UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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| (Mark One) | ||
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2013
or
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| 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: 0-24469
GENVEC, INC.
(Exact name of Registrant as specified in its charter)
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| DELAWARE | 23-2705690 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
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| 910 CLOPPER ROAD, SUITE 220N, GAITHERSBURG, MD | 20878 | |
| (Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code:240-632-0740
Securities registered pursuant to section 12(b) of the Act:
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| Title of Each Class | Name of Each Exchange on Which Registered | |
| Common Stock, Par Value $0.001 Per Share | The NASDAQ Stock Market |
Securities registered pursuant to section (12g) of the Act: Preferred Share Purchase Rights
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.o Yesx No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.o Yesx No
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.x Yeso No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yesx Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filero | Accelerated filero | |
| Non-accelerated filero | Smaller reporting companyx | |
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934.o Yesx No
As of June 28, 2013 the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing sale price of such stock as reported by the NASDAQ Global Market on such date, was $4,769,045. For purposes of this calculation, shares of common stock held by directors, officers, and stockholders whose ownership exceeds 10 percent of the common stock outstanding at June 28, 2013 were excluded. Exclusion of such shares held by any person should not be construed to indicate that the person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that the person is controlled by or under common control with the Registrant.
As of March 24, 2014 there were 17,269,962 shares of the Registrant’s common stock, par value $0.001 per share, outstanding.
TABLE OF CONTENTS
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This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements also may be included in other statements that we make. All statements that are not descriptions of historical facts are forward-looking statements and are based on management’s estimates, assumptions and projections that are subject to risks and uncertainties. These statements can generally be identified by the use of forward-looking words like “believe,” “expect,” “intend,” “may,” “will,” “should,” “anticipate,” or similar terminology.
Although we believe that the expectations reflected in our forward-looking statements are reasonable as of the date we make them, actual results could differ materially from those currently anticipated due to a number of factors, including risks relating to:
| • | decisions we make with respect to the future and strategic direction of our Company; |
| • | the uncertainties regarding our long-term stability and plans raised by our adoption and then abandonment of a Plan of Complete Liquidation and Dissolution of the Company; |
| • | our product candidates being in the early stages of development; |
| • | our ability to find collaborators and, if we find collaborators, to mutually agree on terms for our collaborations; |
| • | our reliance on collaborators; |
| • | the timing, amount, and availability of revenues from our government-funded vaccine programs; |
| • | uncertainties with, and unexpected results and related analyses relating to, pre-clinical development and clinical trials of our product candidates; |
| • | the timing and content of future Food and Drug Administration (FDA) regulatory actions related to us, our product candidates, or our collaborators; |
| • | our financial condition, the sufficiency of our existing cash, cash equivalents, marketable securities, and cash generated from operations, and our ability to lower our operating costs; and |
| • | the scope and validity of patent protection for our product candidates and our ability to commercialize products without infringing the patent rights of others. |
Further information on the factors and risks that could affect our business, financial condition and results of operations is set forth under Item 1A in this Annual Report and is contained in our other filings with the Securities and Exchange Commission (SEC). The filings are available on our website atwww.genvec.comor at the SEC’s website,www.sec.gov.
These forward-looking statements speak only as of the date of this Annual Report and we assume no duty to update our forward-looking statements.
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ITEM 1. BUSINESS
OVERVIEW
GenVec, Inc. (GenVec, we, our, or the Company) is a biopharmaceutical company using differentiated, proprietary technologies to create superior therapeutics and vaccines. A key component of our strategy is to develop and commercialize our product candidates through collaborations. GenVec is working with leading companies and organizations such as Novartis AG, Merial Limited, and the U.S. Government to support a portfolio of programs that address the prevention and treatment of a number of significant human and animal health concerns. GenVec’s development programs address therapeutic areas such as hearing loss and balance disorders; as well as vaccines against infectious diseases including respiratory syncytial virus (RSV), herpes simplex virus (HSV), and malaria. In the area of animal health we are developing vaccines against foot-and-mouth disease (FMD).
Our core technology has the important advantage of localizing protein delivery in the body. This is accomplished by using our adenovector platform to locally deliver genes to cells, which then direct production of the desired protein. This approach reduces side effects typically associated with systemic delivery of proteins. For vaccines, the goal is to induce an immune response against a target protein or antigen. This is accomplished by using an adenovector to deliver a gene which causes production of an antigen, which then stimulates the desired immune reaction by the body.
Our research and development activities yield product candidates that utilize our technology platform and represent potential commercial opportunities. For example, preclinical research in hearing loss and balance disorders through the delivery of the atonal gene using GenVec’s adenovector technology may have the potential to restore hearing and balance function. We are working with Novartis Institutes for BioMedical Research, Inc. (together with Novartis AG and its subsidiary corporations, including Novartis Pharma AG, Novartis), on the discovery and development of novel treatments for hearing loss and balance disorders. There are currently no effective therapeutic treatments available for patients who have lost all balance function, and hearing loss remains a major unmet medical problem.
We have multiple vaccines in development leveraging our core adenovector technology including our preclinical programs to develop vaccine candidates for the prevention of RSV and HSV. We also have a program to develop a vaccine for malaria. In the field of animal health, we are working with Merial Limited to commercialize vaccines for the prevention of a major animal health problem, FMD. Development efforts for this program are also supported by the U.S. Department of Homeland Security (DHS) and in collaboration with the U.S. Department of Agriculture (USDA).
On September 3, 2013, our former President and Chief Executive Officer, Cynthia Collins, departed the Company and resigned from the Company’s Board of Directors. Douglas J. Swirsky was appointed as the President and Chief Executive Officer of the Company and also was appointed to our Board of Directors.
Our current operating strategy was adopted in September 2013, when we announced that our Board of Directors withdrew a Plan of Complete Liquidation and Dissolution of the Company (the Plan of Dissolution) that had been adopted by the Board of Directors on May 24, 2013, subject to stockholder approval. After announcing the approval of the Plan of Dissolution by the Board of Directors, we received several proposals for transactions with us, including transactions to purchase all or portions of our assets or to engage in mergers with private companies that were looking to use us principally as a means to become publicly traded. As part of the Board of Directors' efforts to seek to maximize the value for our stockholders and to provide stockholders with appropriate information for their consideration, the Board of Directors considered these proposals. The process that we went through in evaluating alternative proposals, the business developments during that time, the challenges in monetizing our assets in the near term for values the Board of Directors thought would be fair, and the time that the process took, led the Board of Directors to conclude that it was in the best interests of our stockholders to withdraw the Plan of Dissolution and pursue our current operating strategy. This operating strategy is focused on advancing the Company’s technology through partnerships. Consistent with this strategy, GenVec is no longer investing its own resources in the development of its RSV and HSV vaccine candidates as it pursues collaborators for these programs.
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In going through the process of considering the Plan of Dissolution and alternative transactions, we worked to terminate or further curtail a number of our contractual obligations and a significant portion of our operations. We also ceased to support some programs at the levels at which they were previously supported, or at all. On July 29, 2013, for example, we entered into a modification with the U.S. Naval Medical Logistics Command to terminate contractual obligations under our agreement related to malaria vaccine development efforts with the U.S. Naval Medical Research Center (NMRC).
As a biopharmaceutical company, our business and our ability to execute our strategy to achieve our corporate goals are subject to numerous risks and uncertainties. Material risks and uncertainties relating to our business and our industry are described in Item 1A of this Annual Report on Form 10-K. The description of our business in this Annual Report on Form 10-K should be read in conjunction with the information in Item 1A and the Financial Statements found under Item 8 of Part II of this Annual Report on Form 10-K, which includes additional financial information about our total assets, revenue, measures of profit and loss, and financial information.
OUR STRATEGY
Our primary objective is to leverage our proprietary technology through partnerships to develop and commercialize products that address significant unmet medical needs. We plan to achieve this objective through the following strategies:
Working with Novartis to facilitate the development of first-in-class products for the treatment of hearing and balance disorders. We believe that a significant commercial opportunity exists for hearing loss and balance disorders. We are committed to realizing the value of this program by facilitating Novartis’ development program.
Entering into new collaborations for the development of product candidates utilizing our technology. We are engaged in seeking strategic collaborations and partnerships to further develop and potentially commercialize therapeutic and vaccine product candidates that utilize our technology. We continue to seek corporate partnerships in the following programs and areas:
| • | Vaccine against RSV, which is the most common viral cause of lower respiratory infections in infants and young children. |
| • | Vaccine against HSV, which is the virus responsible for most cases of genital herpes. |
| • | Other therapeutic and prophylactic applications of our human and non-human adenoviral – based technology and cell lines. |
Exploring new applications of our technology to address the treatment and prevention of major unmet medical needs. We intend to continue to enhance our core technologies through internal research as well as external collaborations and possible acquisitions. We have received peer-reviewed external funding from the U.S. government and from nonprofit foundations to improve our technology platform for vaccine and gene delivery applications. We intend to further strengthen our technologies relating to process development, formulation, and manufacturing through our existing and future relationships.
Minimizing our cash burn rate and reducing the need for additional equity financing. We intend to further develop our product candidates and technology through collaborations which bring external and selective deployment of our resources in a prudent manner. We believe this strategy will allow us to advance our programs without the use of substantial additional capital and will insulate us from fluctuating capital raising conditions.
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HEARING AND BALANCE PROGRAM
Overview. In collaboration with Novartis, our hearing and balance disorders program is focused on the restoration of hearing and balance function through the regeneration of critical cells of the inner ear. Within the first half of 2014, we expect that Novartis will initiate a Phase 1 clinical trial to assess the safety and efficacy of CGF166, the first product candidate emerging from the collaboration, in patients with severe hearing loss.
Background. Sensorineural hearing loss and vestibular dysfunction may result from destruction of inner ear sensory hair cells or auditory nerves. Humans are born with approximately 30,000 sensory hair cells, which are located in the cochlea, vestibular canals, utricle and saccule of the ear. Sensory hair cells, located in cochlea are critical for auditory function, while those located in the vestibular canals and the utricle and saccule provide the basis for vestibular function.
Sensory hair cells can be damaged or destroyed by pharmacological agents, infections, loud noises, or simply aging. Because these cells do not regenerate, any damage to or destruction of them is permanent.
Patients whose sensory hair cells have been damaged or destroyed may experience hearing loss. Hearing loss is currently treated with a hearing aid or, if a patient’s hearing has been severely impaired, a cochlear implant. Only approximately 25% of patients with hearing loss have been treated by receiving hearing aids, and according to the January 2014 edition ofHearing Review, they are generally not satisfied with the results of such treatment in noisy situations. Approximately 188,000 patients worldwide have received cochlear implants. Although cochlear implants improve hearing, they require invasive surgery, do not discriminate pitch, and require ongoing maintenance and patient training.
Patients whose sensory hair cells have been damaged or destroyed may also experience more severe vestibular dysfunction, which may result in debilitating vertigo and nausea. There is no therapy other than rehabilitation to acquire environmental signals to compensate for vestibular dysfunction. Because there are no therapeutic options available to regenerate sensory hair cells to restore auditory or balance function, we believe this represents a significant medical need.
GenVec’s Solution. During embryonic development, an atonal gene (Atoh1) induces the generation of sensory cells in the inner ear required for hearing and balance. In multiple animal models, we have demonstrated formation of new inner ear sensory hair cells and the restoration of hearing and balance function using our technology to deliver the Atoh1 gene to the inner ear.
The lead product emerging from GenVec’s hearing program is an advanced adenoviral vector engineered to deliver the human atonal gene under the control of a tissue specific promoter. Novartis has designated this product candidate, CGF166.
On December 4, 2013, the National Institutes of Health’s Recombinant DNA Advisory Committee (RAC) unanimously approved the protocol for initiation of a Phase 1/2 study of CGF166. The protocol, “A Three-part, Multicenter, Open Label, Single Dose Study to Assess the Safety, Tolerability, and Efficacy of Intralabyrinthine (IL) CGF166 in Patients with Severe Hearing Loss,” was the subject of an in-depth review and public discussion at the RAC meeting. Novartis filed an investigational new drug application (IND) for CGF166 in January 2014, and on February 7, 2014 the IND was deemed effective.
Collaboration with Novartis. In January 2010, we announced a collaboration with Novartis to discover and develop novel treatments for hearing loss and balance disorders. Under terms of the agreement, we licensed the world-wide rights to our preclinical hearing loss and balance disorders program to Novartis. We received a $5.0 million upfront payment and Novartis purchased $2.0 million of our common stock. If certain clinical, regulatory, and sales milestones are met, we are eligible, from the inception of the agreement, to receive up to an additional $206.6 million in milestone payments. As of February 28, 2014, milestones available under the agreement include $24.0 million of additional clinical milestones, $45.0 million in regulatory milestones, and $135.0 million of sales-based milestones, which is net of the $2.0 million milestone we achieved in February 2014 as described below. Additionally, we are also entitled to royalties on future sales.
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In August 2010, we entered into an additional agreement with Novartis for the supply of services relating to development materials in connection with our collaboration in hearing loss and balance disorders. Under this additional agreement, valued at $14.9 million, we agreed to manufacture clinical trial material for up to two lead product candidates. In 2010, we recognized approximately $4.4 million for services performed under this agreement. In 2011, we recognized approximately $6.0 million for services performed under this agreement. In 2012, we recognized approximately $3.4 million for services performed under this agreement. In 2013, we recognized approximately $0.4 million for services performed under this agreement.
In September 2010, we announced that we had achieved the first milestone in the collaboration with Novartis. The $300,000 milestone was triggered by the successful completion of certain preclinical development activities.
In December 2011, we announced that we had achieved the second milestone in the collaboration with Novartis. The $300,000 milestone was triggered by the successful completion of certain preclinical development activities.
In February 2014, we announced that we had achieved the third milestone in the collaboration with Novartis. The $2.0 million milestone was triggered by the non-rejection by the FDA of the IND filed by Novartis for CGF166.
A non-rejection of an IND by the FDA is generally required prior to commencing clinical trials with an experimental pharmaceutical or biological product in the United States. As a result of the IND being cleared, we expect Novartis to commence dosing patients with CGF166 within the first half of 2014. Upon the dosing of the first patient with CGF166, we will be entitled to receive a $3.0 million milestone payment from Novartis.
VACCINE PROGRAMS
We have developed vaccine candidates using our adenovector technology. We believe that our adenoviral vectors serotypes have superior properties to deliver antigens and stimulate an effective innate and adaptive immune response against pathogens of interest. Our vaccine candidates include preventative vaccines against RSV and malaria, and a therapeutic vaccine for HSV.
In April 2012, we announced publication of research on new vaccine vectors. These vectors are non-human and circumvent neutralizing antibodies typically associated with vectors sometimes referred to as vector specific immunity in order to generate the desired immunologic response of the vaccine.
Respiratory Syncytial Virus. We are seeking a partner to continue the development of a vaccine against RSV, the single most important viral cause of lower respiratory infections in infants and young children. According to the World Health Organization, nearly all U.S. children have been infected with RSV by two years of age. Although RSV infection usually produces cold-like symptoms, the infection can result in severe lower respiratory tract infection, which causes up to 130,000 pediatric hospitalizations per year in the U.S. RSV also causes repeated infections throughout life, placing the elderly and individuals with compromised immune systems and people with cardiac or pulmonary complications at risk for severe disease. Among the institutionalized elderly, it is estimated there are about 15,000 deaths annually from RSV. In March 2007, we entered into a Collaborative Research and Development Agreement (CRADA) with the National Institute of Allergy and Infectious Diseases (NIAID) of the National Institutes of Health (NIH) to develop vaccines for the prevention and treatment of RSV. This three-year CRADA was renewed in July 2010 for a second three-year term. Initial vaccine candidates are in preclinical testing. In May 2008, we received a $600,000 Small Business Innovation and Research (SBIR) grant from the NIH to support work under this program which was completed in April 2011.
In May 2012, we received a Phase I Small SBIR grant from the NIAID, valued at approximately $590,000, to provide funding to further understand the impact of maternal immunity against RSV on the generation of a protective immune response in newborns. This is an important factor in the development of an effective vaccine for the pediatric population. Revenue recognized under this contract amounted to $122,000 and $109,000 in 2013 and 2012, respectively.
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In September 2012, data were presented on GenVec’s RSV vaccine program at the International Respiratory Syncytial Virus Symposium, which took place in Sante Fe, New Mexico. Data presented at the conference demonstrated GenVec's universal RSV vaccine candidate is highly immunogenic and produces durable and broad protection from a single intramuscular administration. Protection in cotton rat and mouse models was characterized by functional RSV neutralizing antibodies, and no disease potentiation was observed. GenVec's RSV vaccine candidate utilizes a proprietary adenovirus that is capable of generating a broad immune response while avoiding the problems of vector specific immunity that has hampered other vectored vaccines.
In March 2012, data were presented on GenVec's RSV vaccine program at the “Keystone Symposium on Viral Immunity and Host Gene Influence”, which took place in Keystone, Colorado. Data presented at the conference demonstrated encouraging preclinical proof-of-principle findings generated in non-human primates. Specifically, the data showed GenVec's vaccine technology induced neutralizing antibody, and significant T-cell responses with a single administration. The immune responses were consistent with protective responses without disease potentiation and multiple administrations increased the neutralizing antibody responses.
HSV. We are seeking a partner to continue the development of vaccines for the treatment of HSV including HSV type 2 (HSV-2) the virus responsible for most cases of genital herpes. In the United States, HSV-2 infects some 1.6 million new people per year, with approximately 500,000 of those suffering from disease symptoms. At least 40 million people in the United States are infected with HSV-2. Even higher infection rates are evident in developing countries, with further complications in people also infected with HIV. All HSV-2 infections are permanent and result in periodic virus shedding. There is no approved vaccine for HSV-2. Although antiviral regimens have become a standard of care, their inconvenience, cumulative cost and potential for drug resistance further underscore the need for safe, new approaches to reducing HSV-2 lesions, virus shedding, and transmission. Estimated costs of treating HSV in the United States alone are close to $1 billion, primarily for drugs and outpatient medical care.
In March 2008, we received a $600,000 Phase 1 SBIR grant from the NIH for our HSV program. This grant supported work conducted in a collaborative effort by GenVec, the Vaccine and Infectious Disease Institute at Fred Hutchinson Cancer Research Center and the University of Washington. We completed work under this grant in February 2011.
In December 2012, data were presented on GenVec’s HSV vaccine program at the Keystone Symposia meeting on Immunological Mechanisms of Vaccination, which took place in Ottawa, Ontario. Data presented at the conference demonstrated that a single administration of our genetic vaccine was effective against HSV2 in two industry-accepted HSV disease models. Specifically, immunization was shown to reduce viral shedding, and the recurrence and severity of lesions.
Dengue Fever. With our collaborators we were generating vaccine candidates for the prevention of dengue fever, a viral disease spread by mosquitoes that historically affected 50 to 100 million people each year. We had collaboration agreements with NMRC and the Henry M. Jackson Foundation for the Advancement of Military Medicine, Inc., but we are no longer actively developing vaccine candidates for the prevention of dengue fever.
Malaria. With our collaborators we are generating vaccine candidates for the prevention of malaria. There are currently over 300 million cases of malaria in the world each year typically resulting in over two million deaths annually, mostly among children.
We have produced clinical supplies of a multi-antigen vaccine candidate for use by the NMRC in early stage clinical studies.
In April 2010, encouraging clinical and preclinical malaria vaccine data were presented at the Keystone Symposium — Malaria: New Approaches to Understanding Host-Parasite Interactions. Safety, tolerability, immunogenicity, and efficacy data from the Phase 1/2a malaria trial using GenVec technology were presented. Data indicate malaria vaccines given to malaria-naïve adults were found to be safe and well-tolerated with minimal local or systemic reactions and no serious vaccine-related adverse reactions. Sterile protection, a complete absence of parasites in the blood, was seen in 4 out of 15 volunteers that had been inoculated with the vaccine and subsequently challenged with the malaria parasite.
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In November 2012, data were presented on GenVec's malaria vaccine program at the American Society of Tropical Medicine and Hygiene (ASTMH) 61st Annual Meeting, which took take place in Atlanta, Georgia. Data presented at the conference highlighted GenVec's success in identifying novel antigens for use in its malarial vaccine development program. Using a proprietary screening technology, GenVec identified new antigens that are as protective as the gold standard: circumsporozoite protein, or CSP, in an industry-accepted mouse model of malaria. Recent data suggest that new antigens are needed and that CSP, used in vaccines being developed by others, may not be sufficient to generate a protective response in an adequate percentage of people. Data presented at the conference also highlighted GenVec's proprietary non-human primate adenoviral vectors that are capable of generating broad immune responses while avoiding the problems of vector-specific immunity which has limited the development of other adenoviruses as vectors for vaccines.
In March 2012, we received a grant from the NIAID to support the Company's malaria vaccine program. This grant, valued at approximately $600,000 over two years, is being used to identify novel highly protective antigens for malaria vaccine development. Revenue recognized under this grant amounted to $133,000 in 2013 and $94,000 in 2012.
In October 2012, we signed an agreement worth approximately $3.5 million with the NMRC to further support malaria vaccine development. Under the terms of the agreement, GenVec is responsible for producing clinical supplies of its malaria vaccine, which utilizes its novel, proprietary technology. NMRC plans to use this clinical material to assess the safety and efficacy of these next-generation vectored vaccines using the clinical challenge model developed by NMRC and the Walter Reed Army Institute of Research (WRAIR) malaria vaccine programs, which now are unified as the U.S. Military Malaria Vaccine Program (USMMVP). Under the agreement, GenVec retained the right to commercialize this novel technology. GenVec recognized $1.4 million in revenue under this contract in 2013. In July 2013, we entered into a modification with the NMRC to terminate contractual obligations under this agreement.
Global HIV Vaccine. With our collaborators, we were developing adenovector-based vaccine candidates targeted against the major strains of HIV present in the world. We had collaboration agreements with SAIC-Frederick, Inc. and NIAID, but we are no longer actively developing vaccine candidates for the prevention of HIV.
ANIMAL HEALTH PRODUCT DEVELOPMENT PROGRAM
We are exploring applications of our technology to treat and prevent diseases for livestock and other animals. With our collaborators, we are developing vaccine and anti-viral candidates for the prevention and containment of FMD outbreaks. FMD is a highly contagious viral disease affecting cows and other animals with cloven hooves. Our novel FMD vaccine approach utilizes our proprietary adenovector technology and is manufactured on a proprietary GenVec cell line that is capable of producing antigens without the use of highly contagious FMD virus. Because the vaccine is produced without using killed virus materials, it can be produced cost effectively in the U.S. and around the world. While the United States has not had an outbreak of FMD since 1929, the highly contagious nature of FMD, and the grave economic consequences of an outbreak, has made developing a vaccine and anti-viral candidates a high priority of the U.S. government. Initial testing with a vaccine against FMD showed that inoculated cattle challenged with the virus causing FMD did not develop symptoms.
In June 2012, the U.S. Department of Agriculture's Animal and Plant Health Inspection Service (APHIS) issued a conditional license for our FMD vaccine for use in cattle. APHIS issued the conditional license to Antelope Valley Bios, Inc., who manufactured the vaccine under a contract from GenVec. This is the first FMD vaccine licensed by the USDA Center for Veterinary Biologics. Under the conditional license, the product may be distributed as authorized by Federal emergency management officials within USDA, should the need for the product arise. APHIS issues conditional licenses in the event of an emergency situation, limited market or other special circumstance. In this case, the special circumstance was the need for an FMD vaccine that was capable of being manufactured in the U.S. that allowed for the differentiation between infected and vaccinated animals. The vaccine is available to agriculture officials in the event of an FMD emergency situation.
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We have entered into the following agreements related to our FMD vaccine program:
| • | Merial Limited. In December 2010, we entered into a collaboration with Merial Limited to develop and commercialize our proprietary vaccine technology for use against FMD. Merial Limited is the leading FMD vaccine producer in the world, with leading positions in all key markets. Under the agreement, Merial Limited will be responsible for all costs related to the development and commercialization of FMD vaccines developed through the collaboration. We will receive development milestones and royalties on sales. In May 2011, we entered into a second agreement with Merial Limited. Under the agreement, Merial Limited has the right to evaluate GenVec technology for applications in other areas of animal health. |
| • | U.S. Department of Homeland Security. In January 2007, we signed a three-year contract with the DHS to support the development and manufacture of novel adenovector-based vaccines against FMD, which was eventually extended to May 31, 2011. |
In February 2010, we signed a contract with the DHS to continue the development of adenovector-based vaccines against FMD. Under this agreement, we will use our adenovector technology to develop additional FMD-serotype candidate vaccines and also explore methods to increase the potency and simplify the production process of adenovector-based FMD vaccines. This agreement has been extended through July 2014.
| • | U.S. Department of Agriculture. In August 2004, we signed a cooperative agreement with the USDA for the development of vaccine candidates against FMD, which was partly funded through an interagency agreement by the DHS. The purpose of the agreement was to further advance the development of our proprietary cell line and adenovector technology for the generation of countermeasure vaccines and anti-viral agents to prevent the spread of FMD. This agreement was completed in December 2007. |
TECHNOLOGY PLATFORM
We utilize a complimentary collection of differentiated, proprietary technologies to create product candidates with superior attributes.
Adenovirus Vector Technology. Our products are developed with our proprietary adenovector technology, which uses modified adenoviruses to deliver genes to target cells. Adenoviruses are naturally occurring viruses that reproduce in certain tissues, spread, and can cause ailments such as a form of the common cold. Our product candidates consist of adenovectors that contain an inserted gene(s). We design our vectors so they cannot replicate or cause diseases. This limits toxicity, including unwanted effects on target cells and the surrounding tissues. We have multiple proprietary adenovectors to suit different applications in therapeutic and vaccine products.
When administered to tissues, our vectors enter target cells, leading the cells to produce the protein encoded by the inserted gene.
We believe adenovectors are desirable gene delivery vehicles because they efficiently deliver genes, can be readily modified, and have the following safety characteristics:
| • | Adenoviruses are naturally eliminated from cells and tissues; |
| • | Vectors derived from adenoviruses have been generally well tolerated in clinical testing when administered locally; |
| • | Adenovectors have been in clinical trials sponsored by pharmaceutical and biotechnology companies including Bayer AG, Biogen Idec Inc., Genzyme Corporation, Glaxo SmithKline plc, Novartis, Pfizer Inc., and Sanofi S.A.; and |
| • | Thousands of patients have been treated with GenVec adenovectors with very few serious adverse events related to these vectors. |
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We believe our differentiated gene delivery technology enables us to:
| • | Improve the efficiency of discovering new therapies and vaccines; |
| • | Rapidly construct and screen product candidates; |
| • | Identify novel antigens in a quick, and cost-effective manner; |
| • | Minimize interference from antibodies to adenoviruses; |
| • | Put genes or antigens rapidly into vectors to evaluate function and usefulness in therapy; |
| • | Deliver our product candidates to specific organs or cell types to avoid systemic exposure; |
| • | Achieve efficient delivery of gene or antigen to, and stimulate protein expressions in, target cells; |
| • | Control the amount and duration of therapeutic protein production to allow flexibility in treating different diseases; and |
| • | Scale our manufacturing process for commercial production. |
We believe our adenovector technology is preferred for therapeutic and vaccine products:
| • | For local delivery and expression of therapeutic genes; |
| • | For cell type specific delivery and expression; |
| • | For rational vaccine design; |
| • | For high level antibody and cellular based vaccine responses; |
| • | For vaccine production without exposure to contagious pathogens; and |
| • | For the manufacture of new products that cannot be produced using standard technologies. |
Local Delivery and Expression of Genes. To achieve local production of proteins, we administer our product candidates directly to the site of disease using standard medical devices such as syringes. Direct administration of our product candidates into diseased tissue allows us to increase effectiveness by achieving high concentrations of the protein at disease sites while improving safety by avoiding exposure throughout the body.
Control of Gene Expression. Our technology also allows us to modify the location, duration, and rate of therapeutic gene expression. We alter gene expression by inserting a sequence of DNA, called a promoter, into our vectors adjacent to the target gene. We tailor our technology to the therapeutic or vaccine product need. For some diseases, long-term expression of the therapeutic gene is required to achieve a clinical benefit while high level antigen expression from our molecule vaccines is preferred. Moreover, our adenovector technology allows multiple antigens or therapeutic genes to be efficiently expressed for therapeutic benefit. We have also shown that local production of therapeutic proteins by regulating expression by inserting a specific proprietary promoter that either limits expression to specific cell types or can regulate expression after specific treatments can be preferred.
New Adenovector Platforms. We have generated vectors based on different types of adenovirus. These vectors have the potential to improve vaccine potency, avoid neutralizing antibodies, and generate mucosal immune responses. These new adenovectors are being explored as second-generation therapeutics and vaccine candidates.
Proprietary Cell Lines. We have developed a proprietary production cell line 293-ORF6, which supports the growth of adenovectors. We have developed 293-ORF6 cells and a modification of these cells, M2A, to meet the needs for manufacture of our therapeutic and vaccine products. M2A cells have been developed to produce vectors, in particular vaccine vectors, that express antigens or proteins that interfere with the growth of the vector. In August 2009, we received a Phase 2 SBIR grant, valued at $2.5 million, from the NIAID to support the development of our cell line and vector production technology. Revenue recognized under this grant amounted to $2.3 million through December 31, 2013. Work under this grant was completed in 2013.
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RESEARCH AND DEVELOPMENT
As a biopharmaceutical company developing biologic products, and to support the activities discussed above, we have significant research and development expenditures each year. Our research and development expenses were $5.5 million and $14.3 million for the years ended December 31, 2013 and 2012, respectively. These expenses were divided between our research and development platforms in the following manner:
| | | ||||||
| Years ended December 31, | ||||||||
| (in millions) | 2013 | 2012 | ||||||
| Vaccines | $ | 3.4 | $ | 7.6 | ||||
| Hearing Loss and Balance Disorders | 2.0 | 5.6 | ||||||
| Other Programs | 0.1 | 1.1 | ||||||
| Total | $ | 5.5 | $ | 14.3 | ||||
INTELLECTUAL PROPERTY
We generally seek patent protection for our technology and product candidates in the U.S. and abroad. We have submitted patent applications that are pending in the U.S. and other countries. The patent position of biotechnology firms generally is highly uncertain and involves complex legal and factual questions. Our success will depend, in part, on whether we can:
| • | Obtain patents to protect our own products; |
| • | Obtain licenses to use the technologies of third parties, which may be protected by patents; |
| • | Protect our trade secrets and know-how; and |
| • | Operate without infringing the intellectual property and proprietary rights of others. |
Patent Rights and Licenses. We and our licensors have patents and continue to seek patent protection for technologies that relate to our product candidates, as well as technologies that may prove useful for future product candidates. As of December 31, 2013, we hold or have licenses to 204 issued, allowed or pending patents worldwide, 72 of which are issued or allowed in the U.S. These patents and patent applications pertain to (the composition of matter of our vectors), genes that encode therapeutic proteins; expression control elements that regulate the production of the therapeutic proteins by such genes and targeting technology for enhanced target cell selectivity of our product candidates; cell lines used to manufacture our product candidates; methods of constructing, producing (including purification, quality control, and assay techniques), storing and shipping our product candidates; methods of administering our product candidates; and methods of treating disease using our product candidates.
Hearing Loss Program. We have licensed the Atoh1 gene from the Baylor College of Medicine. This license is worldwide and is exclusive for gene therapy applications. We licensed our rights to this gene to Novartis as part of our worldwide collaboration with Novartis to develop treatments for hearing loss and balance disorders.
Targeted Vectors. We have issued patents expiring beginning in 2014 and pending patent applications covering our technology that allow for the delivery of genes in adenovectors to essentially all cell types, as well as our targeted vectors, which are designed for the purpose of creating product candidates that deliver genes in adenovectors only to selected cells. We are aware, however, of issued patents and pending patent applications of third parties relating to such vectors. It could be alleged that our targeted vectors conflict with such existing or future patents. In May 1998, we entered into an Amended and Restated Exclusive License Agreement with the Cornell Research Foundation (Cornell), which was subsequently amended. Pursuant to the Cornell agreement we license certain proteins, genes, gene vectors and similar biological materials that relate to our adenovector platform. We are obligated to pay Cornell a yearly maintenance fee of $50,000 (creditable against any royalties payable in that year). No royalty payments have been made to date, and prior to commercialization of a licensed product, we have no royalty obligations to Cornell. The Cornell agreement may be terminated by Cornell or by us in the event of an uncured material breach by the other party or by us for any reason with prior written notice. The Cornell agreement continues in full force until the expiration of
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all patents or applications covered thereby, unless otherwise terminated. The latest expiring patent under the Cornell agreement expires on July 31, 2020.
Licenses to Genes. To create our product candidates, we combine our vectors with genes intended to produce proteins with therapeutic potential. We have secured licenses to applicable genes for this purpose. We often seek to obtain exclusivity, consistent with our business needs, when securing such licenses. In return for the rights we receive under our gene licenses, we typically are required to pay royalties based on any commercial sales of the applicable product during a specified time period, as well as provide additional compensation, including up-front license fees and product development-related milestone payments.
Any of our licenses may be terminated by the licensor if we are in material breach of a term or condition of the particular license agreement, or if we become insolvent. In addition, some of our licenses require us to achieve specific milestones.
Production, Purification, Quality Assessment and Formulation Technology. We hold issued patents expiring beginning in 2019 and have pending patent applications pertaining to the production, purification, quality assessment, and formulation of our product candidates. In particular, we hold issued patents covering the process for manufacturing our product candidates, the purification of our product candidates applicable to both research and commercial scales, methods of assessing and confirming the quality and purity of our product candidates for clinical testing and commercialization and product formulations that improve the stability of product candidates and allow our product candidates to be conveniently stored, shipped and used. We are aware, however, of issued patents and pending patent applications of third parties relating to these and other aspects of production, purification, quality assessment, and formulation technology. It could be alleged that our production, purification, quality assessment, and formulation technology conflict with such existing or future patents.
We anticipate that we, and our current and future licensors, will continue to seek to improve existing technologies, develop new technologies and, when appropriate, secure patent protection for such improvements and new technologies.
Certain patents pertaining to our product candidates may be eligible for Patent Term Extension under 35 U.S.C. §156. The term of any patent that claims a human drug product (including human biological products), a method of using a drug product or a method of manufacturing a drug product is eligible for an extension to restore that portion of the patent term that has been lost as a result of FDA review subject to certain limitations.
Trade Secrets. To a more limited extent, we rely on trade secret protection and confidentiality agreements to protect our interests. It is our policy to require our employees, consultants, contractors, manufacturers, collaborators and other advisors to execute confidentiality agreements upon the commencement of employment, consulting or collaborative relationships with us. We also require signed confidentiality agreements from any entity that is to receive confidential data. With respect to employees, consultants and contractors, the agreements generally provide that all inventions made by the individual while rendering services to us shall be assigned to us as our property.
MANUFACTURING AND SUPPLY
Technology for Production, Purification, Quality Assessment, and Formulation. We believe our proprietary production technology and know-how facilitate the production, purification, quality assessment and formulation of our product candidates. The structure of our vectors and the procedures for their production and purification enable us to minimize the presence of contaminants. We believe our proprietary positions provide a competitive advantage in the following areas:
| • | Production and Scale-Up. We produce our adenovectors using cell lines grown under standardized and controlled conditions. We have developed specialized proprietary cell lines for production of our vectors. We employ materials that are free of animal-derived components. We have designed our production processes to be scalable for commercial production and to reduce the potential for contamination. |
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| • | Purification. We have proprietary methods for the purification of our vectors that we believe are scalable to commercial levels as well as suitable for small-scale use in discovery and testing of new product candidates. |
| • | Quality Assessment. We have established proprietary methods to assess and confirm the quality and purity of vectors for research purposes and clinical testing. We use advanced techniques to determine the physical characteristics of our product candidates as a means to establish product consistency and purity. We have an issued U.S. patent covering this technology. We believe these methods are also suitable for quality assessment of commercial production. |
| • | Formulation. We have developed a novel product formulation that improves the stability of our vectors and is covered by issued U.S. patents. Our formulation allows products to be stored, shipped, and used in a controlled manner that assures activity for the duration of the product shelf-life. For research purposes, our formulation enhances the ease and reproducibility of testing. |
Manufacturing Strategy. We rely on third-party manufacturers or our collaborators for current good manufacturing process (cGMP) production for clinical trials and intend to do so for any future commercialization of our product candidates. We have significant experience working with contract manufacturers and we have successfully transferred our manufacturing process to several collaborators and contract manufacturers. Our research and development facility is located in Gaithersburg, Maryland where we have established laboratories and staff to support the non-cGMP production and characterization methods for our product candidates. Many of the production and assay technologies developed for our hearing restoration, our now discontinued TNFerade clinical study, and those developed under our now terminated HIV vaccine contract with NIH, are suitable for our other product development programs.
We intend to use third-party contractors for our manufacturing requirements in areas where we lack sufficient internal capability.
We currently have two suppliers for our clinical manufacturing components, one for human health and one for animal health candidates. Currently, we procure raw materials, including specialized components known as resins, for our product purification and testing methods from a limited number of suppliers. We also procure nutrients used to support the growth of microorganisms or other cells from Life Technologies Corporation.
OUR COMPETITION
Competition in the discovery and development of new methods for treating and preventing disease is intense. We face, and will continue to face substantial competition from pharmaceutical and biotechnology companies, as well as academic and research institutions and government agencies both in the U.S. and abroad. We face competition from organizations pursuing the same or similar technologies used by us in our drug discovery efforts and from organizations that are competitive with our potential therapeutic and vaccine product candidates.
Many of our competitors, either alone or together with their collaborative partners, have substantially greater financial resources and larger research and development organizations. In addition, our experience in clinical trials, obtaining FDA and other regulatory approvals, manufacturing and commercialization of products may be more limited. We also compete in recruiting and retaining highly qualified scientific personnel and consultants. Our ability to compete successfully depends on adequate funding and collaborators who can supplement our capabilities.
We are aware of products under development by our competitors that target the same prevention or treatment of disease. There are several development-stage and established entities, including major pharmaceutical and biotechnology companies that are actively engaged in infectious disease vaccine research and development. These include Sanofi S.A., Novartis, GlaxoSmithKline plc, MedImmune, Inc., (a wholly owned subsidiary of AstraZeneca), Merck & Co., Inc., Pfizer Inc., Crucell N.V., Bavarian Nordic A/S, Okairos S.r.l. (acquired by GlaxoSmithKline in 2013), Intercell A.G., Genocea BioSciences Inc., Vical Incorporated, Emergent Biosolutions Inc., and Novavax Inc. among others.
We believe our competitive success will be based on the efficacy and safety of our products, as well as our ability to create and maintain scientifically advanced technology, attract and retain skilled scientific and
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management personnel, obtain patents or other protection for our products and technology, obtain regulatory approvals, and successfully commercialize our products either independently or through collaborators.
Hearing Loss and Balance Disorders. The market for hearing loss treatments is dominated by devices such as hearing aids or cochlear implants, which are the current standard of care. There are no FDA-approved drug therapies. Several biotechnology and pharmaceutical companies have announced research programs into therapies for either the restoration of function or for the protection of hearing function. These therapies are in various stages of development.
RSV Vaccine. There are a number of companies pursuing the development of a RSV vaccine. These include but are not limited to Medimmune Inc., Sanofi S.A., Bavarian Nordic A/S, Crucell N.V., Novavax Inc., AlphaVax Inc., NanoBio Corporation and Okairos S.r.l.
HSV Vaccine. HSV vaccines are currently under development by Genocea BioSciences Inc., Sanofi S.A., Vical Incorporated, Coridon Pty Ltd. and Alphavax Inc.
FMD Vaccine. Vaccine manufacturers include Merial Limited, Intervet Inc., a subsidiary of Merck & Co. Inc., Bayer AG, Indian Immunological Ltd. and other local vaccine producers around the world, including government producers as well as Novavax Inc.
Malaria Vaccine. There are currently no vaccines approved for the prevention of malaria. Companies developing malaria vaccines include GlaxoSmithKline plc, Sanofi S.A., Crucell N.V., Genocea BioSciences Inc., Sanaria and Okairos S.r.l.
GOVERNMENT REGULATION
Regulation of Biologic Products. The research, development, testing, manufacture, quality, safety, effectiveness, labeling, packaging, storage, approval, distribution, marketing, advertising, and promotion of any biologic products developed by us or our collaborators are subject to regulation by federal, state, local and foreign governmental authorities. In the U.S., new drugs are subject to extensive regulation under the Federal Food, Drug, and Cosmetic Act, and biologic products, such as therapeutic products and vaccines, are subject to regulation both under provisions of that Act and under the Public Health Service Act. The process of obtaining FDA approval for a new product is costly and time-consuming, and the outcome is not guaranteed. If approved, drug products are subject to ongoing regulation, and compliance with appropriate federal, state, local, and foreign statutes and regulations will require the expenditure of substantial time and financial resources.
Biologic Product Candidates for Human Health
The steps required before our proposed investigational biologic products may be marketed in the U.S. (other than for veterinary biologics, including our FMD vaccine product candidate, which are discussed below), include:
| • | Performance of preclinical (animal and laboratory) tests; |
| • | Submission to the FDA of an Investigational New Drug application (IND), which must become effective before human clinical trials may commence; |
| • | Performance of adequate and well-controlled human clinical trials to establish the safety and efficacy in the intended target population for each indication for which approval is sought; |
| • | Performance of a consistent and reproducible manufacturing process intended for commercial use; |
| • | Submission to the FDA of a Biologics License Application (BLA); and |
| • | FDA approval of the BLA before any commercial sale or shipment. |
Preclinical studies may take several years to complete. The results of these studies, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND. The FDA must review the IND prior to the commencement of human clinical trials. Unless the FDA raises concerns (such as concerns that human research subjects will be exposed to unreasonable risks), the IND will become effective 30 days following its receipt by the FDA, and the clinical trials covered by the IND may commence.
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Clinical trials typically are conducted in three sequential but often overlapping phases. In Phase 1, a drug is typically studied in a small number of healthy volunteers or patients to test the drug for safety or adverse effects, dosage tolerance, absorption, metabolism, excretion and clinical pharmacology. Phase 2 involves clinical trials in the targeted patient population to determine the effectiveness of the drug for specific, targeted indications, to determine dosage tolerance and optimal dosage, and to gather additional safety data. Phase 3 clinical trials are commonly referred to as pivotal, or registrational, studies and are conducted to further evaluate dosage, to provide substantial evidence of clinical efficacy and to further test for safety in an expanded and diverse patient population. Each phase may take several years to complete.
The conduct of the clinical trials is subject to extensive regulation, including compliance with good clinical practice regulations and guidelines, obtaining informed patient consent, sponsor monitoring, auditing of the clinical, laboratory and product manufacturing sites, and review and approval of each study by an independent institutional review board (IRB) for each site proposing to conduct the clinical trial. The FDA, the IRB or the sponsor may, at its discretion, suspend or terminate a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.
Promising data in early-stage clinical trials do not necessarily assure success in later-stage clinical trials. The FDA may request that additional clinical trials be conducted as a condition to product approval. Additionally, new government requirements may be established that could delay or prevent regulatory approval of our products under development.
After the completion of the required clinical trials, if we believe the data indicate the biologic product is safe and effective, a BLA is prepared and submitted to the FDA. This process takes substantial time and effort. The FDA may refuse to file the BLA and request additional information, in which case, the application must be resubmitted with the supplemental information. Once a BLA is deemed filed by the FDA, there is no guarantee the FDA will approve the BLA. The FDA has substantial discretion in the approval process and may disagree with our interpretation of the preclinical or clinical data and request additional data and information, which could significantly delay, limit, or even prevent regulatory approval.
As part of this review, the FDA may refer the BLA to an appropriate advisory committee, typically a panel of physicians, for review, evaluation, and an approval recommendation. Although the FDA is not bound by the opinion of the advisory committee, advisory committee discussions may further delay, limit, or prevent approval. The FDA also may conclude that as part of the BLA, the sponsor must develop a risk evaluation and mitigation strategy (REMS) to ensure that the benefits of the drug outweigh the risks. A REMS may have different components, including a package insert directed to patients, a plan for communication with healthcare providers, restrictions on a drug’s distribution, or a medication guide to provide better information to consumers about the drug’s risks and benefits.
If the FDA’s evaluations of the BLA are favorable and the agency concludes that the standards for approval have been met, it will issue an approval letter. If the FDA believes the BLA is deficient in some way that precludes approval, it will issue a Complete Response Letter that generally identifies the deficiencies, which can be minor, for example, requiring labeling changes, or major, for example, requiring additional preclinical or clinical studies. The Complete Response Letter may also include recommended actions that the applicant might take to place the BLA in a condition for approval. If a Complete Response Letter is issued, the applicant may either resubmit the BLA, addressing all of the deficiencies identified in the letter, or withdraw the BLA. If the deficiencies have been addressed to the FDA’s satisfaction, the FDA may issue an approval letter. Even if the requested information and data are submitted, however, the FDA may ultimately decide that the BLA does not satisfy the criteria for approval. Prior to granting approval, the FDA generally conducts an inspection of the facilities, including third-party contract facilities that will be involved in the manufacture, production, packaging, testing, and control of the drug substance and finished drug product for compliance with cGMP. The FDA will not approve the BLA unless cGMP compliance is satisfactory. In addition, each manufacturing establishment must be registered with the FDA and is subject to periodic FDA inspection. In order to supply products for use either inside or outside the U.S., including for investigation in clinical trials, domestic and foreign manufacturing establishments, including third-party facilities, must comply with cGMP regulations and are subject to periodic inspection by the corresponding regulatory agencies in their home country, often under reciprocal agreements with the FDA or by the FDA.
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After a biologic product is approved, it is subject to significant ongoing regulation and must comply with requirements relating to manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion, distribution, and recordkeeping. As a condition of BLA approval, the FDA may require post-approval testing (referred to as Phase 4 clinical trials) and surveillance to monitor the product’s safety or efficacy. In addition, the holder of an approved BLA is required to keep extensive records, to report certain adverse reactions, production deviations, and other problems to the FDA, to provide updated safety and efficacy information and to comply with requirements concerning advertising and promotional labeling for their products. Generally, a company can promote a product only for those claims relating to safety and efficacy that are consistent with the labeling approved by the FDA and supported by substantial evidence. Failure to comply with the regulatory requirements of the FDA and other applicable U.S. and foreign regulatory authorities could result in administrative or judicially imposed sanctions or other setbacks, including warning letters, restrictions on the product, product recalls, suspension or withdrawal of approval, seizures, injunctions, civil fines, and criminal sanctions.
If the FDA becomes aware of new safety information, it may require post-approval studies or clinical trials to investigate known serious risks or signals of serious risks or in response to the occurrence of unexpected serious risks. If a post-approval study is required, periodic status reports must be submitted to the FDA. Failure to conduct such post-approval studies in a timely manner may result in substantial civil fines. In addition, newly discovered or developed safety or efficacy data may require changes to an approved product’s distribution or labeling, including the addition of new warnings or contraindications, or suspended marketing or withdrawal of the product.
A biologic product is also subject to regulatory approval in other countries in which it is intended to be marketed. No such product can be marketed in a country until the regulatory authorities of that country have approved an appropriate license application. FDA approval does not assure approval by other regulatory authorities. In many countries, the government is involved in the pricing of the product. In such cases, a pricing review period often begins after market approval is granted.
On March 23, 2010, the Biologics Price Competition and Innovation Act of 2009 (BPCIA) was signed into law. It creates an abbreviated approval pathway for biologic products that are “biosimilar” to a previously approved biologic product, which is called the “reference product.” This abbreviated approval pathway is intended to permit a biosimilar product to come to market more quickly and less expensively than if a full BLA were submitted, by relying to some extent on FDA’s previous review and approval of the reference product. If a proposed biosimilar product meets the statutory standards for approval (which include demonstrating that it is highly similar to the reference product and there are no clinically meaningful differences in safety, purity or potency between the products), the proposed biosimilar may be approved on the basis of an application that is different from the standard BLA. In addition, a biosimilar product may be approved as interchangeable with the reference product if the proposed product application meets standards intended to ensure that the biosimilar product can be expected to produce the same clinical result as the reference product.
The BPCIA provides exclusivity periods during which a product approved under a BLA cannot be relied on as a reference product. No biosimilar application may be submitted to FDA for a period of four years after the reference product was approved, and no biosimilar application may be approved until twelve years after the reference product’s approval. If pediatric studies with the reference product are performed and accepted by the FDA, the twelve-year exclusivity period will be extended for an additional six months. Additionally, the first biosimilar product approved as interchangeable with a reference product will be granted an exclusivity period of varying length, depending on the factual circumstances. Because the BPCIA is a highly complicated statute that has only recently been enacted, there is uncertainty as to how many important components of the new law will be implemented. Some issues may be resolved through regulation or agency guidance, but other interpretations may develop on an ad hoc basis as FDA confronts them in the context of specific applications.
Biologic Products Candidates for Animal Health
Our FMD vaccine product candidate is subject to a separate regulatory regime. In the U.S., governmental regulation of animal health products is primarily provided by two agencies: the Animal and Plant Health Inspection Service (APHIS) within the Department of Agriculture (USDA) and the FDA. Vaccines for animals
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are considered veterinary biologics and are regulated by the Center for Veterinary Biologics of the USDA under the auspices of the Virus-Serum-Toxin Act. The USDA licensing process involves the submission of several data packages. These packages include information on how the product will be manufactured, information on the efficacy and safety of the product in laboratory and target animal studies and information on performance of the product in field conditions. The USDA may issue one of two types of licenses: a full license or a conditional license. Conditional licenses are used to meet an emergency condition, limited market, local situation or other special circumstance and do not permit the general commercialization of the product. Conditionally licensed products are required to be pure and safe, and have a reasonable expectation of efficacy. Conditional licenses are effective for a finite time period and distribution of conditionally licensed products in each state is limited to authorized recipients designated by proper State officials. Conditional licenses may be renewed if the applicant demonstrates a good-faith effort toward obtaining full licensure.
In June 2012, APHIS issued a conditional license for our FMD vaccine for use in cattle. The conditional license was issued because of the need for an FMD vaccine that is capable of being manufactured in the United States that allows for the differentiation between infected and vaccinated animals. The vaccine is available to agriculture officials in the event of an FMD emergency situation.
Reimbursement of Pharmaceutical Products. If and when our products reach commercialization, insurance companies, health maintenance organizations, other third-party payers, and federal and state governments will be the primary payers for our products. The largest payer in this group will probably be the Centers for Medicare and Medicaid Services (CMS), the federal agency that administers the Medicare and Medicaid programs. Under Medicare, there are different reimbursement methodologies for certain drugs and biologic products that depend on the site of service. These methodologies generally use average sales price (ASP) information. Manufacturers, including us, if and when we or our collaborators commercialize, are required to provide ASP information to CMS on a quarterly basis. If a manufacturer is found to have made a misrepresentation in the reporting of ASP, the statute provides for civil monetary penalties of up to $10,000 for each misrepresentation for each day in which the misrepresentation was applied. Additional civil monetary penalties apply for reporting false information or reporting required information late. ASP is used to compute Medicare payment rates, updated quarterly based on this ASP information. Until enough ASP data are available to calculate a payment rate, reimbursement is wholesale acquisition cost plus 6%. There also is a mechanism for comparison of the ASP for a product to the widely available market price and the Medicaid Average Manufacturer Price (AMP) for the product. When the ASP for a product exceeds the product’s AMP by a specified percentage, the product’s ASP may be disregarded and an AMP-based reimbursement rate may be applied instead, which could cause further decreases in Medicare payment rates.
For physician-administered drugs and biologic products furnished in a physician’s office, if the physician purchases the drug or biologic product, CMS will reimburse the physician based upon that drug or biologic product’s ASP plus 6%. The ASP is determined by CMS based upon information reported by manufacturers. Medicare also has several reimbursement methodologies for drugs and biologic products administered in hospital outpatient departments. New drugs and biologics whose cost is “not insignificant” in relation to payment for related procedures are granted “pass-through status” and are reimbursed at ASP plus 6% for the first two to three years of payment under the Medicare hospital outpatient prospective payment system. For many other drugs and biologic products that do not qualify for pass-through status but have an average cost per day greater than $90, the current Medicare payment to a hospital outpatient department is ASP plus 6%. Drugs and biologic products with an average cost per day equal to or less than $90 are not separately reimbursed; payment for these products is included in payment for the associated procedure. Payment levels for drugs without pass-through status and the $90 threshold are subject to change through regulation each calendar year.
In addition, Congress may change Medicare reimbursement amounts or methods by statute. For example, beginning April 1, 2013, Medicare payments for all items and services, including drugs and biologicals, have been reduced by 2% under the sequestration (i.e. automatic spending reductions) required by the Budget Control Act of 2011 (BCA), as amended by the American Taxpayer Relief Act of 2012 (ATRA). Under the BCA, ATRA and the Bipartisan Budget Act of 2013, this reduction will remain in effect until 2023, unless Congress modifies the sequestration in the future. In addition, Congress or CMS could change the calculation of ASP through statute or regulation. Health reform legislation enacted in March of 2010, the Patient
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Protection and Affordable Care Act of 2010 (PPACA), also requires CMS to test new payment methodologies that would bundle payment for physician and hospital services and supplies, including drugs and biological products, for an episode of care. Changes to the calculation of ASP or Medicare reimbursement methodologies could affect reimbursement for our products and could negatively impact our results of operations, if and when we begin to commercialize products that could be reimbursed by the Medicare program.
Effective January 1, 2006, an expanded prescription drug benefit for all Medicare beneficiaries (known as Medicare Part D) commenced to provide Medicare beneficiaries with drug coverage for self-administered drugs and biologic products and other drugs and biologic products not covered by Medicare, including many vaccines. This voluntary benefit is being implemented through private plans under contractual arrangements with the federal government. Currently, these plans negotiate directly with pharmaceutical manufacturers for rebates on drugs dispensed to Medicare Part D beneficiaries. Like pharmaceutical coverage through private health insurance, Medicare Part D plans establish formularies and use other utilization management tools when determining the drugs and biologic products that are offered by each plan. These formularies can change on an annual basis, subject to federal governmental review. These plans may also require beneficiaries to provide out-of-pocket payments for such products. Effective January 1, 2008, private Medicare Part D plans pay physicians one payment that includes both the administration cost and the cost of the vaccine for those vaccines that are not already covered by law under a different component of the Medicare program. PPACA requires manufacturers to pay rebates of 50% on all drugs dispensed to beneficiaries, other than low income beneficiaries, in the Medicare Part D coverage gap, often referred to as the “donut hole.” It is possible that future health reform legislation would require the government to negotiate Medicare Part D rebates directly, which could result in much higher rebate amounts than those currently negotiated with the plans. In addition, although certain treatments are currently included in CMS’s protected classes of drugs for purposes of Medicare Part D formularies, which generally ensures inclusion on plan formularies, it is possible that future regulatory or legislative changes could change that status.
Federal law requires pharmaceutical manufacturers to pay rebates on covered outpatient drugs reimbursed by the Medicaid program as a condition of having federal funds being made available to pay for those drugs under Medicaid and Medicare Part B. Rebate amounts for a product are determined by a statutory formula that is based on prices defined by statute: AMP, which must be calculated for all products that are covered outpatient drugs under the Medicaid program, and best price, which must be calculated only for those covered outpatient drugs that are innovator products, such as biologic products and products approved under new drug applications. A pharmaceutical manufacturer is required to report AMP and best price for each of its covered outpatient drugs to the government on a regular basis. AMP is reported quarterly and monthly, and best price is reported quarterly.
Various states have adopted mechanisms under Medicaid that seek to control drug reimbursement, including by disfavoring certain higher priced drugs and by seeking supplemental rebates from manufacturers. PPACA and subsequent legislation made significant changes to the Medicaid drug rebate program, including changing the definition of AMP, increasing the minimum rebate percentage, changing the rebate calculation for new formulations of existing products, capping the rebate amount for innovator products at 100% of AMP, and expanding rebate liability from fee-for-service Medicaid utilization to include the utilization of Medicaid managed care organizations as well. We expect if and when we or our collaborators commercialize our products in the U.S., a significant portion of our revenue and the revenue of our collaborators from sales of our products will be obtained through government payers, including Medicare, Medicaid and Department of Defense programs, and any failure to qualify for reimbursement for our products under those programs would have a material adverse effect on future revenues from sales of our products.
A pharmaceutical manufacturer must also participate in the 340B drug pricing program in order for federal funds to be available to pay for the pharmaceutical manufacturer’s drugs under Medicaid and Medicare Part B. Under this program, the participating pharmaceutical manufacturer agrees to charge statutorily-defined covered entities no more than the 340B discounted ceiling price for the pharmaceutical manufacturer’s covered outpatient drugs. The formula for determining the discounted purchase price is defined by statute and is based on the AMP and rebate amount for a particular product as calculated under the Medicaid drug rebate program, discussed above. PPACA also obligates the Secretary of the Department of Health and Human Services to create regulations and processes to improve the integrity of the 340B drug pricing program and to
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ensure the agreement that manufacturers must sign to participate in the program obligates manufacturers to offer the ceiling price to covered entities if the manufacturer makes the drug available to any other purchaser at any price and report to the government the ceiling prices for its drugs. In addition, legislation may be introduced that, if passed, could further expand the 340B drug pricing program to include additional covered entities or could require participating manufacturers to agree to provide 340B discounted pricing on drugs used in the inpatient setting. To the extent that PPACA and subsequent legislation, as discussed above, causes the statutory and regulatory definitions of AMP and the Medicaid rebate amount to change, these changes also impact the 340B discounted ceiling price.
In order to be eligible to have our products paid for with federal funds under the Medicaid and Medicare Part B programs and purchased by certain federal agencies and grantees, we anticipate that we will participate in the Department of Veterans Affairs (VA) Federal Supply Schedule (FSS) pricing program, established by Section 603 of the Veterans Health Care Act of 1992. Under this program, we will be obligated to make our products available for procurement on an FSS contract and charge prices to four federal agencies — VA, Department of Defense (DoD), Public Health Service and Coast Guard — that are no higher than the statutory Federal Ceiling Price (FCP). The FCP is based on the non-federal average manufacturer price (Non-FAMP), which we will be required to calculate and report to the VA on a quarterly and annual basis.
To the extent our other products become available in the retail pharmacy setting if and when they are commercialized, we would be subject to Section 703 of the National Defense Authorization Act for Fiscal Year 2008. DoD has established a program under which it seeks FCP-based rebates from drug manufacturers on TRICARE retail utilization of covered drugs. Under this authority, DoD asserts an entitlement to rebates on TRICARE Retail Pharmacy utilization from January 28, 2008 forward, unless DoD grants a waiver or compromise of amounts due. Rebates are computed by subtracting the applicable FCP from the corresponding annual Non-FAMP. DoD has asserted the right to apply offsets and/or proceed under the Debt Collection Act in the event that a company does not pay rebates or request a waiver of rebate liability in a timely fashion. Companies that want their covered drugs to be eligible for favorable positioning on DoD’s Uniform Formulary must enter into a Section 703 Agreement with TMA under which the company agrees to pay the quarterly rebates.
If and when we begin commercializing our products, we expect to experience pricing pressures in the United States in connection with the sale of these products due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals. We are unable to predict what additional legislation, regulations or policies, if any, relating to the healthcare industry or third-party coverage and reimbursement may be enacted in the future or what effect such legislation, regulations or policies would have on our business. Any cost containment measures, including those listed above, or other healthcare system reforms that are adopted could have a material adverse effect on our ability to operate profitably.
In addition to the changes discussed above, PPACA substantially changes the way healthcare is financed by both governmental and private insurers and significantly impacts the pharmaceutical industry in other ways as well. PPACA contains a number of provisions that are expected to impact our business and operations, in some cases in ways we cannot currently predict. Changes that may affect our business following the commercialization in the U.S. of our products include those governing expanded enrollment in federal and private healthcare programs, new Medicare reimbursement methods and rates, increased rebates and taxes on pharmaceutical products, and revised fraud and abuse and enforcement requirements. These changes will impact existing government healthcare programs and will result in the development of new programs.
Many of PPACA’s most significant reforms take effect in 2014 and, thereafter, and their effects will be shaped significantly by implementing regulations that have yet to be finalized, by difficulties in implementation of the new insurance marketplaces, and by state government decisions. In 2012, CMS, the federal agency that administers the Medicare and Medicaid programs issued proposed regulations to implement the changes to the Medicaid drug rebate program under PPACA but has not yet issued final regulations. CMS is currently expected to release the final regulations in 2014. Many states chose not to expand their Medicaid programs by raising the income limit to 133% of the federal poverty level, as permitted by PPACA. It is unclear whether these states will choose to expand their programs in the future and whether there will be more uninsured
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patients in 2014 than anticipated when Congress passed PPACA. For each state that does not choose to expand its Medicaid program, there will be fewer insured patients overall. In addition, problems with implementation of the websites and other administrative services to help people enroll in qualifying insurance coverage may have reduced the number of uninsured people who obtain coverage under PPACA. The reduction in the number of insured patients could impact our sales, business and financial condition following the commercialization, if successful, of our products in the U.S.
Other Regulations. Our business is also subject to regulation under various state and federal environmental laws, including the Occupational Safety and Health Act, the Resource Conservation and Recovery Act and the Toxic Substances Control Act. These and other laws govern our use, handling, and disposal of various biological, chemical and radioactive substances used in and wastes generated by our operations. We are not aware of any costs or liabilities in connection with any environmental laws that will have a material adverse effect on our business or financial condition.
Our business is subject to healthcare fraud and abuse regulation and enforcement by both the federal government and the states in which we conduct our business. The healthcare fraud and abuse laws and regulations that may affect our ability to operate include but are not limited to:
| • | the federal Anti-Kickback Law, which prohibits, among other things, knowingly or willingly offering, paying, soliciting or receiving remuneration, directly or indirectly, in cash or in kind, to induce or reward the purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any health care items or service for which payment may be made, in whole or in part, by federal healthcare programs such as Medicare and Medicaid. This statute has been interpreted to apply to arrangements between pharmaceutical companies on one hand and prescribers, purchasers and formulary managers on the other. Further, PPACA clarified that a person or entity needs not to have actual knowledge of the federal Anti-Kickback statute or specific intent to violate it. In addition, PPACA amended the Social Security Act to provide that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Law constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Although there are a number of statutory exemptions and regulatory safe harbors to the federal Anti-Kickback Law protecting certain common business arrangements and activities from prosecution or regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that do not fit squarely within an exemption or safe harbor may be subject to scrutiny; |
| • | the federal civil False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment of government funds or knowingly making, using or causing to be made or used, a false record or statement material to an obligation to pay money to the government or knowingly concealing or knowingly and improperly avoiding, decreasing or concealing an obligation to pay money to the federal government. Many healthcare companies have been investigated and have reached substantial financial settlements with the federal government under the civil False Claims Act for a variety of alleged improper activities including causing false claims to be submitted as a result of the marketing of their products for unapproved and thus non-reimbursable uses, inflating prices reported to private price publication services which are used to set drug payment rates under government healthcare programs and other interactions with customers including those that may have affected their billing or coding practices and submission to the federal government. Pharmaceutical and other healthcare companies also are subject to other federal false claim laws, including, among others, federal criminal healthcare fraud and false statement statutes that extend to non-government health benefit programs; |
| • | The Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended by the Health Information Technology for Economic and Clinical Health Act, among other things, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program or making false statements in connection with the delivery of or payment for healthcare benefits, items or services, and also imposes obligations with respect to safeguarding the privacy, security and transmission of individually identifiable health information; |
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| • | the federal Physician Payment Sunshine Act, being implemented as the Open Payments Program, requires certain pharmaceutical manufacturers to engage in extensive tracking of payments or transfers of value to physicians and teaching hospitals, maintenance of a payments database and public reporting of the payment data. Pharmaceutical manufacturers with products for which payment is available under Medicare, Medicaid or the State Children’s Health Insurance Program are required to track and report such payments. Centers for Medicare and Medicaid Services (CMS), recently issued a final rule implementing the Physician Payment Sunshine Act provisions and clarified the scope of the reporting obligations, as well as that applicable manufacturers must begin tracking on August 1, 2013 and must report payment data to CMS by March 31, 2014 and annually thereafter. |
| • | analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to items or services reimbursed under Medicaid and other state programs or, in several states, apply regardless of the payer. Some state laws also require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products and to report gifts and payments to individual physicians in the states. Other states prohibit providing meals to prescribers or other marketing related activities. In addition, California, Connecticut, Nevada and Massachusetts require pharmaceutical companies to implement compliance programs or marketing codes of conduct; |
| • | the federal Foreign Corrupt Practices Act of 1997 and other similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from providing money or anything of value to officials of foreign governments, foreign political parties or international organizations with the intent to obtain or retain business or seek a business advantage. Recently, there has been a substantial increase in anti-bribery law enforcement activity by U.S. regulators, with more frequent and aggressive investigations and enforcement proceedings by both the Department of Justice and the U.S. Securities and Exchange Commission. A determination that our operations or activities are not, or were not, in compliance with United States or foreign laws or regulations could result in the imposition of substantial fines, interruptions of business, loss of supplier, vendor or other third-party relationships, termination of necessary licenses and permits and other legal or equitable sanctions. Other internal or government investigations or legal or regulatory proceedings, including lawsuits brought by private litigants, may also follow. |
Violation of any of the laws described above or any other government regulations that apply to us may result in significant civil, criminal and administrative penalties, damages, fines, exclusion from government-funded healthcare programs like Medicare and Medicaid and the curtailment or restructuring of our operations.
EXECUTIVE OFFICERS OF THE REGISTRANT
| | | ||
| Name | Age | Present Position with the Registrant | ||
| Douglas J. Swirsky | 44 | President and Chief Executive Officer, Chief Financial Officer, Treasurer, and Corporate Secretary | ||
| Douglas E. Brough, Ph.D. | 59 | Chief Scientific Officer | ||
| Bryan T. Butman, Ph.D. | 61 | Sr. Vice President, Development |
The Board of Directors appoints all executive officers annually. There is no family relationship between or among any of the executive officers or directors, or any arrangement or understandings pursuant to which the officers were appointed.
Douglas J. Swirskyhas served as the President and Chief Executive Officer and as a director of the Company since September 2013. He joined GenVec in 2006 as Chief Financial Officer, Treasurer, and Corporate Secretary, which are positions he continues to hold. Prior to joining GenVec, Mr. Swirsky was a Managing Director and the Head of Life Sciences Investment Banking at Stifel Nicolaus from 2005 to 2006 and held investment banking positions at Legg Mason from 2002 until Stifel Financial’s acquisition of the Legg Mason Capital Markets business in 2005. Mr. Swirsky, a Certified Public Accountant and a CFA charter holder, has also previously held investment banking positions at UBS, PaineWebber, and Morgan Stanley. His experience also includes positions in public accounting and consulting. Mr. Swirsky received his B.S. in Business Administration from Boston University and his M.B.A. from the Kellogg School of Management at
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Northwestern University. Mr. Swirsky is a member of the Board of Directors of Fibrocell Science, Inc. Within the past five years, Mr. Swirsky has also served on the board of PolyMedix, Inc.
Douglas E. Brough, Ph.D.joined GenVec in 1993 and since September 2013 has served as Chief Scientific Officer. Dr. Brough previously held several positions at GenVec including Senior Vice President, Research, Vice President, Head of Research, Executive Director of Vector Sciences, Senior Director of Vector Sciences, Director of Vector Sciences, Director of Molecular Virology, Head Molecular Virology and Research Scientist. Prior to joining GenVec, Dr. Brough was a Research Fellow in the Department of Molecular Biology at the Lewis Thomas Laboratory, Princeton University. Dr. Brough received his B.S. in Biology from Purdue University, a M.S. in Microbiology and Biochemistry from Idaho State University and his Ph.D. in Microbiology and Molecular Genetics from Rutgers, the State University of New Jersey and the Robert Wood Johnson Medical School. Dr. Brough performed post-doctoral research in molecular biology at Princeton University.
Bryan T. Butman, Ph.D. joined the company in September, 1999 and now serves as Senior Vice President, Development. Dr. Butman previously served as GenVec’s Vice President of Vector Operations (2005 to 2006), Vice President of Quality (2002 to 2005) and Director of Quality and Analytical Science (1999 to 2002). Prior to joining GenVec, Dr. Butman was Executive Director of Diagnostic Product Research and Development with INTRACEL Corporation, a biotechnology company. Dr. Butman has over 30 years of biotechnology product development experience including clinical gene therapy, human monoclonal antibody and clinical diagnostic products. Throughout his biotechnology career, Dr. Butman has developed successful products in the areas of oncology, cardiovascular disease, infectious disease, food safety and hematology. He has held senior positions within Warner Lambert, AKZO-Nobel, Organon Teknika, PerImmune and INTRACEL. Dr. Butman holds a Ph.D. in Cell Biology from Wayne State University.
EMPLOYEES
As of February 28, 2014, we had 11 employees, 2 of whom hold Ph.D. degrees and 2 of whom hold other advanced degrees. Of our total workforce, 4 are engaged primarily in research and development activities and 7 are engaged primarily in business development, finance, marketing, and administration functions. None of our employees is represented by a labor union or covered by a collective bargaining agreement, and we consider our employee relations to be good.
PRINCIPAL EXECUTIVE OFFICES
We were incorporated in Delaware in 1992. Our principal executive offices are located at 910 Clopper Road, Suite 220N, Gaithersburg, Maryland 20878. Our telephone number at that location is (240) 632-0740.
AVAILABLE INFORMATION
We maintain an internet website atwww.genvec.com. Our electronic filings with the U.S. Securities and Exchange Commission (including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to these reports) are available free of charge through our website as soon as reasonably practicable after we electronically file them with or furnish them to the U.S. Securities and Exchange Commission. Our website also includes copies or links to selected published studies and posters of presentations, within the limits of copyright law and practicability, which contain additional information about clinical trials of our product candidates. In addition to visiting our website, you may read and copy public reports we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington DC 20549, or atwww.sec.gov. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
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ITEM 1A. RISK FACTORS
Investing in our securities involves a high degree of risk. In addition to the other information contained in this Annual Report on Form 10-K, you should consider the following important factors that could affect our actual future results, including, but not limited to, our product development programs, contract revenues, expenses, net losses, and earnings per share.
We have a history of losses and anticipate future losses.
We have incurred net losses in each year since our inception in December 1992, including a net loss of $10.0 million for the year ended December 31, 2013. As of December 31, 2013, we had an accumulated deficit of approximately $275.8 million. We are unsure if or when we will become profitable. The size of our net losses will depend, in part, on our revenues and our expenses.
We have derived all of our revenues from payments from collaborations with corporations and government entities and will continue to do so for the foreseeable future. It may be several years, if ever, before we will recognize revenue from product candidate sales or royalties. While we have taken efforts to control costs throughout 2013, a large portion of our expenses are fixed, including expenses related to facilities, equipment and personnel, and our ability to continue to meaningfully reduce costs is limited. In addition, we expect to continue to spend significant amounts to fund research and development to advance our lead program in hearing loss and balance disorders and to enhance our core technologies. As a result of our operating expenses, we will need to generate significant additional revenue to achieve profitability. Even if we do achieve profitability, it may not be sustainable.
We are a biopharmaceutical company deploying unproven technologies, and we may never be able to develop, obtain regulatory approval of, or market any of our product candidates.
Gene-based products are new and rapidly evolving medical approaches, which have not been shown to be effective on a widespread basis. Only a limited number of gene-based products have been successfully developed and commercialized to date. In addition, no gene therapy product has received regulatory approval in the U.S. None of our product candidates have been approved for sale in the U.S. or elsewhere. Gene-based products may be susceptible to various risks, including undesirable and unintended side effects from genes or the delivery systems, unintended immune responses, inadequate therapeutic efficacy, or other characteristics that may prevent or limit their approval or commercial use. Successful products require significant development and investment, including a lengthy and uncertain period of testing to show their safety and effectiveness before their regulatory approval or commercialization. We have not proven our ability to develop, obtain regulatory approval of, or commercialize gene-based medicines or vaccines.
If we or our collaborators fail to adequately show the safety and efficacy of our product candidates, we will not be able to obtain FDA approval of our product candidates.
We face the risk of failure involved in developing therapies based on new technologies and the difficulties generally associated with drug development. Neither we nor our collaborators currently have any of our product candidates in clinical trials. We anticipate that Novartis will initiate a Phase 1 clinical trial of CGF166 within the first half of 2014. Significant additional research and animal testing, referred to as preclinical testing, will need to be conducted before any of our other product candidates currently under active development can advance to clinical trials. It may take us many years to complete preclinical testing or trials, and we expect that doing so will be dependent on our ability to enter into collaborations. Drug development is an uncertain scientific and medical endeavor, and failure could occur at any stage of development. Acceptable results in early testing or trials might not be repeated later. Not all products in preclinical testing or early stage clinical trials will become approved products, and historically there is a high rate of attrition for product candidates in preclinical and clinical trials due to scientific feasibility, safety, efficacy, changing standards of medical care and other variables. Before an application can be filed with the FDA for product approval, we or our collaborators must show that a particular product candidate is safe and effective. Even with respect to product candidates that advance to clinical trials, we or our collaborators must demonstrate the safety and efficacy of those product candidates before FDA approval can be secured. The failure to adequately show the safety and effectiveness of our product candidates would prevent FDA approval of our products. Any one of our product candidates could fail at any time, as clinical development of drug candidates presents numerous
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unpredictable and significant risks and is very uncertain at all times prior to regulatory approval by the FDA or health authorities in other major markets.
Because regulatory approval must be obtained to market our products in the U.S. and in non-U.S. jurisdictions, we cannot predict whether or when our products will be commercialized; failure to comply with applicable regulations can also harm our business and operations.
The pharmaceutical industry is subject to stringent regulation by a wide range of authorities. We cannot predict whether we or our collaborators will obtain regulatory approval for any of our products. No one can market a pharmaceutical product in the U.S. until it has completed rigorous preclinical testing, clinical trials, and an extensive regulatory approval process implemented by the FDA. To date, the FDA has not approved a gene therapy product for sale in the U.S. Satisfaction of regulatory requirements typically takes many years, is dependent upon the type, complexity, and novelty of the product, and requires the expenditure of substantial resources. Of particular significance are the requirements covering research and development, testing, manufacturing, quality control, labeling, and promotion of drugs for human use.
Before commencing clinical trials, we or our collaborators must submit an IND application to the FDA and wait for the IND to become effective 30 days following its receipt by the FDA. Even after an IND becomes effective, however, a clinical trial is subject to continuing oversight by an Institutional Review Board (IRB) and the FDA. Clinical trials are also subject to:
| • | Informed consent; |
| • | Good clinical practices (GCP) regulations; and |
| • | Potential suspension or termination by the company conducting the clinical trial, the IRB, or the FDA at any time if, among other reasons, it is believed that the subjects participating in these trials are being exposed to unacceptable health risks or if the FDA finds deficiencies in the IND or the conduct of the trials. |
Delays or rejections in the regulatory approval process may be encountered because of additional government regulation from future legislation or administrative action or changes in FDA policy during the period of product development, clinical trials, or FDA regulatory review. For instance, the FDA Amendments Act of 2007 imposed additional obligations on pharmaceutical companies and delegated more enforcement authority to the FDA in the area of drug safety. Key elements of this legislation give the FDA authority to: (1) require companies to conduct post-marketing safety studies of drugs, (2) impose certain drug labeling changes relating to safety, (3) mandate risk mitigation measures such as the education of healthcare providers and the restricted distribution of medicines, and (4) require companies to publicly disclose data from clinical trials.
Failure to comply with applicable FDA or other applicable regulatory requirements may result in criminal prosecution, civil penalties, recall or seizure of products, total or partial suspension of production, or injunction, as well as other regulatory action against our product candidates or us. If regulatory approval of a product is granted, this approval will be limited to those disease indications for which the product has been shown through clinical trials to be safe and effective. Even if approved, a product may not be approved for the indications that are necessary or desirable for successful commercialization, or the FDA may impose restrictions on distribution of the product that may materially impact our operations. The FDA also strictly regulates promotion and labeling after approval. Outside the U.S., the ability to market a product is contingent upon receiving clearances from the appropriate regulatory authorities. This non-U.S. regulatory approval process includes risks similar to those associated with FDA clearance described above and is subject to the independent judgments, policies, priorities and decisions of the applicable regulatory authorities, which may differ from those of the FDA.
We do not currently have any late stage clinical trials in our therapeutic product or vaccine development programs and, therefore, we do not have any near-term prospects of generating revenues from the commercial sale of our therapeutic or vaccine products.
We do not currently have any therapeutic products or vaccines in late stage clinical programs, and the one product of ours that has received some approval is our FMD vaccine, on which a conditional license was issued that was applicable in certain emergency or similar situation. Accordingly, we do not have any
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near-term prospects of generating revenues from the commercial sale of our product candidates in our therapeutic product or vaccine programs. We anticipate that Novartis will initiate a Phase 1 clinical trial of CGF166 within the first half of 2014. There can be no assurance that CGF166 will successfully complete that trial, much less enter or successfully complete any other clinical trial. There also can be no assurance that any of our other therapeutic products or our vaccines will enter or successfully complete the clinical trials required for commercialization.
In 2013, our Board of Directors adopted a new operating strategy, and we do not know if it will be successful.
In 2013, our Board of Directors approved an operating strategy focused on working with leading companies and organizations such as Novartis Institutes for BioMedical Research, Inc. (together with Novartis AG and its subsidiary corporations, including Novartis Pharma AG, Novartis) and the U.S. government to leverage our proprietary gene-delivery technologies to address the prevention and treatment of significant health concerns. This strategy includes working with Novartis to facilitate the development of first-in-class products for the treatment of hearing and balance disorders, developing a sustainable revenue base by licensing rights to our proprietary vector and cell line technologies to additional companies and organizations, licensing our preclinical vaccine candidates for the prevention of RSV and the treatment of HSV-2 infection, and minimizing our cash burn by operating our business in a cost-efficient manner. This operating strategy was adopted after our Board of Directors approved and then determined to withdraw a Plan of Complete Liquidation and Dissolution of the Company (the Plan of Dissolution). This operating strategy may not be successful, and is largely dependent on the success of our collaboration agreement with Novartis, of which there can be no assurance. Furthermore, our ability to execute on our operating strategy may also be affected by our having approved and then withdrawn the Plan of Dissolution. For example, potential licensees or other collaborators may be reluctant to enter into arrangements with us on terms that are acceptable to us, or at all, because of any concerns regarding our long-term stability and plans raised by our adoption and then abandonment of the Plan of Dissolution. Accordingly, we may not be able to successfully execute our operating strategy.
A central aspect of our business strategy is to enter into collaborations with other companies to develop, obtain regulatory approval of, and commercialize our potential products, and if we are unable to find collaborators or sustain existing relationships, we may not be able to generate revenue and advance our products.
A central aspect of our business strategy is to enter into collaborations to support the development of our products. Our lead program, in the field of regenerative medicine and licensed to Novartis, is for the development of novel treatments for hearing loss and balance disorders. In addition to this program, we intend to license rights to our proprietary vector and cell line technologies to additional companies and organizations and license our preclinical vaccine candidates for the prevention of RSV and the treatment of HSV-2 infection. There can be no assurance that we will be able to enter into licensing and other collaboration agreements on terms that are acceptable to us, or at all. If we are not able to enter into and sustain license or other collaboration agreements, we would not able to develop a sustainable revenue base, and we would need to raise additional funds for the development and commercialization of our product candidates and technologies and develop additional capabilities in testing, manufacturing, marketing and sales, among other areas. If we are not able to enter into successful collaborations or obtain additional funds through other means, we would have to delay, curtail or abandon the development and commercialization of certain product candidates and technologies.
We intend to continue to seek support for our government funded contracts and collaborations for the development of new vaccines, but our existing agreements are subject to termination and uncertain future funding and there is no certainty that we will be able to enter into new agreements.
In addition to corporate collaborations, we have entered into agreements with U.S. government agencies, such as the National Institute of Allergy and Infectious Diseases (NIAID) of the National Institutes of Health (NIH), the U.S. Department of Homeland Security (DHS), the U.S. Department of Agriculture (USDA) and the U.S. Naval Medical Research Center (NMRC) to support our vaccine research. These and similar
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agreements have historically accounted for a substantial portion of our revenues, and we intend to continue entering into these agreements in the future. Our business strategy is partially dependent on collaboration agreements with U.S. government agencies and on the ability of these government agencies to perform under these agreements, which performance depends on adequate continued funding of the agencies and their programs.
We have no control over the resources and funding government agencies may devote to any collaboration agreements with us, which may be subject to annual renewal and which generally may be terminated by the government agencies at any time. Any significant reductions in the funding of U.S. government agencies or in the funding areas targeted by our business could materially and adversely affect our business, results of operations, and financial condition. If we were to fail to satisfy our contractual obligations to deliver in the manner required by a collaboration agreement with a U.S. government agency, the applicable Federal Acquisition Regulations allow the agency to cancel the agreement in whole or in part, and we may be required to perform corrective actions, including but not limited to delivering to the government any uncompleted or partially completed work. The performance of these corrective actions could have a material adverse impact on our financial results in the period or periods affected. Government agencies may fail to perform their responsibilities under these agreements, which could materially impact our financial results.
In addition, our contract related costs and fees, including allocated indirect costs, are subject to audits and adjustments by negotiation between us and the U.S. government. As part of the audit process, the government audit agency verifies that all charges made by a contractor against a contract are legitimate and appropriate. Audits may result in recalculation of contract revenues and non-reimbursement of some contract costs and fees. Any audits of our contract related costs and fees could result in material adjustments to our revenues. In addition, U.S. government contracts are conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds on a fiscal year basis even though contract performance may take several years. Consequently, at the outset of a major program, the contract is usually incrementally funded and additional funds are normally committed to the contract by the procuring agency as appropriations are made by Congress for future fiscal years. Any failure of such agencies to continue to fund such contracts could have a material adverse effect on our business, results of operations, and financial condition.
We apply for and have received funding from government agencies under Small Business Technology Transfer (STTR) and Small Business Innovation Research (SBIR) grants. Eligibility of public companies to receive such grants is based on size and ownership criteria that are under review by the Small Business Administration (SBA). As a result, our eligibility may change in the future and additional funding from this source may not be available.
We depend, and anticipate depending further, on corporate collaborators for the development of our product candidates.
When we sign a collaboration agreement, license agreement or similar agreement with a collaborator to develop a product candidate, we will generally expect them to further the development of the product candidate, which could include the design and conduct of clinical trials, the preparation and filing of documents necessary to obtain regulatory approval, and the manufacturing, sale, marketing and other commercialization of the product if it obtains regulatory approval. We may also grant the collaborator certain rights. For example, under the terms of our collaboration agreement with Novartis, we granted Novartis certain exclusive, worldwide rights in specified intellectual property related to our atonal gene program and atonal adenovectors, as well as non-exclusive, world-wide rights to certain other intellectual property related to our hearing loss and balance disorders program and our adenovector platform related to the atonal gene. Novartis has the right to develop and commercialize any products related to the licensed intellectual property. Our dependence on a corporate collaborator, such as Novartis, subjects us to a number of risks, including that:
| • | We may not be able to control the amount and timing of resources that the collaborator devotes to the development or commercialization of product candidates or to their marketing and distribution; |
| • | The collaborator may not be successful in its efforts to obtain regulatory approvals in a timely manner, or at all; |
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| • | The collaborator may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our proprietary information or expose us to potential litigation; |
| • | The collaborator may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing; |
| • | Changes in the collaborator’s business strategy may also adversely affect its willingness or ability to complete its obligations under any arrangement; |
| • | Our agreement with the collaborator may fail to provide us with significant protection, or may not be effectively enforced, if a collaborator fails to perform; |
| • | The collaboration may be terminated or allowed to expire, which would delay the development and may increase the cost of developing our product candidates; |
| • | The collaborator could have the ability to unilaterally terminate agreements, or have extension or renewal rights, in instances that we believe are not commercially reasonable or consistent with our current business strategy; and |
| • | The collaborator may not be able to pay us as expected. |
Given these risks, the success of our current and future collaborations is highly unpredictable and can have a substantial negative or positive impact on our business. If our collaborations fail, our product development or commercialization of product candidates could be delayed or cancelled, which would negatively impact our business, results of operations and financial condition.
Collaborations might produce conflicts that could delay or prevent the development or commercialization of our potential product candidates and negatively impact our business and financial condition.
An important part of our strategy involves conducting multiple product development programs. We may pursue opportunities in fields that conflict with those of our collaborators. In addition, disagreements with our collaborators could develop over rights to our intellectual property or rights to technology developed with our collaborators. The resolution of such conflicts and disagreements may affect ownership of intellectual property that we believe we are entitled to. In addition, any disagreement or conflict with our collaborators could reduce our ability to obtain future collaboration agreements and negatively impact our relationship with existing collaborators. Such a conflict or disagreement could also lead to delays or termination of collaborative research, development, regulatory approval, or commercialization of various products or could require or result in litigation or arbitration, which would be time consuming, expensive, lead to a diversion of management attention and resources and could have a significant negative impact on our business, financial condition, and results of operations.
Our collaboration agreements may prohibit us from conducting research in areas that may compete with our collaboration products, while our collaborators may not be limited to the same extent. This could negatively affect our ability to develop products and, ultimately, prevent us from achieving a continuing source of revenues.
We anticipate some of our corporate or academic collaborators will be conducting multiple product development efforts within each disease area that is the subject of their collaborations with us. In certain circumstances we have agreed not to conduct independently, or with any third party, certain research and development activities that are competitive with the research and development activities conducted under our collaborations. Therefore, our collaborations may limit the areas of research and development we may pursue alone or with others. Some of our collaborators, however, may develop, either alone or with others, products in related fields that are competitive with the products or potential products that are the subject of their collaborations with us. In addition, competing products, either developed by the collaborators or to which the collaborators have rights, may result in their withdrawing support for our product candidates.
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Agreements with government agencies may lead to claims against us under the Federal False Claims Act, and these claims could result in substantial fines and other penalties.
The biopharmaceutical industry is, and in recent years has been, under heightened scrutiny as the subject of government investigations and enforcement actions. Our agreements with U.S. government agencies or any arrangement that implicates the payment of government funds may be subject to substantial financial penalties under the Federal Civil Monetary Penalties Act and the federal civil False Claims Act. Under the False Claims Act’s “whistleblower” provisions, private enforcement of fraud claims against businesses on behalf of the U.S. government has increased due in part to amendments to the False Claims Act that encourage private individuals to sue on behalf of the government. These whistleblower suits, known as qui tam actions, may be filed by private individuals, including present and former employees. The federal civil False Claims Act provides for treble damages and civil penalties of up to $11,000 per false claim. If our operations are found to be in violation of any of these laws, or any other governmental regulations that apply to us, we may be subject to penalties, damages, fines, exclusion from federal healthcare programs like Medicare and Medicaid, and the curtailment or restructuring of our operations. Any penalties, damages, fines, exclusions, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results.
We or our collaborators may experience delays in conducting our clinical trials.
Clinical trials, including the Phase 1 clinical trial of CGF166 that we anticipate Novartis will initiate within the first half of 2014, may be delayed or prematurely terminated by many factors, including: (i) limited number of, and competition for, suitable patients for the particular clinical trial; (ii) slower than expected rate of patient recruitment and enrollment; (iii) failure of patients to complete the trial; (iv) inability to obtain sufficient quantities of acceptable materials for use in clinical trials; (v) delay or failure in reaching agreement on contract terms with prospective study sites or other third-party vendors who are supporting our clinical trials; (vi) inability to reach agreement with the FDA on a trial design that we are able to execute; (vii) difficulty in adequately following up with patients after treatment; and (viii) changes in laws, regulations, regulatory policy or clinical practices. Our ability or the ability of our collaborators to enroll appropriate patients for any clinical trials for our product candidates also may be adversely affected by trials being conducted by our competitors for similar disease indications. The failure of any clinical trials to meet applicable regulatory standards, or the standards of the relevant reviewing bodies could cause such trials to be delayed, suspended or terminated, which could further delay the development of any of our product candidates. Any such delays increase our product development costs, with the possibility that we could be required to raise additional funds. Delays in one clinical trial also can adversely affect our ability and the ability of our collaborators to launch clinical trials for similar or different indications. Consequently, if such delays are significant they could negatively affect our financial results and the commercial prospects for our products.
Additionally, clinical trials may be suspended or terminated at any time by the FDA, an IRB, other regulatory authorities, or by us for a variety of reasons, including safety. Any failure or significant delay in completing clinical trials for our product candidates could harm our financial results and commercial prospects for our product candidates.
Any clinical trial may fail to produce results satisfactory to the FDA. Preclinical and clinical data can be interpreted in different ways, and the FDA may not agree with our interpretations, which could delay, limit or prevent regulatory approval. Negative or inconclusive results or adverse medical events during a clinical trial could cause a trial to be delayed or repeated or a program to be terminated.
If successful large-scale manufacturing of gene-based medicines is not possible, we or our collaborators may be unable to manufacture enough of our product candidates to achieve regulatory approval or market our products.
Few companies to date have demonstrated successful large-scale manufacturing of gene-based medicines, including those that have had significantly more resources than we and it is anticipated that significant challenges will be faced in the scale-up of our manufacturing process for commercial production. There are a limited number of contract manufacturers qualified to perform large-scale manufacturing of gene-based
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medicines. We or our collaborators may be unable to manufacture commercial-scale quantities of gene-base medicines or receive appropriate government approvals on a timely basis or at all. Failure to successfully manufacture or obtain appropriate government approvals on a timely basis or at all would prevent us from achieving our business objectives.
If regulatory approvals are not obtained for a manufacturing facility for our products, we may experience delays, be unable to meet demand, and may lose potential revenues.
Completion of clinical trials for and commercialization of our product candidates requires access to, or development of, facilities to manufacture a sufficient supply of our product candidates. We have limited experience manufacturing any of our gene-based products in the volumes that will be necessary to support large-scale clinical trials or commercial sales, and we expect that we will rely on our collaborators for manufacturing capabilities. Before we or our collaborators can begin commercial manufacturing of any of our product candidates, we or our collaborators must obtain regulatory approval of the manufacturing facility and process. Manufacturing of our proposed products must comply with the FDA’s current Good Manufacturing Practices (cGMP) requirements and similar non-U.S. regulatory requirements. The cGMP requirements govern personnel, buildings and facilities, equipment, control of components and drug product containers and closures, production and process controls, packaging and labeling controls, holding and distribution, laboratory controls and records and reports. Among other things, complying with cGMP and comparable non-U.S. regulatory requirements will require us to expend time, money and effort in production, record keeping, and quality control to assure the product meets applicable specifications and other requirements. We or our collaborators must also pass a preapproval inspection before FDA approval. Significant capital will likely need to be expended on the development of manufacturing capacity for a product candidate even before we know if the FDA will approve the product for commercialization. Furthermore, if we or our collaborators materially fail to comply with these requirements, our product candidates likely would not be approved. If we or our collaborators fail to comply with these requirements after approval, we would be subject to possible regulatory action (including warning letters, restrictions on the product, product recalls, suspension or withdrawal of approval, seizures, injunctions, civil fines, and criminal sanctions), and we may be limited in the jurisdictions in which we are permitted to sell our products. The FDA and non-U.S. regulatory authorities generally have the authority to perform unannounced periodic inspections of manufacturing facilities to ensure compliance with cGMP and non-U.S. regulatory requirements.
We rely on a limited number of suppliers for some of our manufacturing materials. Any problems experienced by any of these suppliers could negatively impact our operations.
We rely on third-party suppliers and vendors for some of the materials used in the manufacture of our product candidates. Some of these materials are available from only one supplier or vendor. For supply of early clinical trial materials, we rely on one supplier, Life Technologies Corporation, for its cell culture medium and another supplier, Lonza Walkersville, Inc., for custom buffers. The cell culture medium is used to grow the cells within which our product candidates are produced. We do not currently have supply agreements with any of these suppliers. Any significant problem experienced by one of our suppliers could result in a delay or interruption in the supply of materials to us until such supplier resolves the problem or an alternative source of supply is located. We have limited experience with alternative sources of raw materials. Any delay or interruption would likely lead to a delay or interruption of manufacturing operations, which could negatively affect our operations.
We face substantial competition from other companies and research institutions that are developing products to treat the same diseases that our product candidates target, and we may not be able to compete successfully.
We compete with pharmaceutical and biotechnology companies pursuing other forms of treatment for the health concerns our product candidates target. We may also face competition from companies that may develop competing technology internally or acquire it from the government, universities or other research institutions. As these companies develop their technologies, they may develop proprietary positions, which may prevent or limit our product commercialization efforts.
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Some of our competitors are established companies with greater financial and other resources than ours. Our competitors may succeed in:
| • | Identifying important genes or delivery mechanisms before we do; |
| • | Developing products or product candidates earlier than we do; |
| • | Forming collaborations before we do or precluding us from forming collaborations with others; |
| • | Obtaining approvals from the FDA or other regulatory agencies, for such products more rapidly than we do; |
| • | Developing and validating manufacturing processes more rapidly than we do; |
| • | Obtaining patent protection to other intellectual property rights that would limit or preclude our ability to use our technologies or develop products; or |
| • | Developing products that are safer or more effective than those we develop or propose to develop. |
While we seek to expand our technological capabilities to remain competitive, research and development by others may render our technology or product candidates obsolete or noncompetitive or result in treatments or cures superior to any therapy developed by us.
In addition, with the March 2010 enactment of the Biologics Price Competition and Innovation Act (BPCIA), our products, if approved, may subsequently face competition from “biosimilar” products that are approved via an abbreviated process on the basis of a showing that the product is similar to our approved product. The BPCIA provides periods of exclusivity during which abbreviated applications may not be submitted to, or approved by, FDA, but the statute then allows approval by an abbreviated pathway and, if certain standards are met, a finding by FDA that the biosimilar product is interchangeable with the reference product. A similar abbreviated approval process for biosimilars (but without the possibility of an interchangeability determination) is available in Europe, too. If competitors are able to obtain marketing approval for biosimilars under an abbreviated regulatory approval process in the U.S. or Europe, our products may become subject to additional competition with the attendant pricing pressure. We also could face or be forced to bring litigation with respect to the validity or scope of patents relating to our products
If we are unable to adequately protect our intellectual property rights, our competitors may be able to take advantage of our research and development efforts to compete with us.
Our commercial success will depend, in part, on obtaining patent protection for our products and other technologies and successfully defending these patents against third party challenges. Our patent position, like that of other biotechnology firms, is highly uncertain and involves complex legal and factual questions. The laws, rules, and regulations affecting biotechnology patent protection in the U.S. and other countries are uncertain and are currently undergoing review and revision. Changes in, or different interpretations of, patent laws in the U.S. and other countries might allow others to use our discoveries or to develop and commercialize our products without any compensation to us.
Our ability to develop and protect a proprietary position based on biotechnological innovations and technologies involving genes and gene delivery systems, methods of use, production, formulations, and the like is particularly uncertain. The U.S. Patent and Trademark Office, as well as patent offices in other countries, have often required that patent applications concerning biotechnology-related inventions be limited or narrowed substantially. Our disclosures in our patent applications may not be sufficient to meet the statutory requirements for patentability in all cases. In addition, other companies or institutions possess issued patents and have filed and will file patent applications that cover or attempt to cover genes, vectors, cell lines, and methods of making and using gene therapy products that are the same as or similar to the subject matter of our patent applications. For example, although we have pending patent applications pertaining to particular adenovectors that cannot reproduce themselves and adenovectors modified to alter cell binding characteristics, we are aware of issued patents and pending patent applications of other companies and institutions relating to the same subject matter. Patents and patent applications of third parties may have priority over our issued patents and our pending or yet to be filed patent applications. Proceedings before the U.S. Patent and
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Trademark Office and other patent offices to determine who properly lays claim to inventions are costly and time consuming, and we may not win in any such proceedings.
The issued patents we already have or may obtain in the future may not provide commercially meaningful protection against competitors. Other companies or institutions may challenge our or our collaborators’ patents in the U.S. and in other countries. In the event a company, institution or researcher infringes upon our or our collaborators’ patent rights, enforcing these rights may be difficult, expensive and time consuming, with no guarantee that our or our collaborators’ patent rights will be upheld. Others may be able to design around these patents or develop unique products providing effects similar to our products. In addition, our competitors may legally challenge our patents, and they may be considered invalid. In addition, various components used in developing gene therapy products, such as particular genes, vectors, promoters, cell lines, and construction methods, used by others and by us, are available to the public. As a result, we are unable to obtain patent protection with respect to such components, and third parties can freely use such components. Third parties may develop products using such components that compete with our potential products. Also, with respect to some of our patentable inventions, we or our collaborators have decided not to pursue patent protection outside the U.S. Accordingly, our competitors could develop, and receive non-U.S. patent protection for, gene therapies or technologies for which we or our collaborators have or are seeking U.S. patent protection. Our competitors may be free to use these gene therapies or technologies outside the U.S. in the absence of patent protection.
We also rely to a limited extent on trade secrets to protect our technology. However, trade secrets are difficult to protect. While we have entered into confidentiality agreements with employees and collaborators, we may not be able to prevent the disclosure or use of our trade secrets. In addition, other companies or institutions may independently develop substantially equivalent information and techniques.
If our technologies and potential products conflict with intellectual property rights of competitors, universities, or others, then we may be prevented from licensing those technologies, developing those product candidates or both.
Other companies and institutions have issued patents and have filed or will file patent applications that may issue into patents that cover or attempt to cover genes, vectors, cell lines, and methods of making and using gene and gene-based therapy products used in or similar to our product candidates and technologies. We also are aware of other issued patents and pending patent applications that relate to various aspects of our manufacture of our product candidates and systems, and it could be alleged that our manufacture of these product candidates or licensure of those technologies conflicts with these patents. We have not conducted freedom-to-use patent searches on all aspects of our technologies, product candidates or potential product candidates, and we may be unaware of relevant patents and patent applications of third parties. In addition, the freedom-to-use patent searches that have been conducted may not have identified all relevant issued patents or pending patent applications that could issue into patents, particularly in view of the characterizations of the subject matter of issued patents and pending patent applications, as well as the fact that pending patent applications can be maintained in secrecy for a period of time and, in some circumstances, until issuance as patents.
An issued patent gives rise to a rebuttable presumption of validity under U.S. law and under the laws of some other countries. The holder of a patent to which we or our collaborators do not hold a license could bring legal actions against our collaborators or us for damages or to stop us or our collaborators from using the affected technology, which could limit or preclude our ability to license our technologies or to develop and commercialize our product candidates. If any of our potential products are found to infringe a patent of a competitor or third party, we or our collaborators may be required to pay damages and to either obtain a license in order to continue to develop and commercialize the potential products or, at the discretion of the competitor or third party, to stop development and commercialization of the potential products. Similarly, if any of our out-licensed technologies are found to infringe a patent of a competitor or third party, we or our collaborators may be required to pay damages and to either obtain a license in order to continue to utilize the technologies or, at the discretion of the competitor or third party, to stop utilizing the technologies. Since we have concentrated our resources on licensing certain of our technologies and developing only a limited number of products, the inability to license one of our technologies or to market one of our products would disproportionately affect us as opposed to a competing company with many products in development.
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We believe there will be significant litigation in our industry regarding intellectual property rights. Many of our competitors have expended and are continuing to expend significant amounts of time, money and management resources on intellectual property litigation. If we become involved in litigation, it could consume a substantial portion of our resources and could adversely affect our business, financial condition and results of operations, even if we ultimately are successful in such litigation, in view of our limited resources.
If we lose our rights to use intellectual property we license from others, or those rights are not enforceable, then our ability to develop and commercialize our product candidates will be harmed.
We rely, in part, on licenses to use some technologies material to our business. For example, to create our product candidates we combine our adenovectors with genes intended to produce therapeutic proteins. In most instances we do not own the patents or patent applications that cover these genes and certain methods of use thereof which underlie these licenses. For these genes, we do not control the enforcement of the patents. We rely upon our licensors to properly prosecute and file those patent applications and defend and enforce any issued patents.
While many of the licenses under which we have rights provide us with exclusive rights in specified fields, the scope of our rights under these and other licenses may be subject to dispute by our licensors or third parties. In addition, our rights to use these technologies and practice the inventions claimed in the licensed patents and patent applications are subject to our licensors abiding by the terms of those licenses and not terminating them. Any of our licenses may be terminated by the licensor if we are in breach of a term or condition of the license agreement or in certain other circumstances. In addition, some of our licenses require us to achieve specific development milestones.
Legal proceedings to obtain, enforce, and defend patents, and litigation of third-party claims of intellectual property infringement could require us to spend money and could impair our operations.
Our success will depend, in part, on our ability to obtain patent protection for our products and processes, both in the U.S. and in other countries. The patent positions of biotechnology and pharmaceutical companies, however, can be highly uncertain and can involve complex legal and factual questions. Therefore, it is difficult to predict the breadth of claims allowed in the biotechnology and pharmaceutical fields.
Protecting intellectual property rights can be expensive and time consuming. Litigation may be necessary to enforce patents issued to us or to determine the scope and validity of third party proprietary rights. Moreover, if a competitor were to file a patent application claiming technology also invented by us, we would have to participate in an interference proceeding before the U.S. Patent and Trademark Office to determine the priority of invention. We may be drawn into interferences with third parties or may have to provoke interferences ourselves to challenge third-party patent rights to allow us or our licensees to commercialize products based on our technologies. Litigation could result in substantial costs and diversion of management efforts regardless of the results of the litigation. An unfavorable result in litigation could subject us to significant liabilities to third parties, require disputed rights to be licensed, or require us to cease using some technologies.
Our products and processes may infringe, or be found to infringe, patents not owned or controlled by us. Patents held by others may require us to alter our products or processes, obtain licenses or stop activities. If relevant claims of third-party patents are upheld as valid and enforceable, we could be prevented from practicing the subject matter claimed in the patent. In addition, we may be required to obtain licenses, redesign our products or processes to avoid infringement or pay money damages. As a result, our business may suffer if we are not able to obtain licenses at all or on commercially reasonable terms to us or we are required to redesign our products or processes to avoid infringement.
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Adverse events in the field of gene therapy may negatively affect regulatory approval or public perception of our products or product candidates.
Most of our product candidates under development could be broadly described as recombinant DNA therapies. A number of clinical trials are being conducted by other biotechnology and pharmaceutical companies involving related therapies, including compounds similar to or competitive with, our product candidates. The announcement of adverse results from these clinical trials, such as serious adverse events or unexpected side effects attributable to the treatment, or any response by the FDA or other similar regulatory authority to such clinical trials, may impede the timing of our clinical trials, delay or prevent us from obtaining regulatory approval, impede our ability to secure additional funding, or negatively influence public perception of our product candidates. As a result, these conditions could harm our business and results of operations and depress the value of our stock.
The commercial success of our product candidates will depend, in part, on public acceptance of the use of gene therapies for the prevention or treatment of significant health concerns. Public attitudes may be influenced by claims that gene therapy is unsafe, and gene therapy may not gain the acceptance of the public or the medical community. Negative public reaction to gene therapy could result in greater government regulation and stricter clinical trial oversight and commercial product labeling requirements of gene therapy products and could cause a decrease in the demand for any products we may develop.
Our product candidates involve new technologies and therapeutic approaches in the field of gene therapy, which is a new and evolving field. As discussed above, no gene therapy product has received regulatory approval in the U.S., and adverse events in this field may negatively affect public perception of our product candidates. Even if our product candidates attain regulatory approval, our success will depend upon the medical community, patients, and third-party payers accepting gene therapy products in general, and our product candidates in particular, as medically useful, cost-effective, and safe. In particular, our success will depend upon physicians specializing in the treatment of those diseases that our product candidates target prescribing treatments that involve the use of our product candidates in lieu of, or in addition to, existing treatments they are already familiar with and for which greater clinical data may be available. Even if the clinical safety and efficacy of our product candidates is established, physicians may elect not to recommend our products for a variety of reasons, including the reimbursement policies of government and third-party payers. Furthermore, third-party payers, such as health insurance plans, may be reluctant to authorize and pay for new forms of treatment they may deem expensive and less proven than existing treatments. Even if gene therapy products, and our product candidates in particular, are accepted by the medical community and third-party payers, the public in general, or patients in particular, may be uncomfortable with new therapies, including our product candidates, and it could take substantial time for them to accept gene therapy products as a viable treatment alternative, if ever. If gene therapy and our product candidates do not gain widespread acceptance, we may be unable to generate significant revenues, if any, which would adversely affect our results of operations. In addition, even if our product candidates achieve market acceptance, we may not be able to maintain that market acceptance over time if new products or technologies are introduced that are more favorably received than our product candidates or that render them obsolete.
We use hazardous biological materials in our business; any liability or disputes relating to improper handling, storage or disposal of these materials could be time consuming and costly.
Our research and development processes involve the use of hazardous biological materials. Such materials include human and animal cell lines and viruses, such as adenoviruses and animals infected with human viruses. Some of the biological material may be novel, including viruses with novel properties. We cannot eliminate the risk of accidental contamination or discharge or injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, these hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our total assets.
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Although we have general liability insurance, these policies contain exclusions from insurance against claims arising from pollution from chemical or radioactive materials. Our collaborators are working with these types of hazardous materials in connection with our collaborations. In the event of a lawsuit or investigation, we could be held responsible for any injury we or our collaborators cause to persons or property by exposure to, or release of, any hazardous materials. Although we believe we are currently in compliance with all applicable environmental and occupational health and safety regulations, compliance with environmental laws and regulations may be expensive and current or future environmental regulations may impair our research, development, or production efforts.
Our revenue is exclusively derived from our collaboration agreements, which can result in significant fluctuation in our revenue from period to period, and our past revenue is therefore not necessarily indicative of our future revenue.
Our revenue is exclusively derived from our collaboration agreements with corporate partners, under which we may receive grants, milestone payments based on clinical progress, regulatory progress or net sales achievements, royalties, manufacturing revenue or payment for our development activities on behalf of third parties. We are particularly dependent on our agreement with Novartis, pursuant to which we are facilitating the development of first-in-class products for the treatment of hearing and balance disorders. On February 11, 2014, Novartis informed us that the third milestone under our agreement had been achieved after Novartis filed an IND with the FDA for the clinical development of CGF166, the lead product candidate under our collaboration. The IND was deemed effective on February 7, 2014, triggering a $2 million milestone payment to us. If achieved, the next milestone payment to the Company under the collaboration would be triggered by the first patient visit in the planned Phase 1 clinical trial of CGF166. Significant variations in the timing of receipt of cash payments and our recognition of revenue can result from the timing of clinical, regulatory or sales events which result in milestone payments and the timing and success of the commercial launch of new products by our collaboration partners. The amount of our revenue derived from collaboration agreements in any given period will depend on a number of unpredictable factors, including our ability to find and maintain suitable collaboration partners, the timing of the negotiation and conclusion of collaboration agreements with such partners, whether and when we or our collaboration partner achieve clinical, regulatory and sales milestones, whether the collaboration is exclusive or whether we can seek other partners, the timing of regulatory approvals in one or more major markets and the market introduction of new products or generic versions of the approved product, as well as other factors.
Changes in healthcare law and implementing regulations, including those based on recently enacted legislation, as well as changes in healthcare policy, may impact our business in ways that we cannot currently predict, and these changes could have a material adverse effect on our business and financial condition if we are able to commercialize our candidate products.
Healthcare costs have risen significantly over the past decade. In March 2010, President Obama signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, (collectively, PPACA). This law substantially changes the way health care is financed by both governmental and private insurers and significantly impacts the pharmaceutical industry. PPACA contains a number of provisions that are expected to impact our business and operations, in some cases in ways we cannot currently predict. Changes that may affect our business include those governing enrollment in federal and private healthcare programs, new Medicare reimbursement methods and rates, increased rebates and taxes on pharmaceutical products, and revised fraud and abuse and enforcement requirements. These changes will impact existing government healthcare programs and will result in the development of new programs.
We anticipate that if and when we or our collaborators commercialize our products in the U.S., a significant portion of our revenue and the revenue from our collaborators from sales of our products will be obtained though may be derived from government payers, including Medicare, Medicaid, and Department of Defense programs. Reimbursement rates to purchasers of our drugs and our net revenues for sales of drugs used by these programs can be altered by legislation or regulation. PPACA and other federal law require rebates on certain drugs utilized under Medicare and Department of Defense programs and require discounts on certain drugs furnished to Medicare beneficiaries. For example, as part of PPACA’s provisions closing a funding gap that currently exists in the Medicare Part D prescription drug program, (commonly known as the “donut
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hole”), once we or our collaborators participate in the Medicare program, we or our collaborators will be required to provide a 50% discount on branded prescription drugs dispensed to beneficiaries within this donut hole.
PPACA also made changes to the Medicaid drug rebate program, discussed further herein, including changing the definition of AMP, expanding rebate liability from fee-for-service Medicaid utilization to include the utilization of Medicaid managed care organizations as well, and increasing the minimum rebate from 15.1% to 23.1% of the AMP for most innovator products and from 11% to 13% for non-innovator products. We expect that the increased minimum rebate of 23.1% will apply to our products following commercialization, if successful, in the U.S. Furthermore, PPACA requires pharmaceutical manufacturers of branded prescription drugs to pay a branded prescription drug fee to the federal government beginning in 2011. Each individual pharmaceutical manufacturer pays a prorated share of the branded prescription drug fee of $3.0 billion in 2014 (and set to increase in ensuing years), based on the dollar value of its branded prescription drug sales to certain federal programs identified in the law. We expect that PPACA, as currently enacted or as it may be amended in the future, and other healthcare reform measures that may be adopted in the future could have an adverse effect on our industry generally and our ability to successfully commercialize our product candidates or could limit or eliminate our spending on development projects.
Many of PPACA’s most significant reforms take effect in 2014 and thereafter, and their effects will be shaped significantly by implementing regulations that have yet to be finalized, by difficulties in implementation of the new insurance marketplaces and by state government decisions. In 2012, Centers for Medicare and Medicaid Services (CMS), the federal agency that administers the Medicare and Medicaid programs, issued proposed regulations to implement the changes to the Medicaid drug rebate program under PPACA but has not yet issued final regulations. CMS is currently expected to release the final regulations in 2014. Many states have not chosen to expand their Medicaid programs by raising the income limit to 133% of the federal poverty level, as is permitted by PPACA. It is unclear whether these states will choose to expand their programs in the future and whether there will be more uninsured patients in 2014 than anticipated when Congress passed PPACA. For each state that does not choose to expand its Medicaid program, there will be fewer insured patients overall. In addition, problems with implementation of the websites and other administrative services to help people enroll in qualifying insurance coverage may have reduced the number of uninsured people who obtain coverage under PPACA. The reduction in the number of insured patients could impact the sales, business and financial condition following the commercialization, if successful, of our products in the U.S.
PPACA also expanded the Public Health Service’s 340B drug pricing discount program. A pharmaceutical manufacturer must participate in the 340B drug pricing program in order for federal funds to be available to pay for the pharmaceutical manufacturer’s drugs under Medicaid and Medicare Part B. Under this program, the participating pharmaceutical manufacturer agrees to charge statutorily-defined covered entities no more than the 340B discounted ceiling price for the pharmaceutical manufacturer’s covered outpatient drugs. PPACA obligates the Secretary of the Department of Health and Human Services to create regulations and processes to improve the integrity of the program and to ensure the agreement that manufacturers must sign to participate in the program obligates a manufacturer to offer the ceiling price to covered entities if the manufacturer makes the drug available to any other purchaser at any price and to report to the government the ceiling prices for its drugs. In addition, legislation may be introduced that, if passed, could further expand the 340B drug pricing program to include additional covered entities or could require participating manufacturers to agree to provide 340B discounted pricing on drugs used in the inpatient setting. To the extent that PPACA and subsequent legislation, as discussed above, causes the statutory and regulatory definitions of AMP and the Medicaid rebate amount to change, these changes also impact the 340B discounted ceiling price.
In addition to PPACA, there will continue to be proposals by legislators at both the federal and state levels, regulators and third-party payers to keep these costs down while expanding individual healthcare benefits. Certain of these changes could impose limitations on the prices we will be able to charge for any product candidates that are approved or the amounts of reimbursement available for these products from governmental agencies or third-party payers, or may increase the tax obligations on life sciences companies such as ours.
The healthcare industry, and thus our business, continues to be subject to extensive federal, state, local and foreign regulation. Some of the pertinent laws have not been definitively interpreted by the regulatory
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authorities or the courts, and their provisions are open to a variety of interpretations. In addition, these laws and their interpretations are subject to change. The restrictions under applicable federal and state health care fraud and abuse laws and regulations that may affect our ability to operate include, but are not limited to:
| • | the federal Anti-Kickback Law, which prohibits, among other things, knowingly or willingly offering, paying, soliciting or receiving remuneration, directly or indirectly, in cash or in kind, to induce or reward the purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any health care items or service for which payment may be made, in whole or in part, by federal healthcare programs such as Medicare and Medicaid. This statute has been interpreted to apply to arrangements between pharmaceutical companies on one hand and prescribers, purchasers and formulary managers on the other. Further, PPACA clarified that a person or entity needs not to have actual knowledge of the federal Anti-Kickback statute or specific intent to violate it. In addition, PPACA amended the Social Security Act to provide that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Law constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Although there are a number of statutory exemptions and regulatory safe harbors to the federal Anti-Kickback Law protecting certain common business arrangements and activities from prosecution or regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that do not fit squarely within an exemption or safe harbor may be subject to scrutiny; |
| • | the federal civil False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment of government funds or knowingly making, using or causing to be made or used, a false record or statement material to an obligation to pay money to the government or knowingly concealing or knowingly and improperly avoiding, decreasing or concealing an obligation to pay money to the federal government. Many healthcare companies have been investigated and have reached substantial financial settlements with the federal government under the civil False Claims Act for a variety of alleged improper activities including causing false claims to be submitted as a result of the marketing of their products for unapproved and thus non-reimbursable uses, inflating prices reported to private price publication services which are used to set drug payment rates under government healthcare programs and other interactions with customers including those that may have affected their billing or coding practices and submission to the federal government. Pharmaceutical and other healthcare companies also are subject to other federal false claim laws, including, among others, federal criminal healthcare fraud and false statement statutes that extend to non-government health benefit programs; |
| • | the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended by the Health Information Technology for Economic and Clinical Health Act, among other things, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program or making false statements in connection with the delivery of or payment for healthcare benefits, items or services, and also imposes obligations with respect to safeguarding the privacy, security and transmission of individually identifiable health information; |
| • | the federal Physician Payment Sunshine Act, being implemented as the Open Payments Program, requires certain pharmaceutical manufacturers to engage in extensive tracking of payments or transfers of value to physicians and teaching hospitals, maintenance of a payments database, and public reporting of the payment data. Pharmaceutical manufacturers with products for which payment is available under Medicare, Medicaid or the State Children’s Health Insurance Program are required to track and report such payments. CMS, recently issued a final rule implementing the Physician Payment Sunshine Act provisions and clarified the scope of the reporting obligations, as well as that applicable manufacturers must begin tracking on August 1, 2013 and must report payment data to CMS by March 31, 2014 and annually thereafter. |
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| • | analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to items or services reimbursed under Medicaid and other state programs or, in several states, apply regardless of the payer. Some state laws also require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products and to report gifts and payments to individual physicians in the states. Other states prohibit providing meals to prescribers or other marketing related activities. In addition, California, Connecticut, Nevada, and Massachusetts require pharmaceutical companies to implement compliance programs or marketing codes of conduct; |
| • | the federal Foreign Corrupt Practices Act of 1997 and other similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from providing money or anything of value to officials of foreign governments, foreign political parties, or international organizations with the intent to obtain or retain business or seek a business advantage. Recently, there has been a substantial increase in anti-bribery law enforcement activity by U.S. regulators, with more frequent and aggressive investigations and enforcement proceedings by both the Department of Justice and the U.S. Securities and Exchange Commission. A determination that our operations or activities are not, or were not, in compliance with United States or foreign laws or regulations could result in the imposition of substantial fines, interruptions of business, loss of supplier, vendor or other third-party relationships, termination of necessary licenses and permits, and other legal or equitable sanctions. Other internal or government investigations or legal or regulatory proceedings, including lawsuits brought by private litigants, may also follow. |
If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government-funded healthcare programs like Medicare and Medicaid and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.
If third party payers do not provide coverage or reimbursement for our products, those products will not be widely accepted, which would have a negative impact on our business, results of operations and financial conditions.
Even if a product of ours receives regulatory approval, our success will depend, in part, on the extent to which coverage and reimbursement will be available from third party payers such as Medicare, Medicaid, other government health programs, private health insurers, managed care programs, and other organizations. Third party payers are increasingly challenging the price and cost-effectiveness of medical products and services, and that is expected to continue. Therefore, significant uncertainty exists as to the pricing approvals for, and the coverage or reimbursement status of, newly approved healthcare products. Additional federal or state health care legislation may be adopted in the future, any products that we seek to commercialize may not be considered cost-effective, and limitations on coverage and the amount of reimbursement for our products could be imposed. Adequate third-party insurance coverage may not be available for us to establish and maintain price levels that are sufficient for realization of an appropriate return on our investment in product development. Moreover, the existence or threat of cost control measures, including a reduction in reimbursement rates could cause potential corporate collaborators to be less willing or able to pursue research and development programs related to our product candidates. We cannot be certain that, if and when our products become commercialized, the pertinent reimbursement amounts or formulary status for our products will be sufficient to enable us to market and sell our products.
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Our business involves animal testing and changes in laws, regulations, accepted clinical procedures, or social pressures could restrict our use of animals in testing and adversely affect our research and development efforts.
Many of the research and development efforts we sponsor involve the use of laboratory animals. Changes in laws, regulations, or accepted clinical procedures may adversely affect these research and development efforts. Social pressures that would restrict the use of animals in testing or actions against us or our partners by groups or individuals opposed to testing using animals could also adversely affect these research and development efforts. In addition, preclinical animal studies conducted by us or third parties on our behalf may be subject to the USDA regulations for certain animal species. Failure to comply with applicable regulations could extend or delay clinical trials conducted for our drug candidates.
Our stock price could continue to be highly volatile and investors may not be able to resell their shares at or above the price they paid for them.
The market price of our common stock, like that of many other life sciences companies, has been and is likely to continue to be highly volatile. During 2013, the closing price of our stock price ranged from $0.27 to $2.32. The following factors, among others, could have a significant impact on the market price of our common stock:
| • | Results of our preclinical studies and future clinical trials or announcements regarding our plans for future studies or trials, or those of our competitors; |
| • | Evidence or lack of evidence of the safety or efficacy of our potential products or those of our competitors; |
| • | Announcement by us or our competitors of technological innovations or new products; |
| • | Developments concerning our patent or other proprietary rights or those of our competitors, including litigation and challenges to our proprietary rights; |
| • | Geopolitical developments, natural or man-made disease threats, or other events beyond our control; |
| • | U.S. and foreign governmental regulatory actions; |
| • | Changes or announcements in reimbursement policies; |
| • | Period-to-period fluctuations in our operating results; |
| • | Market conditions for life science stocks in general; |
| • | Changes in the collective short interest in our stock; |
| • | Changes in estimates of our performance by securities analysts; and |
| • | Our cash balances, need for additional capital, and access to capital. |
We are at risk of additional securities-related litigation due to our expected stock price volatility.
In the past, stockholders have brought securities class action litigation against a company following a decline in the market price of its securities. This risk is especially acute for us because life science companies have experienced greater than average stock price volatility in recent years and, as a result, have been subject to, on average, a greater number of securities class action claims than companies in other industries. As more fully described below in Item 3, we were subject to a securities class action that was dismissed in September 2013, and we continue to be subject to a related shareholder derivative and class action. We may be the target of securities-related litigation in the future. Securities litigation could result in substantial costs, divert our management’s attention and resources, and could seriously harm our business.
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We depend on our key technical and management personnel to advance our technology and implement our business strategy, and the loss of these personnel could impair the development of our products and business.
We rely, and will continue to rely, on our key management and scientific staff, all of whom are employed at will. Our success depends upon the ability of our senior management to implement our business strategy. The loss of key personnel could have a material adverse effect on our business and results of operations. There is intense competition from other companies, research and academic institutions and other organizations for qualified personnel. We may not be able to continue to attract and retain the qualified personnel necessary for the development of our business. If we do not succeed in retaining and recruiting necessary personnel or developing this expertise, our business could suffer significantly. Furthermore, changes in our senior management may lead to instability for our Company which could cause our business to suffer significantly.
We have implemented anti-takeover provisions that could discourage or prevent a takeover, even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management.
Provisions of our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors. Because our Board of Directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. These provisions include:
| • | Establishing a classified board of directors requiring that members of the board be elected in different years, which lengthens the time needed to elect a new majority of the board; |
| • | Authorizing the issuance of “blank check” preferred stock that could be issued by our Board of Directors to increase the number of outstanding shares or change the balance of voting control and thwart a takeover attempt; |
| • | Prohibiting cumulative voting in the election of directors, which would otherwise allow for less than a majority of stockholders to elect director candidates; |
| • | Limiting the ability of stockholders to call special meetings of the stockholders; |
| • | Prohibiting stockholder action by written consent and requiring all stockholder actions to be taken at a meeting of our stockholders; and |
| • | Establishing 90- to 120-day advance notice requirements for nominations for election to the Board of Directors and for proposing matters that can be acted upon by stockholders at stockholder meetings. |
We have adopted a stockholder rights plan that may discourage, delay, or prevent a merger or acquisition that is beneficial to our stockholders.
In August 2011, our Board of Directors adopted a stockholder rights plan that may have the effect of discouraging, delaying or preventing a merger or acquisition beneficial to our stockholders by diluting the ability of a potential acquirer to acquire us. Pursuant to the terms of our plan, when a person or group (except under certain circumstances) acquires 20 percent or more of our outstanding common stock or 10 business days after commencement or announcement of a tender or exchange offer for 20 percent or more of our outstanding common stock, the rights (except those rights held by the person or group who has acquired or announced an offer to acquire 20 percent or more of our outstanding common stock) would generally become exercisable for shares of our common stock at a discount. Because the potential acquirer’s rights would not become exercisable for our shares of common stock at a discount, the potential acquirer would suffer substantial dilution and may lose its ability to acquire us. In addition, the existence of the plan itself may deter a potential acquirer from acquiring us. As a result, either by operation of the plan or by its potential deterrent effect, mergers and acquisitions of us that our stockholders may consider in their best interests may not occur.
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The issuance of debt or equity securities could adversely affect our common stockholders.
We have historically raised capital through the issuance of equity securities, and in the future we expect to issue either debt or equity securities to raise additional capital. We have on file an effective shelf registration statement that allows us to raise up to $75.0 million from the sale of common or preferred stock or warrants for the purchase of common or preferred stock. We may also choose to issue either debt or equity securities in offerings not made pursuant to our shelf registration statement. The issuance of debt or equity securities could adversely affect the voting power of holders of our common stock. The issuance of debt or equity securities could also decrease the market price of our common stock or have terms and conditions that could discourage a takeover or other transaction that might involve a premium price for our shares or that our stockholders might believe to be in their best interests.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
In December 2013, we entered into a lease for 6,489 square feet for our corporate offices and research development laboratories at 910 Clopper Road, Suite 220N in Gaithersburg, Maryland. We relocated our operations to this location in January 2014. The term of the lease expires on October 31, 2019. We also currently lease 42,900 square feet at 65 West Watkins Mill Road in Gaithersburg, Maryland. The term of that lease expires on October 31, 2014. We have additional space within our Gaithersburg, Maryland facilities that can be utilized to accommodate future growth. We currently believe the Gaithersburg facility is sufficient to meet our present needs.
ITEM 3. LEGAL PROCEEDINGS
On February 3, 2012, a putative class action lawsuit captioned Satish Shah v. GenVec, Inc., et al. Civil Action. No. 8:12 CV-00341-DKC was commenced in the United States District Court for the District of Maryland against the Company, Paul H. Fischer, Douglas J. Swirsky, and Mark O. Thornton. Following appointment of a Lead Plaintiff group in April 2012, Lead Plaintiffs filed a pleading titled Amended Class Action Complaint for Violations of the Federal Securities Laws on July 6, 2012 (the Amended Complaint). In the Amended Complaint, Lead Plaintiffs asserted claims, purportedly on behalf of a class of persons who had purchased or acquired Company common stock between March 12, 2009 and March 30, 2010 (the Class Period), that the Company and the individual defendants had violated Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act), Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act. Lead Plaintiffs alleged generally that defendants had made materially false or misleading statements or omissions concerning the prospects for the Company’s leading product candidate at the time, TNFerade, and the outcome of the then-ongoing clinical trial for TNFerade. Lead Plaintiffs alleged that these misrepresentations resulted in the Company’s common stock trading at artificially inflated prices throughout the Class Period. Lead Plaintiffs sought unspecified damages. On September 4, 2012, the Company and the individual defendants moved to dismiss the Amended Complaint in its entirety for failure to state a claim upon which relief can be granted. On September 20, 2013, the Court granted this motion and dismissed the case in its entirety and with prejudice. Lead Plaintiffs did not file an appeal.
On March 12, 2012, a putative shareholder derivative action was commenced in the United States District Court for the District of Maryland against certain current and former members of our Board of Directors and the Company as a nominal defendant. The case is styledGarnitschnig v. Horovitz, et al.and generally arose out of the matters alleged to underlie the securities action. The plaintiff, who purported to bring the action derivatively on behalf of the Company, alleged that the defendants violated their fiduciary duties, wasted corporate assets and were unjustly enriched by the receipt of compensation while serving as our directors. More particularly, the plaintiff’s Complaint alleged that as a result of the defendants’ failure of oversight, we disseminated misleading public statements and improperly continued with a clinical trial. While theGarnitschnig action did not seek a monetary recovery against the Company, plaintiff sought, among other things, an unspecified award of damages against the defendants, an order directing us to make certain changes to our corporate governance and oversight procedures, disgorgement by the defendants of compensation and an award of attorneys’ fees. Pursuant to the Court’s order dated April 5, 2013, theGarnitschnig case was
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stayed pending a decision on the motions to dismiss filed in theShah action. On October 2, 2013, the parties entered into a stipulation confirming that the stay of theGarnitschnig action was lifted and providing that, if the plaintiff elected to continue with the action, he would file an Amended Complaint on or before November 26, 2013.
On November 1, 2013, the plaintiff in theGarnitschnig action filed an Amended Verified Shareholder Derivative and Class Action Complaint (the Amended Complaint) that supersedes the previous Complaint and now asserts claims for breach of fiduciary duty, unjust enrichment, waste of corporate assets and alleged violations of the duty of candor. The plaintiff, who now purports to bring the Amended Complaint both derivatively and as a shareholder class action, alleges that certain current and former members of the Board of Directors exceeded their authority under the Company’s 2011 Omnibus Incentive Plan (the 2011 Plan) by exceeding certain limits applicable to both stock options and restricted stock. The Amended Complaint further alleges that Company’s Proxy Statement is materially false and misleading for failing to disclose the alleged violations of the 2011 Plan. The Amended Complaint seeks, among other things, an unspecified amount of damages.
On November 1, 2013, the plaintiff in theGarnitschnig action also filed a motion for preliminary injunction seeking to postpone the Company's 2013 annual meeting unless and until certain disclosures were made to the Company's shareholders regarding the 2011 Plan. On November 20, 2013, the Court denied that motion in its entirety. Defendants then filed motions to dismiss the Amended Complaint on January 27, 2014. Those motions have not yet been fully briefed and remain pending. The Company intends to vigorously defend this action. We also are informed that the individual defendants deny the material allegations of the Garnitschnigaction and intend to continue vigorously defending the case.
Given the inherent uncertainties of the litigation, the ultimate outcome of theGarnitschnig matter cannot be predicted at this time, nor can the amount of possible loss or range of loss, if any, be reasonably estimated. The Company does not believe that, based on currently available information, the outcome of this proceeding will have a material adverse effect on our financial condition.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
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PART II
| ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is currently traded on the NASDAQ Capital Market under the symbol “GNVC”. Set forth below is the range of quarterly high and low closing sale prices for our common stock for the two most recent years, as reported on the NASDAQ Capital Market:
| | | ||||||
| HIGH | LOW | |||||||
| First Quarter 2013 | $ | 2.00 | $ | 1.40 | ||||
| Second Quarter 2013 | $ | 1.49 | $ | 0.35 | ||||
| Third Quarter 2013 | $ | 1.50 | $ | 0.27 | ||||
| Fourth Quarter 2013 | $ | 2.32 | $ | 1.26 | ||||
| First Quarter 2012 | $ | 2.75 | $ | 2.29 | ||||
| Second Quarter 2012 | $ | 2.88 | $ | 2.27 | ||||
| Third Quarter 2012 | $ | 2.39 | $ | 1.40 | ||||
| Fourth Quarter 2012 | $ | 1.71 | $ | 1.20 | ||||
As of February 28, 2014, there were approximately 65 stockholders of record of our common stock, one of which is Cede & Co., a nominee for Depository Trust Company (DTC), which is the single record holder for shares of common stock held by brokerage firms, banks, and other financial institutions as nominees for beneficial owners.
We have not paid any cash dividends since our inception and we do not anticipate paying any cash dividends in the foreseeable future. We did not repurchase any of our equity securities during the last fiscal year.
Unregistered Sales of Equity Securities and Use of Proceeds.
None.
| ITEM 6. | SELECTED FINANCIAL DATA |
The following tables set forth our selected financial data for each of the years in the five-year period ended December 31, 2013. The information below should be read in conjunction with our financial statements and notes thereto included elsewhere in this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. The historical results are not necessarily indicative of results to be expected for future periods.
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| | | | | | |||||||||||||||
| YEARS ENDED DECEMBER 31, | ||||||||||||||||||||
| SUMMARY STATEMENT OF OPERATIONS: | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
| (in thousands, except per share data) | ||||||||||||||||||||
| Revenue from stragetic alliances and research contracts | $ | 3,682 | $ | 9,353 | $ | 17,744 | $ | 16,467 | $ | 13,857 | ||||||||||
| Operating expenses: | ||||||||||||||||||||
| Research and development | 5,492 | 14,348 | 17,416 | 20,936 | 24,689 | |||||||||||||||
| General and administrative | 8,484 | 9,102 | 7,810 | 8,152 | 7,172 | |||||||||||||||
| Total operating expenses | 13,976 | 23,450 | 25,226 | 29,088 | 31,861 | |||||||||||||||
| Operating loss | (10,294 | ) | (14,097 | ) | (7,482 | ) | (12,621 | ) | (18,004 | ) | ||||||||||
| Other income (expense), net | 275 | 42 | 41 | 347 | (358 | ) | ||||||||||||||
| Net loss | $ | (10,019 | ) | $ | (14,055 | ) | $ | (7,441 | ) | $ | (12,274 | ) | $ | (18,362 | ) | |||||
| Basic and diluted net loss per share | $ | (0.77 | ) | $ | (1.09 | ) | $ | (0.58 | ) | $ | (0.97 | ) | $ | (1.89 | ) | |||||
| Shares used in computation of basic and diluted net loss per share | 12,948 | 12,940 | 12,921 | 12,671 | 9,707 | |||||||||||||||
| | | | | | |||||||||||||||
| AS OF DECEMBER 31, | ||||||||||||||||||||
| SUMMARY BALANCE SHEET DATA: | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Cash, cash equivalents, and short-term investments | $ | 6,105 | $ | 15,255 | $ | 26,446 | $ | 35,170 | $ | 10,961 | ||||||||||
| Working capital | 3,999 | 12,741 | 25,739 | 31,689 | 7,002 | |||||||||||||||
| Total assets | 7,254 | 17,430 | 30,150 | 39,432 | 13,443 | |||||||||||||||
| Accumulated deficit | (275,780 | ) | (265,761 | ) | (251,706 | ) | (244,265 | ) | (231,991 | ) | ||||||||||
| Total stockholders' equity | 4,610 | 13,743 | 26,538 | 32,420 | 7,636 | |||||||||||||||
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this report. See “Item 1A: Risk Factors” regarding certain factors known to GenVec that could cause reported financial information not to be necessarily indicative of future results, including discussions of the risks related to the development, regulatory approval, manufacture, proprietary protection of our product candidates, and their market success relative to alternative products.
OVERVIEW
GenVec, Inc. (GenVec, we, our, or the Company) is a biopharmaceutical company using differentiated, proprietary technologies to create superior therapeutics and vaccines. A key component of our strategy is to develop and commercialize our product candidates through collaborations. GenVec is working with leading companies and organizations such as Novartis AG, Merial Limited, and the U.S. Government to support a portfolio of programs that address the prevention and treatment of a number of significant human and animal health concerns. GenVec’s development programs address therapeutic areas such as hearing loss and balance disorders; as well as vaccines against infectious diseases including respiratory syncytial virus (RSV), herpes simplex virus (HSV) and malaria. In the area of animal health we are developing vaccines against foot-and-mouth disease (FMD).
Our core technology has the important advantage of localizing protein delivery in the body. This is accomplished by using our adenovector platform to locally deliver genes to cells, which then direct production of the desired protein. This approach reduces side effects typically associated with systemic delivery of proteins. For vaccines, the goal is to induce an immune response against a target protein or antigen. This is accomplished by using an adenovector to deliver a gene which causes production of an antigen, which then stimulates the desired immune reaction by the body.
Our research and development activities yield product candidates that utilize our technology platform and represent potential commercial opportunities. For example, preclinical research in hearing loss and balance
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disorders through the delivery of the atonal gene using GenVec’s adenovector technology may have the potential to restore hearing and balance function. We are working with Novartis Institutes for BioMedical Research, Inc. (together with Novartis AG and its subsidiary corporations, including Novartis Pharma AG, Novartis), on the discovery and development of novel treatments for their hearing loss and balance disorders. There are currently no effective therapeutic treatments available for patients who have lost all balance function, and hearing loss remains a major unmet medical problem.
We have multiple vaccines in development leveraging our core adenovector technology including our preclinical programs to develop vaccine candidates for the prevention of RSV and HSV. We also have a program to develop a vaccine for malaria. In the field of animal health, we are working with Merial Limited to commercialize vaccines for the prevention of a major animal health problem, FMD. Development efforts for this program are also supported by the U.S. Department of Homeland Security (DHS) and in collaboration with the U.S. Department of Agriculture (USDA).
On September 3, 2013, Our former President and Chief Executive Officer, Cynthia Collins, departed the Company and resigned from the Company’s Board of Directors. Douglas J. Swirsky was appointed as the President and Chief Executive Officer of the Company and also was appointed to our Board of Directors.
Our current operating strategy was adopted in September 2013, when we announced that our Board of Directors withdrew a Plan of Complete Liquidation and Dissolution of the Company (the Plan of Dissolution) that had been adopted by the Board of Directors on May 24, 2013, subject to stockholder approval. After announcing the approval of the Plan of Dissolution by the Board of Directors, we received several proposals for transactions with us, including transactions to purchase all or portions of our assets or to engage in mergers with private companies that were looking to use us principally as a means to become publicly traded. As part of the Board of Directors' efforts to seek to maximize the value for our stockholders and to provide stockholders with appropriate information for their consideration, the Board of Directors considered these proposals. The process that we went through in evaluating alternative proposals, the business developments during that time, the challenges in monetizing our assets in the near term for values the Board of Directors thought would be fair, and the time that the process took, led the Board of Directors to conclude that it was in the best interests of our stockholders to withdraw the Plan of Dissolution and pursue our current operating strategy. This operating strategy is focused on advancing the Company’s technology through partnerships. Consistent with this strategy, GenVec is no longer investing its own resources in the development of its RSV and HSV vaccine candidates as it pursues collaborators for these programs.
In going through the process of considering the Plan of Dissolution and alternative transactions, we worked to terminate or further curtail a number of our contractual obligations and a significant portion of our operations. We also ceased to support some programs at the levels at which they were previously supported, or at all. On July 29, 2013, for example, we entered into a modification with the U.S. Naval Medical Logistics Command to terminate contractual obligations under our agreement related to malaria vaccine development efforts with the NMRC.
Our business strategy is focused on entering into collaborative arrangements with third parties to complete the development and commercialization of our product candidates. In the event that third parties take over the development for one or more of our product candidates, the estimated completion date would largely be under the control of that third party rather than us. We cannot forecast with any degree of certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements, in whole or in part, and how such arrangements would affect our development plan or capital requirements. Our programs may also benefit from subsidies, grants, or government or agency-sponsored studies that could reduce our development costs.
An element of our business strategy is to pursue, as resources permit, the research and development of a range of product candidates for a variety of indications. This is intended to allow us to diversify the risks associated with our research and development expenditures. To the extent we are unable to maintain a broad range of product candidates, our dependence on the success of one or a few product candidates would increase.
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Our research and development expenses were $5.5 million and $14.3 million for the years ended December 31, 2013 and 2012, respectively. These expenses were divided between our research and development platforms in the following manner:
| | | ||||||
| Years ended December 31, | ||||||||
| (in millions) | 2013 | 2012 | ||||||
| Vaccines | $ | 3.4 | $ | 7.6 | ||||
| Hearing Loss and Balance Disorders | 2.0 | 5.6 | ||||||
| Other Programs | 0.1 | 1.1 | ||||||
| Total | $ | 5.5 | $ | 14.3 | ||||
Hearing. In a collaboration with Novartis, our hearing loss and balance disorders program is focused on the restoration of hearing and balance function through the regeneration of critical cells of the inner ear. Since commencement of this development program, GenVec has incurred approximately $22 million in research and development costs, including an allocation of corporate general and administrative expenses, most of which have been funded under our agreement with Novartis.
Vaccines. Under our corporate and government funded vaccine programs, GenVec continues to develop vaccine candidates against malaria, RSV, HSV, and other infectious diseases, as well as an animal health vaccine for FMD. Since commencement of these vaccine development programs in 2002, GenVec has incurred approximately $119 million in research and development costs, including an allocation of corporate general and administrative expenses, most of which have been funded under our agreements with our various sponsors.We have entered into a collaboration with Merial Limited to develop vaccines for the prevention of a major animal health problem, FMD. Development efforts for this program are supported by the U.S. Department of Homeland Security and in collaboration with the U.S. Department of Agriculture.
To date, none of our proprietary or collaborative programs has resulted in a commercial product; therefore, we have not received any revenues or royalties from the sale of products. We have funded our operations primarily through public and private placements of equity securities, payments received under collaborative programs with public and private entities, and debt financings.
We have incurred operating losses each year since inception and, as of December 31, 2013, had an accumulated deficit of approximately $275.8 million. Our losses have resulted principally from costs incurred in research and development and from general and administrative activities. Research and development expenses consist primarily of salaries and related personnel costs, sponsored research costs, patent costs, technology access fees, clinical trial costs, and other expenses related to our product development and research programs. General and administrative expenses consist primarily of compensation and benefit expenses for executive, finance and other administrative personnel, facility costs, professional fees, business development costs, insurance premiums, and other general corporate expenditures.
As a result of the uncertainties discussed above, among others, we are unable to estimate the duration and completion costs of our research and development projects or when, if ever, and to what extent we will receive cash inflows from the commercialization and sale of a product. Our inability to complete our research and development projects in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue with our business strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business. However, we believe that we have sufficient operating capital to continue our current research, development and collaborative activities into the foreseeable future.
CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates using authoritative pronouncements, historical experience, and other assumptions as the basis for making estimates.
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Actual results could differ from those estimates. Significant accounting policies are more fully described in Note 2 of the “Notes to Financial Statements” included in this Annual Report on Form 10-K.
We have discussed the development, selection, and disclosure of critical accounting policies and estimates with the Audit Committee of our Board of Directors. While we base estimates and assumptions on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions.
We believe the following accounting policies to be critical because they require significant estimates or judgment on the part of management:
Revenue Recognition. Revenue is recognized when all four of the following criteria are met (i) a contract is executed, (ii) the contract price is fixed and determinable, (iii) delivery of the services or products has occurred, and (iv) collectability of the contract amounts is considered probable.
Our collaborative research and development agreements provide for upfront license fees, research payments, and/or substantive milestone payments. Upfront non-refundable fees associated with license and development agreements where we have continuing involvement in the agreement are recorded as deferred revenue and recognized over the estimated service period. If the estimated service period is subsequently modified, the period over which the upfront fee is recognized is modified accordingly on a prospective basis. Non-refundable research and development fees for which no future performance obligations exist are recognized when collection is assured. Substantive milestone payments are considered performance payments and are recognized upon achievement of the milestone if all of the following criteria are met: (i) achievement of the milestone involves a degree of risk and was not reasonably assured at the inception of the arrangement; (ii) substantive effort is involved in achieving the milestone; and (iii) the amount of the milestone payment is reasonable in relation to all of the deliverables and payment terms within the arrangement. Determination of whether a milestone meets the aforementioned conditions involves the judgment of management.
Research and development revenue from cost-reimbursement and cost-plus fixed-fee agreements is recognized as earned based on the performance requirements of the contract. Revisions in revenues, cost, and billing factors, such as indirect rate estimates, are accounted for in the period of change. Reimbursable costs under such contracts are subject to audit and retroactive adjustment. Contract revenues and accounts receivable reported in the financial statements are recorded at the amount expected to be received. Contract revenues are adjusted to actual upon final audit and retroactive adjustment. Estimated contractual allowances are provided based on management’s evaluation of current contract terms and past experience with disallowed costs and reimbursement levels. Payments received in advance of work performed are recorded as deferred revenue.
Research and development revenue from fixed-price best efforts arrangements is recognized as earned based on the performance requirements of the contract. Revenue under these arrangements is recognized when delivery to and acceptance by the customer has been received. During the period of performance, recoverable contract costs are accumulated on the balance sheet in other current assets, but no revenue or profit is recorded prior to customer acceptance of the contractually stated deliverables. Recoverable contract costs that are accumulated on the balance sheet include all direct costs associated with the arrangement and an allocation of indirect costs. Payments received in advance of customer acceptance are recorded as deferred revenue. Once customer acceptance has been received, revenue and recoverable contract costs are recognized. Over the course of the arrangement, we routinely evaluate whether revenue and profitability should be recognized in the current period. Any known or probable losses on projects are charged to operations in the period in which such losses are determined.
Stock Based Compensation
We account for stock-based compensation based on the estimated grant date fair value of the stock using the Black-Scholes option-pricing model. The estimated grant date fair value is recognized in earnings over the requisite service period.
RECENT ACCOUNTING PRONOUNCEMENTS
For a discussion of recently issued accounting pronouncements, refer to the section titled“Recent Accounting Pronouncements”within Note 2Summary of Significant Accounting Policies in the notes to our Financial Statements.
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RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2013 AND 2012
REVENUE
Revenue. Revenue decreased 61% to $3.7 million in 2013 from $9.4 million in 2012.
Revenues for the twelve-month period ended December 31, 2013 were derived from the collaboration with Novartis to discover and develop novel treatments for hearing loss and balance disorders and from the Company’s funded research and development programs with the Department of Homeland Security, National Institutes of Allergy and Infectious Diseases (NIAID) of the National Institutes of Health (NIH), and the U.S. Naval Medical Research Center (NMRC), all of which use GenVec’s proprietary adenovector technology for the development of either vaccine candidates against foot-and-mouth disease (FMD) for livestock or vaccines against malaria, HIV, respiratory syncytial virus (RSV), and herpes simplex virus (HSV).
We entered into a research collaboration and license agreement (the Agreement) with Novartis in January 2010, which accounted for $0.4 million and $0.9 million of revenue in 2013 and 2012, respectively.
Additionally, since the inception of the Agreement, we have been eligible to receive up to an additional $206.6 million in milestone payments if certain clinical, regulatory and sales milestones are met. In September 2010, we announced that we had achieved the first milestone in the collaboration with Novartis. The $300,000 milestone was triggered by the successful completion of certain preclinical development activities. In December 2011, we announced that we had achieved the second milestone in the collaboration with Novartis. The $300,000 milestone was triggered by the successful completion of certain preclinical development activities. In February 2014, we announced that we had achieved the third milestone in the collaboration with Novartis. The $2.0 million milestone was triggered by the non-rejection of the Investigational New Drug application filed by Novartis with the U.S. Food and Drug Administration (FDA). As of February 28, 2014, milestones available under the Agreement include $24.0 million of additional clinical milestones, $45.0 million in regulatory milestones, and $135.0 million of sales-based milestones. Additionally, we are also entitled to royalties on future sales.
In August 2010, the Company and Novartis entered into a development agreement related to the supply of clinical trial material in connection with activities under the Agreement, which accounted for $0.4 million and $3.4 million in revenue in 2013 and 2012, respectively.
In September 2012, we signed an agreement worth approximately $3.5 million with the U.S. Naval Medical Logistics Command to support malaria vaccine development efforts at the NMRC. Under the terms of the agreement, GenVec was responsible for producing clinical supplies of our malaria vaccine, which utilizes our novel, proprietary technology. NMRC used this clinical material as part of its efforts to assess the safety and efficacy of these next-generation vectored vaccines using the clinical challenge model developed by NMRC and the Walter Reed Army Institute of Research (WRAIR) malaria vaccine programs, which now are unified as the U.S. Military Malaria Vaccine Program (USMMVP). Under the agreement, GenVec retained the right to commercialize this novel technology. There was $1.4 million of revenue recognized under this contract during 2013 and no revenue recognized under this contract during 2012. On July 29, 2013, we entered into a modification to terminate contractual obligations under the agreement. Partially offsetting the increased revenues associated with the NMRC contract during 2013, the Company experienced reduced revenue associated with its malaria grant programs as compared to 2012.
The decrease in 2013 is primarily due to decreased revenue of $3.5 million, $1.7 million, and $1.3 million generated by our hearing loss and balance disorder, foot and mouth disease program, and other grant programs, respectively, versus the prior year. These revenue decreases were partially offset by a $1.2 million increase in revenue associated with our malaria program with the NMRC in 2013 as compared to the comparable prior year period. The decrease in revenue associated with our hearing program was a result of a reduced work scope as we near completion of our development work under the two Novartis agreements. The decrease in revenue associated with our foot-and-mouth disease program is due mainly to the successful completion of field safety studies in 2012. The decrease in revenue associated with our other grant programs is due mainly to our reductions in force during 2013. The increase in revenue associated with our malaria program with the NMRC is due to the work performed under our September 2012 agreement.
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OPERATING EXPENSES
Research and development. Research and development expenses decreased 62% to $5.5 million in 2013 from $14.3 million in 2012. In 2013 we experienced lower research and development costs than in the prior year due primarily to decreased personnel costs due to our reductions in force, manufacturing costs in the FMD and hearing programs, internal costs associated with HSV and RSV internal research and development, reduced material costs for our funded and internal research programs, reduced equipment purchases under our hearing and FMD programs, lower repair and maintenance costs for our equipment, and decreased allocation of facility costs to research and development in 2013 as compared to 2012. Stock-based compensation expense included in research and development personnel costs decreased approximately $0.4 million in 2013 as compared to the prior year.
General and administrative. General and administrative expenses decreased 7% to $8.5 million in 2013 from $9.1 million in 2012. General and administrative expenses were lower in 2013 primarily due to lower personnel and recruiting costs. In 2012 we incurred recruiting costs associated with our chief executive officer search, for which we incurred no such costs in 2013. The reduced costs were partially offset by increased allocation of facility costs to general and administrative and allocated facility costs in 2013 as compared to 2012. General and administrative expenses include a decrease of approximately $7,000 of stock-based compensation expense in 2013 as compared to the prior year and an increase in non-recurring severance costs in 2013, $1.5 million, as compared to 2012, $1.3 million.
OTHER INCOME (LOSS)
Total other income increased to $0.3 million in 2013 as compared to $42,000 in 2012. In 2013, total other income consisted of the gain on the sale of non-capital laboratory supplies and equipment and to a lesser extent interest income. In 2012, total other income consists primarily of interest income.
LIQUIDITY AND CAPITAL RESOURCES
We have experienced significant losses since our inception. As of December 31, 2013 we have an accumulated deficit of $275.8 million. The process of developing and commercializing our product candidates requires significant research and development work and clinical trial work, as well as significant manufacturing and process development efforts. These activities, together with our general and administrative expenses, are expected to continue to result in significant operating losses for the foreseeable future.
As of December 31, 2013, cash, cash equivalents, and short-term investments totaled $6.1 million as compared to $15.3 million at December 31, 2012.
For the 12 months ended December 31, 2013, we used net cash of $9.3 million for operating activities. This consisted of a net loss for the period of $10.0 million, which included approximately $0.2 million of non-cash depreciation and amortization, $0.9 million of non-cash stock-based compensation expenses, $0.2 million of impairment of long lived assets, $0.3 million for the gain on sale of long lived assets, $0.4 million used for the net change in current assets and liabilities, and $0.1 million provided by the net change in non-current assets. Net cash was used primarily for our internally funded research and development programs and general and administrative activities.
Net cash provided by investing activities during the 12 months ended December 31, 2013 was $10.4 million which included $10.2 million for the net proceeds from sales of marketable securities and $0.6 million for proceeds from the sale of property and equipment, reduced by $0.4 million for the purchase of property and equipment.
There was no cash provided or used from financing activities during the 12 months ended December 31, 2013.
As of December 31, 2012, cash, cash equivalents, and short-term investments totaled $15.3 million as compared to $26.4 million at December 31, 2011.
For the 12 months ended December 31, 2012, we used net cash of $10.8 million for operating activities. This consisted of a net loss for the period of $14.1 million, which included approximately $0.2 million of non-cash depreciation and amortization, $1.3 million of non-cash stock-based compensation expenses, $1.8 million provided by the net change in current assets and liabilities, and $0.1 million used for the net change in
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non-current assets. Net cash was used primarily for the advancement of our hearing program, research and development programs, and to a lesser extent, the termination of our TNFerade PACT trial and general and administrative activities.
Net cash provided by investing activities during the 12 months ended December 31, 2012 was $10.9 million which included $11.2 million for the net proceeds from sales of marketable securities, reduced by $0.3 million for the purchase of property and equipment.
There was no cash provided or used from financing activities during the 12 months ended December 31, 2012.
Historically we have entered into agreements with academic medical institutions and contract research organizations to perform research and development activities and with clinical sites for the treatment of patients under clinical protocols. Such contracts expire at various dates and have differing renewal and expiration clauses. We also utilize different financing instruments, such as debt and capital and/or operating leases, to finance various equipment and facility needs.
Since our initial public offering, we have raised capital by offering shares of our common stock and warrants to purchase shares of our common stock in a variety of offerings. As a result of a number of those offerings, as of February 28, 2014, we have approximately 1.1 million warrants outstanding. Please see Note 8 “Stockholders’ Equity” to our audited financial statements included in this Annual Report.
On September 7, 2011, we entered into a Stockholder Rights Agreement between the Company and American Stock Transfer & Trust Company, LLC, as rights agent. The Stockholder Rights Agreement was not adopted in response to any specific effort to acquire control of the Company. In connection with the adoption of the new Stockholder Rights Agreement, the Company’s Board of Directors declared a dividend of one preferred stock purchase right, or Right, for each outstanding share of common stock to stockholders of record as of the close of business on September 7, 2011. Initially, the Rights will be represented by GenVec's common stock certificates or book entry notations, will not be traded separately from the common stock and will not be exercisable. In the event that any person acquires beneficial ownership of 20% or more of the outstanding shares of GenVec's common stock, or upon the occurrence of certain other events, each holder of a Right, other than the acquirer, would be entitled to receive, upon payment of the purchase price, which is initially set at $32 per Right, a number of shares of GenVec common stock having a value equal to two times such purchase price. The Company’s Board of Directors is entitled to redeem the Rights at $0.001 per right at any time before a person or group has acquired 20% or more of the Company’s common stock. The Rights will expire on September 7, 2021, subject to the Company’s right to extend such date, unless earlier redeemed or exchanged by the Company or terminated. The Rights will at no time have any voting rights. The Company has authorized 30,000 shares of Series B Junior Participating Preferred Stock in connection with the adoption of the new Stockholder Rights Agreement. There was no Series B Junior Participating Preferred Stock issued or outstanding as of December 31, 2013.
On June 25, 2013, we received a notice from The NASDAQ Stock Market LLC (NASDAQ) stating that the minimum bid price of our common stock had been below $1.00 per share for 30 consecutive business days and that the Company was therefore not in compliance with the minimum bid price requirement for continued listing set forth in Marketplace Rule 5550(a)(2). The notification letter stated that we would be afforded 180 calendar days, or until December 23, 2013, to regain compliance with the minimum bid price requirement. On October 7, 2013, we received a letter from NASDAQ stating that the Company had regained compliance with the minimum bid price requirement because the closing bid price of our common stock had met or exceeded $1.00 per share for at least ten consecutive business days. The letter further stated that the matter relating to the Company’s non-compliance with the minimum bid price requirement had been closed with NASDAQ.
On January 23, 2014, we filed a $75.0 million shelf registration statement on Form S-3 (the 2014 shelf registration statement), with the Securities and Exchange Commission. The 2014 shelf registration statement was declared effective February 11, 2014 and allows us to obtain financing through the issuance of any combination of common stock, preferred stock or warrants. Pursuant to General Instruction I.B.6 of Form S-3, in no event will we sell securities in a public primary offering using Form S-3 with a value exceeding more than one-third of our public float in any 12-month period so long as our public float remains below
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$75.0 million. As of March 24, 2014, pursuant to the Equity Distribution Agreement and the Registered Direct Offering described below we have sold approximately $11.6 million of securities since February 11, 2014.
On February 11, 2014, we entered into an Equity Distribution Agreement (the EDA) with Roth Capital Partners, LLC (Roth Capital Partners), pursuant to which we may sell from time to time up to $10.0 million of shares of our common stock, par value $0.001 per share, through Roth Capital Partners (the ATM Offering). Sales of shares in the ATM Offering, if any, may be made by any method permitted by law deemed to be an “at the market” offering as defined in Rule 415 of the Securities Act of 1933, as amended, including without limitation directly on the NASDAQ Capital Market, or any other existing trading market for the shares or through a market maker, or, if agreed by the Company and Roth Capital Partners, by any other method permitted by law, including but not limited to in negotiated transactions. The ATM Offering is being made pursuant to the 2014 shelf registration statement. We intend to use the net proceeds from the sale of shares in the ATM Offering, if any, for operating costs, working capital and general corporate purposes. At the time of the registered direct offering described immediately below, we suspended the ATM Offering. We will continue to evaluate whether to resume the ATM offering in the future. As of March 18, 2014, we had sold 721,677 shares in the ATM Offering for gross proceeds of approximately $2.6 million.
On March 18, 2014, we sold 2,870,000 shares of our common stock, par value $0.001, in a registered direct offering pursuant to the 2014 shelf registration statement (the Registered Direct Offering), at a price of $3.15 per share, resulting in net proceeds of approximately $8.4 million.
Our estimated future capital requirements are uncertain and could change materially as a result of many factors, including the progress of our research, development, clinical, manufacturing, and commercialization activities. We currently estimate we will use between $5.0 million and $7.0 million of cash during the four quarters ending December 31, 2014. Our estimate includes approximately $1.2 million in contractual obligations. Based on this estimate we have sufficient resources to fund our operations into the foreseeable future.
OFF-BALANCE SHEET OBLIGATIONS
We had no off-balance sheet obligations other than in connection with our operating leases.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOURES ABOUT MARKET RISK |
Not applicable.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The response to this item is submitted in a separate section of this report. See “Index to Financial Statements” on Page F-1 for a list of the financial statements being filed herein.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
We have carried out an evaluation, under the supervision and the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of December 31, 2013. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of that period, our disclosure controls and procedures are effective in providing reasonable assurance that: (a) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (b) such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
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Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
| • | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; |
| • | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| • | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (1992). Based on this assessment, management has concluded that, as of December 31, 2013, our internal control over financial reporting is effective based on those criteria.
| ITEM 9B. | OTHER INFORMATION |
None.
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PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE |
Directors
The following table sets forth the director nominees for election at the Company’s 2014 annual meeting of stockholders (the Annual Meeting), the directors of the Company currently in office, their ages and the positions currently held by each such person with the Company.
| | | ||
| Name | Age | Position | ||
| Directors whose terms expire at the Annual Meeting | ||||
| Stefan D. Loren, Ph.D.(1) | 50 | Director | ||
| Marc R. Schneebaum(1)(2) | 59 | Director | ||
| Directors whose terms expire in 2015 | ||||
| Douglas J. Swirsky | 44 | Director, President, and Chief Executive Officer | ||
| Wayne T. Hockmeyer, Ph.D.(2)(3)(4) | 69 | Director | ||
| Directors whose terms expire in 2016 | ||||
| Zola P. Horovitz, Ph.D.(1)(3) | 79 | Director | ||
| William N. Kelley, M.D.(2)(3) | 74 | Director |
| (1) | Member of the Audit Committee. |
| (2) | Member of the Compensation Committee. |
| (3) | Member of the Nominating and Corporate Governance Committee. |
| (4) | Chairman of the Board of Directors. |
The biographies of each of the directors below contains information regarding the experiences, qualifications, attributes, or skills that caused the Nominating and Corporate Governance Committee and the Board to determine that the person should serve as a director for the Company.
Directors Whose Terms Expire in 2014
Stefan D. Loren, Ph.D. has served as a director of the Company since September 2013. Dr. Loren is a member of the Audit Committee. Dr. Loren was recommended to the Nominating and Corporate Governance Committee by a stockholder of the Company, based on his experience in both financial markets and biotechnology research and development. Dr. Loren is the founder of LCS, a strategic investment firm focused on life science companies. Most recently, he headed the life science practice of Westwicke Partners, Dr. Loren served as a Managing Director of Westwicke Partners, a healthcare-focused consulting firm, a position he held from 2008 until early 2014. From 2007 to 2008, Dr. Loren was an Analyst with Perceptive Advisors, a healthcare-focused investment fund, and, prior to that, served as an analyst and portfolio manager for MTB Investment Advisors from 2005 to 2007. Prior to 2005, Dr. Loren was a Managing Director in the healthcare equity research group at Legg Mason, and before joining Legg Mason, a Research Chemist at the advanced technologies division of Abbott Laboratories and a Research Fellow at the Scripps Research Institute. Dr. Loren received his B.A. from the University of California, San Diego, and his Ph.D. from University of California, Berkeley. Currently, he is a director of Marina Biotech, Inc. Within the past five years, Dr. Loren has served on the boards of directors of Orchid Cellmark, Inc. and PolyMedix, Inc.
Dr. Loren has over 15 years of experience in financial markets and a decade of experience in research and development in the pharmaceutical and biotechnology industries. This unique combination makes Dr. Loren an important resource to our Board.
Marc R. Schneebaum has served as a director of the Company since April 2007. Mr. Schneebaum is a member of the Compensation Committee and the Chairman of the Audit Committee. Mr. Schneebaum served as President, Chief Executive Officer and a director of Predictive BioSciences, Inc., a commercial stage cancer diagnostics company, from 2011 to 2013. From 1997 to 2010, Mr. Schneebaum served as President, Chief
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Executive Officer, and a director of Sensors for Medicine and Science, Inc., an emerging medical technology company. From 1991 to 1997, he served as Senior Vice President, Finance, Business Development and Administration, and Chief Financial Officer of Genetic Therapy, Inc., a biotechnology company (acquired by Sandoz/Novartis). From 1987 to 1991, Mr. Schneebaum was a Vice President at Alex Brown & Sons Incorporated, a leading investment banking firm (now part of Deutsche Bank), where he participated in a variety of finance and strategic assignments. Mr. Schneebaum began his career in the accounting and auditing group at KPMG LLP, advancing to Senior Manager in the management consulting group. Mr. Schneebaum, a Certified Public Accountant (inactive), received his degree in Business Administration from the University of Maryland. He has also served on the boards of the March of Dimes of Maryland and the Maryland Enterprise Investment Fund.
Mr. Schneebaum’s financial acumen, his varied leadership roles in the medical technology and biotechnology fields and his experience in investment banking, accounting, and management consulting at leading institutions bring a level of knowledge to the Board that aids greatly in its deliberations.
Directors Whose Terms Expire in 2015
Wayne T. Hockmeyer, Ph.D. has served as a director of the Company since December 2000. Dr. Hockmeyer is a member of the Nominating and Corporate Governance Committee, is the Chairman of the Compensation Committee, and was appointed Chairman of the Board in November 2013. Dr. Hockmeyer founded MedImmune, Inc. (MedImmune) in April 1988 as President and Chief Executive Officer and was elected a director of MedImmune in May 1988. Dr. Hockmeyer became Chairman of the board of directors of MedImmune in May 1993 and left his position as Chief Executive Officer in October 2000. Dr. Hockmeyer is currently retired, having resigned from his positions as a member of the MedImmune board of directors and as President of MedImmune Ventures, Inc. following the acquisition of MedImmune by AstraZeneca Biopharmaceuticals, Inc. in June 2007. Dr. Hockmeyer earned his bachelor’s degree from Purdue University and his Ph.D. from the University of Florida in 1972. Currently, he is a director of Baxter International Inc., Idenix Pharmaceuticals, Inc., and the Indian River Medical Center. Within the past five years, Dr. Hockmeyer has also served on the board of Middlebrook Pharmaceuticals, Inc.
Dr. Hockmeyer’s experience for the past two decades at the forefront of biotechnology development provides a valuable resource and knowledge base for our Board. Dr. Hockmeyer’s experience in founding and managing MedImmune prior to its acquisition, both as its most senior executive and as Chairman of its board of directors, enables him to counsel the Board in a unique and beneficial manner.
Douglas J. Swirsky, has served as the President and Chief Executive Officer and as a director of the Company since September 2013. He joined the Company in 2006 as Chief Financial Officer, Corporate Secretary and Treasurer, which are positions he continues to hold. Prior to joining the Company, Mr. Swirsky was a Managing Director and the Head of Life Sciences Investment Banking at Stifel Nicolaus from 2005 to 2006 and held investment banking positions at Legg Mason from 2002 until Stifel Financial’s acquisition of the Legg Mason Capital Markets business in 2005. Mr. Swirsky, a Certified Public Accountant and holder of a Chartered Financial Analyst® designation, previously held investment banking positions at UBS, PaineWebber, and Morgan Stanley. His experience also includes positions in public accounting and consulting. Mr. Swirsky received his undergraduate degree in Business Administration from Boston University and his M.B.A. from the Kellogg School of Management at Northwestern University. Mr. Swirsky is a member of the Board of Directors of Fibrocell Science, Inc. Within the past five years, Mr. Swirsky has also served on the board of PolyMedix, Inc.
Mr. Swirsky’s background with, and institutional knowledge of, the Company together with his day-to-day leadership of our business gives the Board an invaluable executive with a Company-focused perspective.
Directors Whose Terms Expire in 2016
Zola P. Horovitz, Ph.D. has served as a director of GenVec since August 2003. Dr. Horovitz is a member of the Nominating and Corporate Governance Committee and the Audit Committee. Dr. Horovitz is currently retired. Dr. Horovitz served as a director of Diacrin, Inc. from 1994 to August 2003. From 1991 to 1994, Dr. Horovitz was Vice President, Business Development and Planning at Bristol-Myers Squibb Pharmaceutical Group and was Vice President, Licensing from 1989 to 1991. Prior to 1989, Dr. Horovitz spent 30 years as a
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member of the Squibb Institute for Medical Research and received his Ph.D. from the University of Pittsburgh. Dr. Horovitz currently serves as a director of Palatin Technologies, Inc. Within the past five years, Dr. Horovitz also served on the boards of Avigen, Inc., Genaera Corp., Immunicon Corp., NitroMed, Inc., BioCryst Pharmaceuticals, Inc., Inc. and DoV Pharmaceutical Inc. (acquired by Euthymics Bioscience, Inc. in July 2010).
Dr. Horovitz has spent over five decades in the pharmaceutical and biotechnology industry, and brings this depth of experience to his leadership of our Board. Dr. Horovitz’s wide range of business development and licensing expertise has served and will continue to serve as an important resource for the Board as the Company continues its development.
William N. Kelley, M.D. has served as a director of GenVec since June 2002. Dr. Kelley is a member of the Compensation Committee and is the Chairman of the Nominating and Corporate Governance Committee. Dr. Kelley brings a long history of involvement in experimental models of gene therapy to the Board. Dr. Kelley and his colleagues at the University of Michigan were the first to proposein vivo gene therapy as it is recognized today and the first to directly administer a human genein vivo and obtain expression in an experimental animal model. From 1989 to 2000, Dr. Kelley served as Executive Vice President of the University of Pennsylvania with responsibilities as Chief Executive Officer for the Medical Center, Dean of the School of Medicine, and the Robert G. Dunlop Professor of Medicine and Biochemistry and Biophysics. He became Chief Executive Officer of the University of Pennsylvania Health System when it was established in 1993. He is currently Professor of Medicine at the School of Medicine of the University of Pennsylvania. In the national leadership arena, Dr. Kelley has served as President of the American Society for Clinical Investigation, President of the American College of Rheumatology, Chair of the American Board of Internal Medicine and Chair of the Residency Review Committee for Internal Medicine. Currently, he is a director of the Indian River Medical Center. Within the past five years, Dr. Kelley served on the board of directors of Merck & Co., Inc., Beckman Coutler, Inc., Advanced Bio-Surfaces, Inc. and PolyMedix, Inc.
Dr. Kelley brings a long history of involvement in experimental models of gene therapy to the Board. Dr. Kelley’s many leadership roles, both as a leader in the field of gene therapy and as a senior management figure of an internationally renowned medical center, allow him to provide strong leadership to our Board.
Executive Officers
Please see “Executive Officers of the Registrant” in Part I of this Form 10-K.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company’s executive officers, directors and persons who beneficially own more than 10% of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Such executive officers, directors, and greater than 10% beneficial owners are required by SEC regulation to furnish the Company with copies of all Section 16(a) reports filed by such reporting persons.
Based solely on the Company’s review of copies of such reports furnished to the Company and written representations that no other reports were required during the year ended December 31, 2013, the Company believes that all Section 16(a) filing requirements applicable to the Company’s executive officers, directors, and greater than 10% beneficial owners were complied with in a timely manner except for one (1) Form 4 filed by Dr. Loren on September 24, 2013.
Code of Business Conduct and Ethics
The Board has adopted the Code of Business Conduct and Ethics (the Code), which sets forth standards of expected conduct of the Chief Executive Officer, financial executives, directors, executive officers and all employees of the Company. The Code includes policies on employment, conflicts of interest and confidential information and requires strict adherence to all laws and regulations applicable to the conduct of the Company’s business. A copy of the Code can be found in the Investors and Media — Corporate Governance section on the Company’s website atwww.genvec.com. The Company will disclose any amendment to the Code or waivers of the Code relating to the Company’s directors, executive officers, principal financial and
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accounting officers, or persons performing similar functions on its website within five business days following the date of any such amendment or waiver.
Director Nomination Process
There have been no material changes to the process by which stockholders may submit nominees for election to the Board of Directors to the Nominating and Corporate Governance Committee since that process was described in the Company’s Proxy Statement filed with the SEC on November 22, 2013.
Audit Committee & Audit Committee Financial Expert
The Board has established the Audit Committee in accordance with Section 3(a) (58) (A) of the Exchange Act. The Board has adopted, and annually reviews, a written charter outlining the practices followed by the Audit Committee. The Audit Committee’s job is one of oversight as set forth in its Charter. It is not the duty of the Audit Committee to prepare the Company’s financial statements, to plan or conduct audits or to determine that the Company’s financial statements are complete and accurate and are in accordance with accepted accounting principles. The Company’s management is responsible for the preparation, presentation and integrity of the financial statements. Management is also responsible for maintaining appropriate accounting and financial reporting practices and policies as well as internal controls and procedures designed to provide reasonable assurance that the Company is in compliance with accounting standards and applicable laws and regulations. The independent registered public accounting firm is responsible for planning and performing an independent audit of financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB). The independent registered public accounting firm is responsible for expressing an opinion on the conformity of those audited financial statements with U.S. generally accepted accounting principles.
The members of the Audit Committee are Marc R. Schneebaum (Chairman), Zola P. Horovitz, Ph.D. and Stefan D. Loren. Each member of the Audit Committee is independent as defined by NASDAQ listing standards. The Board has determined that at least one member of the Audit Committee, Marc R. Schneebaum, is an Audit Committee Financial Expert as defined in the SEC’s rules and regulations. The Audit Committee is responsible for appointing, compensating, overseeing and evaluating the selection of the Company’s independent registered public accounting firm and is responsible for overseeing the following: management’s preparation of the Company’s financial statements and management’s conduct of the accounting and financial reporting processes; management’s maintenance of internal controls and procedures for financial reporting; the Company’s compliance with applicable legal and regulatory requirements, including without limitation those requirements relating to financial controls and reporting; the independent auditor’s qualifications and independence; and the performance of the independent auditors, including the annual independent audit of the Company’s financial statements.
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| ITEM 11. | EXECUTIVE COMPENSATION |
EXECUTIVE COMPENSATION TABLES AND INFORMATION
Summary Compensation Table
The following table summarizes the total compensation paid or earned by each of the named executive officers for the year ended December 31, 2013:
| | | | | | | | |||||||||||||||||||||
| Name and Principal Position(1) | Year | Salary ($) | Stock Awards ($)(2) | Option Awards ($)(2) | Non-Equity Incentive Plan Compensation ($)(3) | All Other Compensation ($)(4) | Total ($) | |||||||||||||||||||||
| Douglas J. Swirsky, Sr. Vice President, Chief Financial Officer | 2013 | 316,259 | 53,200 | 152,156 | — | 6,500 | 528,115 | |||||||||||||||||||||
| 2012 | 310,919 | — | 117,138 | 75,305 | 10,175 | 513,537 | ||||||||||||||||||||||
| Cynthia Collins, Chief Executive Officer | 2013 | 303,750 | — | 257,496 | — | 249,269 | 810,515 | |||||||||||||||||||||
| 2012 | 273,438 | — | 497,404 | 126,000 | 59,996 | 956,838 | ||||||||||||||||||||||
| Douglas E. Brough, Chief Scientific Officer | 2013 | 310,650 | 33,250 | 103,466 | — | 6,500 | 453,866 | |||||||||||||||||||||
| 2012 | 288,206 | — | 146,423 | 64,491 | 8,960 | 508,080 | ||||||||||||||||||||||
| Bryan T. Butman, Senior Vice President, Development(5) | 2013 | 278,060 | 19,950 | 91,294 | — | 6,500 | 395,804 | |||||||||||||||||||||
| (1) | Mr. Swirsky became Chief Executive Officer in September 2013. Ms. Collins departed as Chief Executive Officer in September 2013. |
| (2) | Amounts represent the aggregate grant date fair value as computed in accordance with ASC Topic 718 using the assumptions set forth in Note 8 to the audited financial statements of the Company. |
| (3) | Represents amounts earned under the Company's annual performance award plan for the respective year. |
| (4) | Amounts shown for 2013 are discussed below under Narrative Disclosure to Summary Compensation Table. |
| (5) | In 2013, Dr. Butman was named as an executive officer. |
Narrative Disclosure to Summary Compensation Table
The following section provides a description of the 2013 compensation information contained in the Summary Compensation Table above for the following individuals, whom we refer to as our named executive officers:
| • | Douglas J. Swirsky, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer |
| • | Douglas E. Brough, Chief Scientific Officer |
| • | Bryan T. Butman, Senior Vice President, Development |
| • | Cynthia Collins, our former Chief Executive Officer |
Mr. Swirsky became our Chief Executive Officer (CEO) in September 2013, which is when Ms. Collins departed from that position. Ms. Collins had been appointed as our CEO in May 2012.
Base Salaries
The Compensation Committee recommends a base salary level for the CEO, subject to Board approval, and approves base salary levels for the other named executive officers based on individual performance, promotions, and industry information. In considering base salary levels, the Compensation Committee gives most weight to the CEO's performance assessment of each named executive officer (other than himself or herself). Based on the recommendation by the Compensation Committee, Ms. Collins, Mr. Swirsky, and Drs. Brough and Butman did not receive an increase to their base salaries in 2013. After the departure of Ms. Collins and the appointment of Mr. Swirsky to the position of President and CEO in September 2013, Mr. Swirsky’s base salary was increased by 20.6% to $375,000 in December 2013.
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Annual Performance Award Plan
Each year, the named executive officers have the opportunity to receive annual performance awards through participation in the Company's annual performance award plan. Participants in this plan are eligible to receive a target payment that is expressed as a percentage of the participant's base salary and that is based on performance of the Company and each named executive officer's overall individual performance (with the exception of the CEO). For 2013, annual performance award opportunities for Ms. Collins, Mr. Swirsky and Drs. Brough and Butman remained unchanged from the percentages used in the prior year, and were 50%, 35% and 30%, respectively. In December 2013, the Board of Directors adjusted Mr. Swirsky’s target payment expressed as a percentage of base salary at 50% consistent with his new role as President and CEO.
For Ms. Collins, at the time it was established, 100% of the annual performance award was based on corporate goals until her departure in September 2013. For Drs. Brough and Butman, 70% was payable based on corporate goals and 30% was payable based on individual goals. For Mr. Swirsky, at the time the Board adjusted his target payment, 100% of the annual performance award was based on corporate goals. Prior to the Board adjustment, Mr. Swirsky’s annual performance award was 70% payable based on corporate goals and 30% was payable based on individual goals.
The corporate goals for 2013 were set on January 23, 2013 and revised in March 2013. The goals, level of achievement and weight are described below:
| | |
| Hearing Program | File IND (weighted 40%) | |
| Business Development | Enter new corporate collaboration for RSV, HSV, or TNFerade (weighted 25%) | |
| Hearing Program | Treat first patient (weighted 15%) | |
| Malaria Program | Manufacture three Bulk Drug Lots (weighted 10%) | |
| Financial Goals | 2013 Cash Burn of $8M or less and other corporate initiatives (weighted 10%) |
In general, achievement of 100% of the corporate goals and the Compensation Committee’s positive evaluation of individual performance will result in an annual incentive award payment to the individual at the target level. The Compensation Committee retains the discretion, however, to pay the annual performance awards at levels below or above the target level as it evaluates both the achievement of corporate goals, taking into account the weightings assigned to each goal, and the individual performance of the executives. Ms. Collins’s employment agreement provided that she was eligible for a payment under the annual performance award plan of up to 150% of her base salary in the event of superior performance.
The Compensation Committee determined that no annual performance awards should be awarded for 2013 given the lack of accomplishment of corporate goals.
Annual Stock Option Grants
The Company uses stock options for its equity incentive awards in order to be consistent with its objective to align the interests of stockholders and its executives. Stock options are awarded annually and are considered part of total compensation, along with base salary and annual performance awards. Stock options granted in 2013, consistent with awards in prior years, vest over a four-year period, with one-eighth of each option grant vesting six months after the date of grant and the remainder vesting ratably over the following 42 months. This vesting schedule was selected because of the Company's belief that it is consistent with industry practice while still providing a relatively long retention benefit.
Stock options that are granted as part of the long-term incentive program are granted with an exercise price equivalent to the closing price of the common stock on NASDAQ Capital Market on the date of grant. The exercise price of stock options granted to a newly hired executive officer is set at the closing price of GenVec's common stock on NASDAQ on the start date of the executive officer, which is a date on or after approval of the grant by the Compensation Committee. In 2013, Mr. Swirsky and Drs. Brough and Butman, received annual stock option grants of 125,000, 85,000 and 75,000, respectively, on January 22, 2013 at an exercise price of $1.56 per share.
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Ms. Collins received a stock option award on January 23, 2013 for 200,000 options at an exercise price of $1.65 per share. Unvested options at the time of Ms. Collins’ departure in September 2013 were forfeited. At December 31, 2013, Ms. Collins had options to purchase 33,333 shares at an exercise price of $1.65 that expire on January 23, 2023 and 83,333 shares at an exercise price of $2.54 that expire on May 23, 2022.
Long-term Incentives — Special, One-time Restricted Share Grant
The Compensation Committee and our Board of Directors approved a special one-time award of 200,000, 125,000 and 75,000 restricted shares of our common stock to Mr. Swirsky, Dr. Brough and Dr. Butman, respectively, in September 2013 at the same time that the Board of Directors adopted our new operating strategy. The Committee determined it was appropriate to make the one-time award of restricted stock because of concerns about retention and to further align the interests of our executives with our stockholders. The Committee was concerned that, notwithstanding the positive performance of our leadership by creating a new operating strategy, there was a risk of not being able to retain the Company’s leadership who were viewed as important to achieve that strategy. Furthermore, the Committee determined it appropriate to make a grant to Mr. Swirsky to reflect his appointment as CEO. The stock award is disclosed in the stock award column of the summary compensation table.
All Other Compensation
In 2013, for Mr. Swirsky and Drs. Brough and Butman, the amounts shown in All Other Compensation in the Summary Compensation Table above include amounts for matching contributions under the Company’s 401(k) plan. For Ms. Collins the amount shown in All Other Compensation for 2013 represents amounts paid to Ms. Collins in 2013 pursuant to her employment agreement in connection with her departure from the Company in September 2013, reimbursements for her for moving expenses consistent with Company policy and a gross-up to cover applicable taxes on that reimbursement, matching contributions under the Company’s 401(k) plan, and payment of accrued vacation.
Employment, Severance and Change in Control Arrangements
GenVec had an employment agreement with Ms. Collins, and has salary continuation agreements with Mr. Swirsky and Drs. Brough and Butman and has a change in control agreement with Mr. Swirsky.
Employment Agreement with Ms. Collins. The Company entered into an employment agreement with Ms. Collins on May 18, 2012 as a condition of her willingness to take the position of Chief Executive Officer. The employment agreement provides for the base salary and annual performance award provisions discussed above. Under the terms of the employment agreement, if Ms. Collins terminates her employment for “good reason” (as defined below) or if her employment is terminated by the Company without “cause” (as defined below) and other than by reason of death or disability, Ms. Collins will also be entitled to receive accrued compensation, her regular base salary for a period of 18 months and an amount equal to one and one-half times her target bonus as of the time of termination. The employment agreement also includes continued health care benefits until the earliest of the 18-month anniversary of the termination date, the date Ms. Collins is no longer eligible for continuation coverage and the date on which Ms. Collins becomes eligible to receive substantially similar coverage from another employer. In connection with her departure from the Company on September 3, 2013, Ms. Collins received these benefits.
If Ms. Collins terminates her employment for “good reason” or if her employment is terminated by the Company without “cause” within 12 months following a change in control (as defined below under the heading Acceleration of Stock Awards), Ms. Collins is entitled to receive accrued compensation amounts and a lump sum payment in an amount equal to the greater of (i) two times her base salary for the year in which the termination date occurs, or the year immediately preceding the year in which the change in control occurs (the Reference Base Salary), and (ii) two times her annual target bonus based on the Reference Base Salary. In connection with her departure from the Company on September 3, 2013, Ms. Collins did not receive these benefits as a change of control did not occur within three months of that date.
Whether or not Ms. Collins’s termination follows a change in control, the treatment of any outstanding equity awards is determined in accordance with the terms of the applicable award agreements.
In addition, Ms. Collins’s employment agreement includes a non-disparagement clause and non-competition and non-solicitation provisions terminating 18 months after the last day of her employment. Upon the death or
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disability of Ms. Collins during such time as she is entitled to any payments or benefits under the agreement, such payments and benefits are payable to her estate and/or beneficiaries, as the case may be.
Under the terms of the employment agreement, “good reason” is defined as the occurrence of any of the following events during the employment term without Ms. Collins’s written consent:
| • | a material reduction in Ms. Collins’s base salary other than as a general reduction in base salary that affects all similarly situated executives in substantially the same proportions; |
| • | a material reduction in Ms. Collins’s target bonus opportunity; |
| • | a relocation of Ms. Collins’s principal place of employment by more than 50 miles, except for required travel on Company business to an extent substantially consistent with Ms. Collins’s business travel obligations as of the date of relocation; |
| • | any material breach by the Company of any material provision of the agreement or any material provision of any other agreement between the Executive and the Company; |
| • | a material adverse change in Ms. Collins’s title, authority, duties or responsibilities (other than temporarily while Ms. Collins is physically or mentally incapacitated or as required by applicable law) taking into account the Company’s size, status as a public company and capitalization on the date of the agreement; or |
| • | a material adverse change in the reporting structure applicable to Ms. Collins. |
“Cause” is defined to include any of the following actions by Ms. Collins:
| • | the willful failure to perform her duties (other than any such failure resulting from incapacity due to physical or mental illness); |
| • | the willful failure to comply with any duly authorized and legal directive of the Board; |
| • | the engagement in dishonesty, illegal conduct or misconduct, which is, in each case, materially injurious to the Company or its affiliates; |
| • | the embezzlement, misappropriation or fraud, whether or not related to the Executive’s employment with the Company; |
| • | the conviction of or plea of guilty ornolo contendere to a crime that constitutes a felony (or state law equivalent) or a crime that constitutes a misdemeanor involving moral turpitude; |
| • | the material, intentional unauthorized breach of the Proprietary Information Agreement (as defined in her employment agreement); or |
| • | the material breach of any material obligation under the agreement or any other written agreement between Ms. Collins and the Company. |
Salary Continuation Agreements. The Company entered into a salary continuation agreement with Mr. Swirsky when he joined the Company in 2006, which was pursuant to a form of agreement that was adopted in October 2002 and amended in December 2008 to provide for technical compliance with certain Treasury regulations. The Company has also entered into a salary continuation agreement with Drs. Brough and Butman with terms substantially similar to the form of agreement adopted in October 2002 as amended by the December 2008 amendment. Under the terms of the salary continuation agreements, if the named executive officer is terminated without “cause” (as defined below) and other than by reason of death or disability, the officer will be paid the officer’s regular base salary for a period of 12 months. The named executive officer will also receive a pro-rata bonus equal to the product of the bonus paid to the officer for the fiscal year preceding the termination date, divided by 12 months times the number of months of service during the year of termination. These agreements also include continued health and welfare benefits for the same period as the salary continuation, a non-compete for the same period as the salary continuation and a non-disparagement clause.
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Under the terms of the salary continuation agreements, “cause” is defined to include:
| • | the willful and continued failure of the named executive officer to substantially perform his duties; |
| • | willfully engaging in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company; |
| • | personal dishonesty or breach of fiduciary duty to the Company for personal benefit at the expense of the Company; or |
| • | willfully violating any law, rule, regulation, or order in a manner that is materially and demonstrably injurious to the Company. |
Acceleration of Stock Awards. The form of stock option award agreements for stock option awards made to each of the named executive officers provides that in the event of a change in control, all unvested equity awards will accelerate in full. Under the terms of the stock option award agreements, a “change in control” means the occurrence of any of the following events:
| • | any person becomes the beneficial owner of 40% or more of the Company’s common stock; |
| • | the Company’s stockholders approve a merger, consolidation, share exchange, division or other reorganization of the Company with any other organization; |
| • | the Company’s stockholders approve a complete plan of liquidation, winding-up of the Company, or an agreement for the sale or disposition of all or substantially all of the Company’s assets; or |
| • | during any twenty-four month period, individuals who at the beginning of such period constituted the Board cease for any reason to constitute at least a majority of the Board. |
Change in Control Agreement with Mr. Swirsky. GenVec entered into a change in control agreement with Mr. Swirsky when he joined the Company in September 2006. Mr. Swirsky’s agreement was amended in December 2008 to provide for technical compliance with certain Treasury regulations. Mr. Swirsky is entitled to certain payments upon termination without cause (as defined in the salary continuation agreements described above) following a change in control (as defined in the stock option award agreements described above).
Specifically, if Mr. Swirsky’s employment is terminated without cause other than as a result of his death or disability or if he resigns for good reason within two years following a change in control, he is entitled to a lump sum severance payment equal to his monthly salary and average monthly bonus times 18, continued health and welfare benefits for an 18-month period and a pro-rata bonus for the termination year. In addition, his agreement provides for an excise tax gross-up payment, reimbursement of certain legal costs related to the enforcement of the agreement and the accelerated vesting of all unvested options at termination.
In addition, pursuant to his change in control agreement, upon the death or disability of Mr. Swirsky during such time as he is entitled to any payments or benefits under the agreement, such payments and benefits are payable to Mr. Swirsky’s heirs or estate, respectively. To the extent Mr. Swirsky becomes entitled to benefits under the change in control agreement, the salary continuation agreement is superseded and he will not receive any benefit under that agreement.
Under the terms of the change in control agreement, “good reason” is defined as the occurrence of any of the following events without the consent of the executive in connection with a change of control, unless, if correctable, such circumstances are fully corrected with 30 days of the notice of termination given in respect thereof, which notice must be given within 90 days of the occurrence:
| • | the assignment to the executive of any duties inconsistent in any material respect with the executive’s position, authority, duties or responsibilities, as they were immediately prior to the change in control; |
| • | the diminution in any material respect in the executive’s position, authority, duties or responsibilities as they were immediately prior to a change in control; |
| • | a reduction by the Company in the executive’s annual base salary; |
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| • | a relocation of more than 35 miles from where the executive’s office or location was immediately prior to a change in control; |
| • | the failure to continue any compensation plan in which the executive participates, unless an equitable arrangement has been made, or the continuation of the plan under materially less favorable terms; |
| • | the failure by the Company to pay to the executive any deferred compensation when due under any deferred compensation plan or agreement applicable to the executive; or |
| • | a material breach by the Company of the terms and provisions of the change in control agreement. |
To constitute good reason for purposes of the change in control agreement, the termination by the executive must occur within two years following the initial occurrence of the event constituting the good reason.
Outstanding Equity Awards at Fiscal Year End
The following table provides information with respect to outstanding stock options and restricted stock awards held by the named executive officers as of December 31, 2013. All outstanding grants issued prior to 2012 were made under the Company’s 2002 Stock Incentive Plan. Grants made in 2012 and thereafter were made under the Company’s 2011 Omnibus Incentive Plan, with the exception of Ms. Collins’ grant in 2012 which was made pursuant to a CEO inducement award agreement.
| | | | | | | ||||||||||||||||||
| Option Awards | Stock Awards | |||||||||||||||||||||||
| Name | Number of Securities Underlying Unexercised Options Exercisable (#)(1) | Number of Securities Underlying Unexercised Options Unexercisable (#)(1)(2) | Option Exercise Price ($)(1) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#)(1)(3) | Market Value of Shares or Units of Stock That Have Not Vested ($)(1)(3) | ||||||||||||||||||
| Cynthia Collins | 83,333 | — | 2.54 | 5/23/2022 | ||||||||||||||||||||
| 33,333 | — | 1.65 | 1/23/2023 | |||||||||||||||||||||
| Paul H. Fischer | 150,000 | — | 2.49 | 6/1/2022 | ||||||||||||||||||||
| Douglas J. Swirsky | 30,000 | — | 11.30 | 9/18/2016 | ||||||||||||||||||||
| 3,000 | — | 26.10 | 1/18/2017 | |||||||||||||||||||||
| 15,000 | — | 17.90 | 1/16/2018 | |||||||||||||||||||||
| 22,500 | — | 4.10 | 1/22/2019 | |||||||||||||||||||||
| 14,687 | 313 | 22.00 | 1/20/2020 | |||||||||||||||||||||
| 14,583 | 5,417 | 5.70 | 1/19/2021 | |||||||||||||||||||||
| 28,750 | 31,250 | 2.49 | 1/18/2022 | |||||||||||||||||||||
| 28,645 | 96,355 | 1.56 | 1/22/2023 | |||||||||||||||||||||
| — | 200,000 | 464,000 | ||||||||||||||||||||||
| Douglas E. Brough | 1,250 | — | 32.10 | 1/15/2014 | ||||||||||||||||||||
| 500 | — | 39.50 | 3/1/2014 | |||||||||||||||||||||
| 2,500 | — | 18.80 | 1/19/2015 | |||||||||||||||||||||
| 2,500 | — | 16.90 | 1/18/2016 | |||||||||||||||||||||
| 4,000 | — | 26.10 | 1/18/2017 | |||||||||||||||||||||
| 2,500 | — | 17.90 | 1/16/2018 | |||||||||||||||||||||
| 4,000 | — | 21.80 | 4/16/2018 | |||||||||||||||||||||
| 4,000 | — | 4.10 | 1/22/2019 | |||||||||||||||||||||
| 12,240 | 260 | 22.00 | 1/20/2020 | |||||||||||||||||||||
| 3,354 | 146 | 17.90 | 2/1/2020 | |||||||||||||||||||||
| 14,583 | 5,417 | 5.70 | 1/19/2021 | |||||||||||||||||||||
| 35,937 | 39,063 | 2.49 | 1/18/2022 | |||||||||||||||||||||
| 19,479 | 65,521 | 1.56 | 1/22/2023 | |||||||||||||||||||||
| — | 125,000 | 290,000 | ||||||||||||||||||||||
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| | | | | | | ||||||||||||||||||
| Option Awards | Stock Awards | |||||||||||||||||||||||
| Name | Number of Securities Underlying Unexercised Options Exercisable (#)(1) | Number of Securities Underlying Unexercised Options Unexercisable (#)(1)(2) | Option Exercise Price ($)(1) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#)(1)(3) | Market Value of Shares or Units of Stock That Have Not Vested ($)(1)(3) | ||||||||||||||||||
| Bryan T. Butman | 3,000 | — | 32.10 | 1/15/2014 | ||||||||||||||||||||
| 4,500 | — | 18.80 | 1/19/2015 | |||||||||||||||||||||
| 7,500 | — | 16.90 | 1/18/2016 | |||||||||||||||||||||
| 7,500 | — | 26.10 | 1/18/2017 | |||||||||||||||||||||
| 17,500 | — | 17.90 | 1/16/2018 | |||||||||||||||||||||
| 22,500 | — | 4.10 | 1/22/2019 | |||||||||||||||||||||
| 14,687 | 313 | 22.00 | 1/20/2020 | |||||||||||||||||||||
| 14,583 | 5,417 | 5.70 | 1/19/2021 | |||||||||||||||||||||
| 28,750 | 31,250 | 2.49 | 1/18/2022 | |||||||||||||||||||||
| 17,187 | 57,813 | 1.56 | 1/22/2023 | |||||||||||||||||||||
| — | 75,000 | 174,000 | ||||||||||||||||||||||
| (1) | All awards have been adjusted to reflect the effect of the Reverse Stock Split. |
| (2) | The options indicated in the table above as unexercisable at December 31, 2013 result from the following option grants which vest over a four year period with 12.5% vestiing after six months from the date of grant and the remainder vesting ratably over the next 42 months. |
On January 20, 2010, Mr. Swirsky was granted 15,000 options, Dr. Butman was granted 15,000 options, and Dr. Brough was granted 12,500 options.
On February 1, 2010, Dr. Brough was granted 3,500 options.
On January 19, 2011, Mr. Swirsky, Dr. Brough, and Dr. Butman were each granted 20,000 options.
On January 18, 2012, Dr. Brough was granted 75,000 options and Mr. Swirsky and Dr. Butman were each granted 60,000 options.
On May 23, 2012, Ms. Collins was granted 250,000 options, of these options all but 83,333 were forfeited upon her departure.
On January 22, 2013, Mr. Swirsky was granted 125,000 options, Dr. Brough was granted 85,000 options and Dr. Butman was granted 75,000 options.
On January 23, 2013, Ms. Collins was granted 200,000 options, of these options all but 33,333 were forfeited upon her departure.
| (3) | Restricted Stock has a two-year cliff vesting with 100% vesting on September 3, 2015. The market value of the shares of common stock that have not vested is based on the closing price of our common stock on the NASDAQ Capital Market of $2.32 on December 31, 2013. |
On September 3, 2013, Mr. Swirsky was granted 200,000 shares of restricted stock, Dr. Brough was granted 125,000 shares of restricted stock, and Dr. Butman was granted 75,000 shares of restricted stock.
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DIRECTOR COMPENSATION TABLE
The Compensation Committee, pursuant to its charter, periodically reviews the compensation of non-employee directors. The Company’s current policy for the compensation of non-employee directors, which was approved in September 2013, provides that non-employee directors of the Company receive $40,000 annually for their service on the Board of Directors. The new policy is effective as of October 1, 2013.
The Company’s previous policy for the compensation of non-employee directors, which was approved in September 2011 and in effect through September 2013, provided that non-employee directors of the Company received $30,000 annually for their service on the Board of Directors, $2,000 for each Board meeting attended and $1,000 for each committee meeting attended. Additionally, the chairman of each of the Company’s committees received an additional annual payment of $7,000, with the exception of the Audit Committee chairman who received an annual payment of $10,000. The Chairman of the Board of Directors received $35,000 annually, $4,000 for each Board meeting attended, and $1,000 per committee meeting.
Directors who are employees of GenVec do not receive fees or other compensation for their services as directors. All directors are reimbursed for travel and other expenses incurred in the performance of their duties.
In addition, pursuant to a policy adopted by the Board in 2012, each non-employee director receives: (i) upon becoming a director, an option to purchase 20,000 shares of common stock that is exercisable ratably over a four-year period, and (ii) after our annual meeting of stockholders each year, an annual grant of an option to purchase 15,000 shares of common stock, 50% of which becomes exercisable six months after the date of grant and 50% of which becomes exercisable 12 months after the date of grant. In the case of the Chairman of the Board, the annual grant is of an option to purchase 22,500 shares of common stock. Director options have an exercise price equal to the fair market value of our common stock on the date of the grant and a 10-year term.
The following table details the total compensation earned by the Company’s non-employee directors in 2013:
| | | | | ||||||||||||
| Name(1) | Fees Earned or Paid in Cash(2) ($) | Restricted Stock Awards ($) | Option Awards ($) | Total ($) | ||||||||||||
| Wayne T. Hockmeyer, Ph.D. | $ | 88,500 | $ | 19,950 | (3) | $ | — | $ | 108,450 | |||||||
| Zola P. Horovitz, Ph.D. | $ | 101,250 | $ | 19,950 | (3) | $ | — | $ | 121,200 | |||||||
| William N. Kelley, M.D. | $ | 77,500 | $ | 19,950 | (3) | $ | — | $ | 97,450 | |||||||
| Marc R. Schneebaum | $ | 91,500 | $ | 19,950 | (3) | $ | — | $ | 111,450 | |||||||
| Stefan D. Loren, Ph.D. | $ | 10,978 | $ | — | $ | 32,923 | (3) | $ | 43,901 | |||||||
| Edward M. Connor, Jr., M.D.(4) | $ | 44,299 | $ | — | $ | — | $ | 44,299 | ||||||||
| Adel A.F. Mahmoud, M.D., Ph.D.(4) | $ | 40,299 | $ | — | $ | — | $ | 40,299 | ||||||||
| Kevin M. Rooney(4) | $ | 41,299 | $ | — | $ | — | $ | 41,299 | ||||||||
| (1) | Neither Mr. Swirsky, the President and Chief Executive Officer of GenVec, nor his predecessor, Ms. Collins, receive compensation as a Director of the Company. Compensation for Mr. Swirsky and Ms. Collins is disclosed in the Summary Compensation Table. |
| (2) | All annual retainers payable to the chairman of the board, the chairman of each committee and for the directors in general are paid in quarterly installments. |
| (3) | On September 3, 2013, each of the Company's continuing non-management directors received a restricted stock award of 75,000 shares, which had an aggregate grant date fair value of $19,950, except for Dr. Loren. Dr. Loren received an initial grant of 20,000 stock options on September 19, 2013 when he became a member of the Board of Directors and an annual grant of 15,000 stock options on November 22, 2013, these grants had aggregate grant date fair values of $13,414 and $19,509 respectively. All fair values have been computed in accordance with ASC Topic 718 using the assumptions set forth in Note 8 to the audited financial statements of the Company. |
| (4) | Drs. Connor and Mahmoud and Mr. Rooney resigned from the Board of Directors on September 3, 2013. |
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As of December 31, 2013, each director had the following number of vested and unvested equity awards outstanding:
| | | | |||||||||
| Name(1) | Total (#) | Vested (#) | Unvested (#) | |||||||||
| Wayne T. Hockmeyer, Ph.D. | 102,000 | 27,000 | 75,000 | |||||||||
| Zola P. Horovitz, Ph.D. | 114,000 | 39,000 | 75,000 | |||||||||
| William N. Kelley, M.D. | 102,000 | 27,000 | 75,000 | |||||||||
| Marc R. Schneebaum | 99,500 | 24,500 | 75,000 | |||||||||
| Stefan D. Loren, Ph.D. | 35,000 | — | 35,000 | |||||||||
| Kevin M. Rooney(2) | 23,000 | 23,000 | — | |||||||||
| Edward M. Connor, Jr., M.D.(2) | 17,500 | 17,500 | — | |||||||||
| Adel A.F. Mahmoud, M.D., Ph.D.(2) | 17,500 | 17,500 | — | |||||||||
| (1) | Unvested equity awards for all continuing directors with the exception of Dr. Loren’s unvested equity awards represent a grant of restricted stock that will vest on September 3, 2015. Dr. Loren has 15,000 stock options that will vest 50% on May 22, 2014 and 50% on November 22, 2014 with the remaining 20,000 stock options vesting ratably over four years beginning on September 19, 2014. |
| (2) | Dr. Connor and Mahmoud and Mr. Rooney resigned from our Board of Directors on September 3, 2013. |
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of March 24, 2014 (unless otherwise specified), regarding the beneficial ownership of the Company’s common stock by (i) each named executive officer (as defined below) of the Company (ii) each director of the Company and (iii) all current directors and executive officers as a group. As of March 24, 2014, there was one person known to the Company to be the beneficial owners of more than 5% of the outstanding shares of common stock.
Beneficial ownership is determined in accordance with the rules of the SEC for computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person. Shares of common stock subject to options currently exercisable or exercisable within 60 days after March 24, 2014 are considered outstanding for the purpose of computing the percentage ownership of the person holding such options, but are not considered outstanding when computing the percentage ownership of each other person. Except as indicated in the footnotes to this table, each stockholder named in the table below has sole voting and investment power for the shares shown as beneficially owned by them. Percentage of beneficial ownership is based on 17,269,962 shares of common stock outstanding on March 24, 2014. Unless otherwise specified, the address for each director or executive officer is care of the Company at its principal office.
| | | ||||||
| Name of Beneficial Owner(1) | Total Number of Shares Beneficially Owned | % of Class Owned | ||||||
| Beneficial Owner of More than 5% of the Outstanding Common Stock: | ||||||||
| EcoR1 Capital Fund, L.P. and affiliates(2) | 1,840,000 | 10.7 | % | |||||
| Directors and Named Executive Officers: | ||||||||
| Cynthia Collins(3) | 116,666 | * | ||||||
| Wayne T. Hockmeyer, Ph.D. | 105,000 | * | ||||||
| Zola P. Horovitz, Ph.D. | 119,757 | * | ||||||
| William N. Kelley, Ph.D. | 102,500 | * | ||||||
| Adel A.F. Mahmoud, M.D., Ph.D. | — | * | ||||||
| Kevin M. Rooney | — | * | ||||||
| Stefan D. Loren, Ph.D. | 7,500 | * | ||||||
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| | | ||||||
| Name of Beneficial Owner(1) | Total Number of Shares Beneficially Owned | % of Class Owned | ||||||
| Marc R. Schneebaum | 100,000 | * | ||||||
| Douglas J. Swirsky | 410,833 | 2.4 | % | |||||
| Douglas E. Brough, Ph.D. | 256,332 | 1.5 | % | |||||
| Bryan T. Butman, Ph.D. | 232,551 | 1.3 | % | |||||
| All directors and executive officers as a group (8 persons) | 1,334,473 | 7.7 | % | |||||
| (1) | Includes shares of Common Stock issuable upon exercise of options that are exercisable within 60 days of March 24, 2014 in the following amounts: Cynthia Collins, 116,666 shares; Wayne T. Hockmeyer, 27,000 shares; Zola P. Horovitz, 39,000 shares; William N. Kelley, 27,000 shares; Marc R. Schneebaum, 24,500 shares; Douglas J. Swirsky, 178,833 shares; Douglas E. Brough 124,249 shares; Bryan T. Butman, 151,166 shares; and directors and executive officers as a group (8 people) 579,248 shares. |
| (2) | Based soley on the Schedule 13G/A filed February 1, 2014 by EcoR1 Capital Fund, L.P. (“Capital Fund”), EcoR1 Capital Fund Qualified, L.P., (“Qualified Fund”), EcoR1 Capital, LLC (“EcoR1”) and Mr. Oleg Nodelman. As disclosed in the Schedule 13G/A, (i) Capital Fund directly owns 1,141,379 shares, (ii) Qualified Fund directly owns 698,621 shares, (iii) EcoR1 may be deemed to beneficially own 1,840,000 shares as general partner of Capital Fund and Qualified Fund, and (iv) Mr. Nodelman may be deemed to beneficially own 1,840,000 shares as manager of EcoR1. |
EcoR1 and Mr. Nodelman each disclaim beneficial ownership of the shares directly owned by Capital Fund. The address for the above entities and person is 409 Illinois Street, San Francisco, California 94158.
| (3) | Ms. Collins departed from the Company on September 3, 2013. |
Equity Compensation Plan Information
The following table discloses certain information about the options issued and available for issuance under all outstanding Company option plans as of December 31, 2013:
| | | | |||||||||
| Plan category | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights | (b) Weighted- average exercise price of outstanding options, warrants and rights | (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||||
| Equity compensation plans approved by security holders | 2,477,081 | $ | 10.03 | 1,035,125 | ||||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||
| Total | 2,477,081 | $ | 10.03 | 1,035,125 | ||||||||
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| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Related Person Transactions
We review all relationships and transactions in which the Company and our directors and executive officers or their immediate family members are participants to determine whether such persons have a direct or indirect material interest. The Company’s senior management is primarily responsible for the development and implementation of processes and controls to obtain information from the directors and executive officers with respect to related party transactions, including obtaining annual written certifications of the directors and executive officers with respect to their knowledge of related person transactions. The Company’s senior management is responsible for then determining, based on the facts and circumstances, whether the Company or a related person has a direct or indirect material interest in the transaction. The Audit Committee reviews and approves or ratifies any related party transaction that meets the standard for disclosure under the SEC rules. The Audit Committee’s review of related party transactions, including information reported to the Audit Committee by senior management and the written certifications, encompasses transactions with related persons within the meaning of Item 404 of Regulation S-K as promulgated by the SEC. The Audit Committee reviews each potential related party transaction on its underlying merit. In accordance with the Audit Committee’s practices, in the course of its review and approval or ratification of related person transactions, the Committee considers:
| • | the nature of the related person’s interest in the transaction; |
| • | the material terms of the transaction, including, without limitation, the amount and type of transaction; |
| • | the importance of the transaction to the related person; |
| • | whether the transaction would impair the judgment of a director or executive officer to act in the best interest of the Company; and |
| • | any other matters the committee deems appropriate. |
Any member of the Audit Committee who is a related person with respect to a transaction under review may not participate in the deliberations or vote respecting approval or ratification of the transaction, provided, however, that such director may be counted in determining the presence of a quorum at a meeting of the committee that considers the transaction.
Director Independence
The Board of Directors has affirmatively determined that each of the following directors is independent within the meaning of the NASDAQ director independence standards: Wayne T. Hockmeyer, Ph.D.; Zola P. Horovitz, Ph.D.; William N. Kelley, M.D.; Stefan D. Loren, Ph.D.; and Marc R. Schneebaum. The Board of Directors has also affirmatively determined that each of the following former directors was independent within the meaning of the NASDAQ director independence standards until their resignation from our Board in September 2013: Edward M. Connor, Jr., M.D., Ph.D.,; Adel A.F. Mahmoud, M.D., Ph.D.; and Kevin M. Rooney. The Board of Directors has determined that Douglas J. Swirsky, the Company’s President and Chief Executive Officer and Cynthia Collins, the Company’s President and Chief Executive Officer until her departure in September 2013, are not independent within the meaning of the NASDAQ director independence standards. The Board has also determined that all standing committees of the Board of Directors are composed entirely of independent directors.
The Board does not have a policy on whether the roles of Chairman of the Board and Chief Executive Officer should be separate. Historically, the Company has split the positions of the Chairman of the Board and Chief Executive Officer because we believe that this structure is appropriate given the differences between the two roles in our current management structure. Our Chief Executive Officer, among other duties, is responsible for setting the strategic direction for the Company and the day to day leadership and performance of the Company, while the Chairman of the Board, among other responsibilities, provides guidance to the Chief Executive Officer and presides over meetings of the full Board.
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| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Principal Accountant Fees and Services
The following is a summary of the fees billed to GenVec by KPMG LLP for professional services rendered for the years ended December 31, 2013 and 2012:
| | | ||||||
| Fee Category | 2013 | 2012 | ||||||
| Audit Fees | $ | 250,000 | $ | 328,268 | ||||
| Audit-Related Fees | — | — | ||||||
| Tax Fees | — | — | ||||||
| All Other Fees | — | — | ||||||
| Total | $ | 250,000 | $ | 328,268 | ||||
Audit Fees
These fees consist of fees for professional services rendered for the audit of GenVec’s financial statements, review of the interim financial statements included in quarterly reports, and services in connection with regulatory filings.
Audit-Related Fees
These fees comprise assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported under “Audit Fees” above. GenVec did not incur such fees during 2013 or 2012.
Tax Fees
These fees comprise tax compliance and tax preparation assistance for state and federal filings; consultations concerning tax related matters and other tax compliance projects. GenVec did not incur such fees with KPMG during 2013 or 2012.
All Other Fees
All other fees consist of fees not included in any other category. GenVec did not incur such fees with KPMG during 2013 or 2012.
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee’s policy is to pre-approve all audit and non-audit services provided by KPMG LLP, our independent registered public accounting firm. On an ongoing basis, management of GenVec defines and communicates specific projects and categories of service for which the advance approval of the Audit Committee is requested. The Audit Committee reviews these requests and advises management if the Committee approves the engagement of KPMG LLP. On a periodic basis, GenVec’s management reports to the Audit Committee regarding the actual spending for such projects and services compared to the approved amounts. In 2013, all fees paid to KPMG LLP were pre-approved pursuant to the Audit Committee’s policy. To ensure prompt handling of unexpected matters, the Audit Committee’s charter authorizes its Chairman to act on behalf of the Audit Committee in between regularly scheduled meetings, including pre-approving services provided by KPMG LLP. If the Chairman exercises this authority, he reports the action taken to the Audit Committee at its next regular meeting.
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PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) Financial Statements — See “Index to Financial Statements” on page F-1 below for a list of the financial statements being filed herein.
Financial Statements Schedules — All financial statement schedules are omitted because they are not applicable, not required under the instructions, or all the information required is set forth in the financial statements or notes thereto.
Exhibits — The following exhibits are filed or incorporated by reference as part of this report.
INDEX TO EXHIBITS
| | |
| EXHIBIT NUMBER | DESCRIPTION | |
| 3.1 | Amended & Restated Certificate of Incorporation, as amended, of the Company.(25) | |
| 3.1(a) | Certificate of Designation of the Series B Junior Participating Preferred Stock of the Company.(26) | |
| 3.2 | Amended & Restated Bylaws of the Company.(11) | |
| 4.1 | Specimen Common Stock Certificate.(1) | |
| 4.2 | Rights Agreement dated as August 11, 2011 between the Company and American Stock Transfer & Trust Company, LLC, the form of Certificate of Designation of Series B Junior Participating Preferred Stock attached as Exhibit A thereto, the form of Rights Certificate attached as Exhibit B thereto, and the form of Summary of Rights attached as Exhibit C thereto.(26) | |
| 4.3 | Form of Warrant.(14) | |
| 4.4 | Form of Warrant.(15) | |
| 4.5 | Form of Warrant.(17) | |
| 10.1 | Form of Indemnification Agreement for Directors and Officers.*(1) | |
| 10.2 | 2002 Stock Incentive Plan as amended and forms of agreements thereunder.*(8) | |
| 10.3 | Amendment to the GenVec, Inc. 2002 Stock Incentive Plan.*(19) | |
| 10.4 | 2011 Omnibus Incentive Plan.*(34) | |
| 10.5 | Amendment to 2011 Omnibus Incentive Plan dated July 11, 2012.(28) | |
| 10.6 | Amendment to 2011 Omnibus Incentive Plan dated September 3, 2013.*(34) | |
| 10.7 | License Agreement dated May 31, 1996 between Scios, Inc. and the Company.(1) | |
| 10.8 | Amendment to Common Stock Warrant Agreement dated March 18, 2002 between the Company and Cornell Research Foundation, Inc.(6) | |
| 10.9 | Lease Agreement dated May 4, 1999 between MOR BENNINGTON LLP and the Company.(1) | |
| 10.10 | Amendment to Lease Agreement between MOR BENNINGTON LLP and the Company dated March 11, 2009.(9) | |
| 10.11 | Employment Agreement be and between Cynthia Collins and GenVec, Inc., dated as of May 18, 2012.*(29) | |
| 10.12 | CEO Inducement Award of a Non-Qualified Stock Option by and between Cynthia Collins and GenVec, Inc., dated as of May 23, 2012.*(29) | |
| 10.13 | Separation and Release Agreement by and between Paul H. Fischer and GenVec, Inc.;, dated as of May 22, 2012.*(29) | |
| 10.14 | Consulting Agreement by and between Paul H. Fischer and GenVec, Inc., dated as of May 22, 2012.(29) |
66
| | |
| EXHIBIT NUMBER | DESCRIPTION | |
| 10.15 | Form of Non-Qualified Stock Option Agreement by and between Paul H. Fischer and GenVec, Inc.(29) | |
| 10.16 | Salary Continuation Agreement between the Company and Paul H. Fischer dated October 15, 2002.*(6) | |
| 10.17 | Amendment to Salary Continuation Agreement between the Company and Paul H. Fischer dated December 9, 2008.*(9) | |
| 10.18 | Change in Control Agreement between the Company and Paul H. Fischer dated October 15, 2002.*(6) | |
| 10.19 | Amendment to Change in Control Agreement between the Company and Paul H. Fischer dated December 9, 2008.*(9) | |
| 10.20 | Salary Continuation Agreement between the Company and Douglas J. Swirsky dated September 18, 2006.*(10) | |
| 10.21 | Amendment to Salary Continuation Agreement between the Company and Douglas J. Swirsky dated December 9, 2008.*(9) | |
| 10.22 | Change in Control Agreement between the Company and Douglas J. Swirsky dated September 18, 2006.*(10) | |
| 10.23 | Amendment to Change in Control Agreement between the Company and Douglas J. Swirsky dated December 9, 2008.*(9) | |
| 10.24 | Salary Continuation Agreement between the Company and Douglas E. Brough dated February 1, 2010.*(31) | |
| 10.25 | Salary Continuation Agreement between the Company and Bryan T. Butman dated October 15, 2002.*(32) | |
| 10.26 | Amendment to Salary Continuation Agreement between the Company and Bryan T. Butman dated December 9, 2008.*(32) | |
| 10.27 | Form of Indemnification and Advancement of Expenses Agreement dated December 10, 2003.(7) | |
| 10.28 | Agreement with the Vaccine Research Center at the National Institute of Allergy and Infectious Diseases of the National Institutes of Health for the supporting the transfer of the Company’s manufacturing processes dated September 30, 2006.+(12) | |
| 10.29 | Agreement with the United States Department of Homeland Security for the development of adenovector-based foot and mouth vaccine candidates dated January 30, 2007.+(22) | |
| 10.30 | Amendment to Agreement with the United States Department of Homeland Security for the development of adenovector-based foot and mouth vaccine candidates dated August 30, 2007.+(23) | |
| 10.31 | Amendment to Agreement with the United States Department of Homeland Security for the development of adenovector-based foot and mouth vaccine candidates dated November 9, 2007.(24) | |
| 10.32 | Agreement with the United States Department of Homeland Security for development of adenovector-based foot and mouth vaccine, dated February 12, 2010.(18) | |
| 10.33 | Research Collaboration and License Agreement, dated January 13, 2010, by and between GenVec, Inc. and Novartis Institutes for BioMedical Research, Inc.+(16) | |
| 10.34 | Amended and Restated License Agreement, dated May 23, 1998, between the Company and the Cornell Research Foundation.+(1) | |
| 10.35 | Amendment to Amended and Restated License Agreement, dated March 18, 2002, between the Company and the Cornell Research Foundation.+(6) |
67
| | |
| EXHIBIT NUMBER | DESCRIPTION | |
| 10.36 | Agreement for the Supply of Services related to Development Materials, dated August 4, 2010, between Novartis Pharma AG and GenVec, Inc.+(20) | |
| 10.37 | Agreement, dated November 3, 2009, between GenVec, Inc. and SAIC-Frederick, Inc.+(21) | |
| 10.38 | Amendment to Agreement with the United States Department of Homeland Security for the development of adenovector-based foot-and-mouth vaccine candidates, dated September 20, 2010.+(31) | |
| 10.39 | Amendment to Agreement with the United States Department of Homeland Security for the development of adenovector-based foot-and-mouth vaccine candidates dated December 31, 2012.+(33) | |
| 10.40 | Amendment to Agreement with the United States Department of Homeland Security for the development of adenovector-based foot-and-mouth vaccine candidates dated March 19, 2013.+(33) | |
| 10.41 | Form of Investor Purchase Agreement.(14) | |
| 10.42 | Form of Investor Purchase Agreement.(15) | |
| 10.43 | Form of Investor Purchase Agreement.(17) | |
| 10.44 | Agreement with the U.S. Naval Medical Logistics Command regarding malaria vaccine development for the U.S. Naval Medical Research Center, dated September 29, 2012.+(30) | |
| 10.45 | Amendment, dated July 29, 2013, of Agreement with the U.S. Naval Medical Logistics Command regarding malaria vaccine development for the U.S. Naval Medical Research Center, dated September 29, 2012.+(34) | |
| 10.46 | Amendment, dated January 24, 2012, to Research Collaboration and License Agreement, dated January 13, 2010, by and between GenVec, Inc. and Novartis Institutes for BioMedical Research, Inc.+(31) | |
| 10.47 | Amendment, dated February 12, 2013, to Research Collaboration and License Agreement, dated January 13, 2010, by and between GenVec, Inc. and Novartis Institutes for BioMedical Research, Inc.+(32) | |
| 23.1 | Consent of Independent Registered Public Accounting Firm. (filed herewith) | |
| 24.1 | Power of Attorney. (filed herewith) | |
| 31.1 | Rule 13a-14(a) Certification by Chief Executive Officer and Chief Financial Officer. (filed herewith) | |
| 32.1 | Rule 13a-14(b) Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 United States Code Section 1350. (filed herewith) | |
| 101.INS | XBRL Instance Document. | |
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
| * | Compensatory plan, contract or arrangement. |
| + | Certain portions of this exhibit have been omitted based upon a request for confidential treatment. The omitted portions have been filed with the Commission pursuant to our application for confidential treatment. |
| (1) | Incorporated by reference to our Registration Statement on Form S-1 (File No. 333-47408) declared effective by the Securities and Exchange Commission on December 12, 2000. |
68
| (2) | Incorporated by reference from our Registration Statement on Form S-8 (File No. 333-55590) filed with the Securities and Exchange Commission on February 14, 2001. |
| (3) | Incorporated by reference from our Registration Statement on Form 8-A (File No: 0-24469) filed with the Securities and Exchange Commission on September 26, 2001. |
| (4) | Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on August 22, 2003. |
| (5) | Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 29, 2002. |
| (6) | Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 31, 2003. |
| (7) | Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 15, 2004. |
| (8) | Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 17, 2008. |
| (9) | Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 16, 2009. |
| (10) | Incorporated by reference from our Current Report on Form 8-K (File No: 0-24469) filed with the Securities and Exchange Commission on September 19, 2006. |
| (11) | Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on November 10, 2003. |
| (12) | Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on November 9, 2006. |
| (13) | Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on June 14, 2007. |
| (14) | Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on June 6, 2008. |
| (15) | Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on May 28, 2009. |
| (16) | Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on January 19, 2010. |
| (17) | Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on January 27, 2010. |
| (18) | Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 10, 2010. |
| (19) | Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on June 18, 2010. |
| (20) | Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on August 6, 2010. |
| (21) | Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on November 9, 2010. |
| (22) | Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on May 10, 2007. |
| (23) | Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on November 9, 2007. |
| (24) | Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on August 8, 2008. |
| (25) | Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on August 9, 2011. |
| (26) | Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on August 12, 2011. |
| (27) | Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on June 17, 2011. |
69
| (28) | Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on July 17, 2012. |
| (29) | Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on May 24, 2012. |
| (30) | Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on November 9, 2012. |
| (31) | Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 15, 2012. |
| (32) | Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 22, 2013. |
| (33) | Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on May 10, 2013. |
| (34) | Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on November 12, 2013. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GENVEC, INC.
| By: | /s/ DOUGLAS J. SWIRSKY Douglas J. Swirsky President, Chief Executive Officer and Director |
| Date: | March 28, 2014 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
| | | ||
| TITLE | DATE | |||
| /s/ DOUGLAS J. SWIRSKYDouglas J. Swirsky | President, Chief Executive Officer and Director (Principal Executive Officer) Chief Financial Officer, Treasurer & Secretary (Principal Financial and Accounting Officer) | March 28, 2014 | ||
| /s/ WAYNE T. HOCKMEYER, PH.D.*Wayne T. Hockmeyer, Ph.D. | Director | March 28, 2014 | ||
| /s/ ZOLA P. HOROVITZ, PH.D.*Zola P. Horovitz, Ph.D. | Director | March 28, 2014 | ||
| /s/ WILLIAM N. KELLEY, M.D.*William N. Kelley, M.D. | Director | March 28, 2014 | ||
| /s/ MARC R. SCHNEEBAUM*Marc R. Schneebaum | Director | March 28, 2014 | ||
| /s/ STEFAN D. LOREN, PH.D.*Stefan D. Loren, Ph.D. | Director | March 28, 2014 |
| | |
*By: /s/ DOUGLAS J. SWIRSKY |
71
GENVEC, INC.
INDEX TO FINANCIAL STATEMENTS
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
GenVec, Inc.:
We have audited the accompanying balance sheets of GenVec, Inc. (“the Company”) as of December 31, 2013 and 2012, and the related statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GenVec, Inc. as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
McLean, Virginia
March 28, 2014
F-2
GENVEC, INC.
BALANCE SHEETS
| | | ||||||
| As of December 31, | ||||||||
| (in thousands, except per share data) | 2013 | 2012 | ||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 5,249 | $ | 4,150 | ||||
| Investments (Note 3) | 856 | 11,105 | ||||||
| Accounts receivable, net | 201 | 947 | ||||||
| Prepaid expenses and other | 337 | 226 | ||||||
| Total current assets | 6,643 | 16,428 | ||||||
| Property and equipment, net (Note 4) | 514 | 805 | ||||||
| Restricted cash | 97 | — | ||||||
| Other assets | — | 197 | ||||||
| Total assets | $ | 7,254 | $ | 17,430 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,048 | $ | 1,500 | ||||
| Accrued expenses and other (Note 5) | 1,596 | 2,187 | ||||||
| Total current liabilities | 2,644 | 3,687 | ||||||
| Total liabilities | 2,644 | 3,687 | ||||||
| Commitments and Contingencies (Note 7) | ||||||||
| Stockholders' equity (Note 8): | ||||||||
| Preferred stock, $0.001 par value; 5,000 shares authorized in 2013 and 2012; none issued and outstanding in 2013 and 2012 | — | — | ||||||
| Common stock, $0.001 par value; 30,000 shares authorized in 2013 and 2012; 13,678 and 12,948 shares issued and outstanding in 2013 and 2012 | 14 | 13 | ||||||
| Additional paid-in capital | 280,398 | 279,518 | ||||||
| Accumulated other comprehensive loss (Note 3) | (22 | ) | (27 | ) | ||||
| Accumulated deficit | (275,780 | ) | (265,761 | ) | ||||
| Total stockholders' equity | 4,610 | 13,743 | ||||||
| Total liabilities and stockholders' equity | $ | 7,254 | $ | 17,430 | ||||
See accompanying notes to financial statements.
F-3
GENVEC, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| | | ||||||
| Years ended December 31, | ||||||||
| (in thousands, except per share data) | 2013 | 2012 | ||||||
| Revenue from strategic alliances and research contracts (Note 6) | $ | 3,682 | $ | 9,353 | ||||
| Operating expenses: | ||||||||
| Research and development | 5,492 | 14,348 | ||||||
| General and administrative | 8,484 | 9,102 | ||||||
| Total operating expenses | 13,976 | 23,450 | ||||||
| Operating loss | (10,294 | ) | (14,097 | ) | ||||
| Other income: | ||||||||
| Interest and Other Income, net | 275 | 42 | ||||||
| Net loss | $ | (10,019 | ) | $ | (14,055 | ) | ||
| Basic and diluted net loss per share | $ | (0.77 | ) | $ | (1.09 | ) | ||
| Shares used in computation of basic and diluted net loss per share | 12,948 | 12,940 | ||||||
| Comprehensive Loss: | ||||||||
| Net loss | $ | (10,019 | ) | $ | (14,055 | ) | ||
| Unrealized holding gain (loss) on securities available for sale | 5 | (19 | ) | |||||
| Comprehensive loss | $ | (10,014 | ) | $ | (14,074 | ) | ||
See accompanying notes to financial statements.
F-4
GENVEC, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
| | | | | | | ||||||||||||||||||
| (in thousands) | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total | |||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||
| Balance, December 31, 2011 | 12,958 | $ | 13 | $ | 278,239 | $ | (8 | ) | $ | (251,706 | ) | $ | 26,538 | |||||||||||
| Net loss | — | — | — | — | (14,055 | ) | (14,055 | ) | ||||||||||||||||
| Unrealized change in investments, net | — | — | — | (19 | ) | — | (19 | ) | ||||||||||||||||
| Restricted stock issued under stock incentive plans | (10 | ) | — | — | — | — | — | |||||||||||||||||
| Stock-based compensation | — | — | 1,279 | — | — | 1,279 | ||||||||||||||||||
| Balance, December 31, 2012 | 12,948 | $ | 13 | $ | 279,518 | $ | (27 | ) | $ | (265,761 | ) | $ | 13,743 | |||||||||||
| Net loss | — | — | — | — | (10,019 | ) | (10,019 | ) | ||||||||||||||||
| Unrealized change in investments, net | — | — | — | 5 | — | 5 | ||||||||||||||||||
| Restricted stock issued under stock incentive plans | 730 | 1 | — | — | — | 1 | ||||||||||||||||||
| Stock-based compensation | — | — | 880 | — | — | 880 | ||||||||||||||||||
| Balance, December 31, 2013 | 13,678 | $ | 14 | $ | 280,398 | $ | (22 | ) | $ | (275,780 | ) | $ | 4,610 | |||||||||||
See accompanying notes to financial statements.
F-5
GENVEC, INC.
STATEMENTS OF CASH FLOWS
| | | ||||||
| Years ended December 31, | ||||||||
| (in thousands) | 2013 | 2012 | ||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (10,019 | ) | $ | (14,055 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 174 | 242 | ||||||
| Non-cash charges for stock-based compensation | 880 | 1,279 | ||||||
| Impairment of long lived assets | 229 | — | ||||||
| Gain on sale of long lived assets | (286 | ) | — | |||||
| Changes in current assets and liabilities, net | (407 | ) | 1,806 | |||||
| Changes in non-current assets, net | 100 | (89 | ) | |||||
| Net cash used in operating activities | (9,329 | ) | (10,817 | ) | ||||
| Cash flows provided by investing activities: | ||||||||
| Purchases of equipment | (376 | ) | (355 | ) | ||||
| Proceeds from sale of property and equipment | 550 | — | ||||||
| Purchases of investment securities | (2,295 | ) | (28,632 | ) | ||||
| Proceeds from sale and maturity of investment securities | 12,549 | 39,840 | ||||||
| Net cash provided by investing activities | 10,428 | 10,853 | ||||||
| Cash flows from financing activities: | — | — | ||||||
| Increase in cash and cash equivalents | 1,099 | 36 | ||||||
| Beginning balance of cash and cash equivalents | 4,150 | 4,114 | ||||||
| Ending balance of cash and cash equivalents | $ | 5,249 | $ | 4,150 | ||||
See accompanying notes to financial statements.
F-6
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS DESCRIPTION
GenVec, Inc. (GenVec, we, our, or the Company) is a biopharmaceutical company using differentiated, proprietary technologies to create superior therapeutics and vaccines. A key component of our strategy is to develop and commercialize our product candidates through collaborations. GenVec is working with leading companies and organizations such as Novartis AG, Merial Limited, and the U.S. Government to support a portfolio of programs that address the prevention and treatment of a number of significant human and animal health concerns. GenVec’s development programs address therapeutic areas such as hearing loss and balance disorders; as well as vaccines against infectious diseases including respiratory syncytial virus (RSV), herpes simplex virus (HSV), and malaria. In the area of animal health we are developing vaccines against foot-and-mouth disease (FMD).
Our core technology has the important advantage of localizing protein delivery in the body. This is accomplished by using our adenovector platform to locally deliver genes to cells, which then direct production of the desired protein. This approach reduces side effects typically associated with systemic delivery of proteins. For vaccines, the goal is to induce an immune response against a target protein or antigen. This is accomplished by using an adenovector to deliver a gene which causes production of an antigen, which then stimulates the desired immune reaction by the body.
Our research and development activities yield product candidates that utilize our technology platform and represent potential commercial opportunities. For example, preclinical research in hearing loss and balance disorders through the delivery of the atonal gene using GenVec’s adenovector technology may have the potential to restore hearing and balance function. We are working with Novartis Institutes for BioMedical Research, Inc. (together with Novartis AG and its subsidiary corporations, including Novartis Pharma AG, Novartis), on the discovery and development of novel treatments for their hearing loss and balance disorders. There are currently no effective therapeutic treatments available for patients who have lost all balance function, and hearing loss remains a major unmet medical problem.
We have multiple vaccines in development leveraging our core adenovector technology including our preclinical programs to develop vaccine candidates for the prevention of RSV and HSV. We also a program to develop a vaccine for malaria. In the field of animal health, we are working with Merial Limited to commercialize vaccines for the prevention of a major animal health problem, FMD. Development efforts for this program are also supported by the U.S. Department of Homeland Security (DHS) and in collaboration with the U.S. Department of Agriculture (USDA).
On September 3, 2013, our former President and Chief Executive Officer, Cynthia Collins, departed the Company and resigned from the Company’s Board of Directors. Douglas J. Swirsky was appointed as the President and Chief Executive Officer of the Company and also was appointed to our Board of Directors.
Our current operating strategy was adopted in September 2013, when we announced that our Board of Directors withdrew a Plan of Complete Liquidation and Dissolution of the Company (the Plan of Dissolution) that had been adopted by the Board of Directors on May 24, 2013, subject to stockholder approval. After announcing the approval of the Plan of Dissolution by the Board of Directors, we received several proposals for transactions with us, including transactions to purchase all or portions of our assets or to engage in mergers with private companies that were looking to use us principally as a means to become publicly traded. As part of the Board of Directors' efforts to seek to maximize the value for our stockholders and to provide stockholders with appropriate information for their consideration, the Board of Directors considered these proposals. The process that we went through in evaluating alternative proposals, the business developments during that time, the challenges in monetizing our assets in the near term for values the Board of Directors thought would be fair, and the time that the process took, led the Board of Directors to conclude that it was in the best interests of our stockholders to withdraw the Plan of Dissolution and pursue our current operating strategy. This operating strategy is focused on advancing the Company’s technology through partnerships. Consistent with this strategy, GenVec is no longer investing its own resources in the development of its RSV and HSV vaccine candidates as it pursues collaborators for these programs.
F-7
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS DESCRIPTION – (continued)
In going through the process of considering the Plan of Dissolution and alternative transactions, we worked to terminate or further curtail a number of our contractual obligations and a significant portion of our operations. We also ceased to support some programs at the levels at which they were previously supported, or at all. On July 29, 2013, for example, we entered into a modification with the U.S. Naval Medical Logistics Command to terminate contractual obligations under our agreement related to malaria vaccine development efforts with the NMRC.
Our business strategy is focused on entering into collaborative arrangements with third parties to complete the development and commercialization of our product candidates. In the event that third parties take over the development for one or more of our product candidates, the estimated completion date would largely be under the control of that third party rather than us. We cannot forecast with any degree of certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements, in whole or in part, and how such arrangements would affect our development plan or capital requirements. Our programs may also benefit from subsidies, grants or government or agency-sponsored studies that could reduce our development costs.
An element of our business strategy is to pursue, as resources permit, the research and development of a range of product candidates for a variety of indications. This is intended to allow us to diversify the risks associated with our research and development expenditures. To the extent we are unable to maintain a broad range of product candidates, our dependence on the success of one or a few product candidates would increase.
As a result of the uncertainties discussed above, among others, we are unable to estimate the duration and completion costs of our research and development projects or when, if ever, and to what extent we will receive cash inflows from the commercialization and sale of a product. Our inability to complete our research and development projects in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue with our business strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business. Our estimated future capital requirements are uncertain and could change materially as a result of many factors, including the progress of our research, development, clinical, manufacturing, and commercialization activities. However we believe our current cash and investments and committed and expected revenues from our collaborators and strategic alliances and cash from our recently completed financings are expected to be sufficient to continue our current research, development and collaborative activities into the foreseeable future.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) USE OF ESTIMATES
The preparation of financial statements, in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and revenues and expenses during the period. Critical accounting policies involved in applying our accounting policies are those that require management to make assumptions about matters that are highly uncertain at the time the accounting estimate was made and those for which different estimates reasonably could have been used for the current period. Critical accounting estimates are also those which are reasonably likely to change from period to period, and would have a material impact on the presentation of our financial condition, changes in financial condition or results of operations. Our most critical accounting estimates relate to accounting policies for strategic alliances and research contract revenues, research and development activities, and stock-based compensation. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances. Actual results could differ from these estimates.
(b) CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid debt instruments, time deposits, and money market funds with original maturities of three months or less.
F-8
NOTES TO FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)
(c) INVESTMENTS
Our investments consist primarily of corporate stock and bonds, government agency bonds, and commercial paper. These investments are classified as available-for-sale securities, which are carried at fair value, with the unrealized holding gains and losses reported as a separate component of accumulated other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis.
A decline in the market value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until a market price recovery and consider whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year-end, forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned.
(d) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of our financial instruments, as reflected in the accompanying balance sheets, approximate fair value. Financial instruments consist of cash and cash equivalents, investments, accounts receivable, and accounts payable.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of assets, which are generally three to five years for equipment and seven years for furniture and fixtures. Leased property meeting certain criteria is capitalized at the lower of the present value of the future minimum lease payments or fair value at the inception of the lease. Amortization of capitalized leased assets is computed on a straight-line basis over the shorter of the lease term or estimated useful life of the asset. We incur maintenance costs with respect to some of our major equipment. Repair and maintenance costs are expensed as incurred.
(f) REVENUE RECOGNITION
Revenue is recognized when all four of the following criteria are met (i) a contract is executed, (ii) the contract price is fixed and determinable, (iii) delivery of the services or products has occurred, and (iv) collectability of the contract amounts is considered probable.
Our collaborative research and development agreements provide for upfront license fees, research payments, and/or substantive milestone payments. Upfront non-refundable fees associated with license and development agreements where we have continuing involvement in the agreement are recorded as deferred revenue and recognized over the estimated service period. If the estimated service period is subsequently modified, the period over which the upfront fee is recognized is modified accordingly on a prospective basis. Non-refundable research and development fees for which no future performance obligations exist are recognized when collection is assured. Substantive milestone payments are considered performance payments and are recognized upon achievement of the milestone if all of the following criteria are met: (i) achievement of the milestone involves a degree of risk and was not reasonably assured at the inception of the arrangement; (ii) substantive effort is involved in achieving the milestone; and (iii) the amount of the milestone payment is reasonable in relation to all of the deliverables and payment terms within the arrangement. Determination of whether a milestone meets the aforementioned conditions involves the judgment of management.
F-9
NOTES TO FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)
Research and development revenue from cost-reimbursement and cost-plus fixed-fee agreements is recognized as earned based on the performance requirements of the contract. Revisions in revenues, cost, and billing factors, such as indirect rate estimates, are accounted for in the period of change. Reimbursable costs under such contracts are subject to audit and retroactive adjustment. Contract revenues and accounts receivable reported in the financial statements are recorded at the amount expected to be received. Contract revenues are adjusted to actual upon final audit and retroactive adjustment. Estimated contractual allowances are provided based on management’s evaluation of current contract terms and past experience with disallowed costs and reimbursement levels. Payments received in advance of work performed are recorded as deferred revenue.
Research and development revenue from fixed-price best efforts arrangements is recognized as earned based on the performance requirements of the contract. Revenue under these arrangements is recognized when delivery to and acceptance by the customer has been received. During the period of performance, recoverable contract costs are accumulated on the balance sheet in other current assets, but no revenue or profit is recorded prior to customer acceptance of the contractually stated deliverables. Recoverable contract costs that are accumulated on the balance sheet include all direct costs associated with the arrangement and an allocation of indirect costs. Payments received in advance of customer acceptance are recorded as deferred revenue. Once customer acceptance has been received, revenue and recoverable contract costs are recognized. Over the course of the arrangement, we routinely evaluate whether revenue and profitability should be recognized in the current period. Any known or probable losses on projects are charged to operations in the period in which such losses are determined.
(g) RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred. Advance payments to acquire goods or pay for services that will be consumed or performed in a future period in conducting research and development activities are recorded as an asset when the advance payments are made. Capitalized amounts are recognized as expense when the research and development activities are performed; that is, when the goods without alternative future use are acquired or the service is rendered.
Research and development costs include internal research and development expenditures (such as salaries and benefits, raw materials, supplies, and allocated facility expenses), contracted services (such as sponsored research, consulting, manufacture of drug supply, and testing services of proprietary research) and development activities and similar expenses associated with collaborative research agreements. These costs are expensed as incurred.
(h) INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50 percent likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We include any interest or penalties incurred in connection with income taxes as part of other expense.
We have significant net operating loss carryforwards to potentially reduce future federal and state taxable income, and research and experimentation tax credit carryforwards available to potentially offset future federal income taxes. Due to the Company’s prior equity transactions, the Company’s net operating loss and research and experimentation credit carryforwards may expire unutilized due to changes in our ownership as defined within Section 382 of the Internal Revenue Code.
F-10
NOTES TO FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making that assessment. We recorded a full valuation allowance against all estimated net deferred tax assets at December 31, 2013 and 2012.
(i) NET LOSS PER SHARE
Basic earnings per share is computed based upon the net loss available to common stock stockholders divided by the weighted average number of common stock shares outstanding during the period. The dilutive effect of common stock equivalents is included in the calculation of diluted earnings per share only when the effect of the inclusion would be dilutive. For the years ended December 31, 2013 and 2012 approximately 1.6 million and 0.7 million common stock equivalent shares associated with our stock option plans and unvested restricted shares and approximately 1.1 million and 1.4 million stock equivalent shares associated with our warrants, respectively, were excluded from the denominator in the diluted loss per share calculation as their inclusion would have been antidilutive.
(j) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net loss and unrealized holding gains and losses from available-for-sale securities.
(k) STOCK-BASED COMPENSATION
We use the modified prospective method to account for stock-based compensation. Under this method, we measure stock-based compensation expense based on the grant date fair value of the awards which is then recognized over the period during which service is required to be provided. We estimate grant date fair value using the Black-Scholes option-pricing model. Stock-based compensation cost that has been included in expense from continuing operations amounted to $0.9 million and $1.3 million for the years ended December 31, 2013 and 2012, respectively.
(l) LONG-LIVED ASSETS
Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, we first compare undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third party independent appraisals, as necessary.
(m) COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
(n) RECENT ACCOUNTING PRONOUNCEMENTS
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-02,Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (Topic 220). The standard requires that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. The Company’s adoption of the provisions of this guidance on January 1, 2013 did not have a material impact on our financial position, results of operations, or cash flows.
F-11
NOTES TO FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)
There are no other new accounting pronouncements issued but not effective until after December 31, 2013 that are expected to have a significant effect on our financial position or results of operations.
(o) RECLASSIFICATIONS
We have made certain reclassifications to prior year accounts to conform to the 2013 presentation.
(3) FAIR VALUE MEASUREMENTS
For assets and liabilities measured at fair value we utilize FASB Accounting Standards Codification (ASC) Section 820 “Fair Value Measurements and Disclosures” (ASC 820) that defines fair value and establishes a framework for fair value measurements. This standard establishes a three-level hierarchy for disclosure of fair value measurements. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels of inputs used to measure fair value are as follows:
| • | Level 1 — Quoted prices in active markets for identical assets or liabilities; |
| • | Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable (e.g. interest rates, yield curves, volatilities and default rates, among others) or can be corroborated by observable market data; and |
| • | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs. |
The following table presents information about assets recorded at fair value on a recurring basis on the Balance Sheet at December 31, 2013:
| | | | |||||||||
| (In thousands) | Total Carrying Value on the Balance Sheet | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | |||||||||
| Assets: | ||||||||||||
| Cash and cash equivalents | $ | 5,249 | $ | 5,249 | $ | — | ||||||
| Corporate notes and bonds | 303 | — | 303 | |||||||||
| U.S. Government and agency securities | 503 | — | 503 | |||||||||
| Equity Securities | 50 | 50 | — | |||||||||
| Total assets at fair value | $ | 6,105 | $ | 5,299 | $ | 806 | ||||||
The following table presents information about assets and liabilities recorded at fair value on a recurring basis on the Balance Sheet at December 31, 2012:
| | | | |||||||||
| (In thousands) | Total Carrying Value on the Balance Sheet | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | |||||||||
| Assets: | ||||||||||||
| Cash and cash equivalents | $ | 4,150 | $ | 4,150 | $ | — | ||||||
| Corporate notes and bonds | 6,871 | — | 6,871 | |||||||||
| U.S. Government and agency securities | 4,189 | — | 4,189 | |||||||||
| Equity Securities | 45 | 45 | — | |||||||||
| Total assets at fair value | $ | 15,255 | $ | 4,195 | $ | 11,060 | ||||||
F-12
NOTES TO FINANCIAL STATEMENTS
(3) FAIR VALUE MEASUREMENTS – (continued)
We determine fair value for our investments with Level 1 inputs through quoted market prices and have classified them as available-for-sale. Our Level 2 investments consist of corporate notes and bonds and U.S. government agency securities with maturities of less than twelve months.
We review all investments for other-than-temporary impairment at least quarterly or as indicators of impairment exist. Indicators of impairment include the duration and severity of the decline in fair value as well as the intent and ability to hold the investment to allow for a recovery in the market value of the investment. In addition, we consider qualitative factors that include, but are not limited to: (i) the financial condition and business plans of the investee including its future earnings potential; (ii) the investee’s credit rating; and (iii) the current and expected market and industry conditions in which the investee operates. If a decline in the fair value of an investment is deemed by management to be other-than-temporary, we write down the cost basis of the investment to fair value, and the amount of the write down is included in net earnings. Such a determination is dependent on the facts and circumstances relating to each investment. We have determined there have been no such impairments in 2013 or 2012.
All unrealized holding gains or losses related to our investments in marketable securities are reflected in our statements of operations and comprehensive loss.
A summary of marketable securities is shown below:
| | | | | ||||||||||||
| Amortized Cost | Gross Unrealized | Fair Value | ||||||||||||||
| Gains | Losses | |||||||||||||||
| (in thousands) | ||||||||||||||||
| December 31, 2013 | ||||||||||||||||
| Marketable securities | ||||||||||||||||
| Corporate and agency notes and corporate stock | $ | 878 | $ | — | $ | (22 | ) | $ | 856 | |||||||
| Total marketable securities | $ | 878 | $ | — | $ | (22 | ) | $ | 856 | |||||||
| December 31, 2012 | ||||||||||||||||
| Marketable securities | ||||||||||||||||
| Corporate and agency notes and corporate stock | $ | 11,132 | $ | — | $ | (27 | ) | $ | 11,105 | |||||||
| Total marketable securities | $ | 11,132 | $ | — | $ | (27 | ) | $ | 11,105 | |||||||
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
| | | ||||||
| 2013 | 2012 | |||||||
| (in thousands) | ||||||||
| Equipment | $ | 5,777 | $ | 9,750 | ||||
| Leasehold improvements | 6,543 | 6,563 | ||||||
| Furniture and fixtures | 437 | 437 | ||||||
| 12,757 | 16,750 | |||||||
| Less accumulated depreciation and amortization | (12,243 | ) | (15,945 | ) | ||||
| $ | 514 | $ | 805 | |||||
Depreciation and amortization expense related to property and equipment was $0.2 million for the years ended December 31, 2013 and 2012, respectively. In November 2013, we sold laboratory and other long-lived assets that were no longer needed for our current operating strategy. We recognized a gain of approximately $0.3 million on the sales. We also evaluated certain of our long-lived assets and determined that approximately $0.2 million of these assets were impaired during the second quarter of 2013. Gains and losses associated with the sale of long-lived equipment and the impairment of long-lived assets have been recorded within general and administrative expense, as applicable. Additionally, non-capital laboratory equipment was sold for net proceeds of approximately $0.3 million. Gains associated with the sale of non-capital laboratory supplies and equipment has been recorded as Other Income.
F-13
NOTES TO FINANCIAL STATEMENTS
(5) ACCRUED EXPENSES AND OTHER
Accrued expenses consist of the following at December 31:
| | | ||||||
| 2013 | 2012 | |||||||
| (in thousands) | ||||||||
| Payroll, compensation, and benefits | $ | 905 | $ | 1,490 | ||||
| Professional fees | 534 | 523 | ||||||
| Other | 157 | 174 | ||||||
| Total accrued expenses | $ | 1,596 | $ | 2,187 | ||||
(6) STRATEGIC ALLIANCES AND RESEARCH CONTRACTS
We have established collaborations and research contracts with pharmaceutical and biotechnology companies and governmental agencies to enhance our ability to discover, evaluate, develop, and commercialize multiple product opportunities. Revenue earned under these contracts is summarized as follows:
| | | ||||||
| 2013 | 2012 | |||||||
| (in thousands) | ||||||||
| Hearing Program | $ | 924 | $ | 4,435 | ||||
| Foot and Mouth Disease Program | 641 | 2,344 | ||||||
| Vaccine Research Center | 157 | 490 | ||||||
| Malaria Program | 1,571 | 359 | ||||||
| Other strategic alliances and research grants | 389 | 1,725 | ||||||
| $ | 3,682 | $ | 9,353 | |||||
(a) NOVARTIS
In January 2010, we signed a research collaboration and license agreement (the Agreement) with Novartis to discover and develop novel treatments for hearing loss and balance disorders. Under terms of the Agreement, we licensed the world-wide rights to our preclinical hearing loss and balance disorders program to Novartis. We received a $5.0 million non-refundable upfront license fee and Novartis purchased $2.0 million of our common stock. The common stock was recorded at fair value of $3.3 million on the date of issuance. The upfront non-refundable fee was recognized ratably over the initial term of the two-year research and collaboration term of the Agreement. Revenue recognized from the non-refundable upfront license fee was $3.7 million by the end of the initial Agreement due to the pricing agreement associated with the sale of our common stock. In addition, we receive funding from Novartis for a research program focused on developing additional adenovectors for hearing loss. During the years ended December 31, 2013 and 2012 we recognized $0 and $78,000, respectively, of the upfront payment and $0.4 million and $0.8 million, respectively, for research performed under this Agreement.
Under the Agreement, we are eligible to receive milestones payments of up to $206.6 million; including up to $0.6 million for the achievement of preclinical development activities, up to $26.0 million for the achievement of clinical milestones including (non-rejection of an IND with respect to a covered product, the first patient visit in Phase I, Phase IIb and Phase III clinical trials), up to $45.0 million for the receipt of regulatory approvals and up to $135.0 million for sales-based milestones. During each of the years ended December 31, 2011 and 2010, we recognized $0.3 million of milestone payments as a result of the successful completion of preclinical development activities. In 2012 and 2013, there were no milestone payments received. In February 2014, we achieved the third milestone in the collaboration with Novartis. The $2.0 million milestone was triggered by the non-rejection by the FDA of the IND filed by Novartis for CGF166.
In August 2010, we signed an agreement for the supply of services relating to development materials with Novartis, related to our collaboration in hearing loss and balance disorders. Under this agreement, valued at $14.9 million, we agreed to manufacture clinical trial material for up to two lead candidates. During the years ended December 31, 2013 and 2012 we recognized $0.4 million and $3.4 million, respectively, for services performed under this new agreement.
F-14
NOTES TO FINANCIAL STATEMENTS
(6) STRATEGIC ALLIANCES AND RESEARCH CONTRACTS – (continued)
In both January 2012 and January 2013, we announced that we had extended our Research Collaboration and License Agreement with Novartis. Under the extensions, Novartis will fund research at GenVec through January 2014 to support this program.
In February 2014, we achieved the third milestone in the collaboration with Novartis. The $2.0 million milestone was triggered by the non-rejection of the IND application filed by Novartis with the FDA. As of February 28, 2014, milestones available under the Agreement include $24.0 million of additional clinical milestones, $45.0 million in regulatory milestones, and $135.0 million of sales-based milestones. We are also entitled to royalties on future sales.
(b) U.S. DEPARTMENT OF HOMELAND SECURITY (DHS)
In January 2007, we signed a three-year agreement with the DHS, for the development of a vaccine candidate against foot-and-mouth disease (FMD) for livestock, under which we received $6 million in program funding for the first year and had the potential to receive up to $15.1 million in total if annual renewal options under the contract were exercised. Modifications to this agreement have brought the total value of the program up to approximately $20.8 million. During the years ended December 31, 2013 and 2012 we recognized $3,000 and $0.6 million for services performed under this new agreement, respectively. As of December 31, 2013, $20.7 million in revenue has been recognized under this contract since inception. Work under this agreement was completed in 2013.
In February 2010, we signed a contract with the DHS to continue the development of adenovector-based vaccines against FMD. Under this contract, GenVec was to receive $3.8 million in program funding the first year and an additional $0.7 million if DHS exercises its renewal option under the contract. Under this contract, we were to use our adenovector technology to develop additional FMD-serotype candidate vaccines and also explore methods to increase the potency and simplify the production process of adenovector-based FMD vaccines. In June 2010, the DHS exercised its renewal option for 2011 funding under this agreement for $0.7 million. During the years ended December 31, 2013 and 2012, we recognized $0.6 million and $1.7 million, respectively, for services performed under this agreement. As of December 31, 2013, $5.1 million in revenue has been recognized under this contract since inception. Work under this agreement will be completed in 2014.
(c) VACCINE RESEARCH CENTER
In November 2009, we entered into a contract with SAIC-Frederick, Inc., for the development of influenza and HIV vaccines pursuant to their prime grant from the National Cancer Institute. Work under this contract includes generation of HIV vaccine candidates, generation of a universal flu vaccine, process and assay development for manufacture of vaccine candidates for clinical testing, and continued support of the HIV vaccine candidates currently in clinical testing. This four-year contract has a total value of over $22 million if all options are exercised. Revenues of $157,000 and $0.4 million were recognized under this contract for the years ended December 31, 2013 and 2012. As of December 31, 2013, $5.8 million in revenue has been recognized under this contract since inception. Work under this agreement was completed in 2013.
In July 2009, we received a grant from the National Institute of Allergy and Infectious Diseases of the National Institutes of Health (NIAID), valued at approximately $600,000 to identify new antigens for malaria vaccine development. We recognized $8,000 and $121,000 in revenue for the years ended December 31, 2013 and 2012.
In March 2012, we received a grant from the NIAID, valued at approximately $600,000 to identify novel highly protective antigens for malaria vaccine development. We recognized $133,000 and $94,000 in revenue for the years ended December 31, 2013 and 2012.
(d) OTHER STRATEGIC ALLIANCES AND RESEARCH GRANTS
In October 2012, we signed an agreement worth approximately $3.5 million with the NMRC to further support malaria vaccine development. Under the terms of the agreement, we were responsible for producing clinical supplies of its malaria vaccine, which utilized our novel, proprietary technology. NMRC plans to use
F-15
NOTES TO FINANCIAL STATEMENTS
(6) STRATEGIC ALLIANCES AND RESEARCH CONTRACTS – (continued)
this clinical material to assess the safety and efficacy of these next-generation vectored vaccines using the clinical challenge model developed by NMRC and the Walter Reed Army Institute of Research (WRAIR) malaria vaccine programs, which now are unified as the U.S. Military Malaria Vaccine Program (USMMVP). Under the agreement, we retained the right to commercialize this novel technology. We recognized $1.4 million in revenue under this contract in 2013 and no revenue in 2012. In July 2013 we entered into a modification with the NMRC to terminate contractual obligations under this agreement.
In May 2012, we received Phase 1 SBIR grant from the NIH to support the Company’s Respiratory Syncytial Virus (RSV) vaccine program. The SBIR grant, valued at approximately $590,000 provides funding to further understand the impact of maternal immunity against RSV on the generation of a protective immune response in newborns. We recognized $122,000 and $109,000 in revenue for the years ended December 31, 2013 and 2012.
In August 2009, we received a Phase 2 SBIR grant, valued at $2.5 million, from the NIAID to support the development of our cell line and vector production technology. Revenues of $0.3 million and $1.3 million were recognized under this grant for the years ended December 31, 2013 and 2012. Revenue recognized under this grant amounted to $2.3 million through December 31, 2013. Work under this grant was completed in 2013.
We have entered into other research grants with the government, primarily the NIH, and recognized revenue under other collaborations during 2013. Revenue recognized under these research grants totaled $0.2 million and $0.8 million in revenue for the years ended December 31, 2013 and 2012.
(7) COMMITMENTS AND CONTINGENCIES
(a) LEASE AGREEMENTS
We have a non-cancelable operating lease for our new facility in Gaithersburg, MD through October 31, 2019. We also have a non-cancelable operating lease for our old facility in Gaithersburg, MD through October 31, 2014. Rent expense under all operating leases was approximately $0.8 million for each of the years ended December 31, 2013 and 2012.
Future minimum lease payments under our non-cancelable operating leases are as follows (in thousands):
| | |||
| 2014 | $ | 1,168 | ||
| 2015 | 246 | |||
| 2016 | 124 | |||
| 2017 | 128 | |||
| 2018 | 131 | |||
| 2019 | 113 | |||
(b) LICENSE AGREEMENT
In November 2001, we entered into an exclusive, worldwide license agreement with Baylor College of Medicine for the rights related to the Atoh1 gene. Under the terms of the license agreement, we agreed to pay a non-refundable initial license fee of $50,000 at the time of execution of the license agreement and we also agreed to pay a minimum annual license maintenance fee, a percentage of product royalties, and milestone payments based on our achievement of certain clinical and regulatory related milestones for these rights. Our ability to meet the milestones is dependent on a number of factors including final approvals by regulatory agencies and the continued enforceability of patent claims.
(c) LEGAL PROCEEDINGS
On February 3, 2012, a putative class action lawsuit captioned Satish Shah v. GenVec, Inc., et al. Civil Action. No. 8:12 CV-00341-DKC was commenced in the United States District Court for the District of Maryland against the Company, Paul H. Fischer, Douglas J. Swirsky, and Mark O. Thornton. Following appointment of
F-16
NOTES TO FINANCIAL STATEMENTS
(7) COMMITMENTS AND CONTINGENCIES – (continued)
a Lead Plaintiff group in April 2012, Lead Plaintiffs filed a pleading titled Amended Class Action Complaint for Violations of the Federal Securities Laws on July 6, 2012 (the Amended Complaint). In the Amended Complaint, Lead Plaintiffs asserted claims, purportedly on behalf of a class of persons who had purchased or acquired Company common stock between March 12, 2009 and March 30, 2010 (the Class Period), that the Company and the individual defendants had violated Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act), Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act. Lead Plaintiffs alleged generally that defendants had made materially false or misleading statements or omissions concerning the prospects for the Company’s leading product candidate at the time, TNFerade, and the outcome of the then-ongoing clinical trial for TNFerade. Lead Plaintiffs alleged that these misrepresentations resulted in the Company’s common stock trading at artificially inflated prices throughout the Class Period. Lead Plaintiffs sought unspecified damages. On September 4, 2012, the Company and the individual defendants moved to dismiss the Amended Complaint in its entirety for failure to state a claim upon which relief can be granted. On September 20, 2013, the Court granted this motion and dismissed the case in its entirety and with prejudice. Lead Plaintiffs did not file an appeal.
On March 12, 2012, a putative shareholder derivative action was commenced in the United States District Court for the District of Maryland against certain current and former members of our Board of Directors and the Company as a nominal defendant. The case is styledGarnitschnig v. Horovitz, et al.and generally arose out of the matters alleged to underlie the securities action. The plaintiff, who purported to bring the action derivatively on behalf of the Company, alleged that the defendants violated their fiduciary duties, wasted corporate assets and were unjustly enriched by the receipt of compensation while serving as our directors. More particularly, the plaintiff’s Complaint alleged that as a result of the defendants’ failure of oversight, we disseminated misleading public statements and improperly continued with a clinical trial. While theGarnitschnig action did not seek a monetary recovery against the Company, plaintiff sought, among other things, an unspecified award of damages against the defendants, an order directing us to make certain changes to our corporate governance and oversight procedures, disgorgement by the defendants of compensation and an award of attorneys’ fees. Pursuant to the Court’s order dated April 5, 2013, theGarnitschnig case was stayed pending a decision on the motions to dismiss filed in theShah action. On October 2, 2013, the parties entered into a stipulation confirming that the stay of theGarnitschnig action was lifted and providing that, if the plaintiff elected to continue with the action, he would file an Amended Complaint on or before November 26, 2013.
On November 1, 2013, the plaintiff in theGarnitschnig action filed an Amended Verified Shareholder Derivative and Class Action Complaint (the “Amended Complaint”) that supersedes the previous Complaint and now asserts claims for breach of fiduciary duty, unjust enrichment, waste of corporate assets, and alleged violations of the duty of candor. The plaintiff, who now purports to bring the Amended Complaint both derivatively and as a shareholder class action, alleges that certain current and former members of the Board of Directors exceeded their authority under the Company’s 2011 Omnibus Incentive Plan (the “2011 Plan”) by exceeding certain limits applicable to both stock options and restricted stock. The Amended Complaint further alleges that Company’s Proxy Statement is materially false and misleading for failing to disclose the alleged violations of the 2011 Plan. The Amended Complaint seeks, among other things, an unspecified amount of damages.
On November 1, 2013, the plaintiff in theGarnitschnig action also filed a motion for preliminary injunction seeking to postpone the Company's 2013 annual meeting unless and until certain disclosures were made to the Company's shareholders regarding the 2011 Plan. On November 20, 2013, the Court denied that motion in its entirety. Defendants then filed motions to dismiss the Amended Complaint on January 27, 2014. Those motions have not yet been fully briefed and remain pending. The Company intends to vigorously defend this action. We also are informed that the individual defendants deny the material allegations of the Garnitschnigaction and intend to continue vigorously defending the case.
F-17
NOTES TO FINANCIAL STATEMENTS
(7) COMMITMENTS AND CONTINGENCIES – (continued)
(d) RESTRUCTURING
On September 25, 2012, we eliminated 23 positions, or approximately 30% of our workforce in order to reduce our operating costs and conserve capital. As a result, approximately $0.7 million of severance costs was incurred in the third quarter of 2012, all of which has been paid as of September 30, 2013.
On February 7, 2013, we eliminated nine positions as part of our efforts to lower operating costs to conserve capital. The Company incurred $0.2 million of expenses due to the position eliminations with approximately $85,000 paid in the first quarter of 2013 and $90,000 in the second quarter of 2013.
On June 28, 2013, we announced the termination of 30 of our then-remaining 41 employees. The Company incurred $0.3 million of expenses in the second quarter of 2013 due to the position eliminations, which resulted in cash expenditures of that amount in the third quarter.
On September 3, 2013, we announced that Cynthia Collins, our then President and Chief Executive Officer, had departed the Company and resigned as a member of its Board of Directors. Douglas J. Swirsky, who had served as GenVec’s Senior Vice President and Chief Financial Officer since 2006, was named as the Company’s President and Chief Executive Officer and appointed to the Company’s Board of Directors. The Company incurred $1.0 million of expense in the third quarter of 2013 due to the departure of Ms. Collins that will be paid out over 18 months, in accordance with her employment agreement.
Costs associated with the elimination of positions have been recorded as a general and administrative personnel cost.
At December 31, 2013 and 2012, liabilities of approximately $817,000 and $469,000, respectively, remain in accrued expenses for the unpaid portion of the severance costs.
(8) STOCKHOLDERS’ EQUITY
(a) CAPITAL STOCK
In January 2014, we filed a $75.0 million shelf registration statement on Form S-3 (the 2014 shelf registration statement), with the Securities and Exchange Commission. The 2014 shelf registration statement was declared effective February 11, 2014 and allows us to obtain financing through the issuance of any combination of common stock, preferred stock or warrants. Pursuant to General Instruction I.B.6 of Form S-3, in no event will we sell securities in a public primary offering with a value exceeding more than one-third of our public float in any 12-month period so long as our public float remains below $75.0 million. As of March 24, 2014, pursuant to the Equity Distribution Agreement and the Registered Direct Offering described below we have sold approximately $11.6 million of securities since February 11, 2014.
On February 11, 2014, we entered into an Equity Distribution Agreement (the EDA) with Roth Capital Partners, LLC (Roth Capital Partners), pursuant to which we may sell from time to time up to $10.0 million of shares of our common stock, par value $0.001 per share, through Roth Capital Partners (the ATM Offering). Sales of shares in the ATM Offering, if any, may be made by any method permitted by law deemed to be an “at the market” offering as defined in Rule 415 of the Securities Act of 1933, as amended, including without limitation directly on the NASDAQ Capital Market, or any other existing trading market for the shares or through a market maker, or, if agreed by the Company and Roth Capital Partners, by any other method permitted by law, including but not limited to in negotiated transactions. The ATM Offering is being made pursuant to the 2014 shelf registration statement. We intend to use the net proceeds from the sale of shares in the ATM Offering, if any, for operating costs, working capital and general corporate purposes. At the time of the registered direct offering described immediately below, we suspended the ATM Offering. We will continue to evaluate whether to resume the ATM offering in the future. As of March 18, 2014, we had sold 721,677 shares in the ATM Offering for gross proceeds of approximately $2.6 million.
On March 18, 2014, we sold 2,870,000 shares of our common stock in a registered direct offering pursuant to the 2014 shelf registration statement (the Registered Direct Offering), at a price of $3.15 per share, resulting
F-18
NOTES TO FINANCIAL STATEMENTS
(8) STOCKHOLDERS’ EQUITY – (continued)
in net proceeds of approximately $8.4 million. We intend to use the net proceeds from the sale of shares in the Registered Direct Offering for operating costs, working capital and general corporate purposes.
In September 2001, our Board of Directors of the Company adopted a Stockholders Rights Plan, and in connection therewith declared a dividend which was issued on September 28, 2001 of one preferred stock purchase right (a Right) for each share of common stock outstanding. The Rights would become exercisable only if a person or group acquired beneficial ownership of 20 percent or more of the outstanding common stock of GenVec (an Acquiring Person), or announced the intention to commence a tender or exchange offer the consummation of which would result in that person or group becoming an Acquiring Person. The Stockholder Rights Plan expired in September 2011.
In August 2011, the Company’s Board of Directors adopted a new Stockholder Rights Agreement between the Company and American Stock Transfer & Trust Company, LLC, as rights agent, to be effective on September 7, 2011 upon expiration of the prior Stockholder Rights Agreement. The new Stockholder Rights Agreement was not adopted in response to any specific effort to acquire control of the Company. In connection with the adoption of the new Stockholder Rights Agreement, the Company’s Board of Directors declared a dividend of one preferred stock purchase right, or Right, for each outstanding share of common stock to stockholders of record as of the close of business on September 7, 2011. Initially, the Rights will be represented by GenVec's common stock certificates or book entry notations, will not be traded separately from the common stock and will not be exercisable. In the event that any person acquires beneficial ownership of 20% or more of the outstanding shares of GenVec's common stock, or upon the occurrence of certain other events, each holder of a Right, other than the acquirer, would be entitled to receive, upon payment of the purchase price, which is initially set at $32 per Right, a number of shares of GenVec common stock having a value equal to two times such purchase price. The Company’s Board of Directors is entitled to redeem the Rights at $0.001 per right at any time before a person or group has acquired 20% or more of the Company’s common stock. The Rights will expire on September 7, 2021, subject to the Company’s right to extend such date, unless earlier redeemed or exchanged by the Company or terminated. The Rights will at no time have any voting rights. The Company has authorized 30,000 shares of Series B Junior Participating Preferred Stock in connection with the adoption of the new Stockholder Rights Agreement. There was no Series B Junior Participating Preferred Stock issued or outstanding as of December 31, 2013 or December 31, 2012.
In addition to the common stock reflected on our balance sheets, the following items are reflected in the capital accounts as of December 31, 2013 and 2012:
| • | 4,400,000 shares of $0.001 par value preferred stock have been authorized; none are issued or outstanding. |
| • | 600,000 shares of $0.001 par value Series A junior participating preferred stock have been authorized in connection with the preferred stock purchase rights referred to above; none are issued or outstanding. |
(b) STOCK-BASED COMPENSATION
Stock Incentive Plans
Our stockholders approved the 2011 Omnibus Incentive Plan (2011 Plan) in June 2011. In July 2012 at the Company’s 2012 Annual Meeting of Stockholders, the stockholders of GenVec, Inc. (the “Company”) approved an amendment to the GenVec, Inc. Omnibus Incentive Plan (the “2011 Plan”) to increase the number of shares of common stock that are available to be issued through grants or awards made thereunder or through the exercise of options granted thereunder by 640,000 shares. On September 3, 2013, the Board of Directors of the Company acted to award shares of restricted stock pursuant to the 2011 Plan and thereby amended the Plan to provide that the limitation in Section 6.2(b) of the 2011 Plan on the maximum number of shares of stock that may be granted under the 2011 Plan, other than pursuant to Options or SARs (as those terms are defined in the 2011 Plan), in a calendar year was increased to 200,000 shares for purposes of those awards. In November 2013 at the Company’s 2013 Annual Meeting of Stockholders, the stockholders of the
F-19
NOTES TO FINANCIAL STATEMENTS
(8) STOCKHOLDERS’ EQUITY – (continued)
Company approved an amendment to the 2011 Plan to increase the number of shares of common stock that are available to be issued through grants or awards made thereunder or through the exercise of options granted thereunder by 500,000 shares. At December 31, 2013 there are 1,035,125 shares available for future issuance and 1,345,542 outstanding options and 730,000 outstanding restricted stock awards under the 2011 Plan, CEO incentive, and 2002 Plan. Options outstanding under the 2011 Plan at December 31, 2013 expire through 2023. Restricted stock awards generally vest over a two-year term, with 100% vesting two years after issuance. In 2013, no restricted stock awards vested.
Stock options granted under the 2011 Plan generally have a contractual term of 10 years and will vest and become exercisable as to one-eight (1/8th) of the shares of common stock covered by the option on the six month anniversary of the grant date and, on the first day of each month thereafter the option will vest and become exercisable as to an additional one-forty-eighth (1/48th) of the shares of common stock covered by the option until the option is fully exercisable. The Compensation Committee administers the 2011 Plan, approves the individuals to whom options, restricted stock, or other awards will be granted, and determines the terms of the awards, including the number of shares granted and exercise price of each option.
The 2011 Plan replaces the 2002 Stock Incentive Plan (2002 Plan), which was approved in June 2002 as the replacement for the 1993 Stock Incentive Plan (1993 Plan). There are 371,876 outstanding options and no outstanding restricted stock awards under the 2002 Plan at December 31, 2013. Options outstanding under the 2002 Plan at December 31, 2013 expire through 2021. Restricted stock awards under the 2002 Plan generally vest over a three-year term, with 50% vesting two years after issuance and 50% vesting three years after issuance. In 2012, all 11,750 remaining outstanding restricted stock awards issued under the 2002 Plan vested on October 14, 2012.
In May 2012, the Company granted an Inducement Award to purchase shares of common stock to our then President and Chief Executive Officer pursuant to a CEO inducement award agreement. The Inducement Award allows for the purchase of up to 250,000 shares of common stock at an exercise price per share equal to $2.54. The option has a ten-year term and will vest and become exercisable as to one-eighth ( 1/8th) of the shares of common stock covered by the option on the six month anniversary of the grant date and, on the first day of each month thereafter the option will vest and become exercisable as to an additional one-forty-eighth ( 1/48th) of the shares of common stock covered by the option until the option is fully exercisable. When Ms. Collins departed the Company she forfeited her unvested shares as of September 3, 2013. There are 83,333 outstanding options awards under the CEO inducement plan at December 31, 2013.
Stock-Based Compensation Expense
The following table summarizes stock-based compensation expense related to employee stock options for the years ended December 31, 2013 and 2012, which was allocated as follows:
| | | ||||||||||
| Years ended December 31, | ||||||||||||
| 2013 | 2012 | |||||||||||
| (in thousands) | ||||||||||||
| Research and development | $ | 472 | $ | 864 | ||||||||
| General and administrative | 408 | 415 | ||||||||||
| $ | 880 | $ | 1,279 | |||||||||
We use the Black-Scholes pricing model to value stock options. The weighted-average estimated fair value of employee stock options granted during the 12 months ended December 31, 2013 and 2012 was calculated using the Black-Scholes model with the following weighted-average assumptions:
| | | ||||||
| 2013 | 2012 | |||||||
| Weighted average risk-free interest rate | 1.06 | % | 1.05 | % | ||||
| Expected dividend yield | 0.00 | % | 0.00 | % | ||||
| Expected volatility | 98.09 | % | 97.97% | |||||
F-20
NOTES TO FINANCIAL STATEMENTS
(8) STOCKHOLDERS’ EQUITY – (continued)
| | | ||||||
| 2013 | 2012 | |||||||
| Expected life (years) | 6.10 | 6.30 | ||||||
| Weighted-average fair value of options granted | $ | 1.23 | $ | 1.99 | ||||
The risk-free interest rate assumption is based upon various U.S. Treasury rates as of the date of the grants, ranging from 1.00 percent to 1.85 percent and 0.81 percent to 1.66 percent, respectively, for the years ended December 31, 2013 and 2012. The dividend yield is based on the assumption that we are not expected to declare a dividend over the life of the options. The volatility assumption for 2013 and 2012 is based on the weighted average volatility for the most recent one-year period as well as the volatility over the expected life of 6.10 and 6.30, respectively. The expected life of employee stock options represents the weighted average combining the actual life of the options that have already been exercised or cancelled with the expected life of all outstanding options. The expected life of outstanding options is calculated assuming the options will be exercised at the midpoint of the vesting date and the full contractual term.
The Company estimates forfeiture rates at the time of grant and revises these estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on the demographics of current option holders and standard probabilities of employee turnover. Stock-based compensation expense recognized in the statement of operations for the year ended December 31, 2013 and 2012 has been adjusted for actual forfeitures during the respective periods. We do not record tax-related effects on stock-based compensation given our historical and anticipated operating experience and offsetting changes in our valuation allowance which fully reserves against potential deferred tax assets.
Stock Options
The activity of the plans from December 31, 2011 to December 31, 2013 is as follows:
| | | | | ||||||||||||
| (in thousands, except per share data) | Number of Shares Under Option | Weighted Average Exercise Price | Weighted Average Contractual Life (years) | Aggregate Intrinsic Value | ||||||||||||
| Outstanding at December 31, 2011 | 1,021 | 14.77 | ||||||||||||||
| Granted | 1,006 | 2.48 | ||||||||||||||
| Cancelled | (618 | ) | 12.34 | |||||||||||||
| Outstanding at December 31, 2012 | 1,409 | 7.06 | ||||||||||||||
| Granted | 676 | 1.57 | ||||||||||||||
| Exercised | — | — | ||||||||||||||
| Forfeited | (551 | ) | 2.29 | |||||||||||||
| Cancelled | (188 | ) | 13.55 | |||||||||||||
| Stock options outstanding at December 31, 2013 | 1,346 | $ | 5.35 | 7.6 | $ | 306 | ||||||||||
| Vested or expected to vest at December 31, 2013 | 1,281 | $ | 5.52 | 7.5 | $ | 271 | ||||||||||
| Exercisable at December 31, 2013 | 919 | $ | 6.88 | 7.0 | $ | 77 | ||||||||||
Unrecognized stock-based compensation expense related to stock options was approximately $0.5 million as of December 31, 2013. This amount is expected to be expensed over a weighted average period of 2.5 years. There were no stock options exercised during the years ended December 31, 2013 or 2012.
F-21
NOTES TO FINANCIAL STATEMENTS
(8) STOCKHOLDERS’ EQUITY – (continued)
The following table summarizes information about our stock options outstanding at December 31, 2013:
| | | | | | |||||||||||||||||||
| Outstanding | Exercisable | |||||||||||||||||||||||
| Range of exercise prices | Number of shares | Weighted average remaining contractual life | Weighted average exercise price | Number of shares | Weighted average exercise price | |||||||||||||||||||
| (number of shares in thousands) | ||||||||||||||||||||||||
| $0.00 – $10.00 | 1,126 | 8.3 | $ | 2.53 | 701 | $ | 2.86 | |||||||||||||||||
| $10.01 – $20.00 | 124 | 3.2 | 15.82 | 124 | 15.82 | |||||||||||||||||||
| $20.01 – $30.00 | 83 | 5.0 | 23.57 | 81 | 23.59 | |||||||||||||||||||
| $30.01 – $41.00 | 13 | 0.7 | 33.21 | 13 | 33.21 | |||||||||||||||||||
| 1,346 | 7.6 years | $ | 5.35 | 919 | $ | 6.88 | ||||||||||||||||||
As of December 31, 2013 options covering 919,224 shares were exercisable at $1.56 to $41.00 per share (average $6.88 per share) and options covering 1,035,125 shares remain available to be granted.
Restricted Stock Awards
In September 2013, the Company issued 730,000 restricted shares of common stock under the 2011 Plan. The following table summarizes the status of the Company’s unvested restricted stock as of December 31, 2013:
| | | | |||||||||||||
| (in thousands, except per share data) | Number of Shares | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value | |||||||||||||
| Non-vested RSU's at December 31, 2011 | 20 | $ | 7.90 | |||||||||||||
| Granted | — | — | ||||||||||||||
| Vested | (12 | ) | — | |||||||||||||
| Forfeited | (8 | ) | — | |||||||||||||
| Non-vested RSU's at December 31, 2012 | — | — | ||||||||||||||
| Granted | 730 | 0.27 | ||||||||||||||
| Vested | — | — | ||||||||||||||
| Forfeited | — | — | ||||||||||||||
| Non-vested restricted stock units at December 31, 2013 | 730 | $ | 0.27 | $ | 194 | |||||||||||
| Expected to vest at December 31, 2013 | 582 | $ | 0.27 | $ | 155 | |||||||||||
Restricted stock awarded in 2013 vests 100% two years after the date of grant. The cost of the grant is charged to operations over the vesting period. Unrecognized stock-based compensation expense related to restricted stock units was approximately $0.2 million as of December 31, 2013. This amount is expected to be expensed over a weighted average period of 1.7 years.
(c) WARRANTS
Warrants to purchase common stock were granted to organizations and institutions in conjunction with certain licensing and funding activities. The warrants typically vest six-months after issuance. Outstanding warrants are summarized below (in thousands, except per share amounts):
| | | | | ||||||||||||
| Offering Date | Outstanding Warrants | Exercise Price | Expiration Date | Status | ||||||||||||
| May 2009 | 711,539 | $ | 8.58 | 5/29/2014 | Exercisable | |||||||||||
| February 2010 | 420,000 | $ | 27.50 | 2/1/2015 | Exercisable | |||||||||||
| 1,131,539 | ||||||||||||||||
On June 11, 2013, 220,383 warrants with an exercise price of $20.16 issued in June 2008 expired. There were no warrants exercised during the year ended December 31, 2013.
(9) INCOME TAXES
For the years ended December 31, 2013 and 2012 there is no provision for income taxes included in the statement of operations. We have incurred operating losses, but have not recorded an income tax benefit for
F-22
NOTES TO FINANCIAL STATEMENTS
(9) INCOME TAXES – (continued)
2013 and 2012 as we have recorded a valuation allowance against our net operating losses and other net deferred tax assets due to uncertainties related to the ability to realize these tax assets. A reconciliation of tax credits computed at the statutory federal tax rate (34%) on operating loss before income taxes to the actual income tax expense is as follows (in thousands):
| | | ||||||
| 2013 | 2012 | |||||||
| Tax provision computed at the statutory rate | $ | (3,406 | ) | $ | (4,779 | ) | ||
| State income taxes, net of federal income tax provision | (546 | ) | (765 | ) | ||||
| Book expenses not deductible for tax purposes | 11 | 18 | ||||||
| Nondeductible compensation expense | 185 | 277 | ||||||
| Expired net operating losses and other | 1,662 | 17,305 | ||||||
| Change in valuation allowance for deferred tax assets | 2,094 | (12,056 | ) | |||||
| Income tax expense | $ | — | $ | — | ||||
The Company provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes our historical operating performance and the reported accumulated net losses to date, we have provided a full valuation allowance against our deferred tax assets.
Deferred income taxes reflect the net effects of net operating loss carryforwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets are as follows (in thousands):
| | | ||||||
| 2013 | 2012 | |||||||
| Net operating loss carryforwards | $ | 98,944 | $ | 95,497 | ||||
| Research and experimentation tax credit | 14,226 | 14,568 | ||||||
| Property and equipment, principally due to differences in depreciation | (141 | ) | (151 | ) | ||||
| Accrued severance | 266 | 102 | ||||||
| Deferred compensation expense | 783 | 2,053 | ||||||
| Other | 197 | 131 | ||||||
| Total deferred tax assets | 114,275 | 112,200 | ||||||
| Valuation allowance | (114,275 | ) | (112,200 | ) | ||||
| Net deferred tax assets | $ | — | $ | — | ||||
The difference reflected in the change in the valuation allowance as it appears in the analysis of deferred tax assets in comparison to the reconciliation of income tax expense is the result of the tax impact of other comprehensive income.
At December 31, 2013, we have net operating loss carryforwards of approximately $250.8 million for federal income tax purposes which expire at various dates through 2032. We have research and experimentation tax credit carryforwards of $14.2 million at December 31, 2013 which will expire at various dates through 2032. During 2013, $0.3 million of research and experimentation tax credit expired.
Our NOL and tax credit carryforwards may be significantly limited under Section 382 of the Internal Revenue Code (IRC). NOL and tax credit carryforwards are limited under Section 382 when there is a significant “ownership change” as defined in the IRC. The amount of US loss carryforward which can be used by the Company each year is limited due to changes in the Company’s ownership which occurred in 2006. Thus, a portion of the Company’s loss carryforward may expire unutilized.
The limitation imposed by Section 382 would place an annual limitation on the amount of NOL and tax credit carryforwards that can be utilized. When we complete the necessary studies, the amount of NOL carryforwards available may be reduced significantly. However, since the valuation allowance fully reserves for all available carryforwards, the effect of the reduction would be offset by a reduction in the valuation
F-23
NOTES TO FINANCIAL STATEMENTS
(9) INCOME TAXES – (continued)
allowance. Thus, the resolution of this matter would have no effect on the reported assets, liabilities, revenues, and expenses for the periods presented.
As discussed in Note 2, we recognize the effect of income tax positions only if those positions are more likely than not of being sustained effective January 1, 2007. At December 31, 2013 and December 31, 2012, we had no gross unrecognized tax benefits. We do not expect any significant changes in unrecognized tax benefits over the next 12 months. In addition, we did not recognize any interest or penalties related to uncertain tax positions at December 31, 2013 and 2012.
We file U.S. and state income tax returns in jurisdictions with varying statutes of limitations. The 2010 through 2012 tax years generally remain subject to examination by federal and most state tax authorities. In addition, we would remain open to examination for earlier years if we were to utilize net operating losses or tax credit carryforwards that originated prior to 2010.
(10) QUARTERLY RESULTS (UNAUDITED)
Our unaudited quarterly information is as follows:
| | | | | ||||||||||||
| 2013 (unaudited) | Q1 | Q2 | Q3 | Q4 | ||||||||||||
| (in thousands, except per share data) | ||||||||||||||||
| Revenue | $ | 1,207 | $ | 748 | $ | 1,582 | $ | 145 | ||||||||
| Operating Loss | $ | (3,054 | ) | $ | (3,131 | ) | $ | (2,963 | ) | $ | (1,146 | ) | ||||
| Net Loss | $ | (3,045 | ) | $ | (3,126 | ) | $ | (2,961 | ) | $ | (887 | ) | ||||
| Basic and Diluted Loss Per Share | $ | (0.24 | ) | $ | (0.24 | ) | $ | (0.23 | ) | $ | (0.07 | ) | ||||
| | | | | ||||||||||||
| 2012 (unaudited) | Q1 | Q2 | Q3 | Q4 | ||||||||||||
| (in thousands, except per share data) | ||||||||||||||||
| Revenue | $ | 3,164 | $ | 2,540 | $ | 2,128 | $ | 1,521 | ||||||||
| Operating Loss | $ | (3,203 | ) | $ | (3,673 | ) | $ | (4,051 | ) | $ | (3,170 | ) | ||||
| Net Loss | $ | (3,194 | ) | $ | (3,663 | ) | $ | (4,039 | ) | $ | (3,159 | ) | ||||
| Basic and Diluted Loss Per Share | $ | (0.25 | ) | $ | (0.28 | ) | $ | (0.31 | ) | $ | (0.24 | ) | ||||
The loss per share was calculated for each three-month period on a stand-alone basis. As a result, the sum of the loss per share for the four quarters may not equal the loss per share for the respective 12-month period.
(11) SUBSEQUENT EVENTS
On January 23, 2014, we filed a $75.0 million shelf registration statement on Form S-3 (the 2014 shelf registration statement), with the Securities and Exchange Commission. The 2014 shelf registration statement was declared effective February 11, 2014 and allows us to obtain financing through the issuance of any combination of common stock, preferred stock or warrants.
In February 2014, we achieved the third milestone in the collaboration with Novartis. The $2.0 million milestone was triggered by the non-rejection of the Investigational New Drug application filed by Novartis with the U.S. Food and Drug Administration. As of February 28, 2014, milestones available under the Agreement include $24.0 million of additional clinical milestones, $45.0 million in regulatory milestones, and $135.0 million of sales-based milestones. We are also entitled to royalties on future sales.
On February 11, 2014, we entered into an Equity Distribution Agreement with Roth Capital Partners, LLC (Roth), pursuant to which we may sell from time to time up to $10.0 million of shares of our common stock, par value $0.001 per share, through Roth (the ATM Offering). Sales of shares in the ATM Offering, if any, may be made by any method permitted by law deemed to be an “at the market” offering as defined in Rule 415 of the Securities Act of 1933, as amended, including without limitation directly on the NASDAQ Capital Market, or any other existing trading market for the shares or through a market maker, or, if agreed by the Company and Roth, by any other method permitted by law, including but not limited to in negotiated transactions. The ATM Offering is being made pursuant to the 2014 shelf registration statement. We intend to
F-24
NOTES TO FINANCIAL STATEMENTS
(11) SUBSEQUENT EVENTS – (continued)
use the net proceeds from the sale of shares, if any, for operating costs, working capital and general corporate purposes. At the time of the registered direct offering described immediately below, we suspended the ATM Offering. We will continue to evaluate whether to resume the ATM offering in the future. As of March 18, 2014, we had sold 721,677 shares in the ATM Offering for gross proceeds of approximately $2.6 million.
On March 18, 2014, we sold 2,870,000 shares of our common stock in a registered direct offering pursuant to the 2014 shelf registration statement (the Registered Direct Offering), at a price of $3.15 per share, resulting in net proceeds of approximately $8.4 million.
F-25