UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/ X / Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the fiscal year ended December 31, 1996, or
/___ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ________ to _________.
Commission file number: 0-21088
VICAL INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 93-0948554
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
9373 TOWNE CENTRE DRIVE, SUITE 100, SAN DIEGO, CA 92121
Address of principal executive offices
(619) 453-9900
Registrant's telephone number including area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Common Stock, Par Value $0.01
Section 12(g) of the Act: Preferred Stock Purchase Rights, Par
Value $0.01 (Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant, based upon the last sale price of the Common Stock reported on the
National Association of Securities Dealers Automated Quotation National Market
System on February 28, 1997, was $233,226,333.
The number of shares of Common Stock outstanding as of February 28, 1997, was
15,426,574.
1
DOCUMENTS INCORPORATED BY REFERENCE
(To the Extent Indicated Herein)
Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the Registrant's
1997 Annual Meeting of Stockholders to be held on June 10, 1997, is
incorporated by reference in Part III, Items 10 (as to directors), 11, 12 and
13 of this Form 10-K.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Vical discovers and develops non-viral, gene-based pharmaceutical
product candidates for human therapy. Gene transfer is an approach to the
treatment and prevention of genetic and acquired diseases in which genes are
introduced into cells in an effort to produce specific proteins needed to
selectively correct or modulate disease conditions. The Company and its
collaborators have developed core technologies that allow direct transfer of
specific genes into cells in vivo (inside the body). The Company believes that
its non-viral, gene-based drug therapy approach may offer safer and more
cost-effective treatment opportunities for many diseases as well as novel
treatment alternatives for certain diseases that are currently poorly
addressed.
Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-K are forward-looking statements
that involve risks and uncertainties, including the timely and successful
development of candidate products, receipt of necessary regulatory approvals
and commercial acceptance of products, the obtaining of proprietary protection
for any such products, the impact of competitive products and pricing and
reimbursement policies, changing market conditions and the other risks detailed
throughout this Form 10-K. Actual results may differ materially from those
projected. These forward-looking statements represent the Company's judgment
as of the date of the filing of this Form 10-K. The Company disclaims,
however, any intent or obligation to update these forward-looking statements.
The key discoveries leading to Vical's proprietary direct gene
transfer technology were that, under certain conditions, some muscle tissues
are able to absorb genetic material directly and subsequently express a desired
protein for periods ranging from weeks to several months. From these basic
findings the Company has developed yield increases and productivity
improvements that have led to what is referred to as "naked DNA" reagents for
gene transfer. In addition, the Company is developing other technologies that
may allow the delivery of DNA directly into certain non-muscle tissues,
including the use of lipid molecules (cytofectins) that facilitate direct
absorption of DNA into cells. The active ingredients of products under
development at Vical consist of highly purified, well-defined gene sequences
produced by conventional fermentation processes. The Company believes that the
broad applicability, ease of manufacturing and potential cost effectiveness of
its gene-based drug therapy approach may provide it with competitive advantages
for commercialization.
Vical is concentrating its research and development activities in:
oncology, infectious diseases and metabolic disorders. Currently, the Company
is developing its cancer and metabolic disorder product candidates internally,
while developing vaccines for infectious diseases primarily in collaboration
with corporate partners.
PRODUCT DEVELOPMENT PROGRAMS
Vical is applying its direct gene transfer technology to the following
therapeutic areas:
ONCOLOGY
The Company is developing a product candidate, Allovectin-7, for the
treatment of various solid tumors. Allovectin-7 is a gene-based product
candidate intended for direct injection into tumor lesions of cancer patients.
The product contains a gene that encodes a foreign tissue antigen (HLA-B7)
which, when injected into tumors, is intended to cause the malignant cells to
bear this antigen on their surface. If this foreign antigen is expressed, the
Company believes that the patient's immune system, which previously failed to
recognize the tumor cells as abnormal, may attack and destroy the cancer cells
as if they were foreign tissue.
After a small pilot trial conducted by the Company's collaborator, Dr.
Gary Nabel of the University of Michigan, Vical initiated Phase I/II clinical
trials with approximately 15 patients for each of three advanced cancer
indications: renal cell carcinoma, melanoma, and colorectal carcinoma. The
trials were designed primarily to test the safety of Allovectin-7 at varying
dosage levels and to assess HLA-B7 gene transfer and expression. Upon
completion of the trials in June 1995, the Company concluded that the gene
transfer was successful in the majority
3
of patients, the treatment appeared to be safe and well-tolerated, and
measurable tumor shrinkage was observed in 7 of 14 patients with advanced
melanoma. In September 1995, Vical commenced multi-center Phase II clinical
testing of Allovectin-7 in five tumor types: melanoma, renal cell carcinoma,
colorectal carcinoma, breast carcinoma and non-Hodgkin's lymphoma. Treatment
of more than 100 patients was completed in December 1996, and initial results
are expected to be presented in 1997. In October 1996, Vical commenced
additional multi-center Phase II clinical testing of Allovectin-7 in
approximately 40 advanced melanoma patients. In addition, Allovectin-7 is
being evaluated, either alone or in combination with approved cancer
therapeutic agents, in several other Phase I/II clinical trials.
In April 1995, Vical initiated clinical testing of Leuvectin, its
second gene-based product candidate intended for direct injection into tumor
lesions of cancer patients. Leuvectin contains a gene that encodes the potent
immunostimulator, IL-2, and a lipid material to facilitate gene uptake. The
Company expects that Leuvectin, when injected into tumors, will cause the
malignant cells to produce and secrete IL-2 in the vicinity of the tumor
lesion. The Company believes that local expression of IL-2 will stimulate the
patient's immune system to attack and destroy the tumor cells. Recombinant
IL-2 protein is a Food and Drug Administration ("FDA")-approved anti-cancer
agent for the treatment of advanced renal cell carcinoma. It has been
investigated widely as a cancer immunotherapeutic agent, but is frequently
associated with serious side effects. Because Vical's gene-based product
candidate is designed to deliver IL-2 only at the site of tumor lesions,
Leuvectin may provide similar efficacy with fewer side effects than systemic
protein-based therapy.
The initial Phase I/II clinical trials were designed primarily to test
the safety of Leuvectin at varying dosage levels and to assess IL-2 gene
transfer and expression. Upon completion of the trials in February 1996, the
Company concluded that the gene transfer was effective in the majority of
patients, the treatment appeared to be safe and well-tolerated, and measurable
tumor shrinkage was observed in 5 of 23 patients with various types of advanced
malignancies. In October 1996, the Company initiated additional multi-center
Phase I/II clinical testing of higher doses of Leuvectin in approximately 45
patients with advanced melanoma, renal cell carcinoma, and soft-tissue sarcoma.
In September 1996, Vical entered into a collaboration with Dr. Ronald
Levy of Stanford University Medical Center to develop a naked DNA anti-idiotype
vaccine, Vaxid, against low-grade non-Hodgkin's B-cell lymphoma. This type of
lymphoma is characterized by a slow growth rate and excellent initial response
to chemotherapy or radiotherapy; however, a regular pattern of relapse to a
diffuse aggressive lymphoma generally occurs for which no curative therapy has
been identified. Vaxid is a DNA plasmid that encodes the patient-specific
idiotype of the B-cell tumor immunoglobulin. The Company believes that
immunization of post-chemotherapy patients with Vaxid could result in the
elimination of residual disease and the prevention of the relapse of disease.
Vaxid is currently under preclinical development and may enter clinical trials
in the second half of 1997.
INFECTIOUS DISEASE VACCINES
Preventive Vaccines. Vical and its collaborators have generated
preclinical data demonstrating that direct intramuscular injection of specific
genes can induce a potent, specific and prolonged immune response to infectious
disease-causing agents. In preclinical models, a direct injection of genes for
antigens of influenza resulted in both antibody-mediated and cell-mediated
immunity that was protective across widely divergent strains of influenza.
Thus, it may be possible, using Vical's naked DNA vaccine technology, to
develop a new generation of preventive vaccine products effective against a
variety of microorganism strains. Additional studies by Vical, its
collaborators and several independent laboratories have extended these findings
to preclinical models for over a dozen infectious diseases, suggesting a wide
array of potential targets for Vical's naked DNA vaccine technology.
In May 1991, Vical entered into a commercial collaborative agreement
with Merck & Co., Inc. ("Merck") to undertake research and development in the
area of infectious disease preventive vaccines. As of April 1995, Merck had
exercised its options to exclusive licenses to use Vical's naked DNA technology
for development of vaccines directed against seven human infectious disease
targets: influenza, HIV, herpes, hepatitis B, hepatitis C, human papilloma and
tuberculosis. Merck initiated a Phase I clinical trial with a preventive DNA
vaccine candidate for influenza in April 1996, and is expected to present
initial results in 1997. Merck has indicated that a preventive DNA vaccine
candidate for herpes simplex may enter a clinical trial in 1997.
4
In September 1994, the Company entered into a collaborative agreement
with Pasteur Merieux Serums & Vaccins, subsequently renamed Pasteur Merieux
Connaught ("PMC"), covering the use of Vical's proprietary naked DNA technology
for developing up to five new vaccine products directed against
cytomegalovirus, respiratory syncytial virus, Lyme disease, helicobacter pylori
and malaria. As of December 31, 1996, PMC had added a new target, herpes
zoster, exercised four of the options, and extended one option. See
"--Collaboration and Licensing Agreements-- Corporate Partners--Merck & Co.,
Inc." and "--Pasteur Merieux Connaught."
Independently, the Company is conducting research on preventive
vaccines for the Epstein-Barr virus (EBV) and chlamydia.
Therapeutic Vaccines. Vical is also developing gene-based therapeutic
vaccines that are intended to stimulate the immune system to eliminate
already-existing infections. For these product opportunities, the Company is
focusing on the treatment of chronic viral infections, including hepatitis B
and herpes.
THERAPEUTIC PROTEINS FOR METABOLIC DISORDERS
Vical's direct gene transfer technology may also permit the
development of sustained-release alternatives to chronically administered
therapeutic proteins. Delivering therapeutic proteins by way of direct gene
injection may represent a cost-effective, more convenient and, possibly safer,
mode of administration than using the protein itself. The Company has entered
into a collaborative agreement with Genzyme Corporation ("Genzyme") for the
treatment of cystic fibrosis. See "--Collaboration and Licensing
Agreements--Corporate Partners--Genzyme Corporation."
5
Vical's product development programs are summarized in the following
table:
- ---------------------------------------------------------------------------------------------------------------------------------
Project Target Indication(s) Development Status(1) Development Rights(2)
- ---------------------------------------------------------------------------------------------------------------------------------
ONCOLOGY
Allovectin-7 Breast Carcinoma Phase II Clinical Trials Vical
Colorectal Carcinoma
Melanoma
Non-Hodgkin's Lymphoma
Renal Cell Carcinoma
Head and Neck Carcinoma Phase I/II Clinical Trial Vical
Leuvectin Melanoma Phase I/II Clinical Trials Vical
Renal Cell Carcinoma
Other Solid Tumors
Vaxid Non-Hodgkin's B-Cell Preclinical Vical
Lymphoma
INFECTIOUS DISEASES
Preventive Vaccines Influenza Phase I Merck
Hepatitis B Research/Preclinical
Hepatitis C Development
Herpes Simplex
HIV
Human Papilloma Virus
Tuberculosis
Cytomegalovirus Research/Preclinical PMC
Helicobacter Pylori Development
Herpes Zoster
Lyme Disease
Malaria
Respiratory Syncytial Virus
Chlamydia Research Vical
Epstein-Barr Virus
Therapeutic Vaccines Hepatitis B Research Vical
Herpes Simplex
Animal Health Vaccines Various Research Rhone Merieux
Merck
THERAPEUTIC PROTEINS
Cystic Fibrosis Transmembrane Cystic Fibrosis Phase I/II Genzyme
Regulator (CFTR)
Hormones Metabolic Disorders Research Vical
(1) As denoted in the table, "Research" indicates research related to
identification and synthesis of lead compounds. "Preclinical
Development" indicates that a specific compound is undergoing
toxicology testing and manufacturing scale-up, among other things, in
preparation for filing an 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
such studies may provide results traditionally obtained in Phase II
trials. Such trials are frequently referred to as "Phase I/II"
trials. See "--Government Regulation."
(2) See "--Collaboration and Licensing Agreements--Corporate Partners."
6
TECHNOLOGY
GENE TRANSFER OVERVIEW
Gene transfer is an approach to the treatment and prevention of
genetic and acquired diseases in which genes are introduced into cells to
direct the production of specific proteins needed to selectively correct or
modulate disease conditions. A typical human cell 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 the 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 aberrant expression of even a single gene can severely alter a
cell's normal function, frequently resulting in a disease condition.
A variety of methods have been developed to transfer genes into cells.
The most common approach used to date relies on viral gene transfer. The use
of viruses takes advantage of the natural ability of these organisms to insert
their own genes into a host cell and use the host's metabolic machinery to
produce proteins essential for the survival and function of the virus. In gene
transfer applications, viruses are genetically modified to replace certain
viral genes with desired genes and inhibit the ability of the virus to
reproduce and infect other cells. The most widely tested viral gene transfer
systems to date have been based on retroviruses. Successful application of
retroviral gene transfer processes entails two specific technical requirements.
First, the viral DNA carrying the gene of interest must become stably
integrated into the DNA of the host cell. Such integration results in a
permanent genetic alteration of the modified cell and of all daughter cells
resulting from cell division of the parent cell. Second, the viral DNA
modified with a specific gene generally must be administered to the cells ex
vivo (outside the body). Once the DNA is incorporated, the cells must be
expanded in number, cleansed of contaminants, and then reintroduced into the
patient. More recently, several companies and academic institutions have begun
testing viral gene transfer systems based on other types of viruses, especially
adenoviruses, which may be suitable for direct administration to patients.
While more convenient to administer, these systems may, however, be hampered by
the development of an immune response against the viral components of the
products which may prevent effective repeat administrations.
VICAL'S DIRECT GENE TRANSFER TECHNOLOGY
Vical has developed a direct, non-viral gene transfer technology which
it believes will potentially allow a safer and more cost- effective method of
gene therapy in a number of therapeutic applications. Vical and its
collaborators are developing core technologies to allow the non-viral delivery
of genes into cells directly in vivo. The initial observation that led to
Vical's direct gene transfer approach was that, under certain conditions, some
tissues, specifically myocardial (heart) and peripheral striated skeletal
muscle tissues, are able to directly absorb genetic material into cells and
subsequently express the desired protein for periods ranging from weeks to
several months. In addition, the Company is developing other proprietary gene
transfer methods to allow the delivery of genes directly into certain
non-muscle tissues, including the use of lipid molecules (cytofectins) that
facilitate direct absorption of genes into cells.
Vical's direct gene transfer 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, or flanking sequences,
that control the rate and location of protein expression. These plasmids can
be manufactured through conventional fermentation and purification techniques,
and in some applications will be formulated with a cytofectin.
Vical's gene-based products are intended to be administered to
patients by different techniques depending on the therapeutic application and
the target tissue. For many applications, direct intramuscular injection of a
pure plasmid DNA in an aqueous solution may suffice. For delivery to
non-muscle tissues, the Company anticipates that the plasmids will generally be
formulated with a cytofectin.
Cytofectins are proprietary lipid substances that Vical is developing
specifically as drug delivery vehicles for its direct gene transfer technology.
These lipid molecules are positively charged, which allows them to bind
effectively to negatively charged molecules of DNA. The resulting
cytofectin-DNA complex can be delivered in an
7
aqueous solution to tissues in vivo using a syringe or a catheter. Cytofectins
are capable of delivering DNA to the interior of the target cell while allowing
the DNA to evade metabolic processes that normally degrade internalized
material. Cytofectins appear to be superior for the in vivo delivery of DNA,
as compared with other lipid-based vehicles (e.g., liposomes), in which there
is rapid degradation of the genetic material following ingestion by cells.
The Company believes that the potential benefits of Vical's direct
gene transfer technology may include:
- Convenience. Vical's gene-based drug therapy is intended to
be directly administered to patients similar to conventional
pharmaceuticals.
- Safety. Vical's anticipated products will contain no viral
structural components that may induce an unwanted immune response or
infection.
- Ease of Manufacturing. Vical's products are expected to be
manufactured using conventional fermentation techniques and
standardized purification procedures.
- Cost-Effectiveness. The Company believes that its direct gene
transfer technology will prove more cost-effective than gene transfer
systems requiring ex vivo manipulation of cells on a
patient-by-patient basis. In addition, in certain clinical
situations, administering a gene-based drug consisting of DNA encoding
a particular protein may prove to be more cost-effective than
administering a therapeutically effective dose of the protein itself.
This is because the DNA, once introduced into the body, is intended to
stimulate the production of a therapeutic protein over a prolonged
period of time.
ONCOLOGY
Cancer is a disease in which certain cells grow uncontrolled by the
body's normal self-regulatory mechanisms. Traditional chemotherapy seeks to
control cancer by killing rapidly dividing cells. However, a number of
non-malignant cells in the body, such as intestinal epithelium and bone marrow
cells, are also rapidly dividing and hence are highly susceptible to
chemotherapy. Thus, doses sufficient to eradicate the cancer often cannot be
administered without life-threatening side effects.
A therapeutic approach that selectively kills tumor cells would be far
superior to currently available therapies. One such approach would be the
generation of a specific immune response capable of recognizing cancer cells as
foreign. It is generally believed that the immune system is capable of
selectively recognizing cancer cells as abnormal and destroying 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 cytotoxic T lymphocytes
("CTLs") response is not powerful enough to kill all of the abnormal cells. A
variety of methods have been used to augment the immune response against tumor
cells, including the administration of natural immune-enhancing proteins such
as IL-2, either alone or in combination with other agents. These methods have
shown encouraging results in some patients with certain tumor types but suffer
from serious side effects.
In collaboration with Dr. Gary J. Nabel of the University of Michigan,
Vical scientists are developing a novel approach to cancer immunotherapy by
seeking to induce a strong local immune response to tumor cells. Vical's
approach is based on direct injection into the tumor of a gene encoding a human
histocompatibility antigen ("HLA"). Vical has formulated a complex called
Allovectin-7 containing the gene for a particular antigen, called HLA-B7, and a
lipid material to facilitate gene uptake. After injection, the gene encoding
HLA-B7 enters cancer cells at the injection site, and causes the cells to begin
producing the HLA-B7 protein. This in turn would be expected to trigger a
potent CTL response against the tumor cells, similar to the rejection of donor
organs in transplant recipients.
After a small pilot trial conducted by Dr. Nabel, Vical initiated
Phase I/II clinical trials with approximately 15 patients for each of three
advanced cancer indications: renal cell carcinoma, melanoma, and colorectal
carcinoma. The trials were designed primarily to test the safety of
Allovectin-7 at varying dosage levels and to assess HLA-B7 gene transfer and
expression. Upon completion of the trials in June 1995, the Company concluded
that:
8
- Direct gene transfer into different tumor types and a variety
of lesion sites was well-tolerated;
- The HLA-B7 gene was transferred and protein could be detected
for several weeks in greater than 80 percent of biopsies from
treated patients;
- Measurable tumor shrinkage was observed in 7 of 14 patients
with advanced melanoma; 3 of these 7 were in clinical partial
remission, and as of January 1997, one patient had been in
complete remission for a period of 33 months;
- No significant differences were observed in gene expression or
tumor responses to 10, 50, or 250 ug doses.
In September 1995, Vical commenced multi-center Phase II clinical
testing of Allovectin-7 in five tumor types: melanoma, renal cell carcinoma,
colorectal carcinoma, breast carcinoma and non-Hodgkin's lymphoma. Treatment
of more than 100 patients was completed in December 1996, and initial results
are expected to be presented in 1997. In October 1996, Vical commenced
additional multi-center Phase II clinical testing of Allovectin-7 in
approximately 40 advanced melanoma patients. In addition, Allovectin-7 is
being evaluated, either alone or in combination with approved cancer
therapeutic agents, in several other Phase I/II clinical trials.
In April 1995, Vical initiated clinical testing of Leuvectin, its
second gene-based product candidate intended for direct injection into tumor
lesions of cancer patients. Leuvectin contains a gene that encodes the potent
immunostimulator, IL-2, and a lipid material to facilitate gene uptake. The
Company expects that Leuvectin, when injected into tumors, will cause the
malignant cells to produce and secrete IL-2 in the vicinity of the tumor
lesion. The Company believes that local expression of IL-2 will stimulate the
patient's immune system to attack and destroy the tumor cells. Recombinant
IL-2 protein is an FDA-approved anti-cancer agent for the treatment of advanced
renal cell carcinoma. It has been investigated widely as a cancer
immunotherapeutic agent, but is frequently associated with serious side
effects. Because Vical's gene-based product candidate is designed to deliver
IL-2 only at the site of tumor lesions, Leuvectin may provide similar efficacy
with fewer side effects than systemic protein-based therapy.
The initial Phase I/II clinical trials were designed primarily to test
the safety of Leuvectin at varying dosage levels and to assess IL-2 gene
transfer and expression. Upon completion of the trials in February 1996, the
Company concluded that:
- Direct injection at varying doses and gene transfer into
different tumor types and a variety of lesion sites was well-
tolerated;
- The IL-2 gene was transferred and protein could be detected in
more than 75 percent of biopsies from treated patients;
- Measurable tumor shrinkage was observed in 5 of 23 patients
with various types of advanced malignancies;
In October 1996, the Company initiated additional multi-center Phase
I/II clinical testing of higher doses of Leuvectin in approximately 45 patients
with advanced melanoma, renal cell carcinoma, and soft-tissue sarcoma.
In September 1996, Vical entered into a collaboration with Dr. Ronald
Levy of Stanford University Medical Center to develop a naked DNA anti-idiotype
vaccine, Vaxid, against low-grade non-Hodgkin's B-cell lymphoma. This type of
lymphoma is characterized by a slow growth rate and excellent initial response
to chemotherapy or radiotherapy; however, a regular pattern of relapse to a
diffuse aggressive lymphoma occurs for which no curative therapy has been
identified. Clinical studies involving administration of either monoclonal
anti-idiotype antibodies or patient-specific B-cell lymphoma idiotype protein
have resulted in prolonged remissions; however, these therapies are limited by
the time and effort required to produce the drug product. Vaxid is a DNA
plasmid that encodes the patient-specific idiotype of the B-cell tumor
immunoglobulin. In preclinical studies, Dr. Levy showed that the injection
into mice of a murine B-cell lymphoma idiotype plasmid results in strong
anti-idiotype immune responses and significant protection against tumor
challenge. Based on these preclinical studies and additional studies conducted
at Vical, the Company believes that immunization of post-chemotherapy patients
with Vaxid could result in the elimination of residual disease and the
prevention of the relapse of disease. Vaxid is currently under preclinical
development and may enter a clinical trial in the second half of 1997.
9
INFECTIOUS DISEASES
Preventive Vaccines. Vical's naked DNA technology may address two
deficiencies of traditional preventive vaccine approaches: (i) the inability to
predict the random changes in the strains of various infectious agents and (ii)
the need for safe formulations (adjuvants) that accentuate a humoral response
or that elicit sufficient cell-mediated responses. The Company's scientists
have shown in animal experiments that the intramuscular injection of a plasmid
encoding a protein common to all strains of the influenza virus stimulates both
humoral and cell- meditated responses against the virus itself and the
virus-infected cells. The immune response is potent, specific and requires no
adjuvant formulation. For over a year following vaccination, animals were
shown to have higher survival rates from an otherwise lethal dose of inhaled
influenza virus as compared with untreated control animals. Improved survival
rates were also observed in treated animals that were exposed to a lethal dose
of a different strain of influenza. This observed cross-strain protection, if
reproducible in humans, will offer a key advantage compared with conventional
influenza vaccines, which must be specifically designed and manufactured to
combat a particular strain of a prevalent influenza virus. Thus, Vical's
direct gene transfer technology may be universal, not requiring frequent
re-design or product modification for each new viral strain.
Additional studies by Vical and its collaborators have extended these
findings to other models of infectious diseases for which there are no
currently approved vaccines, such as human papilloma virus, herpes and malaria.
Further, the Company believes Vical's potential vaccine products should be
simpler to manufacture, requiring conventional bacterial fermentation, whereas
many vaccines are made using cumbersome and labor-intensive techniques
involving difficult tissue culture procedures and the use of live viruses.
Merck holds exclusive licenses to use Vical's naked DNA technology for
development of vaccines directed against seven human infectious disease
targets: influenza, HIV, herpes, hepatitis B, hepatitis C, human papilloma and
tuberculosis. Merck initiated a Phase I clinical trial with a preventive DNA
vaccine candidate for influenza in April 1996, and is expected to present
initial results in 1997. Merck has indicated that a preventive DNA vaccine
candidate for herpes simplex may enter a clinical trial in 1997. In September
1994, the Company entered into a commercial collaborative agreement with PMC
covering the use of Vical's proprietary naked DNA technology for developing up
to five new vaccine products directed against cytomegalovirus, respiratory
syncytial virus, Lyme disease, helicobacter pylori and malaria. In 1996, PMC
added herpes zoster as a sixth target indication. As of December 31, 1996, PMC
held licenses for four of the indications and options for the remaining two.
See "-- Collaboration and Licensing Agreements--Corporate Partners--Merck &
Co., Inc." and "-- Pasteur Merieux Connaught."
Independently, the Company is conducting research on preventive
vaccines for the Epstein-Barr virus (EBV) and chlamydia.
Therapeutic Vaccines. The Company believes that by stimulating
cell-mediated immunity, its direct gene transfer approach may prove beneficial
to patients suffering from chronic viral diseases where current therapeutic
alternatives are inadequate. Such diseases include herpes and hepatitis B.
The Company is conducting research to evaluate the feasibility of its direct
gene transfer approach in the treatment of herpes and hepatitis B in relevant
animal models.
THERAPEUTIC PROTEINS
Vical's direct gene transfer technology may permit the development of
alternatives to therapeutic protein administration. The major shortcomings of
some therapeutic proteins are their short duration of action and the side
effects associated with high levels of circulating protein after intravenous
administration. By direct injection of genes into muscles, a sustained-release
of low levels of the therapeutic proteins may be achieved. This may reduce
side effects and the need for repeated dosing, effectively using the muscle as
a "protein factory." Vical is initially focusing on the production of highly
potent proteins which are required in small amounts to produce therapeutic
effects, such as certain immunomodulatory proteins, blood clotting factors, and
other therapeutic proteins. If Vical's technology can successfully demonstrate
therapeutic effect with these proteins, this approach could prove useful with
other proteins.
Cystic fibrosis is the most common fatal recessive genetic disease in
the Caucasian population. It is estimated that about 30,000 Americans have
cystic fibrosis, and the disease occurs in approximately 1 in 2,500 live
10
births. The disease is caused by a defect in the function of a specific
protein, cystic fibrosis transmembrane conductance regulator (CFTR). This
protein functions as a chloride channel in the cell membrane, and the defect
results in the buildup of mucus in the lungs of cystic fibrosis patients.
Cystic fibrosis gene therapy is aimed at restoring chloride channel function by
introducing the gene coding for CFTR into a patient's airway cells. In 1993,
Vical entered into a collaborative research and option agreement with Genzyme
to evaluate the use of, and which granted an option to license, the Company's
cytofectins as non-viral vectors in gene therapy for the treatment of cystic
fibrosis. In 1996, Genzyme exercised the option. See "--Collaboration and
Licensing Agreements--Corporate Partners--Genzyme Corporation."
COLLABORATION AND LICENSING AGREEMENTS
The Company's strategy for the research, development and
commercialization of its potential products requires entering into various
arrangements with corporate, academic and government collaborators, licensors,
licensees and others, and is dependent upon the subsequent success of these
outside parties in performing their responsibilities. Although the Company
believes parties to any such arrangements would have an economic motivation to
succeed in performing their contractual responsibilities, the amount and timing
of resources to be devoted to these activities may not be within the control of
the Company. There can be no assurance that such parties will perform their
obligations as expected or that the Company will derive any revenue from such
arrangements. In addition, there can be no assurance that the collaborators
will not be pursuing alternative technologies as a means for developing
treatments for the diseases targeted by these collaborative programs.
The Company has entered into, and expects to enter into, additional
research collaborations, licensing agreements and corporate collaborations. In
addition to the agreements summarized below, Vical has entered into or is
currently conducting on-going negotiations with potential corporate partners.
However, there can be no assurance that the Company will be able to negotiate
acceptable collaborative agreements, or that its existing collaborative
agreements will be successful.
CORPORATE PARTNERS
Merck & Co., Inc. In May 1991, the Company entered into a research
collaboration and license agreement with Merck (the "Merck Agreement") to
develop vaccines to prevent infection and/or disease in humans utilizing
Vical's intramuscular delivery technology. In connection with the Merck
Agreement, Vical has granted Merck a worldwide exclusive license to preventive
vaccines using Vical's technology against seven human infectious diseases:
influenza, HIV, herpes simplex, hepatitis B, hepatitis C, human papilloma and
tuberculosis. In 1996, Merck initiated a Phase I clinical trial with a
preventive DNA vaccine candidate for influenza and is expected to present
initial results in 1997. Merck has indicated that a preventive DNA vaccine
candidate for herpes simplex may enter a clinical trial in 1997. In connection
with the Merck Agreement, Merck has paid the Company $11.6 million to date at
December 31, 1996. In connection with certain of these payments, Vical was
required to pay 10 percent of certain payments received by the Company under
the Merck Agreement to Wisconsin Alumni Research Foundation ("WARF"). A small
portion of any future milestone or royalty payments received by Vical under the
Merck Agreement would also be owed to WARF. See "--Research
Institutions--Wisconsin Alumni Research Foundation." In addition, Merck also
has certain rights to therapeutic uses of preventive vaccines developed under
the Merck Agreement. Merck is obligated to pay additional fees upon successful
completion of certain research milestones with respect to the products
developed under the Merck Agreement and royalties on net sales by Merck of such
products, if any such products are developed and marketed.
In May 1992, Vical entered into a separate agreement with Merck
pursuant to which the Company granted Merck a worldwide exclusive license to
certain Vical technology to develop vaccines for the prevention of a veterinary
infectious disease.
Pasteur Merieux Connaught. In September 1994, the Company entered
into a collaborative agreement with the vaccine manufacturer PMC (the "PMC
Agreement") covering the use of Vical's proprietary naked DNA technology for
developing up to five new vaccine products. The following vaccine targets are
included: (i) cytomegalovirus (CMV); (ii) respiratory syncytial virus (RSV);
(iii) Lyme disease; (iv) helicobacter pylori; and, (v) malaria. With respect
to malaria, see "--Research Institutions--Naval Medical Research Institute."
In 1996, a sixth option target, herpes zoster, was added. The PMC Agreement
includes a research collaboration and options
11
for PMC to take exclusive licenses to Vical's naked DNA vaccine technology for
each of the six vaccine targets. To maintain the options, PMC is required to
pay Vical annual research payments. For licensed options, PMC will have to
make milestone and royalty payments to Vical. PMC has exercised four such
options at December 31, 1996, and extended an option. PMC will make research
payments to Vical for expenses incurred by Vical in performing certain clinical
and preclinical work. Through December 31, 1996, Vical had received $5,950,000
under this agreement. If Vical were to receive milestone or royalty payments
from PMC, Vical would be required to pay 10 percent of certain payments to
WARF. See "- -Research Institutions--Wisconsin Alumni Research Foundation."
Genzyme Corporation. In October 1993, Vical entered into a
collaborative research and option agreement with Genzyme to evaluate the use of
Vical's proprietary cytofectins as non-viral vectors in gene therapy for the
treatment of cystic fibrosis. The agreement includes a multi-year research
collaboration and an option for Genzyme to take an exclusive worldwide license
for the use of Vical's cytofectins in the field of cystic fibrosis treatment.
Vical also granted Genzyme a four year right of first offer to use Vical's
cytofectin technology in other lung disorders. In 1996, Genzyme exercised the
option. Through December 31, 1996, Vical had received $2,300,000 from Genzyme
under this agreement. The license agreement includes provisions for research,
milestone and royalty payments to Vical.
Baxter Healthcare Corporation. In December 1993, Vical entered into a
collaborative research and option agreement with Baxter to evaluate the use of
Vical's proprietary gene-based pharmaceutical technology for the treatment of
hemophilia. Through the termination of this agreement in December 1996, the
Company received $1.1 million from Baxter.
Rhone Merieux. The Company entered into a corporate alliance in March
1995 relating to DNA vaccines in the animal health area with Rhone Merieux, a
leading manufacturer and marketer of animal health products worldwide. The
agreement includes options for Rhone Merieux to take exclusive licenses to
Vical's direct injection technology and the cytofectin technology to develop
and commercialize certain gene-based products for use in the prevention of
infectious diseases in domesticated animals. If Rhone Merieux exercises its
license options, cash payments and royalties on net sales would be due to the
Company. If Vical were to receive milestone or royalty payments from Rhone
Merieux, Vical would be required to pay 10 percent of certain payments to WARF.
See "--Research Institutions--Wisconsin Alumni Research Foundation." In 1996,
the agreement was extended to March 1998.
RESEARCH INSTITUTIONS
The University of Michigan. In September 1992, the Company entered
into a license agreement with the University of Michigan ("Michigan") pursuant
to which the Company obtained the exclusive license (subject to Michigan's
retaining the right to grant non-exclusive, non-royalty bearing licenses to the
United States government and the Howard Hughes Medical Institute) to products
utilizing technology related to the use of genetically altered heart muscle
cells in the treatment or prevention of certain diseases in return for certain
license fees and royalty payments. The Company's rights to certain gene
transfer technology developed by Dr. Jeffrey Leiden while at Michigan are
governed by this agreement. In October 1996, the Company notified Michigan of
its intent to terminate this agreement effective April 1997.
In October 1992, Vical entered into a second license agreement with
Michigan pursuant to which the Company obtained the exclusive license (subject
to Michigan's retaining the right to grant non-exclusive, non-royalty bearing
licenses to the United States government and the Howard Hughes Medical
Institute) to products for the prevention and treatment of disease utilizing
certain technology relating to the introduction of recombinant nucleic acid
products into cancer cells and cells of the vasculature by catheterization in
return for certain license fees and royalty payments. The Company's rights to
certain gene transfer technology developed by Drs. Gary and Elizabeth Nabel at
Michigan are governed by this agreement.
Wisconsin Alumni Research Foundation. Under a research agreement
entered into in 1989, scientists at the University of Wisconsin, Madison, and
at Vical co-invented a core technology related to intramuscular naked DNA
administration. Effective January 1, 1991, Vical entered into a license
agreement with WARF whereby WARF granted to the Company the exclusive license
to its interest in that technology (except as to the United
12
States government which may hold non-exclusive licenses to certain technology
developed with government funds). As consideration for the license grant,
Vical paid WARF, the designated patent and licensing organization for the
University of Wisconsin, an initial license fee upon execution of the agreement
and has committed to pay WARF a royalty on sales of the products incorporating
the licensed technology and a percentage of up-front license payments from
third parties. Under certain circumstances, Vical is obligated to pay $5,000
annually to WARF from 1995 until the termination of the agreement.
The University of Chicago. In September 1992, Vical entered into a
sponsored research agreement with The University of Chicago ("Chicago")
pursuant to which the Company agreed to pay Chicago an annual research fee for
a four year period for research to be conducted under the direction of Dr.
Jeffrey Leiden in the area of gene therapy using cardiac and skeletal muscles.
The agreement was extended for a fifth year and will end in September 1997.
Naval Medical Research Institute. In November 1993, Vical entered
into a Cooperative Research and Development Agreement ("CRADA") with the Naval
Medical Research Institute ("NMRI"), a laboratory operated under the command of
the United States Navy, for research in the area of vaccines for the prevention
of malaria. Under the CRADA, the Company and NMRI are each contributing
research materials and expertise towards the appropriate testing of candidate
DNA-based malaria vaccines in laboratory animals and, if warranted, human
subjects. Each party funds its own activities. Vical has licensed the right
to commercialize any vaccine product that emerges from research under the CRADA
to PMC, subject to the right of the U.S. government to use any such vaccine for
government purposes only. In September 1995, Vical and NMRI were awarded a
grant from the Department of Defense that was to provide up to $1,000,000 per
year for up to three years to support further development of a malaria vaccine
based on Vical's naked DNA vaccine technology. The agreement commenced in the
first quarter of 1996. As a result of subsequent federal budget cuts, funding
for the grant has been capped at $1,000,000 total and the agreement is expected
to end June 30, 1997.
ACCESS TO PROPRIETARY GENES AND PROTEINS
A number of the genetic sequences or proteins encoded by certain of
those sequences that the Company expects to use or is currently investigating
in its clinical trials or may use in its other gene-based products are or may
become patented by others. As a result, the Company may be required to obtain
licenses under such patents in order to conduct certain research, to
manufacture or to market products that contain proprietary genetic sequences.
There can be no assurance that such licenses will be available on commercially
reasonable terms, if at all.
PATENTS AND PROPRIETARY RIGHTS
Patents and other proprietary rights are important to the Company's
business. The Company's policy is to file patent applications to protect
technology, inventions and improvements to its inventions that are considered
important to the development of its business. The Company also relies upon
trade secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain its competitive position. To date, the
Company has filed or participated as licensee in the filing of a number of
patent applications in the United States relating to the Company's technology,
as well as foreign counterparts of certain of these applications in many
countries. The Company has filed a series of patent applications to cover
direct gene transfer for immunization and for delivering therapeutic proteins
to patients. Other patent applications have been filed that cover specific
gene sequences and formulations comprising the Company's gene-based product
candidates as well as methods for producing pharmaceutical grade DNA. Certain
of these patents have been issued by the U.S. Patent and Trademark Office
("PTO"). See table below. Several other such applications are still pending
in the United States, and corresponding foreign applications have been filed.
No assurance can be given that the claims will issue in their present form, if
at all. Other patent applications seek to cover several families of cytofectin
molecules and their uses in gene delivery. Patents covering the composition of
matter of certain of these molecules and their uses were issued by the PTO and
several foreign counterparts are pending. Under its agreement with Michigan,
the Company is the exclusive licensee of several patent applications related to
gene therapy applications in cardiovascular disease and cancer. One such
patent, claiming a kit for site-specific gene delivery using catheters, was
issued by the PTO. Several other applications relating to the Company's
business are also pending.
13
In December 1996, the Company was issued two U.S. patents covering
methods of direct gene transfer for delivering therapeutic proteins and for
inducing immune responses, respectively. As of December 31, 1996, the Company
or its exclusive licensors had received seven U.S. patents covering various
aspects of its proprietary technology. These patents are summarized below:
U.S. Patent Technology Covered
----------- ------------------
5,589,466 Direct administration of naked DNA for immunization
5,580,859 Direct administration of naked DNA for protein expression
5,576,196 Process to reduce RNA during DNA production
5,561,064 Process to manufacture pharmaceutical-grade DNA
5,459,127 Use of cationic lipids to deliver genes in vivo
5,328,470 Catheter to facilitate intravascular gene transfer
5,264,618 Cationic lipid compositions to facilitate gene transfer in vivo
The patent positions of pharmaceutical and biotechnology firms,
including the Company, are uncertain and involve complex legal and factual
questions for which important legal principles are largely unresolved. In
addition, the coverage claimed in a patent application can be significantly
reduced before a patent is issued. Consequently, the Company does not know
whether any patent applications will result in the issuance of patents or, if
any patents are issued, whether those patents will provide significant
proprietary protection or will be circumvented or invalidated. Since patent
applications in the United States are maintained in secrecy until patents issue
or foreign counterparts, if any, publish, and, since publication of discoveries
in the scientific or patent literature often lag behind actual discoveries, the
Company cannot be certain that it or any licensor was the first creator of
inventions covered by pending patent applications or that it or such licensor
was the first to file patent applications for such inventions. Moreover, the
Company might have to participate in interference proceedings declared by the
PTO to determine priority of invention, which could result in substantial cost
to the Company, even if the eventual outcome were favorable to the Company.
There can be no assurance that the Company's patents, if issued, would be held
valid or enforceable by a court or that a competitor's technology or product
would be found to infringe such patents.
A number of pharmaceutical and biotechnology companies and research
and academic institutions have developed technologies, filed patent
applications or received patents on various technologies that may be related to
the Company's business. Some of these technologies, applications or patents
may conflict with the Company's technologies or patent applications. Such
conflict could limit the scope of the patents, if any, that the Company may be
able to obtain or result in the denial of the Company's patent applications.
In addition, if patents that cover the Company's activities are issued to other
companies, there can be no assurance that the Company would be able to obtain
licenses to these patents at a reasonable cost or be able to develop or obtain
alternative technology.
In addition to patent protection, the Company also relies upon trade
secret protection for its confidential and proprietary information. There can
be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology or that the Company can
meaningfully protect its trade secrets.
It is the Company's policy to require its employees, consultants,
members of its Scientific Advisory Board and parties to collaborative
agreements to execute confidentiality agreements upon the commencement of
employment or consulting relationships or a collaboration with the Company.
These agreements provide that all confidential information developed or made
known during the course of the relationship with the Company is to be kept
confidential and not disclosed to third parties except in specific
circumstances. In the case of employees, the agreements provide that all
inventions resulting from work performed for the Company, utilizing property of
the Company or relating to the Company's business and conceived or completed by
the individual during employment, shall be the exclusive property of the
Company to the extent permitted by applicable law. There can be no assurance,
however, that these agreements will provide meaningful protection of the
Company's trade secrets or adequate remedies in the event of unauthorized use
or disclosure of such information.
14
COMMERCIALIZATION AND MANUFACTURING
Because of the broad potential applications of its technology, Vical
intends to develop and commercialize products both on its own and through
corporate partners. The Company intends to develop and market products to
well-defined specialty markets, such as oncology, infectious diseases and
metabolic disorders. Where appropriate, the Company intends to rely on
strategic marketing and distribution partners for manufacturing and marketing
products addressing diseases treated by primary care physicians. There can be
no assurance that the Company will be able to reach satisfactory arrangements
with such distribution partners or that any such arrangements will be
successful.
The Company believes its DNA plasmids can be produced in commercial
quantities in bacterial cells through traditional 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, the Company's cytofectin formulations consist of lipid components
that are synthesized chemically using traditional, readily scaleable, organic
synthesis procedures.
Vical currently produces supplies of product for Phase I/II and Phase
II clinical trials and intends to produce sufficient supplies for additional
clinical investigations. The Company may also choose to rely in part on
outside organizations to manufacture its product candidates for expanded
clinical trials under close supervision and utilizing the Company's proprietary
processes. There can be no assurance that the Company will be able to contract
for manufacturing capabilities on acceptable terms.
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 the Company's
potential products or technologies becoming obsolete before the Company
recovers a significant portion of its related research, development and capital
expenditures. The Company will experience competition both from other
companies in the field and from companies which have other forms of treatment
for the diseases targeted by the Company. The Company is 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 research and development in areas including both viral gene transfer
and other methods of gene insertion. The Company 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 Vical. See "--Patents and Proprietary Rights."
Certain competitors and potential competitors of the Company have
substantially greater product development capabilities and financial,
scientific, marketing and human resources than the Company. Other companies
may succeed in developing products earlier than the Company, obtaining FDA
approvals for such products more rapidly than the Company, or developing
products that are more effective than those proposed to be developed by the
Company. While the Company will seek to expand its technological capabilities
to remain competitive, there can be no assurance that research and development
by others will not render the Company's technology or products obsolete or
noncompetitive or result in treatments or cures superior to any therapy
developed by the Company, or that any therapy developed by the Company will be
preferred to any existing or newly developed technologies.
The Company's competitive position will be affected by the disease
indications addressed by the Company's and its competitors' potential products,
the timing of market introduction for such potential products and the stage of
development of other technologies under development to address such disease
indications. Accordingly, the Company's and its competitors' proprietary
positions, their ability to complete clinical trials of their potential
products on a timely basis and their ability to obtain timely regulatory
approvals to market such potential products are likely to be significant
competitive factors for the Company. Other important competitive factors will
include the efficacy, safety, reliability, availability and price of the
Company's and its competitors' potential products and the ability of the
Company and its competitors to secure sufficient capital resources for the
often substantial period between technological conception and commercial sales.
15
GOVERNMENT REGULATION
Any products developed by the Company will require regulatory
clearances prior to clinical trials and additional regulatory clearances prior
to commercialization. New human gene therapy products are expected to be
subject to extensive regulation by the FDA and comparable agencies in other
countries. The precise regulatory requirements with which the Company will
have to comply are uncertain at this time due to the novelty of the human gene
products and therapies currently under development. The Company believes that
its potential products will be regulated either as biological products or as
new drugs. New drugs are subject to regulation under the Federal Food, Drug
and Cosmetic Act, and biological products, in addition to being subject to
certain provisions of that Act, are regulated under the Public Health Service
Act. Both statutes and the regulations promulgated thereunder govern, among
other things, the testing, manufacturing, safety, efficacy, labeling, storage,
record keeping, advertising and other promotional practices involving biologics
or new drugs, as the case may be. FDA approval or other clearances must be
obtained before clinical testing, and before manufacturing and marketing, of
biologics or new drugs. At the FDA, the Center for Biological Evaluation and
Research ("CBER") is responsible for the regulation of new biologics and the
Center for Drug Evaluation and Research ("CDER") is responsible for the
regulation of new drugs.
Obtaining FDA approval has historically been a costly and
time-consuming process. Generally, in order to gain FDA premarket approval, a
developer first must conduct preclinical studies 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 of an
investigational drug can start. The IND includes a detailed description of the
clinical investigations to be undertaken.
In order to commercialize any products, the Company must sponsor and
file an IND for each proposed product and will be responsible for initiating
and overseeing the clinical studies to demonstrate the safety, efficacy and
potency that are necessary to obtain FDA approval of any such products.
Clinical trials are normally done in three phases. 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 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. 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 such studies may provide results
traditionally obtained in Phase II clinical trials. Such trials are frequently
referred to as "Phase I/II" clinical trials.
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 gene
therapy products are a new category of therapeutics, and there can be no
assurance as to the length of the clinical trial period or the number of
patients the FDA will require to be enrolled in the clinical trials in order to
establish to its satisfaction the safety, efficacy and potency of human gene
therapy products.
After completion of clinical trials of a new product, FDA marketing
approval must be obtained. If the product is regulated as a biologic, CBER
will require the submission and approval of a Biologic License Application
("BLA") or a Product License Application ("PLA"), and an Establishment License
Application ("ELA") before commercial marketing of the biologic is permitted.
If the product is classified as a new drug, the Company must file a New Drug
Application ("NDA") with CDER and receive approval before commercial marketing
of the drug. The NDA, BLA, or PLA/ELA must include results of product
development activities, preclinical studies and clinical trials in addition to
detailed manufacturing information. The review and approval processes require
substantial time and effort and there can be no assurance that any approval
will be granted on a timely basis, if at all. NDAs and BLA/ELAs submitted to
the FDA can take, on average, two to five years to receive approval after
filing. If questions arise during the FDA review process, approval can take
more than five years. Notwithstanding the submission of relevant data, the FDA
may ultimately decide that the NDA, BLA, or PLA/ELA does not satisfy its
regulatory criteria for approval and 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
16
civil or criminal sanctions. In addition, after marketing clearance is
secured, the manufacturing facility for the Company's products will be subject
to periodic inspections for Good Manufacturing Practices 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 National Institutes of Health
("NIH") have established guidelines for research involving recombinant DNA
molecules, which are utilized by the Company and certain of its collaborators
in their research. These guidelines apply to all recombinant DNA research
which is conducted at or supported by the NIH. Under current guidelines,
proposals to conduct clinical research involving gene therapy which is
conducted at institutions supported by the NIH must be reviewed and allowed by
the NIH. The NIH review is a public process and usually involves review and
approval by the Recombinant DNA Advisory Committee ("RAC") of the NIH.
In both domestic and foreign markets, sales of the Company's products,
if any, will be dependent in part on the availability of reimbursements from
third party payors, such as government and private insurance plans. Third
party payors are increasingly challenging the prices charged for medical
products and services. If the Company succeeds in bringing one or more
products to market, there can be no assurance that these products will be
considered cost-effective, that reimbursement will be available, or if
available, that the payor's reimbursement policies will not adversely affect
the Company's ability to sell its products on a profitable basis.
The Company is also 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
the Company's research work. The extent of government regulation which might
result from any future legislation or administrative action cannot be
accurately predicted.
HUMAN RESOURCES
As of February 28, 1997, Vical had 93 full-time employees, 23 of whom
hold degrees at the doctorate level. Of these employees, 71 are engaged in, or
directly support, research and development activities, and 22 are in
administrative and business development positions. A significant number of the
Company's management and professional employees have had prior experience with
pharmaceutical and biotechnology companies. None of the Company's employees is
covered by collective bargaining agreements, and management considers relations
with its employees to be good.
PRODUCT LIABILITY EXPOSURE
The use of any products produced by the Company could expose the
Company to product liability claims. The Company currently carries insurance
against such claims for clinical trials only. There can be no assurance that
the Company has sufficient coverage, or that sufficient coverage can be
acquired at a reasonable cost. An inability to obtain product liability
insurance at acceptable cost or to otherwise protect against potential product
liability claims could prevent or inhibit the commercialization of products
developed by the Company. A product liability claim or recall could have a
material adverse effect on the business or financial condition of the Company.
17
RISK FACTORS
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
report and presented elsewhere by management from time to time.
UNCERTAINTY OF PRODUCT DEVELOPMENT AND CLINICAL TESTING: Existing preclinical
and clinical data on the safety and efficacy of gene therapy are limited, and
the results of preclinical studies do not necessarily predict safety or
efficacy in humans. The Company has not yet completed the development of any
products and the Company's potential products currently under development will
require significant additional research and development efforts prior to
commercial use. There can be no assurance that further research and
development will be successful, that any of the Company's potential products
will prove to be safe and effective in clinical trials, or that any
commercially successful products utilizing the Company's technology will
ultimately be developed by the Company or its collaborators. Even if
developed, these potential products may not receive regulatory approval or be
successfully commercialized.
HISTORY OF OPERATING LOSSES: The Company has not generated revenues from the
commercialization of any products and expects to incur substantial net
operating losses for the next several years. There can be no assurance that
the Company will ever achieve product revenues or profitable operations.
ADDITIONAL FINANCING REQUIREMENTS AND ACCESS TO CAPITAL: Additional funding
will be required to conduct research and development, preclinical studies and
clinical trials necessary to bring the Company's potential products to market
and to establish manufacturing and marketing capabilities. Insufficient funds
may require the Company to scale back or eliminate some or all of its research
and development programs or to license third parties to commercialize products
the Company would otherwise seek to develop itself. No assurance can be given
that additional financing will be available when needed or on terms acceptable
to the Company.
LENGTHY APPROVAL PROCESS AND UNCERTAINTY OF GOVERNMENT REGULATORY REQUIREMENTS:
Given that gene therapy is a new technology and has not been extensively tested
in patients, the regulatory requirements governing gene therapy products and
related clinical procedures are uncertain and are subject to substantial review
by various governmental regulatory authorities. This regulatory review may
result in extensive delay in the regulatory approval process. Such
requirements ultimately imposed could adversely affect the Company's ability to
clinically test, manufacture or market products. There can be no assurance
that the Company will be able to obtain the necessary approvals for clinical
trials or for manufacturing or marketing of any products.
PATENTS AND PROPRIETARY RIGHTS; ACCESS TO PROPRIETARY GENES AND PROTEINS: To
date, the Company has filed or participated as licensee in the filing of a
number of patent applications in the United States relating to the Company's
technology, as well as foreign counterparts of certain of these applications in
many countries. The Company intends to file applications as appropriate for
patents covering both its products and processes. There can be no assurance
that patents will issue from any of these applications or, if patents do issue,
that claims allowed will be sufficient to protect the Company's technology.
The Company's success will depend in part on its ability to obtain patent
protection for its products and processes both in the United States and other
countries. The patent positions of biotechnology and pharmaceutical companies
can be highly uncertain and involve complex legal and factual questions, and
therefore, the breadth of claims allowed in biotechnology and pharmaceutical
patents cannot be predicted. In addition, there can be no assurance that any
patents issued to the Company or to licensors of the Company's technology will
not be challenged, invalidated, or circumvented, or that the rights granted
thereunder will provide proprietary protection or commercial advantage to the
Company.
The commercial success of the Company will also depend in part on the Company
not infringing patents issued to competitors and not breaching the technology
licenses that might cover technology used in the Company's products. It is
uncertain whether any third-party patents will require the Company to alter its
products or processes, obtain licenses, or cease certain activities. A number
of the genetic sequences or proteins encoded by certain of those sequences that
the Company is currently investigating in its clinical trials or may use in
other of its gene-based products are or may become patented by others. As a
result, the Company may be required to obtain licenses under such patents in
order to test, use or market products that contain proprietary genetic
sequences or encode proprietary proteins. There can be no assurance that the
Company will be able to obtain any such license on commercially favorable
terms, if at all. Failure by the Company to obtain a license to any technology
that it
18
may require to commercialize its products may have a material adverse impact on
the Company. Litigation, which could result in substantial cost to the
Company, may also be necessary to enforce any patents issued to the Company or
to determine the scope and validity of third-party proprietary rights. Should
any of its competitors have prepared and filed patent applications in the
United States which claim technology also invented by the Company, the Company
may have to participate in interference proceedings declared by the PTO in
order to determine priority of invention and, thus, the right to a patent for
the technology in the United States, all of which could result in substantial
cost to the Company to determine its rights. The Company also relies on
protecting its proprietary technology in part through confidentiality
agreements with its corporate collaborators, employees, consultants and certain
contractors. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by its competitors. See "Business - Collaboration and Licensing
Agreements-Access to Proprietary Genes and Proteins" and "-Patents and
Proprietary Rights."
DEPENDENCE ON OTHERS: The Company's strategy for development and
commercialization of certain of its products entails entering into various
arrangements with corporate collaborators, licensors, licensees, and others.
There can be no assurance that such parties will perform their obligations as
expected or that any revenues will be derived from such arrangements, that any
of the Company's current strategic arrangements will be continued, or that the
Company will be able to enter into future collaborations.
COMPETITION AND TECHNOLOGICAL CHANGE: The gene therapy field is new and
rapidly evolving, and it is expected to continue to undergo significant and
rapid technological change. There can be no assurance that competitors will
not succeed in developing technologies and products that are more effective
than any which are being developed by the Company or which would render the
Company's technology and products obsolete or non-competitive or result in
treatments or cures superior to any therapy developed by the Company, or that
any therapy developed by the Company will be preferred to any existing or newly
developed technologies.
LACK OF COMMERCIAL SCALE MANUFACTURING OR MARKETING CAPABILITIES: The Company
does not currently have the resources or capability to manufacture or market
any of its proposed products by itself on a commercial scale, and large scale
manufacturing of such products has not been demonstrated. Initially, the
Company may be dependent on corporate partners, licensees or other entities for
commercial scale manufacturing and marketing of its products. Should the
Company decide to establish a commercial scale manufacturing facility, the
Company will require substantial additional funds and personnel and will be
required to comply with extensive regulations applicable to such a facility.
There can be no assurance that the Company will be able to enter into any
arrangements for the manufacturing or marketing of its products or to obtain
additional capital to conduct such activities independently.
UNCERTAINTY OF PRODUCT PRICING, REIMBURSEMENT AND RELATED MATTERS: The
Company's ability to earn sufficient returns on its products may depend in part
on the extent to which reimbursement for the costs of such products and related
treatments will be available from government health administration authorities,
private health coverage insurers, managed care organizations and other
organizations. If purchasers or users of the Company's products are not
entitled to adequate reimbursement for the cost of using such products, they
may forego or reduce such use. Significant uncertainty exists as to the
reimbursement status of newly approved health care products, and there can be
no assurance that adequate third party coverage will be available.
19
HAZARDOUS MATERIALS AND ENVIRONMENTAL MATTERS: The Company produces limited
quantities of clinical trial supplies. The Company's research and development
processes involve the controlled storage, use and disposal of hazardous
materials, biological hazardous materials and radioactive compounds. Although
the Company believes that its safety procedures for handling and disposing of
such materials comply with the standards prescribed by federal, state and local
laws and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident,
the Company could be held liable for any damages that result, and any such
liability could exceed the resources of the Company. There can be no assurance
that the Company will not be required to incur significant costs to comply with
current or future environmental laws and regulations nor that the operations,
business or assets of the Company will not be materially or adversely affected
by current or future environmental laws or regulations.
VOLATILITY OF STOCK PRICE AND ABSENCE OF DIVIDENDS: The market price of the
Company's Common Stock has been and is likely to be highly volatile.
Announcements by the Company or others regarding its existing and future
collaborations, results of clinical trials, scientific discoveries,
technological innovations, regulatory actions, patents or proprietary rights,
concern as to the safety of the Company's products, period to period
fluctuations in the Company's operating results, market conditions for life
science stocks in general and other factors not within the control of the
Company may have a significant adverse effect on the market price of the Common
Stock. The Company has never paid cash dividends on its Common Stock and does
not anticipate paying any cash dividends in the foreseeable future.
20
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Alain B. Schreiber, M.D. 41 President, Chief Executive Officer
and Director
Martha J. Demski, M.B.A. 44 Vice President, Chief Financial Officer,
Treasurer and Secretary
Jon A. Norman, Ph.D. 48 Vice President, Research
George J. Gray 50 Vice President, Operations
Robert H. Zaugg, Ph.D. 47 Vice President, Business Development
_________________
ALAIN B. SCHREIBER, M.D. has been President, Chief Executive Officer and a
director of the Company since May 1992. Prior to joining the Company, Dr.
Schreiber held various executive level positions at Rhone-Poulenc Rorer Inc., a
pharmaceutical company, 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 Research. 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.
MARTHA J. DEMSKI, M.B.A. joined the Company as Chief Financial Officer in
December 1988 and currently serves as Vice President, Chief Financial Officer,
Treasurer and Secretary. From August 1977 until joining Vical, 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 the Company in January 1993 as Vice President,
Research. From 1986 until joining the Company, Dr. Norman was the Group
Leader/Section Head for the Departments of Pharmacology and Biochemistry at
Bristol-Myers Squibb Corporation, a pharmaceutical company. He was a Senior
Research Scientist at Ciba-Geigy Corporation, a pharmaceutical company, 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 the Company 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 the Company 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 the Company, 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.
The executive officers are elected annually by the Board of Directors.
21
SCIENTIFIC ADVISORY BOARD
Vical's Scientific Advisory Board ("SAB") consists of academic and industrial
experts in the fields of direct gene transfer, infectious diseases, biology and
pharmacology, immunology, oncology and genetic engineering. The Company meets
with members of the SAB on an ad hoc basis to discuss research and development
strategies, and certain members communicate with the Company's scientists
frequently to discuss the details of specific projects. All SAB members own
shares or have been granted options to acquire Common Stock of the Company.
Each SAB member has entered into a consulting agreement specifying the terms
and scope of the advisory relationship with the Company, which provides that
the consultant will not consult or otherwise provide services to any other
Company engaged in gene therapy without the prior consent of Vical. The
Company does not believe that termination of any individual consulting
agreement would materially affect its business. All of the SAB members are
employed by employers other than the Company and may have other commitments to,
or consulting or advisory contracts with, other entities which may compete for
such members' time with their obligations to the Company.
ITEM 2. PROPERTIES
The Company currently leases approximately 38,000 square feet of laboratory and
office space in San Diego, California at three sites and with three leases.
The leases terminate in 1999 and 2001 and contain varying renewal options.
Total current monthly rental on the facilities, including common area
maintenance costs, is approximately $90,000.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the Nasdaq National Market under the
symbol "VICL." The following table presents quarterly information on the price
range of high and low sales prices for the Common Stock on the Nasdaq National
Market for the periods indicated since January 1, 1995.
HIGH LOW
---- ---
January 1 - March 31, 1995 $9.00 $6.50
April 1 - June 30, 1995 10.75 6.50
July 1 - September 30, 1995 14.50 8.75
October 1 - December 31, 1995 12.875 8.50
January 1 - March 31, 1996 20.00 11.50
April 1 - June 30, 1996 22.00 13.00
July 1 - September 30, 1996 16.625 10.375
October 1 - December 31, 1996 21.25 12.75
As of February 28, 1997, there were approximately 579 stockholders of record of
the Company's common stock with 15,426,574 shares outstanding. The Company has
never declared or paid any dividends and does not expect to pay any dividends
in the foreseeable future.
23
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(in thousands, except per share and share amounts)
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract revenue . . . . . . . $ 1,061 $ 900 $ 1,005 $ 1,206 $ 1,387
License/royalty revenue . . . 5,679 5,402 4,509 1,623 2,170
Sale of technology . . . . . . -- -- -- 3,148 --
-------- -------- -------- -------- --------
6,740 6,302 5,514 5,977 3,557
Expenses:
Research and development . . . . 11,318 8,997 8,336 6,163 4,418
General and administrative . . . 3,168 2,902 2,615 1,989 1,428
-------- -------- -------- -------- --------
Loss from operations . . . . . . . . . (7,746) (5,597) (5,437) (2,175) (2,289)
Interest income . . . . . . . . . . . . 2,773 1,687 1,159 873 350
Interest expense . . . . . . . . . . . 108 73 80 63 51
-------- -------- -------- -------- --------
Net loss . . . . . . . . . . . . . . . $ (5,081) $ (3,983) $ (4,358) $ (1,365) $ (1,990)
======== ======== ======== ======== ========
Net loss per share . . . . . . . . . . $ (.33) $ (.29) $ (.34) $ (.12) $ (.23)
======== ======== ======== ======== ========
Shares used in per share calculation . 15,382,848 13,504,790 12,831,585 11,065,357 8,498,742
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(in thousands)
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities . . . . . . . . $ 46,846 $ 52,528 $ 27,339 $ 32,538 $ 10,071
Working capital . . . . . . . . . . . . 46,315 51,541 25,956 30,920 7,462
Total assets . . . . . . . . . . . . . 52,440 55,118 30,324 35,123 11,924
Long-term obligations . . . . . . . . . 1,617 339 527 447 282
Stockholders' equity . . . . . . . . . 48,365 53,264 27,852 32,446 8,536
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Vical was incorporated in April 1987 and since that time has devoted
substantially all of its resources to its research and development programs.
To date, the Company has not received revenues from the sale of products. No
assurance can be given that the Company will be able to generate sufficient
product revenue to become profitable at all or on a sustained basis. As of
December 31, 1996, the Company's accumulated deficit was approximately $24.6
million.
Vical expects to incur substantial operating losses for at least the next
several years due to significant increases in research and development
expenses. The increases are expected to result from costs of preclinical
studies and clinical trials for the Company's product candidates, increased
patent and regulatory costs, and associated increases in personnel. Losses may
fluctuate from quarter to quarter as a result of differences in the timing of
expenses incurred and the revenues received from collaborative agreements.
Such fluctuations may be significant.
When used in this discussion, the words "expects," "anticipated" and similar
expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Readers are
cautioned not to place undue reliance on these forward-looking statements which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking
statements which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The Company had revenues of $6.7 million for the year ended December 31, 1996,
compared with $6.3 million in 1995 and $5.5 million in 1994. Revenues in 1996
resulted from research and license income from: the PMC collaboration in the
amount of $2.7 million, the Merck Agreement in the amount of $1.5 million, the
Genzyme collaboration in the amount of $1.3 million, and several other
agreements in the amount of $1.2 million. Revenue from the PMC agreement in
1996 was primarily the result of PMC's payment of licensing and option fees,
and the addition of a new option, as well as the payment of fees for the
Company's performance of certain clinical and preclinical work. The Merck
revenue resulted from milestone payments due under the Merck agreement. The
Genzyme collaboration income was the result of Genzyme exercising its option to
license the Company's technology for the treatment of cystic fibrosis as well
as payments for the Company's performance of certain research and preclinical
work. Revenues in 1995 resulted from research and license income from the
Merck Agreement in the amount of $3.6 million, from the PMC collaboration in
the amount of $1.3 million and under several other agreements in the amount of
$1.4 million. Revenue in 1995 from the Merck Agreement resulted primarily from
the exercise by Merck of remaining options to license Vical's technology to
develop preventive vaccines against certain human disease targets and the
recognition of revenue from previously received payments. PMC renewed its
options to acquire rights to use Vical's technology against certain disease
targets and exercised one such option in 1995. Revenues in 1994 resulted from
research and license income from the Merck Agreement in the amount of $2.7
million, from the PMC collaboration in the amount of $1.2 million and under
other agreements in the amount of $1.6 million. The Merck revenues included
recognition of previously received payments as well as payments received in
1994 to exercise options to license Vical's technology for use against two
vaccine targets, hepatitis C and human papilloma virus, to extend the exclusive
option to license Vical's technology for use with the hepatitis B and herpes
simplex vaccine targets, and to acquire an option to an exclusive license to
use Vical's proprietary gene-based vaccine technology for development of a
tuberculosis vaccine.
Research and development expense increased to $11.3 million in 1996 from $9.0
million in 1995 and $8.3 million in 1994. This increase in research and
development expense was generally due to expansion of the Company's research
and development activities and preclinical and clinical efforts that resulted
in staffing increases and increased expenditures on laboratory supplies.
During 1996, the Company 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. Such costs are
expected to continue to increase in 1997 and thereafter as the Company's
preclinical and clinical trial activities increase.
25
General and administrative expense increased to $3.2 million in 1996 from $2.9
million in 1995 and $2.6 million in 1994. These increases were due primarily
to additional staffing and related expenses, as well as increased business
development efforts. General and administrative expenses are expected to
continue to increase as research and development activities expand.
Prior to its initial public offering in March 1993, the Company recorded
deferred compensation for the difference between the price of stock sold and
options granted and the deemed fair market value of the Common Stock at the
time of sale or grant. Deferred compensation and related amortization expense
as of and for the year ended December 31, 1996, amounted to approximately $1.0
million and $158,000, respectively. Deferred compensation was fully amortized
at December 31, 1996.
Interest income increased to $2.8 million in 1996 compared with $1.7 million in
1995 and $1.2 million in 1994. These increases are primarily due to changes in
cash balances as a result of the completion of a follow-on offering of common
stock in September 1995, increases in payments received under collaborative
agreements and changes in the overall interest rates earned on cash balances.
Interest expense fluctuated to $107,000 in 1996 from $73,000 in 1995 and
$80,000 in 1994 due to changing capital lease obligations to finance equipment
needs and the addition of a debt instrument in 1996.
Vical expects to incur substantial operating losses over the next several years
due to anticipated significant increases in research and development expenses.
Increases in costs are expected to result from the aforementioned preclinical
efforts and clinical trials for the Company's proposed products, increased
patent and regulatory costs and associated increases in personnel. Losses may
fluctuate from quarter to quarter as a result of differences in the timing of
expenses incurred and the revenues received from collaborative agreements.
Such fluctuations may be significant.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Vical has financed its operations primarily through
private placements of preferred stock, three public offerings of common stock,
and revenues from collaborative agreements. As of December 31, 1996, the
Company had working capital of approximately $46.3 million compared with $51.5
million at December 31, 1995. Cash and marketable securities totaled
approximately $46.8 million at December 31, 1996, compared with $52.5 million
at December 31, 1995.
The Company expects to incur substantial additional research and development
expense including continued increases in personnel and costs related to
preclinical testing and clinical trials. The Company's future capital
requirements will depend on many factors, including the rate of scientific
progress in its 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 scale-up, commercialization activities and arrangements
and other factors not within the Company's control. The Company intends to
seek additional funding through research and development relationships with
suitable potential corporate collaborators and/or through public or private
financings. There can be no assurance that additional financing will be
available on favorable terms, if at all.
If additional financing is not available, Vical anticipates that its available
cash and existing sources of funding will be adequate to satisfy its operating
needs through 1998.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company
required by this item are set forth at the pages indicated in Item 14(a)(1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
The directors of the Company are as follows:
NAME AFFILIATION
- ---- -----------
Alain B. Schreiber, M.D. Vical Incorporated
Robert C. Bellas, Jr. Morgenthaler Ventures
M. Blake Ingle Canji, Inc. (retired)
Patrick F. Latterell Venrock Associates
Fred A. Middleton Sanderling Venture
Partners, Inc.
Dale A. Smith Baxter International Inc.
(retired)
Philip M. Young U.S. Venture Partners
The information required by this item (with respect to Directors) is
incorporated by reference from the information under the caption "Election of
Directors" contained in the Company's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the Company's 1997 Annual Meeting of Stockholders to be held on
June 10, 1997 ("Proxy Statement").
The required information concerning Executive Officers of the Company is
contained in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information under the caption "Executive Compensation" contained in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information contained under the caption "Certain Transactions" contained in the
Proxy Statement.
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS
The financial statements required by this item are submitted in a separate
section beginning on page F-1 of this report.
Financial Statements
Report of Independent Public Accountants F-1
Balance Sheets at December 31, 1996 and 1995 F-2
Statements of Operations for the three years F-3
ended December 31, 1996
Statements of Stockholders' Equity for the three years F-4
ended December 31, 1996
Statements of Cash Flows for the three years F-5
ended December 31, 1996
Notes to Financial Statements F-6
(2) FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because of the absence of conditions under which
they are required or because the required information is included in the
financial statements or the notes thereto.
(3) Exhibits with each management contract or compensatory plan or
arrangement required to be filed are identified. See
paragraph (c) below.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1996.
29
(C) EXHIBITS
EXHIBIT
-------
NUMBER
------
DESCRIPTION OF DOCUMENT
-----------------------
3(i)(11) Restated Certificate of Incorporation.
3(ii)(11) Amended and Restated Bylaws of the Company.
3.2(i)(2) Certificate of Designation, Rights and Preferences of Series A Participating
Stock of Vical Incorporated.
4.1(11) Specimen Common Stock Certificate.
4.2(2) Rights Agreement dated as of March 20, 1995, between the Company and First
Interstate Bank of California.
10.1(4)# 1992 Stock Plan of Vical Incorporated.
10.2(5)# 1992 Directors' Stock Option Plan of Vical Incorporated.
10.3(3) Form of Indemnity Agreement between the Company and its directors and officers.
10.4(3)# Employment Agreement dated April 17, 1992, between the Company and Dr. Alain B.
Schreiber.
10.5(3)# Employment Agreement dated August 20, 1992, between the Company and Mr. George J.
Gray.
10.6(3)# Employment Agreement dated November 2, 1992, between the Company and Dr. Jon A.
Norman.
10.7(3) Stock Purchase Agreement dated February 20, 1992.
10.8(3) Lease dated December 4, 1987, between the Company and Nexus/GADCo.-UTC, a
California Joint Venture, as amended.
10.9(6)* Research Collaboration and License Agreement dated May 31, 1991, between the
Company and Merck & Co., Inc.
10.10(3)* Agreement dated as of January 6, 1993, between the Registrant and Vestar, Inc.
10.11(7)* License and Development Agreement dated February 21, 1992, between the Company
and ISIS Pharmaceuticals, Inc.
10.12(1)* License Agreement dated January 1, 1991, between the Company and Wisconsin Alumni
Research Foundation.
10.13(1)* License Agreement dated September 17, 1992, between the Registrant and the
Regents of University of Michigan.
10.14(1)* License Agreement dated October 23, 1992, between the Company and the Regents of
University of Michigan.
10.15(8)# Employment Agreement dated February 21, 1994, between the Company and Ms. Martha
J. Demski.
10.16(9) Research, Option and License Agreement dated September 29, 1994, between the
Company and Pasteur Merieux Serums & Vaccins.
10.17(10) Amendment dated April 27, 1994, to Research Collaboration and License Agreement
dated May 31, 1991, between the Company and Merck & Co., Inc.
11 Schedule re: Computation of net loss per share.
23.1 Consent of Arthur Andersen LLP.
24 Power of Attorney (see page 32).
__________
(1) Incorporated by reference to the Company's Registration Statement
on Form S-1 (No. 33-56830) filed on January 7, 1993.
(2) Incorporated by reference to the exhibit of the same number to the
Company's Report on Form 10-K for the Fiscal Year ended December
31, 1994 (No. 0-21088).
(3) Incorporated by reference to the Exhibits of the same number filed
with the Company's Registration Statement on Form S-1 (No. 33-
56830) filed on January 7, 1993.
(4) Incorporated by reference to Exhibit 10.1 filed with the Company's
Registration Statement on Form S-8 (No. 33-81602) filed on
July 15, 1994.
30
(5) Incorporated by reference to Exhibit 10.1 filed with the Company's
Registration Statement on Form S-8 (No. 33-87972) filed on
December 29, 1994.
(6) Incorporated by reference to Exhibit 10.9 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1994 (No. 0-21088).
(7) Incorporated by reference to Exhibit 10.3 of ISIS Pharmaceuticals,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
March 31, 1992, as amended (No. 0-19125).
(8) Incorporated by reference to the exhibit of the same number to the
Company's Report on Form 10-K for the Fiscal Year ended December
31, 1993 (No. 0-21088).
(9) Incorporated by reference to Exhibit A of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994.
(10) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994 (No. 0-21088).
(11) Incorporated by reference to the exhibit of the same number
filed with the Company's Registration Statement on Form S-3
(No. 33-95812) filed on August 15, 1995.
* The Company has received confidential treatment of certain portions
of these agreements.
# Indicates management contract or compensatory plan or arrangement.
(D) FINANCIAL STATEMENT SCHEDULES
The financial statement schedules of Vical Incorporated required by this item
are set forth at the pages indicated in Item 14(a)(2).
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on February 28, 1997.
VICAL INCORPORATED
By: s/ Alain B. Schreiber
--------------------------------
Alain B. Schreiber, M.D.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Alain B. Schreiber and Martha J. Demski, and each of
them, his or her attorneys-in-fact, each with full power of substitution, for
him or her in any and all capacities, to sign any amendments to this Report and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each said attorneys-in-fact, or substitute or substitutes,
may do or cause to be done by virtue hereof.
s/ Alain B. Schreiber President, February 28, 1997
- ---------------------------- Chief Executive Officer
Alain B. Schreiber and Director
s/ Martha J. Demski Vice President, Finance February 28, 1997
- ---------------------------- Chief Financial Officer
Martha J. Demski Secretary and Treasurer
s/ Robert C. Bellas Director February 28, 1997
- ----------------------------
Robert C. Bellas
s/ Fred A. Middleton Director February 28, 1997
- ----------------------------
Fred A. Middleton
s/ Philip M. Young Director February 28, 1997
- ----------------------------
Philip M. Young
s/ Patrick F. Latterell Director February 28, 1997
- ----------------------------
Patrick F. Latterell
s/ Dale A. Smith Director February 28, 1997
- ----------------------------
Dale A. Smith
s/ M. Blake Ingle Director February 28, 1997
- ----------------------------
M. Blake Ingle
32
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, 1996 and 1995, and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vical Incorporated as of
December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Diego, California
January 31, 1997
F-1
VICAL INCORPORATED
BALANCE SHEETS
December 31,
1996 1995
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents (Note 2) $ 12,609,277 $ 7,174,128
Marketable securities - available-for-sale (Note 2) 34,237,314 45,353,638
Receivables and other 1,925,995 528,089
------------ ------------
Total current assets 48,772,586 53,055,855
------------ ------------
Property and Equipment (Note 5):
Equipment 4,635,432 3,218,315
Leasehold improvements 1,235,199 517,846
------------ ------------
5,870,631 3,736,161
Less--Accumulated depreciation and amortization (3,607,724) (3,044,110)
------------ ------------
2,262,907 692,051
------------ ------------
Patent costs (Note 1) 1,091,687 835,410
Other assets 312,900 534,188
------------ ------------
$ 52,440,080 $ 55,117,504
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses (Note 4) $ 810,384 $ 528,297
Current portion of capital lease obligations (Note 5) 455,681 307,485
Deferred revenue (Note 3) 1,191,304 679,167
------------ ------------
Total current liabilities 2,457,369 1,514,949
------------ ------------
Long-Term Obligations:
Long-term obligations under capital leases (Note 5) 976,164 338,514
Notes payable (Note 5) 641,320 -
------------ ------------
Total long-term obligations 1,617,484 338,514
------------ ------------
Commitments (Note 5)
Stockholders' Equity (Note 6):
Common stock, $.01 par value--40,000,000 shares authorized-- 153,966 153,643
15,396,582 and 15,364,265 shares issued and outstanding
in 1996 and 1995, respectively
Additional paid-in capital 72,904,472 72,728,484
Deferred compensation - (158,427)
Unrealized gain (loss) on marketable securities (Note 2) (48,785) 104,176
Accumulated deficit (24,644,426) (19,563,835)
------------ ------------
Total stockholders' equity 48,365,227 53,264,041
------------ ------------
$ 52,440,080 $ 55,117,504
============ ============
See accompanying notes.
F-2
VICAL INCORPORATED
STATEMENTS OF OPERATIONS
Year ended December 31,
1996 1995 1994
------------ ------------ ------------
Revenues (Note 3):
Contract revenue $ 1,060,557 $ 899,547 $ 1,005,278
License/Royalty revenue 5,679,542 5,402,018 4,508,794
------------ ------------ ------------
6,740,099 6,301,565 5,514,072
Expenses:
Research and development 11,317,908 8,997,001 8,335,954
General and administrative 3,168,331 2,902,176 2,614,825
------------ ------------ ------------
14,486,239 11,899,177 10,950,779
============ ============ ============
Loss from operations (7,746,140) (5,597,612) (5,436,707)
Other income (expense):
Interest income 2,772,845 1,687,380 1,159,484
Interest expense (107,296) (73,219) (80,645)
------------ ------------ ------------
Net loss $ (5,080,591) $ (3,983,451) $ (4,357,868)
============ ============ ============
Net loss per share (Note 1) $ (0.33) $ (0.29) $ (0.34)
============ ============ ============
Shares used in per share calculation 15,382,848 13,504,790 12,831,585
============ ============ ============
See accompanying notes.
F-3
VICAL INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
Unrealized
Gain
Additional (Loss) on Total
Common Stock Paid-in Deferred Marketab Accumulated Stockholders'
Shares Amount Capital Compensation Securities Deficit Equity
---------- ---------- ------------ ------------ ---------- ------------ ------------
BALANCE, December 31, 1993 12,828,819 $ 128,288 $44,182,216 ($642,288) $ - ($11,222,516) $32,445,700
Repurchase of common stock
at $.16 per share (4,434) (44) (2,223) 1,470 - - (797)
Stock option exercises 21,329 213 3,641 - - - 3,854
Deferred compensation - - - 234,017 - - 234,017
Unrealized gain (loss) on
marketable securities - - - - (472,708) - (472,708)
Net loss - - - - - (4,357,868) (4,357,868)
---------- ---------- ------------ ---------- --------- ------------ -----------
BALANCE, December 31, 1994 12,845,714 128,457 44,183,634 (406,801) (472,708) (15,580,384) 27,852,198
Issuance of common stock
at $12.25 per share 2,500,000 25,000 28,524,733 - - - 28,549,733
Repurchase of common stock
at $.16 per share (449) (4) (123) 43 - - (84)
Stock option exercises 19,000 190 20,240 - - - 20,430
Deferred compensation - - - 248,331 - - 248,331
Unrealized gain (loss) on
marketable securities - - - - 576,884 - 576,884
Net loss - - - - - (3,983,451) (3,983,451)
---------- ---------- ------------ ---------- --------- ------------ -----------
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 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
========== ========== ============ ========== ========= ============ ===========
See accompanying notes.
F-4
VICAL INCORPORATED
STATEMENTS OF CASH FLOWS
Year ended December 31,
----------------------------------------------------
1996 1995 1994
------------ ------------ ------------
OPERATING ACTIVITIES:
Net loss $ (5,080,591) $ (3,983,451) $ (4,357,868)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash provided
from (used in) operating activities:
Depreciation and amortization 620,033 509,375 493,868
Compensation expense related to stock purchases 158,427 248,331 234,017
Write-off of abandoned patent application costs 3,247 220,440 180,314
Changes in operating assets and liabilities:
Receivables and other (1,397,906) 33,902 49,841
Accounts payable and accrued expenses 282,087 (24,400) 156,105
Deferred revenue 512,137 (350,000) (516,249)
Other - 43 1,470
------------ ------------ ------------
Net cash provided from (used in) operating activities (4,902,566) (3,345,760) (3,758,502)
------------ ------------ ------------
INVESTING ACTIVITIES:
Marketable securities 10,963,363 (19,701,751) 5,834,655
Capital expenditures (980,709) (40,322) (503,261)
Other assets 221,288 171,888 171,481
Patent expenditures (269,682) (356,135) (283,326)
------------ ------------ ------------
Net cash provided from (used in) investing activities 9,934,260 (19,926,320) 5,219,549
------------ ------------ ------------
FINANCING ACTIVITIES:
Principal payments under capital lease obligations (414,176) (387,958) (354,495)
Proceeds from notes payable 641,320 - -
Issuance of common stock, net 176,311 28,570,036 1,587
------------ ------------ ------------
Net cash provided from (used in) financing activities 403,455 28,182,078 (352,908)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,435,149 4,909,998 1,108,139
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,174,128 2,264,130 1,155,991
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,609,277 $ 7,174,128 $ 2,264,130
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid $ 107,296 $ 73,219 $ 80,645
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital leases $ 1,200,022 $ 144,355 $ 509,549
See accompanying notes.
F-5
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. Summary of Significant Accounting Policies
Organization and Business Activity
Vical Incorporated (the "Company"), a Delaware corporation, was incorporated in
1987. Vical discovers and develops non-viral, gene-based pharmaceutical
product candidates for human gene therapy.
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 for at least the next several
years. No assurance can be given that the Company can generate sufficient
product revenue to become profitable 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.
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
Net loss per share for the three years ended December 31, 1996, has been
computed using the weighted average number of shares of common stock
outstanding during the periods. Common equivalent shares are excluded as the
effect would be antidilutive.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes."
F-6
New Accounting Standard
In January 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." The
Company has elected to adopt the alternative disclosure provisions of SFAS 123
and therefore will not be recording stock-based compensation using fair value
accounting as defined under SFAS 123.
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, 1996 and 1995, consist primarily of $12,560,988 and
$5,959,870, respectively, in commercial paper and money market funds.
In January 1994, the Company adopted Statement of Financial Accounting
Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and
Equity Securities." The provisions of SFAS 115 require 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 are calculated based on the specific
identification method.
At December 31, 1996, marketable securities consisted of the following:
Amortized Market Unrealized
Cost Value Gain (Loss)
------------ ------------ ------------
U.S. Government Obligations $ 25,421,815 $ 25,395,811 $ (26,004)
Commercial Paper 8,864,284 8,841,503 (22,781)
------------ ------------ ------------
Total Marketable Securities $ 34,286,099 $ 34,237,314 $ (48,785)
============ ============ ============
Approximately 55% of these securities mature within one year of December 31,
1996, and the remaining 45% mature within two years of December 31, 1996.
At December 31, 1995, marketable securities consisted of the following:
Amortized Market Unrealized
Cost Value Gain (Loss)
------------ ------------ ------------
U.S. Government Obligations $ 28,637,937 $ 28,731,446 $ 93,509
Commercial Paper 16,611,525 16,622,192 10,667
------------ ------------ ------------
Total Marketable Securities $ 45,249,462 $ 45,353,638 $ 104,176
============ ============ ============
3. Significant Contracts and License Agreements
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
shall be paid an annual research fee through September 1998 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. Through December
31, 1996, Vical has received $5,950,000 of which $2,746,000, $1,287,500, and
$1,225,000 was recognized as income in 1996, 1995, and 1994, 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. Under a separate agreement Vical is obligated to pay a third
party 10 percent of certain payments received by the Company under the PMC
agreement.
F-7
Genzyme Corporation
In October 1993, the Company entered into an option agreement with Genzyme
Corporation ("Genzyme"). The Company granted Genzyme a three year option to
obtain exclusive worldwide license rights related to the use of the Company's
cytofectin technology in the treatment of cystic fibrosis. Vical also granted
Genzyme a right of first offer to use the Company's cytofectin technology in
other lung disorders. In 1996, Genzyme exercised the option, resulting in a
$1,000,000 payment to Vical. Through December 31, 1996, Vical received
$2,300,000 from Genzyme of which $1,300,000, $400,000 and $475,000 has been
recognized as income in 1996, 1995, and 1994, respectively. The agreement also
provides for the Company to receive additional payments based upon achievement
of certain defined milestones and royalty payments based on net product sales.
Merck & Co., Inc.
In May 1991, the Company entered into a collaborative research, development,
and commercialization agreement with Merck & Co., Inc. ("Merck"), which
provides Merck with certain exclusive rights to develop and commercialize
certain preventive human infectious disease vaccines incorporating the
Company's naked DNA vaccine technology. A second collaborative agreement was
signed in May 1992 granting Merck exclusive rights to develop and commercialize
the Company's naked DNA vaccine technology for an animal disease application.
In 1993, Merck exercised its right under the 1991 agreement to extend its
option to vaccines developed against five specific infectious disease targets
in return for the payment to Vical of $1,250,000. In 1994, Merck acquired the
option to an exclusive license to use the Company's naked DNA vaccine
technology for the development of a tuberculosis vaccine. In 1994, Merck also
exercised its options to license the Company's technology for use with two
vaccine targets and extended its option to vaccines developed against two other
specific diseases. For these 1994 transactions, the Company received
$2,300,000. In 1995, Merck exercised its remaining options. The Company
received approximately $2,950,000 for these transactions in 1995. 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. Through December 1996, the Company had received a total of
$11,630,000 under these agreements of which $1,500,000, $3,562,500, and
$2,665,000 has been recognized as revenues in 1996, 1995, and 1994,
respectively. Both agreements provide for the Company to receive additional
payments based upon achievement of certain defined milestones and royalty
payments based on net product sales. Under a separate agreement the Company is
obligated to pay a third party 10 percent of certain payments received by the
Company under the Merck agreements.
Baxter Healthcare Corporation
In December 1993, the Company entered into a collaborative research and
renewable option agreement with Baxter Healthcare Corporation ("Baxter"). The
Company granted Baxter an option to obtain an exclusive worldwide license to
the Company's direct DNA injection technology for use in the treatment of
hemophilia. Baxter renewed the option agreement in 1995. Through the
termination of this agreement in December 1996, the Company had received
$1,100,000 from Baxter of which $91,667, $300,000, and $666,667 has been
recognized as income in 1996, 1995, and 1994, respectively.
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 $1,102,000,
$752,000, and $483,000 was recognized as revenue during the years ended
December 31, 1996, 1995, and 1994, respectively. Included in the 1996 and 1995
amounts is revenue recognized for a corporate alliance entered into in March
1995 relating to DNA vaccines in the animal health area with Rhone Merieux, a
leading manufacturer and marketer of animal health products worldwide. The
agreement includes options for Rhone Merieux 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. If Rhone Merieux exercises its license options, cash
payments and royalties on net sales would be due to the Company. Under a U.S.
government agreement announced in September 1995, the Company and the Naval
Medical Research Institute were awarded a grant that was to provide up to
$1,000,000 per year for up to three years to support further development of a
malaria vaccine based on Vical's naked DNA vaccine technology. The agreement
commenced in the first quarter of 1996. As a result of subsequent federal
budget cuts, funding for the grant has been capped at $1,000,000 total and the
agreement now is expected to end June 30, 1997.
F-8
4. Other Financial Data
Accounts payable and accrued expenses consisted of the following at December
31, 1996 and 1995:
1996 1995
------------ ------------
Employee compensation $ 556,224 $ 321,233
Accounts payable 148,062 130,242
Other accrued liabilities 106,098 76,822
------------ ------------
$ 810,384 $ 528,297
============ ============
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, taxes, insurance and operating costs, subject to certain minimum
and maximum annual increases.
Annual future minimum obligations for capital and operating leases as of
December 31, 1996, are as follows:
Operating Leases Capital Leases
---------------- --------------
Years ended December 31,
1997 $ 1,072,946 $ 574,290
1998 1,110,388 438,638
1999 1,089,336 353,050
2000 453,204 325,518
2001 114,404 -
------------ ------------
Total minimum lease payments $3,840,278 1,691,496
============
Less amount representing
interest (259,651)
------------
Present value of capital
lease payments 1,431,845
Less current portion (455,681)
------------
Long-term obligations under
capital leases $ 976,164
============
Rent expense for the years ended December 31, 1996, 1995, and 1994, was
$807,713, $517,446, and $549,490, respectively.
Cost and accumulated depreciation of equipment under capital leases were as
follows:
Accumulated
Cost Depreciation Net
---- ------------ ---
December 31, 1996 $2,186,648 807,897 1,378,751
December 31, 1995 $1,415,202 812,646 602,556
F-9
Notes Payable
In June 1996, the Company entered into a loan and security agreement with a
bank which provides for borrowings of up to $2,500,000. Borrowings currently
bear interest at the bank's prime rate (8.25% at December 31, 1996) plus .5%,
or the Company may alternatively choose to have its borrowings bear interest at
the LIBOR rate plus 3.25%. Borrowings under the line of credit are secured by
substantially all assets of the Company, and the Company is required to comply
with certain financial covenants. The Company was in compliance with such
covenants at December 31, 1996. In April 1997, any outstanding borrowings
convert to a term loan with amortization over a three year period. The term
loan will bear interest at the same rate options. At December 31, 1996,
borrowings under the line of credit totaled $641,000.
Research and License Agreements
In 1996 and 1995, 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, 1996 or 1995.
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 15,396,582 and
15,364,265 were outstanding at December 31, 1996 and 1995, respectively.
Deferred Compensation
Prior to its initial public offering the Company recorded approximately
$1,018,000 of deferred compensation for the difference between the price of
stock sold and options granted and the deemed fair value of the Company's
common stock. Such deferred compensation was amortized to expense over the
various vesting periods and is fully amortized at December 31, 1996.
Amortization expense amounted to $158,427 and $248,331 for the years ended
December 31, 1996 and 1995, respectively.
Stock Plan and Directors Option Plan
The Company has a stock plan ("1992 Stock Plan") under which 1,000,000 shares
of common stock are reserved for issuance to employees 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
incentive stock options must equal at least the fair market value on the date
of grant. The exercise price of nonstatutory stock options and direct awards
or sales of shares may be no less than 85 percent of the fair market value on
the date of grant. The maximum term of options granted under the plan is ten
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. In December
1996, the Company's Board of Directors adopted an amendment to increase the
number of shares of common stock reserved for issuance under this plan by
700,000 shares and to allow non-employee director participation in the plan.
The amendment is subject to the approval of the stockholders at the 1997 annual
meeting.
The Company also has a directors stock option plan ("Directors Plan") that
provides for the issuance of up to 210,000 shares of the Company's common stock
to non-employee directors.
F-10
The following table summarizes stock option transactions for the years ended
December 31, 1996 and 1995:
1992 Stock Plan and Directors Plan
----------------------------------
Shares Weighted Ave.
------------ ---------------
Outstanding,
December 31, 1994 655,850 $ 7.2307
Granted 174,650 $ 9.0631
Exercised (19,000) $ 1.0752
Forfeited (61,588) $ 9.8354
----------
Outstanding,
December 31, 1995 749,912 $ 7.5994
Granted 456,350 $ 15.9872
Exercised (32,317) $ 5.4839
Forfeited (14,264) $ 10.9745
--------
Outstanding,
December 31, 1996 1,159,681 $ 10.9176
========== ==========
Exercisable,
December 31, 1996 487,625 $ 6.8222
========== ==========
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 Company's net loss
and loss per share would have increased to the pro forma amounts indicated
below:
1996 1995
---------- ----------
Net loss - as reported $5,080,591 $3,983,451
Net loss - pro forma $6,497,447 $4,143,062
Net loss per share - as reported $.33 $.29
Net loss per share - pro forma $.42 $.31
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 in 1996 and 1995: risk free interest rate of
6.57%, expected option life of 5 years, expected volatility of 73.65% and a
dividend rate of zero.
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, 1996 and 1995, 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 at
December 31, 1996, is $50,000. There were no long-term amounts outstanding at
December 31, 1995. The current portion, included in receivables and other, is
$25,000 and $50,000, at December 31, 1996 and 1995, respectively.
F-11
8. Income Taxes
As of December 31, 1996, the Company has available net operating loss
carryforwards of approximately $22,400,000 and research and development credit
carryforwards of approximately $1,100,000 to reduce future federal income
taxes, if any. These carryforwards expire through 2011 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 $11,600,000 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.
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 full- time employees.
In 1994, the Company implemented a matching program in which the Company
matches employee contributions according to a specified formula. The Company's
matching contributions totaled approximately $78,000, $71,000, and $61,000 in
1996, 1995, and 1994, respectively.
10. Summary of Unaudited Quarterly Financial Information
The following is a summary of the unaudited quarterly results of operations for
the years ended December 31, 1996 and 1995 (in thousands, except per share
amounts):
Quarter Ended
March 31 June 30 September 30 December 31
---------- ---------- ---------- ----------
1996
----
Revenues $ 520 $ 3,555 $ 541 $ 2,124
Research and development costs 2,380 3,133 2,628 3,177
Total operating costs and
expenses 3,110 3,872 3,378 4,126
Net income (loss) (1,905) 350 (2,190) (1,336)
Net income (loss) per common (.12) .02 (.14) (.09)
share
Shares used in per share
calculation 15,373 15,791 15,385 15,392
March 31 June 30 September 30 December 31
---------- ---------- ------------ -----------
1995
----
Revenues $ 977 $ 3,488 $ 1,161 $ 676
Research and development costs 2,088 2,819 2,016 2,074
Total operating costs and
expenses 2,771 3,849 2,525 2,754
Net loss (1,517) (46) (1,057) (1,363)
Net loss per common share (.12) (.00) (.08) (.09)
Shares used in per share
calculation 12,846 12,846 12,955 15,351
F-12