UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-21088
VICAL INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 93-0948554
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9373 Towne Centre Dr., Suite 100, San Diego, California 92121
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(Address of principal executive offices) (Zip code)
(619) 453-9900
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed
since last report)
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 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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT SEPTEMBER 30, 1997
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Common Stock, $.01 par value 15,460,802
VICAL INCORPORATED
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FORM 10-Q
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TABLE OF CONTENTS
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PAGE NO.
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COVER PAGE.................................................................1
TABLE OF CONTENTS..........................................................2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of September 30, 1997 and December 31, 1996..........3
Statements of Operations for the Three Months Ended
September 30, 1997 and 1996, and for the Nine Months
Ended September 30, 1997 and 1996......................................4
Statements of Cash Flows for the Nine Months Ended
September 30, 1997 and 1996............................................5
Notes to Financial Statements..........................................6
ITEM 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................8
ITEM 3.
Quantitative and Qualitative Disclosure About Market Risk. *
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................*
ITEM 2. Changes in Securities.........................................*
ITEM 3. Defaults upon Senior Securities...............................*
ITEM 4. Submission of Matters to a Vote of Security Holders...........*
ITEM 5. Other Information.............................................*
ITEM 6. Exhibits and Reports on Form 8-K..............................12
SIGNATURE..................................................................13
EXHIBIT LIST...............................................................14
* No information provided due to inapplicability of item.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VICAL INCORPORATED
BALANCE SHEETS
September 30, December 31,
1997 1996
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(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 6,704,160 $ 12,609,277
Marketable securities - available-for-sale 35,587,654 34,237,314
Receivables and other 1,350,639 1,925,995
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Total current assets 43,642,453 48,772,586
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Property and Equipment:
Equipment 5,059,109 4,635,432
Leasehold improvements 1,621,461 1,235,199
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6,680,570 5,870,631
Less-Accumulated depreciation and amortization (4,251,022) (3,607,724)
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2,429,548 2,262,907
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Patent Costs 1,204,867 1,091,687
Deposits and Other Assets 115,090 312,900
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$ 47,391,958 $ 52,440,080
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 813,781 $ 810,384
Current portion of capital lease obligations 495,277 455,681
Current portion of notes payable 213,773 --
Deferred revenue 356,522 1,191,304
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Total current liabilities 1,879,353 2,457,369
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Long-Term Obligations:
Notes payable 937,904 641,320
Long-term obligations under capital leases 320,660 976,164
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Total long-term obligations 1,258,564 1,617,484
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Stockholders' Equity:
Common stock, $.01 par value--40,000,000 shares authorized--
15,460,802 and 15,396,582 shares issued and outstanding
at September 30, 1997, and December 31, 1996, respectively 154,608 153,966
Additional paid-in capital 73,214,651 72,904,472
Unrealized gain (loss) on marketable securities 22,868 (48,785)
Accumulated deficit (29,138,086) (24,644,426)
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Total stockholders' equity 44,254,041 48,365,227
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Total Liabilities and Stockholders' Equity $ 47,391,958 $ 52,440,080
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See accompanying notes.
3
VICAL INCORPORATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
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1997 1996 1997 1996
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Revenues:
Contract revenue $ 130,999 $ 254,673 $ 1,325,925 $ 764,101
License/royalty revenue 3,349,434 285,853 4,147,564 3,852,440
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3,480,433 540,526 5,473,489 4,616,541
Expenses:
Research and development 3,319,102 2,628,286 8,910,514 8,142,125
General and administrative 927,968 750,171 2,705,180 2,219,192
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4,247,070 3,378,457 11,615,694 10,361,317
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Loss from operations (766,637) (2,837,931) (6,142,205) (5,744,776)
Interest income 590,731 683,654 1,798,100 2,062,706
Interest expense 48,598 36,199 149,555 63,229
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Net loss $ (224,504) $(2,190,476) $(4,493,660) $(3,745,299)
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Net loss per share (Note 2) $ (.01) $ (.14) $ (.29) $ (.24)
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Shares used in computing net loss
per share (Note 2) 15,458,404 15,385,428 15,443,212 15,379,940
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4
See accompanying notes.
VICAL INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
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1997 1996
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OPERATING ACTIVITIES:
Net loss $ (4,493,660) $ (3,745,299)
Adjustments to reconcile net loss to net cash provided from
(used in) operating activities:
Depreciation and amortization 690,440 423,271
Compensation expense related to stock purchases - 143,280
Write-off of abandoned patent application costs 54,388 3,247
Change in operating assets and liabilities:
Receivables and other 575,356 (558,994)
Accounts payable and accrued expenses 3,397 91,081
Deferred revenue (834,782) 807,065
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Net cash provided from (used in) operating activities (4,004,861) (2,836,349)
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INVESTING ACTIVITIES:
Marketable securities (1,278,687) 668,313
Capital expenditures (449,184) (923,799)
Deposits and other assets 197,810 (158,074)
Patent expenditures (196,091) (220,116)
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Net cash provided from (used in) investment activities (1,726,152) (633,676)
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FINANCING ACTIVITIES:
Principal payments under capital lease obligations (378,038) (300,723)
Proceeds from note payable - 641,320
Principal payments on note payable (106,887) -
Issuance of common stock, net 310,821 133,307
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Net cash provided from (used in) financing activities (174,104) 473,904
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Net decrease in cash and cash equivalents (5,905,117) (2,996,121)
Cash and cash equivalents at beginning of period 12,609,277 7,174,128
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Cash and cash equivalents at end of period $ 6,704,160 $ 4,178,007
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Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Equipment acquired under capital leases $ 379,374 $ 848,433
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See accompanying notes.
5
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
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ORGANIZATION
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Vical was incorporated in April 1987 and has devoted substantially all of
its resources since that time to its research and development programs.
The Company is focusing its resources on the development of its direct
gene transfer and related technologies.
BASIS OF PRESENTATION
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The information contained herein has been prepared in accordance with
instructions for Form 10-Q. The information at September 30, 1997, and
for the three-month and nine-month periods ended September 30, 1997 and
1996, is unaudited. In the opinion of management, the information
reflects all adjustments necessary to make the results of operations for
the interim periods a fair statement of such operations. All such
adjustments are of a normal recurring nature. Interim results are not
necessarily indicative of results for a full year. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. For a
presentation including all disclosures required by generally accepted
accounting principles, these financial statements should be read in
conjunction with the audited financial statements for the year ended
December 31, 1996, included in the Vical Incorporated Form 10-K filed
with the Securities and Exchange Commission.
2. NET LOSS PER SHARE
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Net loss per share for the three-month and nine-month periods ended
September 30, 1997 and 1996, is computed using the weighted average number
of common shares outstanding during the respective periods. Common
equivalent shares are excluded as their effect would be antidilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." The Company will be required to adopt these new rules effective
December 15, 1997. Management does not anticipate any significant impact
resulting from the adoption of this new standard upon current or
previously reported earnings (loss) per share.
3. NOTES PAYABLE
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In June 1996, the Company entered into a loan and security agreement with
a bank for the borrowing of up to $2,500,000. Borrowings under the line of
credit were secured by substantially all assets of the Company, and the
Company was required to comply with certain financial covenants. In
March 1997, the outstanding borrowings converted to a term loan bearing
interest at the bank's prime rate (8.5% at September 30, 1997) plus .5%,
or the Company may alternatively choose to have its outstanding balance
bear interest at the LIBOR rate plus 3.25%. The term loan has a
three-year amortization period. At September 30, 1997, the loan balance
was $534,000, including approximately $214,000 reflected in current
liabilities.
6
4. SUBSEQUENT EVENTS
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In October 1997, the Company entered into an agreement granting
Rhone-Poulenc Rorer Pharmaceuticals Inc. ("RPR") an exclusive worldwide
license to use the Company's patented naked DNA gene delivery technology
to develop certain gene therapy products for potential treatment of
neurodegenerative diseases which involve the loss of nerve cell function.
The agreement resulted in an initial payment to the Company of $1,000,000
which will be recorded as revenue in the fourth quarter of 1997.
On November 3, 1997, the Company entered into an agreement granting
Merck & Co., Inc. ("Merck") certain rights to develop and market
therapeutic vaccines against the human immunodeficiency virus (HIV) and
hepatitis B virus (HBV) using the Company's patented naked DNA technology.
Under the agreement, Merck will be making an investment of $5,000,000 for
approximately 262,000 shares of Vical common stock. The price per share
reflects a twenty-five percent premium over the average per share closing
stock price for the twenty trading days prior to the date of the agreement.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Vical was incorporated in April 1987 and has devoted substantially all of its
resources since that time to its research and development programs. The
Company is focusing its resources on the development of its direct gene
transfer and related technologies. Currently, the Company is developing its
cancer product candidates internally, while developing vaccine product
candidates for infectious diseases primarily in collaboration with corporate
partners Merck & Co., Inc. ("Merck") and Pasteur Merieux Connaught ("PMC")
and developing gene-based therapeutic protein product candidates for
metabolic disorders primarily in collaboration with corporate partners Merck
and Rhone-Poulenc Rorer Pharmaceuticals Inc. ("RPR"). To date, the Company
has not received revenues from the sale of products. The Company expects to
incur substantial operating losses for at least the next several years, due
primarily to expansion of its research and development programs and the cost
of preclinical studies and clinical trials. As of September 30, 1997, the
Company's accumulated deficit was approximately $29.1 million.
In September 1995, the Company commenced Phase II clinical trials of
ALLOVECTIN-7 at 11 teaching oncology centers in five tumor types: melanoma,
colorectal carcinoma, renal cell carcinoma, breast carcinoma and
non-Hodgkin's lymphoma. Treatment of more than 100 patients was completed in
early 1997. Initial results, presented in May 1997, indicated potential
efficacy in certain patients with advanced melanoma. In October 1996, Vical
commenced additional multi-center Phase II clinical testing of ALLOVECTIN-7
in approximately 50 advanced melanoma patients. If appropriate rates and
durations of clinical response are observed in these Phase II clinical
trials, the data could potentially lead to further clinical trials to support
product license approval submissions. Initial results from another Phase
I/II trial, also presented in May 1997, indicated potential efficacy in
certain patients with inoperable head and neck cancer. A multi-center Phase
II trial with ALLOVECTIN-7 in approximately 20 patients with inoperable head
and neck cancer began in September 1997.
In April 1995, the Company initiated Phase I/II clinical testing of its
second gene therapy product candidate, LEUVECTIN, at two clinical centers.
LEUVECTIN is a gene-based product candidate intended for direct injection
into tumor lesions of cancer patients. 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, or sarcoma. In June 1997, the Company
initiated a Phase I/II clinical trial with LEUVECTIN in approximately 18
prostate cancer patients. Accrual and treatment of patients in the
additional trials were ongoing at September 30, 1997.
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. 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. In October 1997, a Phase I/II clinical trial began with
VAXID.
8
In July 1997, the Company and PMC began a Phase I clinical trial of an
experimental naked DNA vaccine against the parasite that causes malaria. The
Company and PMC are sponsoring the trial under their Research, Collaboration
and License Agreement. The trial is being conducted by the U.S. Naval
Medical Research Institute and the U.S. Army Medical Research Institute of
Infectious Diseases. Pursuant to the agreement with PMC, Vical received a
payment of $1,000,000 in July 1997.
In September 1997, the Company entered into an agreement granting Merck the
rights to use the Company's naked DNA technology to deliver certain growth
factors as potential treatments for a range of applications including
revascularization. The agreement resulted in an initial payment to the
Company of $2,000,000. The agreement marked the first license of the
Company's naked DNA technology for potential delivery of a therapeutic
protein, and was the first such agreement since the issuance of Vical's broad
patents covering the naked DNA technology. The Company had previously
licensed the technology to Merck and PMC for use in vaccines against a total
of 13 infectious diseases.
In October 1997, the Company entered into an agreement granting Rhone-Poulenc
Rorer Pharmaceuticals, Inc. ("RPR") an exclusive worldwide license to use the
Company's patented naked DNA gene delivery technology to develop certain gene
therapy products for potential treatment of neurodegenerative diseases which
involve the loss of nerve cell function. The agreement resulted in an
initial payment to the Company of $1,000,000 which will be recorded as
revenue in the fourth quarter of 1997.
On November 3, 1997, the Company entered into an agreement granting Merck
certain rights to develop and market therapeutic vaccines against the human
immunodeficiency virus (HIV) and hepatitis B virus (HBV) using the Company's
patented naked DNA technology. Under the agreement, Merck will be making an
investment of $5,000,000 for approximately 262,000 shares of Vical common
stock. The price per share reflects a twenty-five percent premium over the
average per share closing stock price for the twenty trading days prior to the
date of the agreement.
There can be no assurance that the Company's product candidates will prove to
be safe and effective in clinical trials or that any commercially successful
products will ultimately be developed by the Company.
This Form 10-Q contains, in addition to historical information,
forward-looking statements. 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, including whether the Company's product candidates will be
shown to be safe or efficacious in clinical trials, whether the Company's
corporate collaborations will be successful, and whether the Company's
product candidates will ultimately be successfully developed or receive
necessary regulatory approvals and other matters discussed in Item 1 under
the caption "Risk Factors" in the Company's Form 10-K for the year ended
December 31, 1996, filed with the Securities and Exchange Commission, which
could cause actual results to differ materially from those projected. These
forward-looking statements speak only as of the date hereof. The Company
undertakes no obligation to update these forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
9
RESULTS OF OPERATIONS
Revenues were $3,480,000 for the quarter ended September 30, 1997. License
revenue of $3,178,000 was derived primarily from an initial payment of
$2,000,000 from Merck under a license and option agreement signed in
September for use of the Company's naked DNA technology to deliver certain
growth factors as potential treatments for a range of applications including
revascularization and a milestone payment of $1,000,000 from PMC for the July
start of a Phase I clinical trial of an experimental naked DNA vaccine
against the parasite that causes malaria. License revenue also included the
ongoing amortization of deferred license revenues under earlier PMC and Rhone
Merieux agreements. In addition, the Company recognized contract revenues of
$131,000 primarily from PMC and royalty revenues of $171,000. For the quarter
ended September 30, 1996, the Company had revenues of $541,000, including
ongoing amortization of license and contract revenues and royalties.
Revenues for the nine months ended September 30, 1997, were $5,473,000 and
included license and contract revenue from Merck, PMC and Rhone Merieux,
royalty revenue, and a grant of $209,000 from the Department of Defense. For
the nine months ended September 30, 1996, revenues were $4,617,000 and
principally consisted of $1,000,000 from Merck for a milestone payment as the
result of Merck's initiation of a Phase I clinical trial of an experimental
DNA vaccine against influenza under an agreement with the Company covering
potential DNA vaccines, $2,568,000 from PMC for the exercise of three of five
original license options, the extension of the option on one of these five
vaccine targets, and the addition of an option to a sixth target under PMC's
agreement with the Company. Revenues for the nine months ended September 30,
1996 also included $314,000 from the Department of Defense and other license,
royalty and contract revenue totaling $735,000.
The Company's total operating expenses for the quarter ended September 30,
1997, were $4,247,000 compared with $3,378,000 for the third quarter of 1996.
Total operating expenses for the nine months ended September 30, 1997, were
$11,616,000 compared with $10,361,000 for the same period in 1996.
Research and development expenses increased to $3,319,000 for the three
months ended September 30, 1997, from $2,628,000 for the same period in 1996.
For the nine months ended September 30, 1997, research and development
expenses were $8,911,000 compared with $8,142,000 for the same period of
1996. This increase in research and development expenses in 1997 was due to
increased spending for staff, facilities, laboratory supplies, outside
laboratory services and increased clinical trial activity.
General and administrative expenses increased to $928,000 for the three
months ended September 30, 1997, from $750,000 for the same period in 1996.
General and administrative expenses for the nine months ended September 30,
1997, increased to $2,705,000 from $2,219,000 for the same period in 1996.
The increase was due primarily to additional staffing and related expenses.
Investment income for the three-month and nine-month periods ended September
30, 1997, was $591,000 and $1,798,000, respectively. Investment income for
the three-month and nine-month periods ended September 30, 1996, was $684,000
and $2,063,000, respectively. The decline was primarily a result of lower
cash and investment balances.
The net loss was $.01 per share for the three months ended September 30,
1997, compared with a net loss per share of $.14 for the same period of 1996.
For the nine months ended September 30, 1997, the net loss was $.29 per
share compared with a net loss of $.24 per share for the same period in the
prior year. The Company expects to incur losses throughout the remainder of
1997 and to report a net loss per share for the year ended December 31, 1997.
10
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 September 30, 1997,
the Company had working capital of approximately $41.8 million compared with
$46.3 million at December 31, 1996. Cash and marketable securities totaled
approximately $42.3 million at September 30, 1997, compared with $46.8
million at December 31, 1996.
The Company expects to incur substantial additional research and development
expense including continued increases in personnel costs and costs related to
preclinical testing and clinical trials. The Company's future capital
requirements will depend on many factors, including continued 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 and scale-up, and commercialization activities and
arrangements. The Company intends to seek additional funding through
research and development relationships with suitable potential corporate
collaborators or through public or private financing. There can be no
assurance that additional funding will be available on favorable terms, if at
all.
If additional funding is not available, Vical anticipates that its available
cash and existing sources of funding will be adequate to satisfy its
operating needs through 1999.
11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
Exhibit 10.18 #* Agreement between Merck & Co. Inc. and the Company
dated September 12, 1997.
# Confidential treatment has been requested with respect to certain
portions of this agreement.
* To be filed by amendment.
Exhibit 27 Financial Data Schedule
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2. Reports on Form 8-K
None
12
VICAL INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
Vical Incorporated
Date: November 7, 1997 By: /s/MARTHA J. DEMSKI
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Martha J. Demski
Vice President and
Chief Financial Officer
(on behalf of the registrant and
as the registrant's Principal
Financial and Accounting
Officer)
13
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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1. Exhibit 27 Financial Data Schedule
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14