Intercell Usa (IOMI) 10-Q 2006 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

or

o 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: 000-51709

Iomai Corporation

(exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	52-2049149 (I.R.S. Employer Identification No.)
20 Firstfield Road, Suite 250, Gaithersburg, Maryland (Address of principal executive offices)	20878 (Zip Code)

Registrant’s telephone number, including area code:
(301) 556-4500

Securities registered pursuant to Section 12(b) of the Act:

None	None
(Title of each Class)	(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value Per Share

     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. Yesþ Noo

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

     Large accelerated filero                    Accelerated Filero                      Non-accelerated filerþ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

     There were 16,908,231 shares of the registrant’s Common Stock outstanding as of May 8, 2006.

TABLE OF CONTENTS

	Page
PART I — FINANCIAL INFORMATION
ITEM 1. Unaudited Financial Statements		4
Balance Sheets as of March 31, 2006 and December 31, 2005		4
Statements of Operations for the three months ended March 31, 2006 and 2005		5
Statements of Cash Flows for the three months ended March 31, 2006 and 2005		6
Notes to Unaudited Financial Statements		7
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk		33
ITEM 4. Controls and Procedures		33
PART II — OTHER INFORMATION
ITEM 1A. Risk Factors		34
ITEM 6. Exhibits		34
Signatures		35

2

Cautionary Note Regarding Forward-Looking Statements

     This report contains forward-looking statements. All statements contained in this report other than statements of historical fact are forward-looking statements. Forward-looking statements include statements regarding our future financial position, business strategy, budgets, projected costs, plans and objectives of management for future operations. The words “may,” “continue,” “estimate,” “intend,” “plan,” “will,” “believe,” “project,” “expect,” “seek,” “anticipate” and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. These forward-looking statements include, among other things, statements about the implementation of our corporate strategy; our future financial performance and projected expenditures; our ability to enter into future collaborations with pharmaceutical, biopharmaceutical and biotechnology companies and academic institutions or to obtain funding from government agencies; our product research and development activities, including the timing and progress of our clinical trials, and projected expenditures; our technology’s potential efficacy, advantages over current approaches to vaccination and broad applicability to infectious diseases; our ability to receive regulatory approvals to develop and commercialize our product candidates; our ability to increase our manufacturing capabilities for our product candidates; our ability to develop or obtain funding for our immunostimulant patch for pandemic flu applications; our projected markets and growth in markets; our product formulations and patient needs and potential funding sources; our staffing needs; and our plans for sales and marketing.

     The forward-looking statements in this report are subject to risks and uncertainties that may cause actual results to differ materially. These risks and uncertainties include those set forth under the heading “Factors That May Impact Future Results” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report may not occur as contemplated, and actual results could differ materially from those anticipated or implied by the forward-looking statements. You should not unduly rely on these forward-looking statements, which speak only as of the date of this report. Unless required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise.

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PART I — FINANCIAL INFORMATION

ITEM 1. Unaudited Financial Statements

IOMAI CORPORATION
BALANCE SHEETS
(in thousands, except share and per share data)

	March 31,			December 31,
	2006			2005
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	22,554		$	5,190
Marketable securities		6,934			—
Accounts receivable		1,008			12
Prepaid expenses and other current assets		980			258
Total current assets		31,476			5,460
Property and equipment, net		5,296			4,465
Restricted cash		49			49
Restricted marketable securities		596			590
Deferred financing costs		—			1,108
Other noncurrent assets		217			189
Total assets	$	37,634		$	11,861
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	2,256		$	2,012
Accrued expenses		993			1,611
Notes payable, current portion		1,365			1,333
Notes payable to related party, current portion		197			229
Capital lease obligation, current portion		5			5
Total current liabilities		4,816			5,190
Notes payable, long-term portion		1,044			1,397
Notes payable to related party, long-term portion		1,485			1,264
Capital lease obligation, long-term portion		—			1
Deferred rent		256			122
Total liabilities		7,601			7,974
Common stock subject to put right		—			1,959
Warrant to purchase Series C preferred stock		—			23
Series C convertible redeemable preferred stock, $0.01 par value; 0 shares authorized, issued and outstanding at March 31, 2006; and 150,000,000 shares authorized; 129,590,034 shares issued and outstanding at December 31, 2005		—			70,363
Stockholders’ equity (deficit):
Series B convertible preferred stock; $0.01 par value; 0 shares authorized, issued and outstanding at March 31, 2006; and 15,200,000 shares authorized; 14,734,578 shares issued and outstanding at December 31, 2005		—			147
Common stock, $0.01 par value; 200,000,000 shares authorized and 16,908,231 shares outstanding at March 31, 2006; and 220,000,000 shares authorized; 795,519 shares issued and outstanding at December 31, 2005		169			8
Additional paid-in capital		103,886			—
Accumulated other comprehensive income		2			1
Accumulated deficit		(74,024	)		(68,614	)
Total stockholders’ equity (deficit)		30,033			(68,458	)
Total liabilities and stockholders’ equity (deficit)	$	37,634		$	11,861

See accompanying notes.

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IOMAI CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)

	Three Months Ended
	March 31,
	2006			2005
	(Unaudited)
Revenues	$	997		$	971
Cost and expenses:
Research and development		4,929			3,739
General and administrative		1,219			881
Total costs and expenses		6,148			4,620
Loss from operations		(5,151	)		(3,649	)
Other income (expense)
Interest income		139			115
Interest expense		(97	)		(125	)
Other expense, net		72			(10	)
Total other income (expense), net		114			(20	)
Net loss before cumulative effect of a change in accounting principle		(5,037	)		(3,669	)
Cumulative effect of change in accounting principle		17			—
Net loss		(5,020	)		(3,669	)
Dividends on and accretion of convertible redeemable preferred stock		(434	)		(1,373	)
Net loss available to common stockholders	$	(5,454	)	$	(5,042	)
Net loss available to common stockholders per share of common stock—basic and diluted	$	(0.49	)	$	(6.53	)
Weighted-average number of shares of common stock—basic and diluted		11,179,355			771,991

See accompanying notes.

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IOMAI CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)

	Three Months Ended
	March 31,
	2006			2005
	(Unaudited)
Cash flows from operating activities
Net loss	$	(5,020	)	$	(3,669	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		270			701
Stock-based compensation expense		170			13
Non-cash interest expense and amortization of premium/discount of marketable securities		(16	)		10
Deferred rent		110			(11	)
Loss on disposal of property and equipment		5			1
Changes in operating assets and liabilities:
Accounts receivable		(996	)		(561	)
Prepaid expenses and other current assets		(739	)		(59	)
Other noncurrent assets		(29	)		4
Accounts payable		(158	)		332
Accrued expenses		(418	)		(181	)
Net cash used in operating activities		(6,821	)		(3,420	)
Cash flows from investing activities
Purchases of property and equipment		(619	)		(412	)
Sales of property and equipment		3			—
Sales/maturities of marketable securities		—			7,000
Purchases of marketable securities		(6,906	)		(4,526	)
Net cash (used in) provided by investing activities		(7,522	)		2,062
Cash flows from financing activities
Proceeds from the exercise of stock options		7			—
Proceeds from initial public offering, net of underwriting commissions		32,854			—
Stock issuance costs		(1,020	)		—
Proceeds from notes payable		—			96
Principal payments on notes payable		(322	)		(273	)
Proceeds from notes payable to related party		279			—
Principal payments on notes payable to related party		(90	)		(80	)
Payments under capital lease obligations		(1	)		(5	)
Net cash provided by (used in) financing activities		31,707			(262	)
Net increase (decrease) in cash and cash equivalents		17,364			(1,620	)
Cash and cash equivalents at beginning of period		5,190			6,942
Cash and cash equivalents at end of period	$	22,554		$	5,322
Supplemental schedule of noncash investing and financing activities
Cash paid for interest	$	107		$	133

See accompanying notes.

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IOMAI CORPORATION
NOTES TO FINANCIAL STATEMENTS

1. Basis of Presentation

The financial statements of Iomai Corporation (the “Company” or “Iomai”) for the three-month periods ended March 31, 2006 and 2005 are unaudited and include all adjustments which, in the opinion of management, are necessary to present fairly the financial position and results of operations for the periods then ended. All such adjustments are of a normal recurring nature except for those entries recorded to account for the initial public offering (see Note 3 – Initial Public Offering). These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission.

The results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

2. Significant Accounting Policies

Use of estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure 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.

Restricted cash and marketable securities

Restricted cash at March 31, 2006 and 2005 relates to a deposit held as collateral for a letter of credit acting as a security deposit on a facility operating lease. The interest rate is the bank’s prime rate plus one percent per annum and the fee is one percent annually.

Restricted marketable securities at March 31, 2006 and 2005 include marketable securities with a face value of $600,000 pledged as collateral to secure payment of notes payable issued to finance, in part, the build-out of the Company’s facilities.

Revenue recognition

The Company recognizes revenue when all terms and conditions of the agreements have been met, including persuasive evidence of an arrangement, services have been rendered, price is fixed or determinable, and collectability is reasonably assured. For reimbursable cost research grants, the Company recognizes revenue as costs are incurred once the grant funding is authorized. Funding of government grants beyond the U.S. government’s current fiscal year is subject to annual congressional appropriations, and the Company cannot recognize revenue for subsequent years until the period in which such funding is duly authorized. Provisions for estimated losses on research grant projects and any other contracts are made in the period such losses are determined.

Research and development costs

The Company expenses its research and development costs as incurred; however, equipment and facilities that are acquired or constructed for research and development activities that have alternative future uses (in research and development projects or otherwise) are capitalized and depreciated as tangible assets.

Stock-based compensation

The Company has four stock-based employee compensation plans, described more fully in Note 4 — Stockholders’ Deficit. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123,Accounting for Stock-Based Compensation(SFAS No. 123). Under the prospective method of adoption selected by the Company under the provisions of FASB Statement No. 148,Accounting for Stock-Based Compensation — Transition and Disclosure,an amendment of FASB Statement No. 123 (SFAS No. 148), the recognition provisions have been applied to all employee awards granted, modified, or settled after January 1, 2003. Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), “Share-Based Payment” (Statement 123(R)), using the modified-prospective-transition method. See Note 4 — Stockholders’ Deficit for discussion of impact of adoption of Statement 123(R).

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3. Initial Public Offering

     On February 6, 2006, the Company closed its initial public offering by selling 5,000,000 shares of its common stock at a public offering price of $7.00 per share. Net proceeds, before expenses, were $32,853,574. The Company’s expenses for the initial public offering, including legal, accounting and printing fees, were $1.9 million, so total net proceeds, after expenses, were $31.0 million.

     Upon the closing of the Company’s initial public offering, a put option on 57,500 shares of common stock terminated in accordance with its terms without further financial obligation to the Company. In 2001, the Company granted the put option to the Walter Reed Army Institute of Research (WRAIR) in connection with the issuance of those shares to WRAIR as part of an amendment to the master license agreement for the transcutaneous immunization technology. Prior to initial public offering WRAIR had the right to put these shares to the Company, upon certain conditions, for the greater of $1,958,450 or the then fair market value of those shares at the date of exercise.

     Also in connection with the initial public offering, all of the Company’s preferred stock was automatically converted into shares of Common Stock as follows:

• All shares of Series B convertible preferred stock (Series B Preferred Stock) were automatically converted into 1,133,424 shares of common stock;

• All shares of Series C convertible redeemable preferred stock (Series C Preferred Stock) were automatically converted into 9,968,443 shares of common stock

• A warrant issued to the Company’s placement agent in connection with the Series C Stock financing in December 2002 for 250,000 shares of Series C Preferred Stock was automatically converted into a warrant to purchase up to 19,231 shares of Common Stock at an exercise price of $5.7473 per share.

     The Company previously issued warrants to purchase up to 16,529 shares at a per share exercise price of $5.75 issued in connection with the financing of the build-out of the Company’s facility. Upon the initial public offering, the holder exercised these warrants in accordance with their terms in a cashless exercise for 2,865 shares of Common Stock.

     Upon completion of the initial public offering, the Company had 16,900,251 shares of Common Stock outstanding after giving effect to the automatic conversion of the Company’s Series B and C Preferred Stock, the cashless exercise of the warrant to purchase common stock for 2,865 shares by the equipment financing company, and the issuance of 5,000,000 shares of common stock in the initial public offering.

4. Stockholders’ Deficit

Stock-Based Compensation

The Company expenses options in accordance with the fair value recognition provisions of SFAS No. 123, whereby the Company recognizes stock-based compensation based on the fair value of the options at the date of grant using the Black-Scholes model.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement 123(R), using the modified-prospective-transition method. Results for prior periods have not been restated.

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Under the modified-prospective-transition method, the Company will continue to recognize compensation as options vest. The principal change in accounting with the adoption of Statement 123(R) is that beginning with the first quarter of 2006, management must estimate forfeitures of options (resulting from the failure of optionholders to satisfy service or performance conditions) prior to vesting, and reduce stock-based compensation expense by the amount of these estimated forfeitures. Previously, under Statement 123, the Company had elected to adjust stock-based compensation expense only for actual forfeitures. The Company will periodically monitor the rates for actual forfeitures and, if necessary, adjust its stock-based compensation expense for changes in its estimated rate of forfeitures and differences between expectations and actual experience.

Also, with the adoption of Statement 123(R), the Company recognized a one-time charge recorded as the cumulative effect of a change in accounting principle, which reflects an estimate of forfeitures for unvested awards outstanding upon the adoption of Statement 123(R). This amount represents a reduction in the compensation cost for prior periods for any unvested options remaining that would not have been recognized in those prior periods had forfeitures for such unvested options been estimated during those prior periods. The cumulative effect for this change in accounting principle totaled $16,726 and is recorded on the statement of operations for the three months ended March 31, 2006.

The adoption of Statement 123(R) on January 1, 2006 did not have a material impact on the Company’s net loss and net loss per share for the three-month period ended March 31, 2006.

Under Statement 123(R), the cumulative amount of compensation cost recognized for instruments classified as equity that ordinarily would result in a future tax deduction under existing tax law shall be considered to be a deductible temporary difference in applying FASB Statement No. 109,Accounting for Income Taxes. The deductible temporary difference is based on the compensation cost recognized for financial reporting purposes; however, these provisions currently do not impact to the Company as all the deferred tax assets have a full valuation allowance against them.

A summary of all stock option plan activity during the three months ended March 31, 2006 is as follows:

						Weighted-
						Average
				Weighted-		Remaining		Aggregate
				Average		Contractual		Intrinsic Value(1)
	Shares			Exercise Price		Term		($000s)
Outstanding at December 31, 2005		1,893,264		$	1.64
Granted		660,000			5.29
Exercised		(7,980	)		0.91
Forfeited or expired		—			—
Outstanding at March 31, 2006		2,545,284		$	2.59		8.0	$	8,201
Vested or expected to vest		2,359,501		$	2.57		7.9	$	7,647
Exercisable at March 31, 2006		1,112,614		$	1.97		6.7	$	4,276

⁽¹⁾ Calculated using the per-share closing price of the Company’s common stock on March 31, 2006, which was $5.81.

The total fair value of stock options which vested during the three-month period ended March 31, 2006, less estimated forfeitures, was approximately $187,098. The total intrinsic value of stock options exercised during the three-month period ended March 31, 2006 was approximately $48,598. Cash received from option exercise under all stock compensation plans was $7,262 for the first quarter of 2006.

As of March 31, 2006, there was approximately $3.3 million of total unrecognized compensation expense, less estimated forfeitures, related to nonvested options under the Company’s stock compensation plans. The expenses are expected to be recognized over a weighted-average period of 2.6 years.

Stock options awarded to directors and employees generally are granted with an exercise price equal to the market price of the Company’s stock on the date of grant. Those options generally vest in equal installments over a four-year period based on continued service and have ten-year contractual terms. The Company recognizes compensation costs for those options on a straight-line basis over the requisite service period for the entire award (that is, generally over four years).

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During the first quarter of 2006, the Company issued 660,000 options, which vest in equal installments over a four-year period. The weighted-average fair value of the options granted during the three-months ended March 31, 2006 was $3.25 per share applying the Black-Scholes option-pricing model utilizing the following weighted-average assumptions and a discussion of management’s methodology for developing each of the assumptions used in the valuation model follows:

	Three months ended
	March 31, 2006
Expected dividend yield	0%
Expected volatility	70%
Risk-free interest rate	4.83%
Expected average life of options	5 years
Expected forfeiture rate	3.0% – 7.0%

Dividend Yield — The Company has never declared or paid dividends and has no plans to do so in the foreseeable future.

Expected Volatility — Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company tracks the historical volatility of its own stock, but since the Company went public only in February 2006, the Company also uses an estimated volatility based on the volatility of a number of similarly situated biotechnology companies, along with other factors deemed relevant by management.

Risk-Free Interest Rate — This is the U.S. Treasury rate for the week of each option grant during the quarter having a term that most closely resembles the expected life of the option.

Expected Life of the Option Term — This is the period of time that the options granted are expected to remain unexercised. Options granted during the quarter have a maximum term of ten years. The Company estimates the expected life of the option term to be five years; however, now that the Company is a public entity, management expects that over time, management will track estimates of the expected life of the option term so that its estimates will approximate actual past behavior for similar options.

Expected Forfeiture Rate — The forfeiture rate is the estimated percentage of options granted that are expected to be forfeited or canceled on an annual basis before becoming fully vested. The Company estimates the forfeiture rate based on past turnover data ranging anywhere from the past one to three years, with further consideration given to the class of employees to whom the options were granted.

The Company recognized the following stock option compensation expense for the three months ended:

	March 31,
	2006			2005
Employees and directors	$	199,414		$	12,434
Non-employee consultants		(12,316	)		320
	$	187,098		$	12,755

Stock Compensation Plans

1998 Stock Option Plan

     In 1998, the Company adopted a stock option plan (the 1998 Plan) and reserved 76,923 shares of common stock pursuant to the 1998 Plan. Incentive stock awards are granted with an exercise price equal to the fair market value of the Company’s stock on the date of grant. Nonstatutory options are granted with an exercise price at not less than 85% of the fair market value of the Company’s stock on the date of grant. The options expire 10 years from the date of grant.

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1999 Stock Option Plan

     In August 1999, the Company adopted the 1999 Stock Incentive Plan (the 1999 Plan). The 1999 Plan currently provides for the issuance of restricted common stock, stock options or the direct award of common stock, for up to 2,001,584 shares. Incentive stock awards are required to be granted with an exercise price equal to the estimated fair market value of the Company’s stock on the date of grant. Nonstatutory options are granted with an exercise price at not less than 85% of the fair market value of the Company’s stock on the date of grant. The 1999 Plan options expire 10 years from the date of grant.

     In January 2003, the 1999 Plan was amended to increase the number of shares of Common Stock available for issuance under the 1999 Plan from 423,076 shares to 1,476,923 shares. In September 2003, the 1999 Plan was further amended to increase the number of shares of Common Stock available for issuance under the 1999 Plan by an additional 524,661 shares to 2,001,584 shares, in the aggregate.

2005 Stock Option Plan

     Under the 2005 Incentive Plan (the 2005 Plan), a total of 1,040,000 shares of common stock has been reserved for issuance upon the exercise of awards. The 2005 Plan provides for the grant of awards consisting of any or a combination of stock options, stock appreciation rights, restricted stock, unrestricted stock, stock unit, performance and cash awards. The compensation committee may make grants to key employees of Iomai and its affiliates, board members, including outside directors, and members of an affiliate’s board of directors, and consultants, advisors or other independent contractors who perform services for us or any of our affiliates. The maximum number of shares of stock for which options and stock appreciation rights may be granted to any particular participant in a calendar year shall be, in each case, 780,000, and the maximum number of shares of stock subject to other awards that may be delivered to any particular participant in any calendar year shall be 140,000. These limits, and the total number of shares reserved under the 2005 Plan, are subject to adjustment in the case of stock dividends and other transactions affecting the common stock.

2006 Employee Stock Purchase Plan

     Under the 2006 Employee Stock Purchase Plan (the ESPP), a total of 80,000 shares of common stock has been reserved for issuance under the ESPP. The ESPP will permit eligible employees to purchase shares of our common stock at a discount from fair market value. The Company intends for the ESPP to meet the requirements for an “employee stock purchase plan” under Section 423 of the Internal Revenue Code.

     The ESPP did not go into effect until completion of the Company’s initial public offering in February 2006. As of March 31, 2006, no shares of Common Stock were issued under the ESPP. The ESPP will be implemented by a series of offering periods, each of which has a duration of approximately six months, commencing generally on the third Sunday of February and August of each year. The plan is expected to become operational later in 2006 and, consequently, is expected to have an impact on future periods. The compensation committee, or a duly appointed administrator, will determine the frequency and duration of individual offerings under the ESPP and the dates when employees may purchase stock.

     Eligible employees participate voluntarily and may withdraw from any offering at any time before they purchase stock. Participation terminates automatically upon termination of employment. The purchase price per share of common stock in an offering will equal 85% of the fair market value of the common stock at the first trading day of the offering period or at the last trading day of the offering period, whichever is less. Employees will pay through payroll deductions.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

     We are a biopharmaceutical company focused on the discovery, development and commercialization of vaccines and immune system stimulants delivered to the skin via a novel, needle-free technology called transcutaneous immunization (TCI). TCI exploits the unique benefits of a major group of antigen-presenting cells found in the outer layers of the skin (Langerhans cells) to generate an enhanced immune response. TCI has the potential to enhance the efficacy of existing vaccines, enable new vaccines that are viable only through transcutaneous administration and expand the global vaccine market. We are developing two distinct product applications: (1) a needle-free vaccine patch and (2) an immunostimulant, or IS, patch. We are actively pursuing three product candidates in clinical development. Our three product candidates are a needle-free flu vaccine patch, an IS patch intended to boost the immune response of the elderly to the standard flu vaccine and a needle-free travelers’ diarrhea vaccine patch. We are also pursuing preclinical development of an IS patch to either reduce the required dose of, or improve the timing or magnitude of the immune response to, pandemic flu vaccines. None of our product candidates has been approved for commercial sale by the FDA or any comparable foreign agencies.

     As of March 31, 2006, we had an accumulated deficit of $74.0 million. We expect to incur substantial expenses over the next several years as we continue the clinical development of our needle-free flu vaccine patch and IS patch for elderly receiving flu vaccines; expand the clinical trial program for our needle-free travelers’ diarrhea vaccine patch; continue our existing preclinical development programs, including our IS patch for pandemic flu vaccines, and commence new programs; increase our manufacturing capabilities for product candidates; and expand our research and development activities.

     We anticipate that a substantial portion of our efforts throughout 2006 will be focused on conducting additional development for our three product candidates in clinical development, as well as building our infrastructure to support our operations as a public company.

Management Review of First Quarter of 2006

     The following is a summary of key events that occurred during the first quarter of 2006:

• On February 6, 2006, we closed our initial public offering, in which we sold 5,000,000 shares of common stock at a public offering price of $7.00 per share. Net proceeds, before expenses, were $32,853,574. Our expenses for the initial public offering were $1.9 million, so our total net proceeds, after expenses, were $31.0 million.

• In February 2006, the National Institutes of Health, or NIH, awarded us the remaining $1.4 million available under the last year of a two-year grant to fund up to $2.9 million for further development of our IS technology for pandemic flu applications.

• During the first quarter of 2006, we completed a Phase 1/2 clinical trial in which our dry vaccine patch for travelers’ diarrhea achieved high immune responses in those vaccinated and outperformed its earlier liquid-based patch. With these results in hand, we are incorporating the dry patch into a series of Phase 2 studies for our travelers’ diarrhea vaccine to be conducted over the course of 2006.

     On May 2, 2006, we also submitted to the Department of Health and Human Services (DHHS) a response to government’s request for proposal (RFP) for further development of our IS patch for pandemic influenza vaccines. In the RFP issued in March 2006, DHHS stated that it is looking to stretch the domestic influenza vaccine supply in the event of an influenza pandemic, by awarding multi-year contracts for the preclinical study, clinical testing and regulatory development targeted to selected organizations developing approaches that use fewer or smaller doses of vaccine. In line with the government’s RFP, and if awarded a contract, we will develop a plan to produce in a six-month period 150 million doses of our IS patch. This patch is designed to enhance the immune response to any manufactured pandemic influenza vaccine, an advantage that may allow the public health service to employ a universal dose-sparing strategy to extend the supply of vaccine.

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Historical Results of Operations / Liquidity & Capital Resources

Revenues

     Our revenues to date have principally been limited to amounts we have received under U.S. federal grant programs. As of March 31, 2006, we have one principal active grant, which the NIH originally awarded us in January 2005 to fund over two years up to $2.9 million for further development of our IS technology for pandemic influenza applications. In the first quarter of 2006, the NIH awarded us the $1.4 million remaining to be received under this grant for 2006. Through March 31, 2006, we have incurred $1.0 million of expenses for this second year of funding, which includes expenses incurred in 2005 but for which we could not receive reimbursement until the additional funding was authorized by the NIH in February 2006. These amounts include reimbursement for our employees’ time and benefits and other expenses related to performance under the relevant grants.

Research and development expenses

     Our research and development expenses consist primarily of:

• salaries and related expenses for personnel;

• fees paid to consultants and clinical research organizations in conjunction with their monitoring our clinical trials and acquiring and evaluating data in conjunction with our clinical trials;

• consulting fees paid to third parties in connection with other aspects of our product development efforts;

• fees paid to research organizations in conjunction with preclinical animal studies;

• costs of materials used in research and development;

• depreciation of facilities and equipment used to develop our product candidates; and

• milestone payments, license fees, and royalty payments for technology licenses.

     We expense both internal and external research and development costs as incurred, other than those capital expenditures that have alternative future uses, such as the build-out of our pilot plant. Due to the risks inherent in the clinical trial process and the early stage of development of our product candidates, we do not currently track our internal research and development costs by program and cannot state precisely the costs incurred for each of our research and development programs. However, the following table shows, for the periods presented, our estimate of the total costs that have been incurred for our lead product candidates: from January 1, 2003 to March 31, 2006:

	Three months ended March 31,				Cumulative Since
Product Candidate	2006		2005		January 1, 2003
			(in thousands)
Needle-free flu vaccine patch	$	1,213	$	1,228	$	8,417
IS patch for elderly receiving flu vaccines		156		729		14,712
Needle-free travelers’ diarrhea vaccine patch		2,626		842		12,828
IS patch for pandemic flu		556		381		2,968
Other programs		378		559		10,214
TOTAL	$	4,929	$	3,739	$	49,139

          We expect our research and development costs will continue to be substantial and that they will increase as we advance our current portfolio of product candidates through clinical trials and move other product candidates into preclinical and clinical trials.

General and administrative expense

     General and administrative expense consists primarily of compensation for employees in executive and operational functions, including finance and accounting, business development, and corporate development. Other significant costs include facilities costs and professional fees for accounting and legal services. With the completion of our initial public offering, our general and administrative expenses have increased due to increased costs for insurance, professional fees, public company reporting requirements, and investor relations costs associated with

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operating as a publicly-traded company. In addition, there will likely be further increases going forward related to the hiring of additional personnel.

RESULTS OF OPERATIONS

Comparison of the three months ended March 31, 2006 and 2005

     Revenues.We recognized revenues from government grants of approximately $1.0 million for each of the three months ended March 31, 2006 and 2005, respectively. Grant revenue in the first quarter of 2006 was principally from reimbursable expenses incurred under our two-year NIH grant awarded for further development of our IS patch technology for pandemic flu applications. This grant is our primary active government grant, and there is approximately $0.4 million of available funding remaining under this grant, as of March 31, 2006.

     Research and Development Expenses.Our research and development expenses were approximately $4.9 million for the three months ended March 31, 2006, as compared to $3.7 million for the three months ended March 31, 2005. The $1.2 million increase in research expenditures was driven by three major factors associated with supporting our clinical and product development programs: (1) increased development costs for our skin preparation system, (2) higher payroll costs associated with a 34% increase in headcount and expensing of stock options; and (3) increased clinical trial activity. These increased costs were partially offset by lower depreciation and amortization costs associated with our pilot manufacturing plant in the first quarter of 2006. Prior to signing the lease extension for our facility in October 2005, we amortized all leasehold improvements for the facility over the lesser of the useful life or the expiration of the lease term, which was May 2006. Once we entered into the lease extension, the amortization period for the remaining $1.5 million of unamortized leasehold improvements was extended to May 2013.

     General and Administrative Expenses.General and administrative expenses were approximately $1.2 million for the three months ended March 31, 2006, as compared to $0.9 million for the three months ended March 31, 2005. The increase in general and administrative expenses was principally due to higher payroll costs associated with expensing stock options and higher insurance and legal costs associated with being a public company.

     Interest Income (Expense) and Other — Net.Our net interest and other income was approximately $114,000 for the three months ended March 31, 2006, as compared to net interest and other expense of approximately $20,000 for the three months ended March 31, 2005. The net interest and other income reflects the interest received on our cash and marketable securities, offset by interest expense on financing to purchase equipment and leasehold improvements. The increase in net interest and other income was a result of increased cash and investment balances due to our receipt of the net proceeds from our initial public offering in February 2006.

     Net Loss.Our net loss for the three months ended March 31, 2006 was approximately $5.0 million, and our net loss for the three months ended March 31, 2005 was approximately $3.7 million. The increase in our net loss was principally a result of increased research and development expenses in the three months ended March 31, 2006.

Liquidity and capital resources

     We have incurred annual operating losses since inception, and, as of March 31, 2006, we had an accumulated deficit of $74.0 million. We expect to incur increasing and significant losses over the next several years as we continue our clinical trials, apply for regulatory approvals, continue development of our technologies, and expand our operations. Since our inception, we have financed our operations primarily through the sale of equity securities, interest income earned on cash, cash equivalents, and short-term investment balances, and debt. We have also generated funds from collaborative partners and research grants.

     As of March 31, 2006, we had approximately $29.5 million in unrestricted cash, cash equivalents, and marketable securities. On February 6, 2006, we completed our initial public offering in which we raised approximately $31.0 million in net proceeds, after expenses. We have used cash primarily to finance our research operations, including clinical trials. We invest in cash equivalents and US government and agency obligations. Our investment objectives are, primarily, to assure liquidity and preservation of capital and, secondarily, to obtain investment income. All of our marketable securities are classified as available-for-sale. These securities are carried at fair value, plus any accrued interest.

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     We expect that we will be able to fund our capital expenditures and growing operations with our current working capital through early 2007. In order to fund our needs subsequently, we will need to raise additional money and may seek to do so by: (1) out-licensing technologies or product candidates to one or more corporate partners, (2) completing an outright sale of assets, (3) securing debt financing, and/or (4) selling additional equity securities. Our ability to successfully enter into any such arrangements is uncertain, and, if funds are not available, or not available on terms acceptable to us, we may be required to revise our planned clinical trials, other development activities, capital expenditure requirements, and the scale of our operations. We expect to attempt to raise additional funds in advance of depleting our existing cash balances; however, we may not be able to raise funds or raise amounts sufficient to meet the long-term needs of the business. Satisfying long-term needs will require the successful commercialization of our product candidates and, at this time, we cannot reliably estimate if or when that will occur.

     Our future cash requirements include, but are not limited to, supporting our clinical trial efforts and continuing our other research and development programs. We have entered into various agreements with institutions and clinical research organizations to conduct and monitor our current clinical studies. Under these agreements, subject to the enrollment of patients and performance by the applicable institution of certain services, we have estimated our potential payments to be $5.1 million over the term of currently ongoing studies. Through March 31, 2006, approximately $3.3 million of this amount has been expensed as research and development expenses and $3.3 million has been paid related to these clinical studies. The timing of our expense recognition and future payments related to these agreements are subject to the enrollment of patients and performance by the applicable institutions of certain services. The actual amounts we pay out, if any, will depend on a range of factors outside of our control, including the success of our pre-clinical and clinical development efforts with respect to any products being developed, the content and timing of decisions made by the FDA and other regulatory authorities, and other factors affecting future operating results. As we expand our clinical studies, we plan to enter into additional agreements.

     Net cash used in operating activities for the three months ended March 31, 2006 and 2005 was $6.8 million and $3.4 million, respectively. The $3.4 million change in net cash used in operations was due to (1) an increase in net loss of $1.4 million in the three months ended March 31, 2006, (2) an increase in accounts receivable of $0.4 million under government grants, (3) an increase in prepaid and other current assets of $0.7 million, which are the result of increased insurance costs in 2006 associated with being a public company, and (4) an increase in accounts payable and accrued expenses of $0.7 million. These increased costs were partially offset by lower depreciation and amortization costs associated with our pilot manufacturing plant in the first quarter of 2006. As we develop our technologies and further our clinical trial programs, we expect to increase our spending. Our future ability to generate cash from operations will depend on achieving regulatory approval of our products, market acceptance of such products, and our ability to enter into collaborations.

     Net cash used in investing activities for the three months ended March 31, 2006, was $7.5 million as compared to net cash provided by investing activities of $2.1 million for the three months ended March 31, 2005. The $9.6 million decrease is principally the result of investing the proceeds from the our initial public offering in February 2006. During the three months ended March 31, 2006, we invested $6.9 million of our available cash in marketable securities and did not receive any proceeds from the maturity of such investments, as compared to $4.5 million of our available cash invested in marketable securities and $7.0 million received in proceeds from the maturity of such investments for the three months ended March 31, 2005. Additionally, for the three months ended March 31, 2006, we invested approximately $619,000 in the purchase of equipment, furniture, fixtures, for our pilot manufacturing facility and build-out of additional office and laboratory space, as compared to approximately $412,000 for such purchases in 2005.

     Net cash provided by financing activities was $31.7 million for the three months ended March 31, 2006 as compared to net cash used in financing activities of $0.3 million for the three months ended March 31, 2005. The $31.4 million increase is principally the result of the $32.9 million in net proceeds, before expenses, from the company’s initial public offering, partially offset by payment of stock issuance costs. Net proceeds from the exercise of stock options totaled approximately $7,262 and $298, for the three months ended March 31, 2006 and 2005, respectively. During the three months ended March 31, 2006, and 2005, net proceeds from debt borrowings totaled $279,000 and $96,000, respectively, as we financed the build-out of additional office space in the three months ended March 31, 2006. In the first quarter of 2006, we repaid $412,000 of our debt, as compared to $353,000 during the comparable period in 2005.

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     The following summarizes our long-term contractual obligations as of March 31, 2006:

	Payments Due by Period
			Less Than						More Than
Contractual Obligations	Total		1 Year		1-3 Years		3-5 Years		5 Years
					(In thousands)
Long-Term Debt(1) (2)	$	6,155	$	2,993	$	2,205	$	432	$	525
Capital Lease Obligations		5		5		—		—		—
Operating Lease Obligations(2)		4,805		792		1,228		1,296		1,489
Total	$	10,965	$	3,790	$	3,433	$	1,728	$	2,014

(1)

Includes interest payable in the period.

(2)

In October 2005, we amended our lease agreement to increase our rented research, manufacturing, and administrative space in Gaithersburg, Maryland to approximately 34,800 square feet, with the lease term extending until May 2013. We also extended our payment terms for the indebtedness we have with our landlord. Our obligations under the amended lease and these revised debt repayment terms are reflected in the table as long term debt and operating lease obligations. See discussion of amended lease terms below.

     In October 2005, we amended our lease to extend its term by seven years from May 2006 to May 2013. In connection with the lease extension, we renegotiated with the landlord the terms of the financing for the build-out of our pilot plant, which is recorded as notes payable to related party on our balance sheet, and we agreed to lease approximately 8,000 square feet of additional space in the building. Effective as of June 1, 2006, the then-remaining balance owed to the landlord under this debt financing, which we expect will total $1,342,719, will be amortized over the seven-year extension period at a rate of 10.5%. This change will result in a monthly payment of approximately $22,639 through May 2013, as opposed to the current monthly payment of approximately $44,689, which was being amortized through May 2009. In addition, we now have the right to prepay this debt obligation at any time upon four months’ written notice to the landlord.

     Also, effective June 1, 2006, our annual base rent for our existing space will be reduced from approximately $500,000 to approximately $455,000. With respect to the expansion space of approximately 8,000 square feet, we will pay approximately $27,000 during the first 5 months of 2006 and then beginning June 1, 2006, the annual base rent will adjust to approximately $116,000. All base rents will be subject to minimum rent escalation of 3.5% per year.

     As part of the amended lease, the landlord provided us with tenant improvement allowances totaling approximately $134,000 for the existing space and approximately $120,000 for the expansion space. The landlord has also provided us with up to $280,000 of additional financing to apply toward alterations to the expansion space on the same terms and conditions as our existing landlord financing. During the first quarter of 2006, we made alterations to the expansion space totaling approximately $400,000, and we financed the majority of these alterations by utilizing in full the approximately $120,000 in tenant improvement allowance and by drawing down the full $280,000 in additional landlord financing.

     In addition to the alterations to the expansion space, we currently expect to spend in 2006 approximately $2.0 million in additional capital expenditures, primarily for additional equipment for the pilot plant and related validation costs, which we may fund in whole or in part through equipment financing. As of March 31, 2006, we had purchased approximately $671,000 of this $2.0 million in additional capital expenditures.

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     Under our existing license agreements, we could be required to pay up to a total of $800,000 for each product candidate in milestone payments through product approval, in addition to sales milestones, and royalties on commercial sales, if any occur.

     Our future capital uses and requirements depend on numerous forward-looking factors. These factors include but are not limited to the following:

• the progress and costs of preclinical development and laboratory testing and clinical trials;

• the time and costs involved in obtaining regulatory approvals;

• delays that may be caused by evolving requirements of regulatory agencies;

• our ability to establish, enforce, and maintain collaborations required for product commercialization;

• the number of product candidates we pursue;

• the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims;

• our plans to establish sales, marketing, and/or manufacturing capabilities;

• the acquisition of technologies, products, and other business opportunities that require financial commitments; and

• our revenues, if any, from successful development and commercialization of our products.

     As of March 31, 2006, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. Therefore, we are not materially exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in these relationships.

Critical Accounting Policies and Estimates

     Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to our financial statements included in this report, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition.We recognize revenue when all terms and conditions of the agreements have been met, including persuasive evidence of an arrangement, services have been rendered, price is fixed or determinable, and collectability is reasonably assured. For reimbursable cost research grants, we recognize revenue as costs are incurred once the grant funding is authorized. Funding of government grants beyond the U.S. government’s current fiscal year is subject to annual congressional appropriations, and the Company cannot recognize revenue for subsequent years until the period in which such funding is duly authorized. Provisions for estimated losses on research grant projects and any other contracts are made in the period such losses are determined.

Research and Development Costs.We expense our research and development costs as incurred.

Stock-Based Compensation.We have four stock-based employee compensation plans, described more fully in Note 4 to the Financial Statements, and we record compensation expense based upon the fair value of stock-based awards. Effective January 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123,Accounting for Stock-Based Compensation(SFAS 123). The recognition provisions have been applied to all employee awards granted, modified, or settled after January 1, 2003.

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     Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), “Share-Based Payment” (Statement 123(R)), using the modified-prospective-transition method. As we have expensed options since 2003, the adoption of Statement 123(R) did not have a material impact on our stock-based compensation expenses for the first quarter of 2006, and management believes that the adoption of Statement 123(R) will not have a material impact on its financial statements going forward. We have continued to use the Black-Scholes formula to estimate the value of stock-based awards with the adoption of Statement 123(R).

     With the adoption of Statement 123(R), we recognized in our statement of operations for the three months ended March 31, 2006 a one-time charge recorded as the cumulative effect of a change in accounting principle, which reflects an estimate of forfeitures for unvested awards outstanding as of the adoption of Statement 123(R). This charge represents a reduction in the compensation cost for prior periods for any unvested options remaining that would not have been recognized in those prior periods had forfeitures for such unvested options been estimated during those prior periods. The cumulative effect for this change in accounting principle totaled $16,726 and is recorded on the statement of operations for the three months ended March 31, 2006.

     As of March 31, 2006, we anticipate recognizing approximately $3.3 million of total unrecognized compensation expense, less estimated forfeitures, related to nonvested options under the stock compensation plans in future periods. These expenses are expected to be recognized over a weighted-average period of 2.6 years.

     Based on the closing price of our stock on March 31, 2006, the intrinsic value of options outstanding as of that date was $8.2 million, of which $4.3 million related to vested options and $3.9 million related to unvested options.

     We account for equity instruments issued to nonemployees under the provisions of SFAS 123 and Emerging Issues Task Force Issue No. 96-18,Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in conjunction with, Selling, Goods and Services. Accordingly, the estimated fair value of the equity instrument is recorded on the earlier of the performance commitment date or the date the services required are completed.

Factors That May Impact Future Results

     Our future operating results may differ materially from the results described in this report due to the risks and uncertainties related to our business and our industry, including those discussed below. In addition, these factors represent risks and uncertainties that could cause actual results to differ materially from those implied by forward-looking statements in this report. The risks described below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition or results of operations.

Risks Relating to Our Business

     We are a biopharmaceutical company with a limited operating history and have generated no revenue from product sales. As a development stage company, we face many risks inherent in our business. If we do not overcome these risks, our business will not succeed.

     Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We commenced operations in May 1997, and since that time we have been engaged in research and development activities in connection with our product candidates. We have never generated any revenue from product sales. All of our current product candidates are at an early stage of development, and we do not expect to realize revenue from product sales for several more years, if at all. In addition, we are not currently receiving any significant funding for our research and development programs from third parties through collaborations or grants.

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We are seeking to create a business based upon new technology that is intended to change existing practices of vaccine delivery. As such, we are subject to all the risks incident to the creation of new products and may encounter unforeseen expenses, difficulties, complications and delays and other unknown factors. You also should consider that we will need to:

• obtain sufficient capital to support our efforts to develop our technology and commercialize our product candidates;

• complete and continue to enhance the product characteristics and development of our product candidates; and

• attempt to transition from a development stage company to a company capable of supporting commercial activities.

     We have a history of operating losses and may never be profitable.

     We have incurred substantial losses since our inception, and we expect to continue to incur substantial losses for the foreseeable future. Our net loss for the three months ended March 31, 2006 and for the year ended December 31, 2005 was $5.0 million and $18.0 million, respectively. As of March 31, 2006, we had an accumulated deficit of approximately $74.0 million. These losses have resulted principally from costs incurred in our research and development programs and from our general and administrative costs. We expect to incur additional operating losses in the future, and we expect these losses to increase significantly, whether or not we generate revenue, as we expand our product development and clinical trial efforts. These losses have had, and are expected to continue to have, an adverse impact on our working capital, total assets and stockholders’ equity.

     To date, we have generated no revenue from product sales or royalties. We do not expect to achieve any revenue from product sales or royalties unless and until we receive regulatory approval and begin commercialization of our product candidates. We are not certain of when, if ever, that will occur.

     Even if the regulatory authorities approve any of our product candidates and we commercialize these candidates, we may never be profitable. Even if we achieve profitability for a particular period, we may not be able to sustain or increase profitability.

     We will need additional funding, and we cannot guarantee that we will find adequate sources of capital in the future.

     As of March 31, 2006, we had approximately $29.5 million in cash, cash equivalents and marketable securities. We have incurred negative cash flows from operations since inception and have expended, and expect to continue to expend, substantial funds to conduct our research and development programs. On February 6, 2006, we closed our initial public offering, in which we raised net proceeds, before expenses, of $32.9 million. Our expenses for the initial public offering were $1.9 million, so our total net proceeds after expenses were $31.0 million. We believe that our current working capital and reimbursement of expenses under our existing grants will be sufficient to fund our operating expenses and capital requirements through early 2007, although we cannot assure you that we will not require additional funds before then. We have based this estimate on assumptions that may prove to be wrong. Our future capital requirements will depend on many factors, including:

• the number, size and complexity of our clinical trials;

• our progress in developing our product candidates;

• the timing of and costs involved in obtaining regulatory approvals;

• costs of manufacturing our product candidates;

• costs to maintain, expand and protect our intellectual property portfolio; and

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• costs to develop our sales and marketing capability.

     We expect to seek to raise additional funds in advance of when we exhaust our cash resources, which, if we raise additional funds by issuing equity securities, will result in further dilution to our stockholders. Any equity securities issued also may provide for rights, preferences or privileges senior to those of holders of our common stock. If we raise additional funds by issuing debt securities, these debt securities would have rights, preferences and privileges senior to those of holders of our common stock, and the terms of the debt securities issued could impose significant restrictions on our operations. If we raise additional funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our technology, product candidates or products that we would otherwise seek to develop or commercialize ourselves, or to grant licenses on terms that are not favorable to us.

     We do not know whether additional financing will be available on commercially acceptable terms when needed. If adequate funds are not available or are not available on commercially acceptable terms, we may need to downsize or halt our operations and may be unable to continue developing our products.

     The success of some programs, such as our needle-free flu vaccine patch, may depend on licensing biologics from, and entering into collaboration arrangements with, third parties. We cannot be certain that our licensing or collaboration efforts will succeed or that we will realize any revenue from them.

     The success of our business strategy is, in part, dependent on our ability to enter into multiple licensing and collaboration arrangements and to manage effectively the numerous relationships that will result. For example, we currently do not intend to manufacture any product components other than LT adjuvant and formulated patches. Therefore, we will need to negotiate agreements to acquire biologics, such as the flu antigens contained in our needle-free flu vaccine patch, and other product components from third parties in order to develop some of our vaccine candidates (other than our needle-free travelers’ diarrhea vaccine patch and IS patch). We are seeking a collaboration with respect to our needle-free flu patch. A failure to enter into a collaboration could delay development of this product candidate. Also, we may not establish a direct sales force for our products and, therefore, may need to establish marketing arrangements with third parties or major pharmaceutical companies.

     Our ability to enter into agreements with commercial partners depends in part on convincing them that our TCI technology can help achieve and accelerate their goals or efforts. This may require substantial time and effort on our part. While we anticipate expending substantial funds and management effort, we cannot assure you that a strategic relationship will result or that we will be able to negotiate additional strategic agreements in the future on acceptable terms, if at all. Furthermore, we may incur significant financial commitments to collaborators in connection with potential licenses and sponsored research agreements. Generally, we will not be able to directly control the areas of responsibility undertaken by our strategic partners and will be adversely affected should these partners prove unable to carry the product candidates forward to full commercialization or should they lose interest in dedicating the necessary resources toward developing such products quickly.

     Third parties may terminate our licensing and other strategic arrangements if we do not perform as required under these arrangements. Generally, we expect that agreements for rights to develop technologies will require us to exercise diligence in bringing product candidates to market and will require us to make milestone and royalty payments that, in some instances, are substantial. Our failure to exercise the required diligence or make any required milestone or royalty payment could result in the termination of the relevant license agreement, which could have a material adverse effect on us and our operations. In addition, these third parties may also breach or terminate their agreements with us or otherwise fail to conduct their activities in connection with our relationships in a timely manner. If we or our partners terminate or breach any of our licenses or relationships, we:

• may lose our rights to develop and market our product candidates;

• may lose patent and/or trade secret protection for our product candidates;

• may experience significant delays in the development or commercialization of our product candidates;

• may not be able to obtain any other licenses on acceptable terms, if at all; and

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• may incur liability for damages.

     Licensing arrangements and strategic relationships in our industry can be very complex, particularly with respect to intellectual property rights. Disputes may arise in the future regarding ownership rights to technology developed by or with other parties. These and other possible disagreements between us and third parties with respect to our licenses or our strategic relationships could lead to delays in the research, development, manufacture and commercialization of our product candidates. These disputes could also result in litigation or arbitration, both of which are time-consuming and expensive. These third parties also may pursue alternative technologies or product candidates either on their own or in strategic relationships with others in direct competition with us.

     None of our product candidates has been approved for commercial sale, and we may never receive such approval.

     All of our product candidates are in early pre-commercial stages, and we do not expect our product candidates to be commercially available for several years, if at all. We expect that each of our product candidates, consisting of a patch and one or more active ingredients, will be treated together as a single investigational product by the FDA, even if any active ingredient is part of an existing approved product. None of the active ingredients in our product candidates have been approved by the FDA for commercial sale in any product. Our product candidates are subject to stringent regulation by regulatory authorities in the United States and in other countries. We cannot market any product candidate until we have completed our clinical trials and have obtained the necessary regulatory approvals for that product candidate. We do not know whether regulatory authorities will grant approval for any of our product candidates.

     Conducting clinical trials and obtaining regulatory approvals are uncertain, time consuming and expensive processes. Our product candidates must complete rigorous preclinical testing and clinical trials. It will take us many years to complete our testing, and failure could occur at any stage of testing. Results of early trials frequently do not predict results of later trials, and acceptable results in early trials may not be repeated.

     Even if we complete preclinical and clinical trials successfully, we may not be able to obtain regulatory approvals. Data obtained from preclinical and clinical studies are subject to varying interpretations that could delay, limit or prevent regulatory approval, and failure to observe regulatory requirements or inadequate manufacturing processes are examples of other problems that could prevent approval. In addition, we may encounter delays or rejections due to additional government regulation from future legislation, administrative action or changes in FDA policy. Even if the FDA approves a product, the approval will be limited to those indications encompassed in the approval; marketing the product for a different indication would require a supplementary application.

     Outside the United States, our ability to market any of our potential products is contingent upon receiving marketing authorizations from the appropriate regulatory authorities. These foreign regulatory approval processes include all of the risks associated with the FDA approval process described above.

     If our research and testing is not successful, or if we cannot show that our product candidates are safe and effective, we will be unable to commercialize our product candidates, and our business may fail.

Our technology is unproven and presents challenges for our product development efforts.

     Our TCI technology represents a novel approach to stimulating the body’s immune system. There is no precedent for the successful commercialization of product candidates based on our technology. Developing biopharmaceuticals based on new technologies presents inherent risks of failure, including:

• research could demonstrate that the scientific basis of our technology is incorrect or less sound than we had believed;

• unexpected research results could reveal side effects or other unsatisfactory conditions that either will add cost to development of our product candidates or jeopardize our ability to complete the necessary clinical trials; and

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• time and effort required to solve technical problems could sufficiently delay the development of product candidates such that any competitive advantage that we may enjoy is lost.

     All of our product candidates currently in development rely on LT, a naturally occurring bacterial toxin, as an adjuvant. LT has been shown to cause undesirable side effects when delivered through conventional mechanisms such as injection, intranasal and oral delivery methods. LT cannot be administered orally as an adjuvant and was linked to an increase in the risk of Bell’s palsy, a temporary paralysis of the facial muscles, when used in a nasal flu vaccine that was on the market in Europe during the 2000/2001 flu season. If we find that LT is not safe when administered to patients through the skin using our TCI technology, we will not be able to use LT as an adjuvant in our products. This would have a material adverse effect on our product development efforts.

     Successful commercialization of our TCI technology will require integration of multiple dynamic and evolving components, such as antigens, adjuvants and a delivery mechanism, into finished product candidates. This complexity will likely increase the number of technical problems that we can expect to confront in the clinical and product development processes and, therefore, add to the cost and time required to commercialize each product candidate.

     As part of our product development efforts, we may make significant changes to our product candidates. These changes may not yield the benefits that we expect.

     We have made changes in the design or application of our product candidates in response to preclinical and clinical trial results and technological changes, and we may make additional changes in the future before we are able to commercialize our products. These and other changes to our product candidates may not yield the benefits that we expect and may result in complications and additional expenses that delay the development of our product candidates. In addition, changes to our product candidates may not be covered by our existing patents and patent applications, and may not qualify for patent protection, which could have a material adverse effect on our ability to commercialize our product candidates. See the risk factor entitled “If we are unable to protect our intellectual property, we may not be able to operate our business profitably.”

     We may be required to conduct clinical trials of our IS patch with flu vaccines developed by different manufacturers, which may lead to added cost and delay in approval and commercialization of our IS patch.

     In order for our IS patch to gain approval from the FDA and to be used with commercially available injectable flu vaccines, we may need to conduct multiple clinical trials of our IS patch with multiple flu vaccines developed by different manufacturers. This may substantially expand the cost and time required for the clinical trials of our IS patch, which could delay its potential approval by the FDA and its commercialization.

     We recently began developing and manufacturing heat labile toxin which may not perform comparably to the heat labile toxin we have purchased for use in previous clinical trials.

     Until recently, we have obtained all of the heat labile toxin (LT) used as an adjuvant in our product candidates (and also as an antigen in our needle-free travelers’ diarrhea vaccine patch) from a contract manufacturer. We believe that it is important for us to have control over the manufacture and development of the LT used in our product candidates. As a result, we have terminated our relationship with our contract manufacturer and have developed and are manufacturing our own strain of LT. Because LT is produced in biological processes, there can be no assurance of equivalence between the materials manufactured by our previous supplier and materials manufactured by us in our pilot plant in terms of purity, safety, potency and concentration. While we believe our LT strain is substantially similar to the LT provided by the contract manufacturer and the two strains appear to perform comparably in animal studies, we will not know if there are any differences in humans until we complete comparability studies in humans. In the second quarter of 2006, we initiated the first clinical trial to assess the safety and immunogenicity of our LT.

     The skin preparation systems used in connection with our product candidates may make our products less attractive to consumers.

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     We have observed in our product development efforts that the delivery of antigens and adjuvants to Langerhans cells through the skin is significantly improved by prepping the skin to disrupt the outer dead layer of skin, known as the stratum corneum. Based on animal studies, we believe that the method and level of skin preparation may differ from one product candidate to another because of the different physical properties of the active ingredients. Therefore, more than one skin preparation system (SPS) may be required for our different products to be effective. In recent clinical studies for our needle-free travelers’ diarrhea vaccine patch and IS patch, we have tested simple abrasive materials to disrupt the stratum corneum and are now working to design and test improved embodiments of these materials for use in our upcoming clinical trials for our product candidates. We believe our SPS will be simple to perform and will not involve discomfort to the patient. However, to the degree that our SPS is not perceived to be simple to perform or involve patient discomfort, it could reduce the attractiveness of our products since alternative vaccines or treatments are available for many of the indications that our product candidates under development seek to address.

     If physicians and patients do not accept our products, we may be unable to generate significant revenue.

     Even if any of our vaccine candidates obtain regulatory approval, they still may not gain market acceptance among physicians, patients and the medical community, which would limit our ability to generate revenue and would adversely affect our results of operations. Physicians will not recommend products developed by us or our collaborators until clinical data or other factors demonstrate the safety and efficacy of our products as compared to other available treatments. Even if the clinical safety and efficacy of our products is established, physicians may elect not to recommend these products for a variety of factors, including the reimbursement policies of government and third-party payors. There are other established treatment options for the diseases that many of our product candidates target, such as travelers’ diarrhea and the flu. In order to successfully launch a product based on our TCI technology, we must educate physicians and patients about the relative benefits of our products. If our products are not perceived as easy and convenient to use, for example as compared to an injectable vaccine or antibiotics, or are perceived to present a greater risk of side effects or are not perceived to be as effective as other available treatments, physicians and patients might not adopt our products. A failure of our technology to gain commercial acceptance would have a material adverse effect on our business. We expect that, if approved for commercialization, our needle-free travelers’ diarrhea vaccine patch will be paid for by patients out of pocket. Our needle-free travelers’ diarrhea vaccine patch is not designed to protect against all forms of travelers’ diarrhea, rather it is designed to protect against only those cases of travelers’ diarrhea caused by ETEC and in which the LT toxin is present. We estimate this to be approximately one-third of all cases of travelers’ diarrhea. This could limit commercial acceptance of this product. Because our needle-free flu vaccine patch and IS patch candidates are targeted at preventing or ameliorating the effects of flu infection, if the launch of these products for a particular flu season fails, we may not receive significant revenues from that product until the next season, if at all. See the risk factors set forth below entitled “Our competitors in the biopharmaceutical industry may have superior products, manufacturing capability or marketing expertise,” “Our ability to generate revenues will be diminished if we fail to obtain acceptable prices or an adequate level of reimbursement for our products from third-party payors,” and “We have no experience in sales, marketing and distribution and will depend on the sales and marketing efforts of third parties.”

     Our IS patch for pandemic flu program relies on government health organizations for funding clinical development and for ultimately procuring the product, if approved.

     We currently rely upon funding from the United States government for the preclinical development of our IS patch for pandemic flu and plan to seek additional funding from the United States government for this program. On May 2, 2006, we submitted to the Department of Health and Human Services (DHHS) a proposal in response to the government’s request for proposal (RFP) to develop a plan to produce at least 150 million doses of its dose-sparing patch in a six-month period if awarded the contract. The procurement of government funding is a time consuming process and is subject to government appropriations and other political risks. As a result, the receipt by us of funds from the United States government to fund our research and development of our IS patch for pandemic flu cannot be assured. In addition, if approved, we expect that United States and foreign governments would be the entities procuring any pandemic flu products, not individual consumers. While there has recently been increased public awareness of the risks of pandemic flu, government health organizations may not devote significant resources to the prevention of an outbreak and may not seek to procure pandemic flu products from us. The acceptance of our product candidate for pandemic flu may depend on whether government health organizations adopt a dose-sparing strategy to prevent pandemic flu and whether a competing technology for dose sparing is adopted. If a dose-sparing strategy is not endorsed or a competing technology for dose sparing is adopted, our product candidate will not yield any revenues.

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     The development and clinical testing of our IS patch for pandemic flu product candidate will likely take several years. Even if our IS patch for pandemic flu obtains regulatory approval, by that time the threat of a pandemic flu outbreak may be reduced or government health organizations may have adequate stockpiles of flu vaccine or have adopted other technologies or strategies to prevent or limit outbreaks.

     Even if our IS patch for pandemic flu gains regulatory approval and governmental health organizations choose to stockpile the product, we may be not be able to produce enough of the product to fulfill public health and safety needs.

     Our license to use TCI technology from The Walter Reed Army Institute of Research, or WRAIR, is critical to our success. Under some circumstances, WRAIR may modify or terminate our license or sublicense the TCI technology to third parties which could adversely affect our business.

     We license substantially all of our patented and patentable TCI technology through an exclusive license from WRAIR, a federal government entity. This license will terminate automatically on the expiration date of the last to expire patent subject to the license, which, based on currently issued patents and our assumption that such patents will not be invalidated, would be February 2019. WRAIR may unilaterally modify or terminate the license if we, among other things:

• do not expend reasonable efforts and resources to carry out the development and marketing of the licensed TCI technology and do not manufacture, use, or operate products that use the TCI technology by April 2008 (subject to extension based upon a showing of reasonable diligence in developing the technology);

• do not continue to make our TCI-based products available to the public on commercially reasonable terms after we have developed such products;

• misuse the licensed TCI technology or permit any of our affiliates or sub-licensees to do so;

• fail to pay royalties or meet our other payment or reporting obligations under the license;

• become bankrupt; or

• otherwise materially breach our obligations under the license.

     As we do not expect to have regulatory approval for any of our TCI-based product candidates by April 2008, we may need to seek an extension of the April 2008 milestone. If we violate the terms of the WRAIR license, or otherwise lose our licensed rights to the TCI technology, we would likely be unable to continue to develop our products. WRAIR and third parties may dispute the scope of our rights to the TCI technology under the license. Additionally, WRAIR may breach the terms of its obligations under the license or fail to prevent infringement or fail to assist us to prevent infringement by third parties of the patents underlying the licensed TCI technology. Loss or impairment of the WRAIR license for any reason could materially harm our financial condition and operating results.

     In addition to WRAIR’s termination and modification rights described above, our license is subject to a non-exclusive, non-transferable, royalty-free right of the United States government to practice the licensed TCI technology for research and other governmental purposes on behalf of the United States and on behalf of any foreign government or international organization pursuant to any existing or future treaty or agreement with the United States. WRAIR also reserves the right to require us to grant sublicenses to third parties if WRAIR determines that:

• such sublicenses are necessary to fulfill public health and safety needs that we are not reasonably addressing;

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• such sublicenses are necessary to meet requirements for public use specified by applicable United States government regulations with which we are not reasonably in compliance; or

• we are not manufacturing our products substantially in the United States.

     Although we are currently the only parties licensed to actively develop the TCI technology, we cannot assure you that WRAIR will not in the future require us to sublicense the TCI technology. Any action by WRAIR to force us to issue such sublicenses or development activities instituted by the United States government pursuant to its reserved rights in the TCI technology would erode our ability to exclusively develop products based on the TCI technology and could materially harm our financial condition and operating results.

     Licenses of technology owned by agencies of the United States government, including the WRAIR license, require that licensees—in this case, us—and our affiliates and sub-licensees agree that products covered by the license will be manufactured substantially in the United States. This may restrict our ability to contract for manufacturing facilities, if we attempt to do so, outside the United States and we may risk losing our rights under the WRAIR license, which could materially harm our financial condition and operating results.

     If we are unable to protect our intellectual property, we may not be able to operate our business profitably.

     We base our TCI technology in large part on innovations for which WRAIR has sought protection under the United States and certain foreign patent laws. We consider patent protection of our TCI technology to be critical to our business prospects. As of March 31, 2006, there are three issued United States patents, 20 issued foreign patents and 45 United States and foreign patent applications relating to TCI and improvements on the technology. The three issued United States patents will expire between November 2016 and February 2019. The issued foreign patents will expire between November 2017 and February 2019. While we have filed several patent applications relating to the use of our IS patch technology in conjunction with existing injectable vaccines, no patent relating to that technology has been issued. Under our license agreement with WRAIR, we bear financial responsibility for the preparation, filing, prosecution and maintenance of any and all patents and patent applications licensed. With respect to enforcement, we have the right to bring actions to enforce patents licensed under the WRAIR license agreement, subject to WRAIR’s continuing right to intervene, and WRAIR maintains the right to bring enforcement actions if we fail to do so.

     Patent protection in the field of biopharmaceuticals is highly uncertain and involves complex legal and scientific questions and has recently been the subject of much litigation. We cannot control when or if any patent applications will result in issued patents. Even if issued, our patents may not afford us protection against competitors marketing similar products. Neither the US Patent and Trademark Office nor the courts have a consistent policy regarding the breadth of claims allowed or the degree of protection afforded under many biopharmaceutical patents. The claims of our existing US patents and those that may issue in the future, or those licensed to us, may not offer significant protection of our TCI technology and other technologies. Our patents on transcutaneous immunization, in particular, are broad in that they cover the delivery of antigens and adjuvants to the skin to induce an immune response. While our TCI technology is covered by issued patents and we are not aware of any challenges, patents with broad claims tend to be more vulnerable to challenge by other parties than patents with more narrowly written claims. Patent applications in the United States and many foreign jurisdictions are typically not published until 18 months following their priority filing date, and in some cases not at all. In addition, publication of discoveries in scientific literature often lags significantly behind actual discoveries. Therefore, neither we nor our licensors can be certain that we or they were the first to make the inventions claimed in our issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in these patent applications. In addition, changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection. Furthermore, our competitors may independently develop similar technologies or duplicate technology developed by us in a manner that does not infringe our patents or other intellectual property.

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     If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.

     In addition to patented technology, we rely upon unpatented proprietary technology, processes and know-how. We and our licensors seek to protect this information in part by confidentiality agreements with employees, consultants and third parties. These agreements may be breached, and there may not be adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors. If we are unable to protect the confidentiality of our proprietary information and know-how, competitors may be able to use this information to develop products that compete with our products, which could adversely impact our business.

     If the use of our technology conflicts with the intellectual property rights of third parties, we may incur substantial liabilities, and we may be unable to commercialize products based on this technology in a profitable manner, if at all.

     Our competitors or others may have or acquire patent rights that they could enforce against us. In addition, we may be subject to claims from others that we are misappropriating their trade secrets or confidential proprietary information. If our technology conflicts with the intellectual property rights of others, they could bring legal action against us or our licensors, licensees, suppliers, customers or collaborators. If a third party claims that we infringe upon its proprietary rights, any of the following may occur:

• we may become involved in time-consuming and expensive litigation, even if the claim is without merit;

• we may become liable for substantial damages for past infringement if a court decides that our technology infringes upon a competitor’s patent;

• a court may prohibit us from selling or licensing our product without a license from the patent holder, which may not be available on commercially acceptable terms, if at all, or which may require us to pay substantial royalties or grant cross licenses to our patents; and

• we may have to redesign our product so that it does not infringe upon others’ patent rights, which may not be possible or could be very expensive and time-consuming.

If any of these events occurs, our business will suffer and the market price of our common stock will likely decline.

     We may be involved in lawsuits to protect or enforce our patents or the patents of our collaborators or licensors, which could be expensive and time consuming.

     Competitors may infringe our patents or the patents of our collaborators or licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

     Interference proceedings brought by the US Patent and Trademark Office may be necessary to determine the priority of inventions with respect to our patent applications or those of our collaborators or licensors. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and be a distraction to our management. We may not be able, alone or with our collaborators and licensors, to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the United States.

     Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.

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     We depend on our key personnel, the loss of whom would adversely affect our operations. If we fail to attract and retain the talent required for our business, our business will be materially harmed.

     We are a small company with 73 employees as of March 31, 2006, and we depend to a great extent on principal members of our management and scientific staff. If we lose the services of any key personnel, in particular, Stanley Erck, our President and Chief Executive Officer, or Gregory Glenn, our Chief Scientific Officer, it could significantly impede the achievement of our research and development objectives and could delay our product development programs and approval and commercialization of our product candidates. We do not currently have any key man life insurance policies. While we have entered into agreements with certain of our executive officers relating to severance after a change of control and these officers have agreed to restrictive covenants relating to non-competition and non solicitation, we have not entered into employment agreements with members of our senior management team other than Stanley Erck. Our agreement with Stanley Erck does not ensure that we will retain his services for any period of time in the future. Our success depends on our ability to attract and retain highly qualified scientific, technical and managerial personnel and research partners. Competition among biopharmaceutical and biotechnology companies for qualified employees is intense, and we may not be able to retain existing personnel or attract and retain qualified staff in the future. If we fail to hire and retain personnel in key positions, we will be unable to develop or commercialize our product candidates in a timely manner.

     We rely on third parties to conduct our clinical trials, and those third-parties may not perform satisfactorily, including failing to meet established deadlines for the completion of such trials.

     We do not have the ability to independently conduct clinical trials for our vaccine candidates, and we rely on third parties such as contract research organizations, medical institutions and clinical investigators to enroll qualified patients and conduct our clinical trials. Our reliance on these third parties for clinical development activities reduces our control over these activities. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, our efforts to obtain regulatory approvals for and commercialize our vaccine candidates may be delayed or prevented.

     Our competitors may have superior products, manufacturing capability or marketing expertise.

     Our business may fail because it faces intense competition from major pharmaceutical companies, specialized biopharmaceutical and biotechnology companies and drug development companies engaged in the development and production of vaccines, vaccine delivery technologies and other biopharmaceutical products. Several companies are pursuing programs that target the same markets we are targeting. In addition to pharmaceutical, biopharmaceutical and biotechnology companies, our competitors include academic and scientific institutions, government agencies and other public and private research organizations. Many of our competitors have greater financial and human resources and more experience. Our competitors may:

• develop products or product candidates earlier than we do;

• form collaborations before we do, or preclude us from forming collaborations with others;

• obtain approvals from the FDA or other regulatory agencies for such products more rapidly than we do;

• develop and validate manufacturing processes more rapidly than we do;

• obtain patent protection or other intellectual property rights that would limit our ability to use our technologies or develop our product candidates;

• develop products that are safer or more effective than those we develop or propose to develop; or

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• implement more effective approaches to sales and marketing.

     Alternative competitive technologies and products could render our TCI technology and our product candidates based on this technology obsolete and non-competitive. Presently, there are a number of companies developing alternative methods to the syringe for delivering vaccines and other biopharmaceutical products. These alternative methods include microneedles, electroporations, microporations, jet injectors, nasal sprays and oral delivery, and several of these delivery mechanisms are in late stage clinical trials.

     While there are no vaccines against infection by enterotoxigenicE. coli bacteria(ETEC) that have been approved for sale in the United States, we are aware of several companies with ETEC vaccine product candidates that are in development, which, if approved, would compete against our needle-free travelers’ diarrhea vaccine patch. Those companies with potential ETEC vaccine candidates include Avant Immunotherapeutics, Inc., Berna Biotech AG (which is being acquired by Crucell, N.V.), Cambridge Biostability, Limited, SBL Vacin AB and Emergent BioSolutions, Inc. One of our competitors, SBL Vacin AB, has announced the results from a study of an ETEC vaccine indicating the vaccine may be effective in preventing diarrhea caused by ETEC. In the absence of vaccines, travelers’ diarrhea is generally treated, either prophylactically or following onset, with antibiotics or over-the-counter, or OTC, products that alleviate symptoms. Some of these OTC products and antibiotics, such as Cipro, are marketed by pharmaceutical companies with substantial resources and enjoy widespread acceptance among physicians and patients. In addition, Salix Pharmaceuticals, Ltd. has announced that it has completed a Phase 3 study to evaluate the efficacy and safety of an antibiotic specifically designed to be taken prophylactically for the prevention of travelers’ diarrhea.

     There are multiple influenza vaccines approved for sale in both the United States and Europe. In many cases, these products are manufactured and distributed by pharmaceutical companies with substantial resources, such as Chiron Corporation, GlaxoSmithKline plc, Sanofi-Aventis SA, Solvay SA and MedImmune, Inc. FluMist, a nasal flu vaccine, has received marketing approval from the FDA and would compete against our needle-free flu vaccine. We are also aware of other flu vaccine candidates to be delivered by alternative methods, such as nasal spray and skin delivery, which, if approved, would compete against our needle-free flu vaccine. In addition, we know of multiple flu vaccine candidates that incorporate adjuvants to enhance immune responses, particularly in the elderly. Some of these adjuvanted flu vaccines are being developed by pharmaceutical companies with substantial resources, such as Sanofi-Aventis SA, GlaxoSmithKline plc and Chiron Corporation. These adjuvanted vaccines would compete against our IS patch for the elderly.

     Our ability to generate revenues will be diminished if we fail to obtain acceptable prices or an adequate level of reimbursement for our products.

     We expect that most patients will rely on private health insurers, Medicare and Medicaid and other third party payors to pay for any products that we or our collaborators may market, other than our needle-free travelers’ diarrhea vaccine patch for which we expect patients will pay out-of-pocket. The continuing efforts of government and third party payors to contain or reduce the costs of health care through various means may limit our commercial opportunity. For example, in some foreign markets, pricing and profitability of prescription biopharmaceuticals are subject to government control. In the United States, we expect that there will continue to be a number of federal and state proposals to implement similar government controls. In addition, increasing emphasis on managed care in the United States will continue to put pressure on the pricing of biopharmaceutical products. Cost control initiatives could decrease the price that we would receive for any products in the future.

     Our ability to commercialize biopharmaceutical product candidates, alone or with third parties, could be adversely affected by cost control initiatives and also may depend in part on the extent to which reimbursement for the product candidates will be available from:

• government and health administration authorities;

• private health insurers; and

• other third party payors.

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     Significant uncertainty exists as to the reimbursement status of newly approved health care products. Third party payors, including Medicare, are challenging the prices charged for medical products and services. Government and other third party payors increasingly attempt to contain health care costs by limiting both coverage and the level of reimbursement for new biopharmaceutical products and by refusing, in some cases, to provide coverage for uses of approved products for disease indications for which the FDA has not granted labeling approval. In the United States, there have been a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to market and sell our product candidates profitably. In particular, in December 2003, President Bush signed into law new Medicare prescription drug coverage legislation which went into effect on January 1, 2006. Under this legislation, the Centers for Medicare and Medicaid Services, or CMS, the agency within the Department of Health and Human Services that administers Medicare and is responsible for reimbursement of the cost of drugs, has asserted the authority of Medicare to elect not to cover particular drugs if CMS determines that the drugs are not “reasonable and necessary” for Medicare beneficiaries or to elect to cover a drug at a lower rate similar to that of drugs that CMS considers to be “therapeutically comparable.” Changes in reimbursement policies or health care cost containment initiatives that limit or restrict reimbursement for our products may cause our potential revenues to decline. Third party insurance coverage may not be available to patients for any product candidates we discover and develop, alone or through our strategic relationships. If government and other third party payors do not provide adequate coverage and reimbursement levels for our product candidates, the market acceptance of these product candidates may be reduced.

     We may not be able to manufacture our product candidates in commercial quantities, which would prevent us from commercializing our product candidates.

     To date, our product candidates have been manufactured in small quantities by us and third party manufacturers for preclinical and clinical trials. If any of our product candidates is approved by the FDA or other regulatory agencies for commercial sale, we will need to manufacture it in larger quantities. We or our third party manufacturers may not be able to successfully increase the manufacturing capacity for any of our product candidates in a timely or economic manner, or at all. If we are unable to successfully increase the manufacturing capacity for a product candidate, the regulatory approval or commercial launch of that product candidate may be delayed or there may be a shortage in the supply of the product candidate. Our product candidates require precise, high quality manufacturing that is subject to the FDA’s Good Manufacturing Practices. Our failure or the failure of our third party manufacturers to achieve and maintain these high manufacturing standards and comply with the FDA’s Good Manufacturing Practices, including the incidence of manufacturing errors, could result in patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously harm our business. In addition, our manufacturing facilities will be subject to unannounced inspections by the FDA, and significant scale-up of manufacturing may require additional validation studies, which the FDA must review and approve.

     We have no experience in sales, marketing and distribution and will depend on the sales and marketing efforts of third parties.

     We plan to establish marketing arrangements with third parties or major pharmaceutical companies and do not expect to establish direct sales capability for several years. However, these types of marketing arrangements might not be available on acceptable terms, or at all. In the future, to market any of our product candidates directly, we will need to develop a marketing and sales force with technical expertise and distribution capability. To the extent that we enter into marketing or distribution arrangements, any revenues we receive will depend upon the efforts of third parties. We cannot assure you that we will be successful in gaining market acceptance for any products we may develop.

     Our business exposes us to potential product liability claims.

     Our proposed products could be the subject of product liability claims. A failure of our product candidates to function as anticipated, whether as a result of the design of these products, unanticipated health consequences or side effects, or misuse or mishandling by third parties of such products, could result in injury. Claims also could be based on failure to immunize as anticipated. Tort claims could be substantial in size and could include punitive damages. We cannot assure you that any warranty disclaimers provided with our proposed products would be successful in protecting us from product liability exposure. Damages from any such claims could be substantial and could affect our financial condition.

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     Our business exposes us to potential product liability risks that are inherent in the testing, manufacturing and marketing of biopharmaceutical products. We have obtained clinical trial liability insurance for our clinical trials in the aggregate amount of $10 million. We cannot be certain that we will be able to maintain adequate insurance for our clinical trials. We also intend to seek product liability insurance in the future for products approved for marketing, if any. However, we may not be able to acquire or maintain adequate insurance at a reasonable cost. Any insurance coverage may not be sufficient to satisfy any liability resulting from product liability claims. A successful product liability claim or series of claims could have a material adverse impact on our operations.

     We deal with hazardous materials that may cause injury to others and are regulated by environmental laws that may impose significant costs and restrictions on our business.

     Our research and development programs and manufacturing operations involve the controlled use of potentially harmful biological materials such as toxins fromE. coliand other hazardous materials. We cannot completely eliminate the risk of accidental contamination or injury to others from the use, manufacture, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed our resources or any applicable insurance coverage we may have. We are also subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling or disposal of hazardous materials and waste products. If we fail to comply with these laws and regulations or with the conditions attached to our operating licenses, then our operating licenses could be revoked, we could be subjected to criminal sanctions and substantial liability and we could be required to suspend, modify or terminate our operations. We may also have to incur significant costs to comply with future environmental laws and regulations. We do not currently have a pollution and remediation insurance policy.

     Until recently, we have operated as a private company and as a result, we have limited experience attempting to comply with public company obligations. Attempting to comply with these requirements will increase our costs and require additional management resources, and we still may fail to comply.

     On February 6, 2006, we closed our initial public offering. Previously, as a private company, we maintained a small finance and accounting staff. While we expect to expand our staff, we may encounter substantial difficulty attracting qualified staff with requisite experience due to the high level of competition for experienced financial professionals.

     We will face increased legal, accounting, administrative and other costs and expenses as a public company that we did not incur as a private company. Compliance with the Sarbanes Oxley Act of 2002, as well as other rules of the SEC, the Public Company Accounting Oversight Board and The Nasdaq National Market will result in a significant initial cost to us as well as an ongoing increase in our legal, audit and financial compliance costs. As a public company, we will become subject to Section 404 of the Sarbanes Oxley Act relating to internal control over financial reporting. We have only recently begun a formal process to evaluate our internal controls for purposes of Section 404, and we cannot assure that our internal control over financial reporting will prove to be effective.

     If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock.

     Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed. We have only recently begun a formal process to evaluate our internal control over financial reporting. Given the status of our efforts, coupled with the fact that guidance from regulatory authorities in the area of internal controls continues to evolve, substantial uncertainty exists regarding our ability to comply by applicable deadlines. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.

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Investment Risks

     We expect that our stock price will fluctuate significantly, which may adversely affect holders of our stock and our ability to raise capital.

     The stock market, particularly in recent years, has experienced significant volatility particularly with respect to pharmaceutical, biopharmaceutical and biotechnology stocks. The volatility of pharmaceutical, biopharmaceutical and biotechnology stocks often does not relate to the operating performance of the companies represented by the shares. Factors that could cause volatility in the market price of our common stock include:

• the timing and the results from our clinical trial programs;

• FDA or international regulatory actions;

• failure of any of our product candidates, if approved, to achieve commercial success;

• announcements of clinical trial results or new product introductions by our competitors;

• market conditions in the pharmaceutical, biopharmaceutical and biotechnology sectors;

• developments concerning intellectual property rights;

• litigation or public concern about the safety of our potential products;

• actual and anticipated fluctuations in our quarterly operating results;

• deviations in our operating results from the estimates of securities analysts;

• additions or departures of key personnel;

• third party reimbursement policies; and

• developments concerning current or future strategic alliances.

These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock and our ability to raise capital.

     If the price and volume of our common stock experience extreme fluctuations, then we could face costly litigation.

     In the past, companies that experience volatility in the market price of their securities have often faced securities class action litigation. Whether or not meritorious, if any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management and harm our ability to grow our business.

     Our directors and management exercise significant control over our company.

     Our directors and executive officers and their affiliates collectively control approximately 40.0% of our outstanding common stock. These stockholders, if they act together, may be able to influence our management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. The concentration of ownership may have the effect of delaying or preventing a change in control of our company and might affect the market price of our common stock.

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     We may not achieve our projected development goals in the time frames we announce and expect.

     We set goals for and make public statements regarding timing of the accomplishment of objectives material to our success, such as the commencement and completion of clinical trials. The actual timing of these events can vary dramatically due to factors such as delays or failures in our clinical trials, the uncertainties inherent in the regulatory approval process and delays in achieving manufacturing or marketing arrangements sufficient to commercialize our products. There can be no assurance that our clinical trials will be completed, that we will make regulatory submissions or receive regulatory approvals as planned or that we will be able to adhere to our current schedule for the launch of any of our products. If we fail to achieve one or more of these milestones as planned, the market price of our shares could decline.

     Provisions of Delaware law or our charter documents could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for you to change management.

     Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. This is because these provisions may prevent or frustrate attempts by stockholders to replace or remove our current management or members of our board of directors.

     These provisions include:

• a staggered board of directors;

• a prohibition on stockholder action through written consent;

• a requirement that special meetings of stockholders be called only by the chairman of the board of directors, the chief executive officer, or the board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors;

• advance notice requirements for stockholder proposals and nominations; and

• the authority of the board of directors to issue preferred stock with such terms as it may determine.

As a result, these provisions and others available under Delaware law could limit the price that investors are willing to pay in the future for shares of our common stock.

     Because we do not expect to pay dividends in the foreseeable future, you must rely on stock appreciation for any return on your investment.

     We have paid no cash dividends on any of our capital stock to date, and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future, and payment of cash dividends, if any, will also depend on our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. Furthermore, we may in the future become subject to contractual restrictions on, or prohibitions against, the payment of dividends. Accordingly, the success of your investment in our common stock will likely depend entirely upon any future appreciation. There is no guarantee that our common stock will appreciate in value after you purchase them or even maintain the price at which you purchased your shares, and you may not realize a return on your investment in our common stock.

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ITEM 3. Qualitative and Quantitative Disclosures About Market Risk

     Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because the majority of our investments are in short-term US government and agency debt securities. The market value of these investments fluctuates with changes in current market interest rates. In general, as rates increase, the market value of a debt investment would be expected to decrease. Likewise, as rates decrease, the market value of a debt investment would be expected to increase. To minimize such market risk, we generally hold these instruments to maturity at which time they are redeemed at their stated or face value. Due to the nature of our short-term investments, we believe that we are not subject to any material market risk exposure.

     The interest rates on our debt obligations are fixed so repayment of these obligations is not subject to any material market risk exposure.

     We do not have any foreign currency or other derivative financial instruments.

ITEM 4. Controls and Procedures

     Disclosure Controls and Procedures

     We currently have in place systems relating to disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). In connection with the preparation of this report, our principal executive officer and our principal financial officer evaluated the effectiveness of these disclosure controls and procedures as of the end of our quarterly period ended March 31, 2006. They concluded that the controls and procedures are effective and adequate at that time.

     Changes in Internal Controls Over Financial Reporting

     During the first quarter of 2006, there have been no significant changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1A. Risk Factors

     We incorporate by reference the information included under “Factors That May Impact Future Results” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this report.

ITEM 2. Use of Proceeds From Registered Securities

     On February 6, 2006, we closed our initial public offering of 5,000,000 shares of common stock pursuant to our Registration Statement on Form S-1/A (File No. 333-128765), which was declared effective by the Securities and Exchange Commission on February 1, 2006. The managing underwriters for the offering were UBS Securities LLC, SG Cowen & Co., LLC, First Albany Capital Inc. and Susquehanna Financial Group, LLLP. The net proceeds from our initial public offering, before expenses, were $32,853,574. Our offering expenses were $1.9 million, so our total net proceeds after expenses were $31.0 million. We expect to use the net proceeds from our initial public offering to fund our clinical trials and for other general corporate purposes.

ITEM 6. Exhibits

Exhibit 31.1	Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
Exhibit 31.2	Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
Exhibit 32.1(1)	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1) This certification accompanies the Quarterly Report on Form 10-Q and is not filed as part of it.

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SIGNATURES

     Pursuant to the requirements 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.

IOMAI CORPORATION

/s/Stanley C. Erck

Stanley C. Erck

President and Chief Executive Officer

/s/Russell P. Wilson

Russell P. Wilson

Chief Financial Officer

     Dated: May 15, 2006

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Exhibit Index

Exhibit No.	Description
31.1	Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
32.1(1)	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1) This certification accompanies the Quarterly Report on Form 10-Q and is not filed as part of it.

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