,316,664) (8,304,966) (7,158,982)
Interest income..................... 548,490 607,846 1,687,750 1,879,342
Interest expense.................... 33,489 41,057 96,827 126,051
----------- ----------- ----------- -----------
Net loss.......................... $(2,836,807) $(1,749,875) $(6,714,043) $(5,405,691)
=========== =========== =========== ===========
Net loss per share (basic and
diluted--Note 2).................... $ (0.18) $ (0.11) $ (0.42) $ (0.34)
=========== =========== =========== ===========
Weighted average shares used in
computing net loss per share (Note
2).................................. 16,196,078 15,817,412 16,114,024 15,786,838
=========== =========== =========== ===========
See accompanying notes.
F-19
VICAL INCORPORATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
----------- -----------
OPERATING ACTIVITIES:
Net loss.................................................. $(6,714,043) $(5,405,691)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 795,742 694,653
Write-off of abandoned patent application costs......... -- 94,800
Change in operating assets and liabilities:
Receivables and other................................... (365,192) (769,729)
Accounts payable and accrued expenses................... 599,827 152,134
Deferred revenue........................................ 460,637 321,739
----------- -----------
Net cash used in operating activities................. (5,223,029) (4,912,094)
----------- -----------
INVESTING ACTIVITIES:
Marketable securities..................................... (1,317,960) 5,045,860
Capital expenditures...................................... (182,509) (25,388)
Deposits and other........................................ 15,008 (2,854)
Patent expenditures....................................... (53,800) (155,509)
----------- -----------
Net cash provided from (used in) investment
activities.......................................... (1,539,261) 4,862,109
----------- -----------
FINANCING ACTIVITIES:
Principal payments under capital lease obligations........ (388,707) (369,375)
Payments on notes payable................................. (160,329) (213,773)
Issuance of common stock, net............................. 4,930,347 888,378
----------- -----------
Net cash provided from financing activities........... 4,381,311 305,230
----------- -----------
Net increase (decrease) in cash and cash equivalents........ (2,380,979) 255,245
Cash and cash equivalents at beginning of period............ 13,567,817 12,157,149
----------- -----------
Cash and cash equivalents at end of period.................. $11,186,838 $12,412,394
=========== ===========
Supplemental Disclosure of Non-Cash Investing and Financing
Activities:
Equipment acquired under capital leases................... $ 493,254 $ 273,792
=========== ===========
See accompanying notes.
F-20
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Vical was incorporated in April 1987 and has devoted substantially all of
its resources since that time to its research and development programs. The
Company is currently focusing its resources on the development of its naked DNA
and related technologies.
BASIS OF PRESENTATION
The information contained herein has been prepared in accordance with
instructions for Form 10-Q. The information at September 30, 1999, and for the
three-month and nine-month periods ended September 30, 1999 and 1998, is
unaudited. In the opinion of management, the information reflects all
adjustments necessary to present fairly the financial position and results of
operations for the interim periods. All such adjustments are of a normal
recurring nature. Interim results are not necessarily indicative of results for
a full year. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. For a
presentation including all disclosures required by generally accepted accounting
principles, these financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1998, included
elsewhere in this prospectus.
2. NET LOSS PER SHARE
Net loss per share (basic and diluted) for the three-month and nine-month
periods ended September 30, 1999 and 1998, has been computed using the weighted
average number of common shares outstanding during the respective periods.
Diluted loss per share does not include any assumed exercise of stock options as
the effect would be antidilutive.
3. COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) represents unrealized gain or
loss on marketable securities. For the three-month periods ended September 30,
1999 and 1998, other comprehensive income (loss) was ($23,641) and $148,889,
respectively, and total comprehensive loss was $2,860,448 and $1,600,986,
respectively. For the nine-month periods ended September 30, 1999 and 1998,
other comprehensive income (loss) was ($185,563), and $129,433, respectively,
and total comprehensive loss was $6,899,608 and $5,276,558, respectively.
4. COMMITMENTS
Vical renewed leases on three facilities. Two leases were scheduled to
terminate on November 30, 1999, but will now both expire on December 1, 2004.
Vical has the option to renew both leases for an additional five-year period.
Under one lease, Vical increased its office space by approximately 5,100 square
feet effective August 1, 1999. A third lease was amended in
F-21
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
4. COMMITMENTS (CONTINUED)
November 1999 and now extends to November 30, 2004. This lease can be extended
for two additional five-year periods. Total leased space effective August 1,
1999, was approximately 43,000 square feet. Total monthly rental on all
facilities, including common area maintenance costs, was approximately $107,000
effective August 1, 1999. Minimum lease payments for operating leases are as
follows:
Years ending December 31,
1999........................................................ $1,208,000
2000........................................................ 1,340,000
2001........................................................ 1,384,000
2002........................................................ 1,431,000
2003........................................................ 1,479,000
2004........................................................ 1,395,000
----------
Total minimum lease payments for operating leases....... $8,237,000
==========
5. SUBSEQUENT EVENTS
On November 3, 1999, Vical received a $2 million payment from Merck in
accordance with a 1997 license agreement. The payment extends Merck's exclusive
worldwide rights to use Vical's patented naked DNA technology to develop and
market therapeutic vaccines against human immunodeficiency virus (HIV) and
hepatitis B virus (HBV).
In November 1999, Vical entered into an unsecured line of credit agreement
with a bank to provide financing for leasehold improvements. Under the terms of
the agreement, Vical may borrow up to $1,000,000 through May 1, 2000. Interest
is payable monthly for any borrowings beginning November 1, 1999. Commencing
June 1, 2000, the outstanding principal and interest will be repaid in 42 equal
monthly payments. Interest under this agreement is at the bank's reference rate
minus .25 percentage points. The borrowings can be prepaid without penalty. The
agreement contains certain financial covenants.
F-22
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
Page
--------
Prospectus Summary................... 3
Risk Factors......................... 6
Forward-Looking Statements........... 13
Use of Proceeds...................... 14
Price Range of Common Stock and
Dividend Policy.................... 15
Capitalization....................... 16
Selected Financial Data.............. 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 18
Business............................. 23
Management........................... 41
Underwriting......................... 44
Legal Matters........................ 45
Experts.............................. 45
Where You Can Find More Information.. 45
Incorporation by Reference........... 46
Index to Financial Information....... F-1
2,500,000 Shares
VICAL INCORPORATED
Common Stock
-------------
[LOGO]
-------------
GOLDMAN, SACHS & CO.
ROBERTSON STEPHENS
SG COWEN
FIRST UNION SECURITIES, INC.
Representatives of the Underwriters
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered hereby, other than
underwriting discounts and commissions. All amounts are estimated except the
Securities and Exchange Commission registration fee and the Nasdaq National
Market listing fee.
AMOUNT
---------
SEC registration fee........................................ $ 28,463
NASD fee.................................................... 6,440
Blue Sky fees and expenses.................................. 7,500
Accounting fees and expenses................................ 75,000
Legal fees and expenses..................................... 100,000
Printing and engraving...................................... 250,000
Registrar and transfer agent's fees......................... 10,000
NNM listing fee............................................. 17,500
Miscellaneous fees and expenses............................. 5,097
--------
Total................................................... $500,000
========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "Delaware GCL")
permits our board of directors to indemnify any person against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with any
threatened, pending or completed action, suit or proceeding in which such person
is made a party by reason of his or her being or having been a director,
officer, employee or agent of ours, in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Act"). The Delaware GCL provides that indemnification pursuant
to its provisions is not exclusive of other rights of indemnification to which a
person may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors, or otherwise.
Article X of our Restated Certificate of Incorporation, as amended, and
Article V of our Bylaws, provide for indemnification of our directors, officers,
employees and other agents to the maximum extent permitted by law.
As permitted by Sections 102 and 145 of the Delaware GCL, our Restated
Certificate of Incorporation eliminates a director's personal liability for
monetary damages to us and our stockholders arising from a breach or alleged
breach of the director's fiduciary duty, except for liability under Section 174
of the Delaware GCL or liability for any breach of the director's duty of
loyalty to us or our stockholders, for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law or for any
transaction in which the director derived an improper personal benefit. In
addition, we have entered into separate indemnification agreements with our
directors and officers that will require us, among other things, to indemnify
them against certain liabilities that may arise by reason of their status or
service as directors or officers to the fullest extent not prohibited by law.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
underwriters of us, our directors and officers, and by us of the underwriters,
for certain liabilities arising under the Act and affords certain rights of
contribution with respect thereto.
II-1
ITEM 16. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- ------------------------------------------------------------
1.1(3) Form of Underwriting Agreement.
4.1(1) Specimen Common Stock Certificate.
4.2(2) Rights Agreement dated as of March 20, 1995 between us and
First Interstate Bank of California.
5.1(3) Opinion of Pillsbury Madison & Sutro LLP.
23.1 Consent of Arthur Andersen LLP.
23.2(3) Consent of Pillsbury Madison & Sutro LLP (included in its
opinion filed as Exhibit 5.1 to this Registration
Statement).
23.3 Consent of Sterne, Kessler, Goldstein & Fox P.L.L.C.
24.1(3) Power of Attorney.
- ------------------------
(1) Incorporated by reference to the exhibit of the same number included in our
registration statement on Form S-3 filed as of August 15, 1995 (File
No. 33-95812).
(2) Incorporated by reference to the exhibit of the same number in our Annual
Report on Form 10-K for the fiscal year ended December 31, 1994 (File
No. 0-21088).
(3) Previously filed.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, (the "Act"), may be permitted to our directors, officers
and controlling persons pursuant to the foregoing provisions, or otherwise, we
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by us of expenses incurred or paid by a
director, officer or controlling person of ours in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, we will, unless in
the opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
We hereby undertake:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430(A) and contained in a form
of prospectus filed by us pursuant to Rule 424(b) (1) or (4) or 497(h) under
the Act shall be deemed to be part of this registration statement as of the
time it was declared effective
(2) That, for the purpose of determining any liability under the Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, we certify that
we have reasonable grounds to believe that we meet all of the requirements for
filing on Form S-3, and have duly caused this amendment to registration
statement to be signed on our behalf by the undersigned, thereunto duly
authorized, in the City of San Diego, State of California, January 19, 2000.
VICAL INCORPORATED
By /s/ MARTHA J. DEMSKI
------------------------------------------
Martha J. Demski
VICE PRESIDENT, CHIEF FINANCIAL OFFICER,
SECRETARY AND TREASURER
Pursuant to the requirements of the Securities Act of 1933, this amendment
to registration statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
President, Chief Executive
* Officer, and Director
------------------------------------------- (Principal Executive
Alain B. Schreiber Officer) January 19, 2000
Vice President, Chief
Financial Officer,
/s/ MARTHA J. DEMSKI Secretary and Treasurer
------------------------------------------- (Principal Financial and
Martha J. Demski Principal Accounting
Officer) January 19, 2000
*
------------------------------------------- Chairman of the Board of
R. Gordon Douglas, Jr. Directors January 19, 2000
*
------------------------------------------- Director
M. Blake Ingle January 19, 2000
*
------------------------------------------- Director
Patrick F. Latterell January 19, 2000
*
------------------------------------------- Director
Gary A. Lyons January 19, 2000
II-3
SIGNATURE TITLE DATE
--------- ----- ----
*
------------------------------------------- Director
Dale A. Smith January 19, 2000
*
------------------------------------------- Director
Philip M. Young January 19, 2000
*By: /s/ MARTHA J. DEMSKI
--------------------------------------
Martha J. Demski
ATTORNEY-IN-FACT
II-4
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
1.1(3) Form of Underwriting Agreement.
4.1(1) Specimen Common Stock Certificate.
4.2(2) Rights Agreement dated as of March 20, 1995 between us and
First Interstate Bank of California.
5.1(3) Opinion of Pillsbury, Madison & Sutro LLP.
23.1 Consent of Arthur Andersen LLP.
23.2(3) Consent of Pillsbury, Madison & Sutro LLP (included in its
opinion filed as Exhibit 5.1 to this Registration
Statement).
23.3 Consent of Sterne, Kessler, Goldstein & Fox P.L.L.C.
24.1(3) Power of Attorney.
- ------------------------
(1) Incorporated by reference to the exhibit of the same number included in our
registration statement on Form S-3 filed as of August 15, 1995 (File
No. 33-95812).
(2) Incorporated by reference to the exhibit of the same number in our Annual
Report of Form 10-K for the fiscal year ended December 31, 1994 (File
No. 0-21088).
(3) Previously filed.