UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACTOF 1934
For the fiscal year ended December 31, 2000
Or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________to_______________.
COMMISSION FILE NUMBER: 333-47408
GENVEC, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 23-2705690
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
65 WEST WATKINS MILL ROAD, GAITHERSBURG, MARYLAND 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: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, PAR VALUE $0.001 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No/ /.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /.
As of February 28, 2001, the aggregate market value of the voting stock held by
non-affiliates of the Registrant based on the closing sale price of such stock
as reported by the Nasdaq National Market on such date was $66,440,496. For
purposes of this calculation, shares of common stock held by directors, officers
and stockholders whose ownership exceeds ten percent of the common stock
outstanding at February 28, 2001 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 February 28, 2001, there were 17,946,528 shares of the registrant's common
stock, par value $0.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
See Part III hereof with respect to incorporation by reference from the
registrant's definitive Proxy Statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 and the Exhibit Index hereto.
TABLE OF CONTENTS
FORM 10-K FORM 10-K FORM 10-K
PART NO. ITEM NO. DESCRIPTION PAGE NO.
-------- -------- --------------------------------------------------------- --------
I 1 BUSINESS...................................................... 1
2 PROPERTIES.................................................... 35
3 LEGAL PROCEEDINGS............................................. 35
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 36
II 5 MARKET FOR THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................. 39
6 SELECTED FINANCIAL DATA....................................... 40
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 41
7(A) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 46
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 47
9 CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...................................... 47
III 10-13 48
IV 14 EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K............................. 49
FINANCIAL STATEMENTS.......................................... F
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 ("EXCHANGE ACT"). 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, 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 TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "INTENDS," "MAY,"
"WILL," "SHOULD," OR "ANTICIPATES" OR SIMILAR TERMINOLOGY. ALTHOUGH WE BELIEVE
THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE AS OF THE DATE THEREOF, ACTUAL RESULTS, COULD DIFFER MATERIALLY FROM
THOSE CURRENTLY ANTICIPATED DUE TO A NUMBER OF FACTORS, INCLUDING RISKS RELATING
TO THE EARLY STAGE OF PRODUCTS UNDER DEVELOPMENT; UNCERTAINTIES RELATING TO
CLINICAL TRIALS; DEPENDENCE ON THIRD PARTIES; FUTURE CAPITAL NEEDS; AND RISKS
RELATING TO THE COMMERCIALIZATION, IF ANY, OF OUR PRODUCT CANDIDATES (SUCH AS
MARKETING, SAFETY, REGULATORY, PATENT, PRODUCT LIABILITY, SUPPLY, COMPETITION
AND OTHER RISKS). ADDITIONAL IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM OUR CURRENT EXPECTATIONS ARE INCLUDED IN THE SECTION
BELOW ENTITLED "BUSINESS-RISKS AND UNCERTAINTIES." WE WILL NOT UPDATE ANY
FORWARD-LOOKING STATEMENT TO REFLECT EVENTS OR CIRCUMSTANCES THAT OCCUR AFTER
THE DATE ON WHICH THE STATEMENT IS MADE, EXCEPT AS MAY BE REQUIRED BY LAW.
PART 1
ITEM 1. BUSINESS
OVERVIEW
We develop gene-based products that cause medically beneficial proteins to be
produced at the site of disease. We believe that local production of proteins
over a sustained period will allow the proteins to have a potential benefit
while minimizing the overall toxicity that can occur when large doses of a
protein are introduced directly into the body.
Our current areas of focus are diseases of the heart and blood vessels, cancer
and diseases of the eye. We are developing products consisting of genes and
vehicles, commonly called vectors, that deliver those genes into cells at the
site of the disease.
We have specialized in the use and improvement of particular types of vectors
called adenovectors. These vectors are derived from adenoviruses, which are
viruses that cause ailments such as the common cold. We believe that our
adenovector technology allows us to test the therapeutic benefit of genes in a
broad range of animal models of human disease. We believe that our technology
also allows us to advance our product candidates to human testing, or clinical
testing, generally in less time than traditional drug discovery methods.
Since our incorporation in 1992, we have devoted substantially all of our
resources to developing various gene-based products and are now focused on our
current product candidates.
BACKGROUND
The promise of genomics is that an improved understanding of gene function will
lead to increased knowledge of disease and the ability to create new therapies.
Genomics information has become an important component of biological research
into the cause of human disease. Pharmaceutical and biotechnology companies are
using this information to develop new medically beneficial products.
IMPROVING THE UNDERSTANDING OF THE BIOLOGY OF DISEASE. Genes are the essential
blueprint for life. Genes produce their effect by making proteins using their
DNA sequence as a blueprint. New technologies for life science research and
significant financial investment have accelerated the study of the gene
structure and function of humans and other organisms. This field of study is
generally known as genomics. The majority of this effort has been to identify
partial and full gene sequences of the human genome. The first working draft of
the complete human genome sequence has recently been completed.
Gene sequences, while important, do not provide sufficient information to
determine the function of specific genes. Scientists are now working to
understand the function and role of genes in disease. This field of study is
referred to as functional genomics. Many techniques are used to determine gene
function, including cell culture, biochemical studies and the study of
non-mammalian organisms. However, it is often difficult to determine the
function of a gene and its potential role in a disease. Vectors provide a means
of carrying genes to specific cells in mammals so that the
1
function of specific genes and the proteins whose production they stimulate in a
particular tissue may be rapidly and cost effectively assessed for their
potential role in the prevention or treatment of disease.
CONVERTING GENOMICS INFORMATION INTO THERAPEUTIC PRODUCTS. Key approaches being
used to develop new therapies based on genomics information are identification
of new targets for small molecule drugs, the use of proteins and antibodies as
drugs and the use of genes to treat disease. While each of these approaches has
its particular strengths, with small molecule drugs, proteins and antibodies it
is often difficult to maintain sufficient concentrations of the drugs at the
site of disease for a long enough period of time to show effectiveness.
THE USE OF PROTEINS AS THERAPEUTIC PRODUCTS. Proteins that regulate biological
processes may be candidates to become medically beneficial products. Proteins
are widely used in the practice of medicine. In 1999, sales of proteins used to
treat human disease in the United States approximated $13 billion. Despite the
commercial success of many protein therapies, broad medical use of proteins is
limited by the inability to maintain sufficient concentrations of the protein at
the site of disease for a period of time long enough to provide a benefit, while
minimizing side effects caused by the protein's presence in other, non-target
tissues. In addition, production of proteins requires large-scale cell culture
techniques and highly specialized purification and formulation methods. These
requirements can be expensive and time consuming.
OUR APPROACH
Our approach for creating effective drug therapies is to use genes to produce
proteins at the site of disease. This approach provides us with an opportunity
to convert genomics discoveries directly into product candidates that harness
the powerful potential of proteins in a wide variety of applications. We believe
that administering a gene-based product, rather than the protein whose
production it stimulates, may also overcome many of the production, speed and
cost issues associated with other discovery approaches. Our approach also may
result in greater control over the location, timing and amount of therapy. Since
high concentrations of the protein are produced only at the site of disease, we
anticipate that our new treatments will be effective and well tolerated.
Our product candidates are made up of vectors and genes intended to produce
proteins with the potential for medical benefit. To deliver genes for
therapeutic applications, we believe the adenovector has the combined advantages
of being well tolerated, efficient and flexible, allowing us to create multiple
products for a wide variety of diseases. We believe that we can engineer our
vectors to achieve useful performance characteristics and that we can produce
them in commercial quantities. In addition, we are able to use the same vector
technology for functional genomics purposes to help determine the function of a
specific gene and to create new drug candidates--reducing the number of steps
that are typically involved in developing a new drug.
OUR STRATEGY
Our goal is to lead in the discovery, development and commercialization of
innovative gene-based products that address major medical needs. To achieve this
goal, we intend to:
2
o DEVELOP AND COMMERCIALIZE A BROAD PORTFOLIO OF PRODUCTS. We believe that to
achieve maximum economic return with acceptable risk, we need to develop
and commercialize a broad portfolio of products. Our technology allows us
to create product candidates for the treatment of a variety of diseases. We
intend to use our technology to create a broad portfolio of products so
that we can increase the potential for significant revenues in the future.
In order for us to develop and commercialize multiple product candidates at
the same time, we intend to establish relationships with other companies.
These relationships would provide funding and clinical and marketing
resources for the development and commercialization of some of our product
candidates. They would also enhance our ability to build our internal
capabilities so that we may independently develop and commercialize
selected product candidates.
o USE GENOMICS INFORMATION TO IDENTIFY AND CREATE NEW THERAPEUTIC PRODUCT
CANDIDATES. The genomics revolution is generating an abundance of
information regarding genes and gene function. We intend to use our drug
discovery technology to convert this information into product candidates.
To help us assess the potential of these genes and select the most
promising candidates for development, we will continue to establish
alliances with corporations and academic institutions. These relationships
facilitate our access to genes, genomics information, models of human
disease and other technologies useful for drug discovery purposes.
o SUSTAIN AND EXTEND OUR TECHNOLOGY POSITION IN SAFE, EFFICIENT AND TARGETED
GENE DELIVERY. Our core technology enables us to create products that
deliver genes that cause local production of therapeutic proteins. We refer
to the delivery of our product directly to the site of the disease as
"targeted gene delivery." We will continue to enhance our gene delivery
capabilities through internal research, collaborations and acquisitions. We
expect improvements in our core technology to enhance our drug discovery
efforts and lead to additional product candidates. We intend to further
strengthen our technologies relating to process development, formulation
and manufacturing.
OUR PRODUCT DEVELOPMENT PIPELINE
We have used our proprietary drug discovery and development technologies to
create a portfolio of product candidates that treat a number of major diseases.
Our current areas of therapeutic focus include cardiovascular disease,
particularly insufficient blood flow in the vessels of the heart and legs,
cancer and diseases of the eye. Our existing product candidates use proprietary
genes that we have licensed from others.
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PORTFOLIO OF PRODUCT CANDIDATES
- ------------------------------------------------------------------------------------------------------------------------------
PRODUCT CANDIDATE THERAPEUTIC GENE INDICATION PRECLINICAL PHASE I PHASE II PHASE III
- ----------------------- ---------------- ---------- ----------- ------- -------- ---------
BIOBYPASS(R)angiogen VEGF(121)
Coronary Artery X X X
Disease
Peripheral X X X
Vascular
Disease
TNFerade TNF(alpha)
Locally Advanced X X
Cancers
PEDF Program PEDF
Macular X
Degeneration
Diabetic X
Retinopathy
GENSTENT iNOS
Vascular X
Damage
BIOBYPASS(R) ANGIOGEN
BIOBYPASS(R) angiogen is intended to improve blood flow by stimulating new blood
vessel formation in patients witH insufficient blood flow in the heart and legs.
Cardiovascular disease is the leading cause of death in the United States and in
most other developed countries. In 1999, the American Heart Association ("AHA")
estimated that 60 million Americans suffer from cardiovascular disease and that
over $185 billion is spent annually on the care and treatment of individuals
with this disease. Cardiovascular disease is characterized by insufficient blood
flow, or ischemia, which deprives tissues of oxygen and other vital nutrients.
Ischemia in the heart can lead to severe pain, impaired heart function and heart
attack. Ischemia in the legs can lead to intermittent or chronic pain while at
rest, and ultimately, to severe infection, for which amputation of a leg is the
only current treatment.
4
CORONARY ARTERY DISEASE. Approximately 50% of deaths attributable to
cardiovascular disease are due to coronary artery disease, or blocked arteries
in the heart, which affects more than 12 million patients in the United States.
In patients with severe coronary artery disease, angioplasty is often used to
open blocked vessels. Angioplasty involves the insertion of an inflatable
balloon catheter to physically open a narrowed blood vessel. The AHA estimates
that in 1997, the latest date for which data is available, 450,000 angioplasty
procedures were performed on patients in the United States at an average cost of
$20,000 per procedure. Studies have shown that within seven months following
angioplasty, the blood vessel narrows again in 20% to 40% of patients, a process
called restenosis. Another option for treating more severe coronary artery
disease is coronary artery bypass graft surgery, or CABG, which involves
bypassing the diseased artery with a blood vessel taken from another part of the
body. The AHA estimates that in 1997 more than 600,000 CABG procedures were
performed in the United States at an average cost of $45,000 per procedure.
These procedures are highly invasive and frequently need to be repeated. We
believe that there is a substantial need for products that are less invasive and
provide longer lasting, improved results and reduced deaths in patients
undergoing angioplasty or coronary artery bypass surgery. In addition, some
coronary artery disease patients are ineligible for angioplasty or coronary
bypass procedures. For these patients, new treatments are essential.
PERIPHERAL VASCULAR DISEASE. Peripheral vascular disease is characterized by the
progressive deterioration of blood flow to the legs. Approximately 5% of
individuals over the age of 50, or 8 million people in the United States, have
peripheral vascular disease, resulting in significant medical costs. The cost of
surgical procedures used to treat peripheral vascular disease is in excess of $3
billion annually. Current therapies for the treatment of peripheral vascular
disease, ranging from changes in lifestyle and exercise programs to angioplasty
or blood vessel grafts, generally do not stop the progress of the disease. In
addition, peripheral vascular disease patients who have widespread disease or
vessels that are too small to access tend to be poor candidates for angioplasty
or blood vessel grafts, which is the bypassing of the diseased artery with a
blood vessel taken from another part of the body. Vascular surgeons perform
approximately 140,000 amputations per year, predominantly for end-stage
peripheral vascular disease, in the United States alone.
BIOBYPASS(R) ANGIOGEN. We believe that restoring blood flow to areas of
insufficient blood flow through the formation of new blood vessels, a process
known as angiogenesis, offers one of the most promising treatments for patients
with coronary artery disease and peripheral vascular disease. Angiogenesis, the
body's natural response to insufficient blood flow, is triggered by proteins
such as VEGF. Providing VEGF to ischemic tissue is intended to enhance the
body's normal response and stimulate additional blood vessel formation.
Therapeutic use of the protein has been limited however, because the VEGF
protein is rapidly cleared by the body and can be toxic when administered
generally throughout the body.
Our lead product candidate, BIOBYPASS angiogen, uses one of our proprietary
vectors to deliver a proprietary gene, VEGF(121), to cells of the heart or
legs. The VEGF protein has a high degree of specificity for the cells
involved in new blood vessel formation, thereby reducing the potential for
unwanted side effects. We believe that local administration of BIOBYPASS
angiogen to the diseased tissue using injection catheters or syringes results
in production of the VEGF protein where it is needed and avoids the toxicity
associated with delivering the protein throughout the
5
body. We have an exclusive worldwide license for all gene therapy products of
the VEGF(121) gene from Scios, Inc.
COLLABORATION WITH WARNER-LAMBERT. In July 1997, we entered into a collaboration
with the Warner-Lambert Company, which was acquired by Pfizer Inc. in June 2000,
to research, develop and commercialize gene-based products incorporating the
VEGF gene for the treatment of coronary artery disease and peripheral vascular
disease. Under the terms of our collaboration, we granted Warner-Lambert an
exclusive, royalty-bearing license to manufacture and sell products resulting
from our relationship for the treatment of coronary artery disease and
peripheral vascular disease worldwide, excluding Asia. Warner-Lambert has the
primary responsibility for clinical development, regulatory approval,
manufacturing and commercialization of collaboration products. If we achieve
specified milestones, we may receive a total of more than $100 million,
excluding royalties, in license fees, research and development funding,
milestone payments and equity purchases.
CLINICAL STATUS. BIOBYPASS(R) angiogen has entered Phase II clinical trials to
evaluate its potential use in the treatment of coronary artery disease and
peripheral vascular disease. Warner-Lambert is conducting the Phase II program.
The Phase II clinical studies are designed to be supportive of registration if
an application is filed with the U.S. Food and Drug Administration, or FDA, for
product approval. In our earlier Phase Ib clinical trials, we treated a total of
66 patients by direct injection into the heart and legs and observed that
BIOBYPASS(R) angiogen was well tolerated. The initial clinical studies of 31
patients with coronary artery disease, although not placebo-controlled, did
include measures of exercise capacity, clinical symptoms, new blood vessel
formation and blood flow. The initial clinical study in 35 peripheral vascular
disease patients included similar measures and, as in the coronary artery
disease studies, supported the initiation of Phase II studies.
The clinical program plans to assess the effectiveness, toleration and dosage of
BIOBYPASS(R) angiogen administered through a number of different delivery
methods, including:
o endocardial injection, from inside the heart, by interventional
cardiologists using a catheter,
o epicardial injection, from outside the heart, by cardiac surgeons
using a syringe, and
o intramuscular injection by vascular physicians, including surgeons and
vascular medicine physicians, using a syringe.
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The table below summarizes the status of the clinical program for BIOBYPASS
angiogen.
BIOBYPASS(R) ANGIOGEN CLINICAL PROGRAM
PHYSICIAN PATIENT
INDICATION GROUP STATUS NUMBER TRIAL DESIGN(2)
- --------------------------------------------------------------------------------------------------------------------------
CORONARY ARTERY DISEASE
- --------------------------------------------------------------------------------------------------------------------------
EPICARDIAL SYRINGE DELIVERY:
Phase Open Label,
Adjunct to CABG.................. Cardiac Surgeons Ib--Completed 15 Dose-Escalation
Phase Open Label,
Minimally Invasive Surgery....... Cardiac Surgeons Ib--Completed 16 Dose-Escalation
Randomized, Controlled
vs. Best Available
Minimally Invasive Surgery....... Cardiac Surgeons Phase II--Ongoing 70(1) Treatment
ENDOCARDIAL INJECTION CATHETER
DELIVERY:
Interventional Randomized, Double-blind,
Pilot Study...................... Cardiologists Phase Ib--Ongoing 12(1) Placebo Controlled
- --------------------------------------------------------------------------------------------------------------------------
PERIPHERAL VASCULAR DISEASE
- --------------------------------------------------------------------------------------------------------------------------
Phase Open Label,
Intramuscular Syringe Delivery.. Vascular Physicians Ib--Completed 35 Dose-Escalation
Randomized, Double-blind,
Intramuscular Syringe Delivery... Vascular Physicians Phase II--Ongoing 105(1) Placebo Controlled
(1) Targeted patient enrollment numbers
(2) Open label, dose-escalation indicates that the patient receives increasing
doses of the study medication in an open label fashion, that is, the
physician and the patient both know that the patient received the study
medication. In a randomized, double-blind, placebo controlled study,
neither the patient nor the physician administering the treatment knows
whether the patient is receiving the study medication or a placebo.
Warner-Lambert is also responsible for the manufacture of BIOBYPASS angiogen for
clinical and commercial use in its territories under our collaboration
agreement. Warner-Lambert provided us funding to develop a manufacturing process
and testing methods. In 2000, we transferred this technology and know-how to
Warner-Lambert's newly constructed pilot manufacturing facility in Dublin,
Ireland.
TNFERADE
Cancer is the second leading cause of death in the United States. Approximately
60% of all cancer patients in the U.S. receive radiation therapy as part of
their treatment.
We are developing a new product candidate, TNFerade, to provide benefit in
conjunction with radiation therapy for cancer. TNF(alpha) is a protein with a
well-documented anti-cancer effect. The TNF(alpha) protein was recently approved
for marketing in Europe for the treatment of two types of cancer, sarcoma and
melanoma, in the arms and legs. In accordance with this approval, TNF(alpha)
must be delivered in a manner that requires complex surgery under a general
anesthetic to isolate delivery to the limb and avoid the toxicity of TNF(alpha)
when administered generally throughout the body. This method of administration
is applicable to very few cancers and is cumbersome, expensive, and not without
risk. TNFerade, which incorporates a proprietary adenovector carrying
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the gene coding for TNF(alpha), is delivered locally to the tumor site and
combined with radiation therapy. We have designed TNFerade so that the maximum
gene expression is caused by radiation therapy in order to enhance the local
therapeutic effect of TNF(alpha) while minimizing toxicity. We licensed rights
to the TNF(alpha) gene in the United States from Asahi Chemical Industry Co.,
Ltd.
Our preclinical studies indicate that TNFerade enhances the effect of radiation
in several animal models of human cancer. For example, in a model of head and
neck cancer, TNFerade and radiation were found to have 90% greater tumor
shrinkage than either radiation or TNFerade alone. The combined effect of
radiation and TNFerade is believed to be related to selective disruption of the
blood vessels in the tumor. We observed damage to the blood vessels and rapid
tumor death in the tumors but not in the surrounding normal tissues, indicating
a selective effect on diseased tissue. In the fourth quarter of 2000, we filed
an Investigational New Drug Application for TNFerade in patients with various
injectable solid tumors, such as rectal cancer and head and neck cancer. We
initiated Phase I clinical studies for TNFerade in the first quarter of 2001. We
may seek a corporate partner to help us develop and commercialize TNFerade.
PEDF PRODUCT PROGRAM
The leading causes of blindness in the developed world are macular degeneration
and diabetic retinopathy, a secondary effect of diabetes. Both macular
degeneration and diabetic retinopathy involve an excess growth of abnormal blood
vessels in the eye that can lead to blindness. Macular degeneration is a
progressive eye disease in which new capillaries grow behind the retina. These
capillaries can bleed and scar, damaging light-sensing nerve cells and
effectively destroying a large portion of a person's sight. There are
approximately 300,000 new cases of "wet" age-related macular degeneration
diagnosed in the U.S. annually. In "wet" macular degeneration, the new
capillaries leak blood or a fluid into a portion of the eye, which damages
vision cells. Current treatments for macular degeneration are only partially
effective.
Diabetic retinopathy, the abnormal growth of new blood vessels within the
retina, is the leading cause of blindness and visual disability in the United
States and Europe. Diabetes is estimated to affect over 120 million people
worldwide. Findings suggest that after 15 years of diabetes, 2% of diabetic
patients become blind while an additional 10% develop severe visual impairments.
Ultimately, many diabetic patients will progress to have diabetic retinopathy.
The standard treatment, involving a laser procedure, is often initially
effective, but it can damage the retina and surrounding cells and often loses
its effectiveness after repeated treatment. We are developing the PEDF product
candidates to treat macular degeneration and diabetic retinopathy. The PEDF
product candidates use an adenovector to produce PEDF, the most potent known
natural inhibitor of blood vessel growth in the eye. PEDF is a secreted protein
that is normally produced in the eye and regulates new blood vessel formation.
In the first quarter of 2000, we obtained an exclusive license to use the PEDF
gene for all gene therapy applications in the eye from the Public Health Service
(made up of The National Institutes of Health, the FDA, and the Centers for
Disease Control and Prevention). In the fourth quarter of 2000, we obtained an
exclusive license to certain method patents invented by investigators at
Northwestern University for inhibiting new blood vessel formation using the PEDF
gene. We have developed preclinical data indicating that administration in the
eye of a vector containing the PEDF
8
gene results in substantial inhibition of new vessel formation in the eye in an
animal model of human disease. We have also shown that our vectors can be dosed
multiple times in the eye and cause the repeat production of protein from the
delivered gene. Our product candidates appear to be well tolerated. We may seek
a corporate partner to help us develop and commercialize our product candidates
from this development program.
GENSTENT
Angioplasty and blood vessel grafts can damage blood vessel walls and lead to
abnormal narrowing of the injured vessel. These procedures are often done in
patients with coronary artery disease or peripheral vascular disease, and in
patients with kidney disease who require dialysis. In these circumstances,
damage to blood vessels causes excessive growth of blood vessel cells which
contributes to vessel narrowing. The AHA estimates that in 1997, 450,000
angioplasty procedures were performed in the United States. Narrowing of blood
vessels occurs in 20% to 40% of these patients within seven months. In addition,
more than 200,000 patients in the United States with end-stage kidney disease
received dialysis, which commonly requires placement of a blood vessel graft.
These grafts close prematurely and may only be used for one to three years
before they must be replaced.
We are developing GENSTENT, a product candidate that contains the iNOS gene, to
produce nitric oxide at the site of blood vessel damage. Nitric oxide, a natural
regulator of blood vessel function, has the potential to speed the normal
healing and prevent unwanted narrowing of damaged blood vessels. We have shown
that GENSTENT inhibits the closing of damaged blood vessels in animal models. We
use one of our proprietary vectors to efficiently deliver genes to smooth muscle
cells in damaged blood vessels. We intend to seek a corporate partner to develop
and commercialize GENSTENT. We have an exclusive worldwide license for all gene
therapy products for the iNOS gene from the University of Pittsburgh.
OUR DRUG DISCOVERY AND DEVELOPMENT PLATFORM
We have focused on developing technology to effectively and selectively deliver
genes to cause the production of proteins at the location needed to treat
disease. Using our technology, we believe we can:
o rapidly put genes into vectors to evaluate gene function and
usefulness in therapy;
o deliver our product candidates locally to specific organs or cell
types to avoid systemic exposure;
o achieve highly efficient gene delivery to target cells with lower
dosages;
o control the rate and duration of gene expression directed by our
product to allow flexibility in treating different diseases; and
o produce commercial quantities of our products in a stable, easy-to-
use form.
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In constructing our product candidates, we combine a gene with a vector. We
derive our vectors from a naturally occurring virus, called an adenovirus. In
humans, adenoviruses reproduce in certain tissues, spread and can cause a form
of the common cold. We design our vectors so that they cannot reproduce
themselves. We do this to limit toxicity, including unwanted effects on target
cells and the surrounding tissue, and to reduce any immune response to our
vectors. We have multiple versions of vectors with one or more deleted genes
that cannot reproduce themselves. Our intellectual property extends to cover the
production of stocks of vectors that do not contain any virus that can reproduce
itself.
When administered to tissues, our test vectors enter certain cells and produce
the protein encoded by the inserted gene. These test vectors can be used for
functional genomics purposes to help determine the function of a specific gene
and its potential use as a therapy, as well as to create product candidates. The
benefits of vectors can be increased measurably for both functional genomics and
product development purposes if the vector's ability to enter desired cells and
tissues is broadened or specified. Unlike other vector systems, adenovectors
have the potential to be readily re-engineered to alter their performance
characteristics, including their ability to efficiently deliver genes to a wide
range of tissues or to only select cells in the targeted tissue.
We believe that adenoviruses are an excellent starting point for generating
vectors because they are highly efficient methods for delivering genes, can be
readily modified and have the following safety characteristics:
o adenoviruses do not integrate into the DNA of the target cell, thereby
minimizing the potential for mutations that can occur with other
vector systems;
o adenoviruses are naturally eliminated from cells and tissues; and
o vectors derived from adenoviruses have been well tolerated in clinical
testing when administered locally. Over 2,000 patients have been
treated, with very few serious adverse events related to the vector.
TECHNOLOGY FOR LOCAL DELIVERY AND EXPRESSION OF GENES
USE OF DELIVERY DEVICES. To achieve local production of proteins, we administer
our products locally to the site of disease using medical devices, such as
injection catheters and syringes. Direct administration of our products into
diseased tissue allows us to increase effectiveness by achieving high
concentrations of the protein at disease sites while improving safety by
significantly avoiding exposure throughout the body. For example, we are using
needle-injection catheters so that the interventional cardiologist can
administer BIOBYPASS angiogen directly into the diseased areas of the heart.
DELIVERING GENES TO CELLS. We believe that we are a leader in understanding and
modifying the molecular interactions that specify how vectors derived from
adenoviruses bind to cells. Adenoviruses enter cells by binding to two receptors
on the surface of the cell.
10
In our BIOBYPASS angiogen program, we have taken advantage of our adenovector's
natural binding to the muscle cells found in the heart. However, because not all
disease targets contain this adenovirus receptor, we have developed technology
to direct the binding of our vectors to different target receptors to enable a
broad range of therapies. We can alter our vectors so that we can add new
binding specificities.
We believe that we have a broad and advanced intellectual property position in
creating adenovectors with new binding sites to deliver therapeutic genes to
specified cells.
o UTV Technology. Our proprietary Universal Transduction Vector, or UTV,
technology allows us to create product candidates that deliver genes
to essentially all cell types, including those types that do not
contain the adenovirus receptor on their surface. We have engineered
our vectors to contain a new binding site that allows binding to all
cells that we have tested to date.
o DART Vectors. We have developed Directed And Restricted Tropism, or
DART, vectors that enable us to create product candidates that deliver
genes only to specific cells. In order to achieve selective delivery
to target cells, we remove the ability of the vector to bind to the
cell surface receptors. We then insert new binding sites into the
vector that bind to specific receptors found on the surfaces of target
cells. We have a broad proprietary position covering DART vectors,
including special cell lines required for their production.
We currently use both UTV technology and DART vectors in our drug discovery
process and we may incorporate these technologies into GENSTENT, TNFerade and
our PEDF product candidates.
CONTROL OF GENE EXPRESSION. Our technology allows us to control the location,
duration and rate of therapeutic gene expression. We control gene expression by
inserting a sequence of DNA, called a promoter, into our vectors adjacent to the
therapeutic gene. For some diseases, long-term expression of the therapeutic
gene is required to achieve a clinical benefit. Using our technology, we have
been able to achieve therapeutic gene expression for several months. In
TNFerade, we intend to achieve local production of the TNF(alpha) gene in
cancerous tissue undergoing radiation treatment by inserting a specific promoter
that will increase protein production after radiation, enhancing protein
concentration in the cancer tissue receiving radiation, thereby increasing
effectiveness and decreasing the potential for toxicity. We have broad
proprietary technology for the use of radiation induced gene expression in
TNFerade.
TECHNOLOGY FOR DRUG DISCOVERY AND TESTING
Rapid and accurate construction of test vectors is an important early step in
our drug discovery programs. Our test vectors contain one or more therapeutic
genes, appropriate promoters to control gene production and may contain our DART
vectors or UTV technology. We believe that it is desirable to evaluate multiple
test vectors in preclinical testing in order to identify a product candidate
with the preferred efficacy and safety profile. To do this, we have developed
proprietary technologies for the rapid construction of test vectors. Our AdFAST,
AdACE and AdLIBRARY systems allow us to efficiently and accurately build our
vectors.
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Standard techniques for constructing test vectors rely on assembly in mammal
cells and typically require several months. Using our AdFAST system and AdACE
system, we can assemble test vectors in a few weeks. We can also modify any
region of the test vector and have the flexibility to place one or more
therapeutic genes at different locations in these test vectors. This simplifies
and speeds vector construction where multiple modifications are required at a
specific site.
We are developing AdLIBRARY technology to construct complex libraries of
adenovectors for use in drug discovery. AdLIBRARY technology is a specialized
use of our AdFAST and AdACE systems for the generation of collections, or
libraries, of adenovectors containing thousands of candidate therapeutic genes.
These libraries are suitable for screening genes for a desired biological
function.
TECHNOLOGY FOR PRODUCTION, PURIFICATION, QUALITY ASSESSMENT AND FORMULATION
Our proprietary production technology and know-how facilitates the production,
purification, quality assessment and formulation of gene-based products. The
structure of our core vectors and the procedures for their production and
purification enables us to minimize the presence of contaminants. We have an
issued U.S. patent broadly covering stocks of adenovectors that cannot reproduce
themselves. We believe our proprietary positions in these areas provide a
competitive advantage. We expect to use substantially similar methods to
produce, purify, assay and formulate many of our adenovector products. This
allows us to accelerate product development in a cost effective manner. We have
developed production and quality assessment technology suitable for late stage
clinical testing of BIOBYPASS angiogen.
o Production and Scale Up. We produce our adenovectors using cell lines
grown under standardized and controlled conditions. We have developed
specialized cell lines for production of our vectors. We have designed
our production processes for commercial scale production and to reduce
the potential for contamination.
o Purification. We have proprietary methods for the purification of our
vectors that we believe are suitable for commercial scale as well as
for small scale use in discovery and testing of new product
candidates.
o 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
molecular weight 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.
o Formulation. We have developed novel product formulations that improve
the stability of our vectors and are covered by an allowed U.S. patent
application. Our formulation allows products to be conveniently
stored, shipped and used. For research purposes, our formulation
enhances the ease and reproducibility of testing.
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OUR COLLABORATIVE RELATIONSHIPS
We establish collaborations with pharmaceutical companies and other
organizations to enhance our ability to discover, evaluate, develop and
commercialize multiple product opportunities.
OUR COLLABORATION WITH THE WARNER-LAMBERT COMPANY
In July 1997, we entered into a collaboration with the Warner-Lambert Company to
research, develop and commercialize gene-based products incorporating the VEGF
gene for the treatment of coronary artery disease and peripheral vascular
disease. In June 2000, Pfizer Inc. acquired Warner-Lambert and Warner-Lambert
became a wholly-owned subsidiary of Pfizer. Warner-Lambert has the primary
responsibility for clinical development, regulatory approval, manufacturing and
commercialization of products that we develop under this collaboration,
including BIOBYPASS angiogen.
Under the terms of the collaboration, we may receive more than $100.0 million,
excluding royalties, in research and development funding, milestone payments,
equity purchases and license fees. As of December 31, 2000, we had recognized an
aggregate of $41.5 million in research and development funding, milestone
payments and license fees. We have received, but not recognized, an additional
$1.5 million in funding under the collaboration. Warner-Lambert has agreed to
provide us a total of $30.3 million of research and development funding over the
first four years of the collaboration, of which $6.0 million, $9.8 million and
$9.0 million have been paid in the first three years of the collaboration, and
$5.5 million is anticipated to be paid in year 4 of the collaboration.
As previously announced in January 2001, Warner-Lambert terminated the final
(fifth) year of the preclinical program under our collaboration agreement. The
research and development funding summarized above reflects Warner-Lambert's
decision to terminate the research program in July 2001. The clinical
development of BIOBYPASS(R) angiogen, currently in Phrase II trials for the
treatment of coronary artery disease and peripheral vascular disease, continues.
We also have the potential to receive an aggregate of $57.0 million in license
fees and milestone payments related to the development of the first
collaboration product for coronary artery disease and peripheral vascular
disease, of which we have received $14.8 million as of December 31, 2000.
Warner-Lambert will pay us additional milestone payments upon our achievement of
events related to the conduct of pivotal clinical studies and filings for and
receiving regulatory approvals to market collaboration products. Warner-Lambert
will make additional milestone payments to us for other collaboration products
developed for these indications. In consideration for these payments, we granted
Warner-Lambert an exclusive, royalty-bearing license to manufacture and sell
collaboration products worldwide, excluding Asia, subject to our right to
co-promote in the United States and Canada for coronary artery disease
applications. The license is also subject to our exclusive right to manufacture
and sell gene-based products incorporating the VEGF gene for uses other than
coronary artery disease or peripheral vascular disease.
As mentioned above, Warner-Lambert's research and development funding
obligations to us extend through July 2001. The collaboration expires on a
product-by-product and country-by-country basis until there are no remaining
royalty obligations.
As part of the collaboration, Warner-Lambert agreed to purchase up to an
aggregate of $20.0 million of our capital stock upon the achievement of
specified milestones. As of December 31, 2000, Warner-Lambert has purchased
$15.0 million of our capital stock. Warner-Lambert is required to purchase, at
our election, up to $5.0 million of our capital stock upon showing that a
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process has been established for the production of bulk product at a scale and
site suitable for pivotal clinical studies as shown by the preparation of three
consecutive lots of the first collaboration product. The purchase price for all
of these equity purchases is 125% of the fair market value of the securities.
Warner-Lambert has also committed to guaranteeing a loan to us in a principal
amount of $5.0 million. In 1999, we used $2.5 million of the loan guarantee to
assist in the financing of our research and development/corporate headquarters
facility.
OUR COLLABORATION WITH FUSO PHARMACEUTICALS INDUSTRIES, LTD.
In September 1997, we established a collaboration with Fuso to conduct research
and to identify, evaluate and develop gene therapy products for the treatment of
cancer. Under the terms of the collaboration, we will receive $750,000 annually
for five years, subject to Fuso's right to terminate the collaboration upon 90
days prior written notice. As part of the collaboration, we granted Fuso an
exclusive, royalty-bearing license to develop and commercialize products
developed under the collaboration for the treatment of cancer in Japan and at
Fuso's option, Korea and Taiwan. Fuso will be responsible for the development
and commercialization of any products in its territory. We will receive
additional payments for the achievement by Fuso of specified product development
and regulatory milestones, with the earliest of such payments not expected in
the near term. We will also receive royalties on the sale of any such products
commercialized by Fuso. We have retained all rights to develop and commercialize
these products for the treatment of cancer in the rest of the world, and
generally for all other uses worldwide, independently and with third parties.
OUR COLLABORATIONS WITH ACADEMIC INSTITUTIONS
We sponsor research at leading academic institutions to enhance our ability to
discover, evaluate and develop new product candidates. Our academic
collaborations include agreements with the following institutions:
o Weill Medical College of Cornell University
o The Cleveland Clinic Foundation
o The University of Chicago
o The University of New Mexico
OUR LICENSES FOR THERAPEUTIC GENES
To create our product candidates, we combine our vectors with genes intended to
produce proteins with therapeutic potential. We have secured licenses to many
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 milestones. Our gene licenses include:
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- ----------------------------------------------------------------------------------------------------------------------
SOURCE GENE NATURE OF LICENSE
- ----------------------------------------------------------------------------------------------------------------------
Scios, Inc............................ VEGF(121) Worldwide, exclusive for all gene therapy products
University of Pittsburgh.............. iNOS Worldwide, exclusive for all gene therapy products
Asahi Chemical Industry Co., Ltd...... TNF(alpha) United States, non-exclusive, all gene therapy applications
Public Health Service and
Northwestern University............... PEDF Worldwide, exclusive for all ocular gene therapy applications
On December 20, 2000, we entered into a license agreement with Northwestern
University. Pursuant to this agreement, we obtained a worldwide, exclusive
license for a patent pending method, which we intend to use in the development
of product candidates, for all gene therapy applications for diseases of the
eye, including macular degeneration and diabetic retinopathy. However, we are
aware of pending patent applications of third parties pertaining to similar
methods and processes. It could be alleged that any products we develop using
this license conflict with such existing or future patents.
Under the agreement, we are required to meet certain milestones relating to the
development, testing and regulatory approval of a product using the
patent-pending method that is the subject of the license agreement. The
agreement also sets out payments we are required to make to Northwestern
University upon the achievement of each of these milestones, as well as royalty
payments and certain other financial terms. The agreement terminates on a
licensed product-by-licensed product and country-by-country basis until the
expiration of the last to expire patent for so long as there is an issued valid
patent or patent application in such country covering such licensed product,
unless terminated earlier for cause, breach or bankruptcy, or unless we
terminate the agreement upon 60 days written notice.
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 if we become insolvent. In
addition, some of our licenses require us to achieve specific milestones.
PATENTS, LICENSES AND PROPRIETARY RIGHTS
We generally seek patent protection for our proprietary technology and product
candidates in the United States and abroad. We have submitted patent
applications that are pending in the United States 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:
o obtain patents to protect our own products,
o obtain licenses to use the technologies of third parties, which may be
protected by patents,
o protect our trade secrets and know-how, and
o operate without infringing the intellectual property and proprietary
rights of others.
PATENT RIGHTS; LICENSES.
Our licensors and we 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 February 28, 2001, we held
or had licenses to 357 issued, allowed or pending patents worldwide, of which 51
are issued or allowed in the U.S. These patents and patent applications pertain
to genes, vectors, cell lines used to grow vectors, gene expression control
elements, vector targeting entities, methods of constructing vectors that
include beneficial genes, methods of producing such vectors with beneficial
genes (including purification, quality control and assay techniques), methods of
storing and shipping vector stocks, administration of vectors with beneficial
genes, vector containment and regulation techniques and devices for carrying out
the administration of such vectors with beneficial genes.
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BIOBYPASS ANGIOGEN. We have an exclusive license, under a patent expiring in
2010, for all gene therapy products relating to the VEGF(121) gene. In
addition, we have pending patent applications pertaining to the special cell
lines required for the production of particular adenovectors, including a
cell line we use in the production of BIOBYPASS angiogen, as well as an
issued patent, expiring in 2014, pertaining to stocks of adenovectors that
cannot reproduce themselves. We also have pending patent applications
pertaining to the delivery of angiogenic substances, such as our BIOBYPASS
angiogen. However, third parties have patents and pending patent applications
for other forms of the VEGF gene, and these third parties or their licensees
may develop products using these forms of the gene. Third parties also may
have pending patent applications for adenovectors, including possibly the
adenovector used in the BIOBYPASS angiogen. We are aware of the issued
patents and pending patent applications of third parties relating to special
cell lines required for the production of particular adenovectors, including
a cell line we use in the production of our BIOBYPASS angiogen, as well as
issued patents and pending patent applications relating to the delivery,
including through the use of adenovectors, of therapeutic substances to the
heart and other tissues, similar to our BIOBYPASS angiogen. It could be
alleged that our BIOBYPASS angiogen conflicts with such existing or future
patents.
TNFERADE. We have a nonexclusive license under the U.S. patent, expiring in
2006, relating to the TNF(alpha) gene and its use. In addition, we have issued
patents and pending patent applications pertaining to the adenovector
contemplated for use with TNFerade, regulatory elements particularly suited for
use with TNFerade, and methods of using TNFerade. In particular, we have an
issued U.S. patent, expiring in 2014, covering the use of a spacer sequence
positioned in a particular position in certain adenovectors for improving the
production of the adenovectors, including TNFerade. Also, we have issued U.S.
patents expiring between 2010 and 2016 pertaining to radiation-induced gene
expression and a radiation-inducible promoter enabling controlled production of
therapeutic proteins from gene therapy products, including TNFerade. We are
aware, however, of pending patent applications of third parties pertaining to
adenovectors contemplated for use with TNFerade. It could be alleged that
TNFerade conflicts with patents that may issue on these patent applications.
PEDF PRODUCT CANDIDATES. We have exclusive rights, under a patent expiring in
2015, to use the PEDF gene for all gene therapy applications in the eye. We have
issued patents and pending patent applications pertaining to particular
adenovectors and methods of their use, including adenovectors and related
methods that may be utilized in conjunction with our PEDF product program.
However, we are aware of issued patents and pending patent applications of third
parties relating to various facets of gene therapy to the eye. It could be
alleged that our PEDF product candidates conflict with such existing or future
patents.
GENSTENT. We have an exclusive license in the field of gene therapy under a
patent, expiring in 2012, relating to the iNOS gene and its use. We have pending
patent applications pertaining to the therapeutic use of GENSTENT in gene
therapy. However, we are aware of pending patent applications of third parties
that also claim the iNOS gene and its use. It could be alleged that GENSTENT
conflicts with patents that may issue on these patent applications.
UTV TECHNOLOGY AND DART VECTORS. We have issued patents, expiring in 2014 and
2015, and pending patent applications covering our UTV technology that allows
for the delivery of genes in
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adenovectors to essentially all cell types, as well as our DART vectors, for the
purpose of creating products that deliver genes in adenovectors only to selected
cells, including special cell lines required for the production of the UTV and
DART vectors. We are aware, however, of the issued patents and pending patent
applications of third parties relating to such vectors. It could be alleged that
our UTV and DART vectors conflict with such existing or future patents.
ADFAST, ADACE AND ADLIBRARY SYSTEMS. We have pending patent applications
relating to our AdFAST and AdACE systems for constructing adenovectors,
including adenovectors useful in therapeutic applications such as our product
candidates. Moreover, we have pending patent applications relating to
specialized uses of libraries of adenovectors containing many thousands of
candidate therapeutic genes, which we refer to as our AdLIBRARY system. These
libraries may be particularly well suited for screening genes for a desired
biological function. Third parties, however, have issued patents and are
pursuing pending patent applications relating to similar systems. It is possible
that these or other third parties could use such similar systems in competition
with our AdFAST and AdACE systems to construct adenovectors and/or to screen
gene libraries. In addition, it could be alleged that our AdFAST, AdACE and
AdLIBRARY systems conflict with such existing or future patents.
PRODUCTION, PURIFICATION, QUALITY ASSESSMENT AND FORMULATION TECHNOLOGY. We have
issued patents, expiring in 2017 and 2018, and pending patent applications
pertaining to vector production, purification, quality assessment and
formulation, including with respect to adenovectors such as contemplated for use
with our product candidates. In particular, we have pending patent applications
covering specialized cell lines for production of both small and large volumes
of our vectors, the process for propagating our vectors, the purification of our
vectors applicable to both research and commercial scales, methods of assessing
and confirming the quality and purity of our vectors for late-stage clinical
testing and commercialization, including an issued patent on the use of
techniques to determine molecular weight as a means to establish product
consistency and purity, and product formulations that improve the stability of
adenovectors and allow our vectors to be conveniently stored, shipped and used.
There exist, however, 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 conflicts with such
existing or future patents.
We anticipate that our current and future licensors and we will continue to seek
to improve existing technologies and to develop new technologies and, when
possible, secure patent protection for such improvements and new technologies.
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.
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Nevertheless, these precautions might not prevent proprietary information from
being disclosed to others, or others may independently develop substantially
equivalent proprietary information or otherwise gain access to our trade
secrets. We may not be able to meaningfully protect our trade secrets. Finally,
it is possible that not all inventions made by individuals while rendering
individual services to us will be assigned to us. In the case of a collaborative
arrangement, which requires the sharing of information, our policy is to make
available to our collaborator only such information as is relevant to the
arrangement, under controlled circumstances, and only during the contractual
term of the collaborative arrangement, and subject to a duty of confidentiality
on the part of our collaborator. However, these measures may not adequately
protect our information. Any material leak of confidential information into the
public domain or to third parties may have a material adverse effect on our
business, financial condition and results of operations.
OUR COMPETITION
Competition in the discovery and development of new methods for treating disease
is intense. We face, and will continue to face, intense competition from
pharmaceutical and biotechnology companies, as well as academic and research
institutions and government agencies, both in the United States and abroad. We
face significant competition from organizations that are pursuing the same or
similar technologies used by us in our drug discovery efforts and from
organizations that are developing pharmaceuticals that are competitive with our
potential products. Many of our competitors, either alone or together with their
collaborative partners, have substantially greater financial resources and
larger research and development staffs than we do. In addition, many of these
organizations, either alone or together with their collaborators, have
significantly greater experience than we do in developing products, undertaking
preclinical testing and clinical trials, obtaining FDA and other regulatory
approvals of products and manufacturing and marketing products. Additional
mergers and acquisitions in the pharmaceutical industry may result in even more
resources being concentrated with our competitors. These companies, as well as
academic institutions, governmental agencies and private research organizations,
also compete with us in recruiting and retaining highly qualified scientific
personnel and consultants. Our ability to compete successfully with other
companies in the pharmaceutical field will also depend to a considerable degree
on the continuing availability of capital to us.
Future competition will likely come from existing competitors, including
competitors with rights to proprietary forms of the genes or proteins expressed
by the genes that we currently use in our product development programs and
competitors with rights to gene delivery technologies, as well as other
companies seeking to develop new treatments. We are aware of new product
development efforts, which may compete with BIOBYPASS angiogen, being pursued
by, among others, Chiron Corporation and Genentech, Inc. using therapeutic
proteins and by Collateral Therapeutics, Inc. using gene transfer. Competitors
or their collaborators may identify important new drug discovery, genes or gene
delivery technologies before us, or develop gene-based therapies that are more
effective than those developed by our corporate collaborators or us or obtain
regulatory approvals of their drugs more rapidly than our corporate
collaborators or us. We expect that competition in this field will intensify.
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We are aware of products under development or manufactured by competitors that
are used for the prevention or treatment of diseases we have targeted for
product development. For example, some companies are evaluating laser-based
devices as an approach to improve blood flow in patients with coronary artery
disease. Various companies are developing biopharmaceutical products that
potentially compete with our product candidates. These include Introgen
Therapeutics, Inc. and Schering-Plough Corporation, which are developing
adenoviral vectors to treat cancer, and Cardiogene AG, which is developing
gene-based therapies to produce nitric oxide at the site of blood vessel damage.
In addition, Alcon Laboratories, Inc. is developing inhibitors of blood vessel
growth to treat macular degeneration and diabetic retinopathy. Some of these
product candidates are in clinical development.
We believe that our competitive success will be based on the efficacy and safety
of our products, our ability to create and maintain scientifically advanced
technology, attract and retain skilled scientific and management personnel,
obtain patents or other protection for our products and technology, obtain
regulatory approvals and manufacture and successfully market our products either
independently or through outside parties. We will rely on corporate
collaborators for support of some product candidates and enabling technologies
and intend to rely on corporate collaborators for the development, manufacturing
and marketing of some future product candidates. Generally, our strategic
alliance agreements do not preclude the corporate collaborator from pursuing
development efforts utilizing approaches distinct from that, which is the
subject of the alliance. Our product candidates, therefore, may be subject to
competition with a potential product under development by a corporate
collaborator.
MANUFACTURING AND SUPPLY
We currently rely on third-party manufacturers for current Good Manufacturing
Practice, or cGMP, production of our product candidates for clinical purposes.
We have a research and development facility and have established laboratories
and staff to support the non-cGMP production and process development of more
advanced manufacturing processes and product characterization methods for our
product candidates. We believe that much of the production and assay technology
that has been developed for BIOBYPASS angiogen is suitable for our other product
development programs. Warner-Lambert has provided funding to us to develop a
production process and testing methods suitable for Phase III clinical trial
manufacturing. Warner-Lambert is responsible for the manufacture of BIOBYPASS
angiogen for clinical and commercial use in its territories under the terms of
our collaboration agreement. We have transferred our production and assay
technology to Warner-Lambert's newly constructed pilot manufacturing facility in
Dublin, Ireland.
We intend to continue developing our own product development and manufacturing
capability while utilizing third-party contractors where we lack sufficient
internal capability. This effort will require significant resources and will be
subject to ongoing government approval and oversight.
We currently have only one supplier for certain of our manufacturing components,
including components necessary for BIOBYPASS angiogen. Currently, we procure raw
materials, known as resins, for our product purification and testing methods
from Applied Biosystems. We also procure nutrients used to support the growth of
microorganisms or other cells from JRH Biosciences, Inc.
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However, we have plans in place to develop multiple suppliers for all critical
supplies before the time we would put any of our product candidates into
commercial production.
MARKETING AND SALES
We continue to explore opportunities for corporate alliances and partners to
help develop, commercialize and market our products, although we are prepared to
develop and commercialize each product candidate independently, if necessary.
Our strategy is to enter into collaborative arrangements with pharmaceutical and
other companies for development, manufacturing, marketing and sales of our
products that will require broad marketing capabilities and overseas marketing.
These collaborators are generally expected to be responsible for funding or
reimbursing all or a portion of the development costs, including the costs of
clinical testing necessary to obtain regulatory clearances and for commercial
scale manufacturing, in exchange for rights to market specific products in
particular geographic territories. We licensed our rights for the development
and commercialization of BIOBYPASS angiogen for the treatment of coronary artery
disease and peripheral vascular disease on a worldwide basis, excluding Asia, to
Warner-Lambert in July, 1997.
We presently have all rights to TNFerade, PEDF product candidates and GENSTENT
as well as BIOBYPASS(R) angiogen in Asia and other disease indications not
covered under the Warner-Lambert collaboration. We have initiated Phase I
clinical trials with TNFerade and are currently conducting preclinical
development studies for the PEDF product candidates and GENSTENT. These
activities should provide useful data for these programs while preserving our
opportunities for commercialization, either alone or with a corporate partner.
We may, in the future, consider manufacturing or marketing certain products
directly and co-promoting certain products if we believe it is appropriate under
the circumstances.
GOVERNMENT REGULATION
REGULATION OF PHARMACEUTICAL PRODUCTS
The development, production and marketing of any pharmaceutical products
developed by us or our collaborators will be subject to regulations by the
United States and non-U.S. governmental authorities. In the United States, new
drugs are subject to extensive regulation under the Federal Food, Drug and
Cosmetic Act, and biological products are subject to regulation both under
provisions of that Act and under the Public Health Service Act. The FDA
regulates, among other things, the testing, manufacture, safety, effectiveness,
labeling, storage, record keeping, advertising and promotion of biologics and
new drugs. The process of obtaining FDA approval for a new product is costly and
time-consuming.
The steps required by the FDA before our proposed products may be marketed in
the United States include:
o preclinical tests;
o submission to the FDA of an Investigational New Drug Application, or
IND, which must become effective before human clinical trials may
commence;
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o adequate and controlled human clinical trials to establish the safety
and efficacy of the drug or biologic in our intended application;
o submission to the FDA of a New Drug Application, or NDA, for drugs, or
a Biologic License Application, or BLA, for biologics; and
o FDA approval of the NDA or BLA before any commercial sale or shipment
of the drug.
In addition to obtaining FDA approval for each product, each domestic
manufacturing establishment must be registered with the FDA, is subject to FDA
inspection and must comply with cGMP regulations. To supply products for use in
the United States, including clinical trials, non-U.S. manufacturing
establishments, including third-party facilities, must comply with cGMP
regulations and are subject to periodic inspection by the FDA or by
corresponding regulatory agencies in their home country under reciprocal
agreements with the FDA.
Preclinical studies may take several years to complete and there is no guarantee
that the FDA will permit an IND based on those studies to advance to clinical
testing. Clinical trials generally take two to five years to complete and are
typically conducted in three sequential phases, which often overlap. After the
completion of all three phases, if the data indicates that the drug or biologic
product is safe and effective, a NDA or BLA is filed with the FDA to approve the
marketing and commercial shipment of the drug. This process takes substantial
time and effort and the FDA may not accept the NDA or BLA for filing, and, even
if filed, the FDA might not grant approval. FDA approval of a NDA or BLA may
take up to two years and may take longer if substantial questions about the
filing arise.
In addition to regulatory approvals that must be obtained in the United States,
a drug product is also subject to regulatory approval in other countries in
which it is marketed. No drug product can be marketed in a country until the
regulatory authorities of that country have approved an appropriate application.
FDA approval does not assure approval by other regulatory authorities. In
addition, regulatory approval of prices is required in most countries other than
the United States. The pricing review period often begins after market approval
is granted.
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.
21
OUR EMPLOYEES
As of February 28, 2001, we had 84 full-time employees, 24 of whom hold
M.D. or Ph.D. degrees and 17 of whom hold other advanced degrees. Of our total
workforce, 65 are engaged in research and development activities and 19 are
engaged in business development, finance 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.
RISKS AND UNCERTAINTIES
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF NET LOSSES, AND WE EXPECT TO CONTINUE TO INCUR NET LOSSES
AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY
We have incurred net losses in each year since our inception in December 1992,
including a net loss of $7.8 million for the year ended December 31, 2000. As of
December 31, 2000, we had an accumulated deficit of approximately $50.7 million.
We are unsure if or when we will become profitable. The size of our net losses
will depend, in part, on the growth rate of our revenues and the level of our
expenses.
We derive substantially all of our revenues from payments from corporate
collaborations, and will continue to do so for the foreseeable future. We expect
that it will be several years, if ever, before we will recognize revenue from
product candidate sales or royalties. A large portion of our expenses is fixed,
including expenses related to facilities, equipment and personnel. In addition,
we expect to spend significant amounts to fund research and development and to
enhance our core technologies. As a result, we expect that our operating
expenses will increase significantly over the next several years and,
consequently, we will need to generate significant additional revenue to achieve
profitability. Even if we do achieve profitability, we may not be able to
sustain or increase profitability on a consistent basis.
WE WILL LIKELY NEED TO RAISE ADDITIONAL FUNDS IN THE FUTURE. IF WE ARE UNABLE TO
OBTAIN THE FUNDS NECESSARY TO CONTINUE OUR OPERATIONS, WE MAY BE REQUIRED TO
DELAY, SCALE BACK OR ELIMINATE ONE OR MORE OF OUR PRODUCT DEVELOPMENT OR
RESEARCH PROGRAMS
Our future capital requirements will be substantial. We believe that the net
proceeds from our initial public offering in December 2000 and the sale of the
shares to Warner-Lambert concurrent with our initial public offering and also
upon showing that we have established a process for the production of bulk
product for pivotal clinical studies, existing cash and short-term investments
and anticipated cash flow from our current corporate collaborations will be
sufficient to support our operations for approximately 24 months. We expect that
significant additional financing will be required in the future, which we may
seek to raise through public or private equity offerings, debt financing,
additional strategic alliances and licensing arrangements or some combination of
these financing alternatives. Additional financing may not be available to us
when needed, or it may be available only on terms unfavorable to us. To the
extent that we raise additional capital by issuing equity or convertible
securities, the ownership of existing stockholders would be diluted. If we
cannot find
22
adequate financing when needed, we may be required to significantly curtail one
or more of our research and development programs or to obtain funds through
agreements with corporate collaborators or others that may require us to
surrender rights to some of our technologies or potential product opportunities,
or to grant licenses on terms that are not favorable to us, any of which could
negatively impact our operations and prevent us from achieving our business
objectives.
OUR QUARTERLY REVENUES AND RESULTS OF OPERATIONS FLUCTUATE AND ARE DIFFICULT TO
PREDICT, AND, IF OUR RESULTS ARE BELOW THE EXPECTATIONS OF PUBLIC MARKET
ANALYSTS AND INVESTORS, THE PRICE OF OUR COMMON STOCK MAY DECLINE
Our quarterly revenues and operating results have fluctuated significantly in
the past and are likely to do so in the future. These fluctuations could cause
our stock price to fluctuate significantly or decline. If revenue in a
particular period does not meet expectations, we may not be able to adjust
significantly our level of expenditures in such period, which would have an
adverse effect on our operating results. We believe that quarterly comparisons
of our financial results will not necessarily be a meaningful indication of
future performance. Given these factors, in some future quarter or quarters our
operating results may be below the expectations of public market analysts and
investors. In such event, the price of our common stock could be materially and
adversely affected.
WE ARE AN EARLY STAGE COMPANY DEPLOYING UNPROVEN TECHNOLOGIES, AND WE MAY NEVER
BE ABLE TO DEVELOP, GET REGULATORY APPROVAL OF OR MARKET ANY OF OUR PRODUCT
CANDIDATES
Gene-based therapy is a new and rapidly evolving medical approach, which has not
been shown to be effective on a widespread basis. Biotechnology and
pharmaceutical companies have successfully developed and commercialized only a
limited number of gene-based products to date. In addition, no gene therapy
product has received regulatory approval in the United States or
internationally. We also have only limited data relating to the safety and
effectiveness of our product candidates or delivery systems. To date, none of
our product candidates has been approved for sale in the United States or
elsewhere. Our lead product candidate, BIOBYPASS angiogen, is in Phase II
clinical trials. We may be unable to develop products or delivery systems that:
o prove to be safe and effective;
o meet applicable regulatory standards;
o are capable of being manufactured at reasonable costs;
o do not infringe the intellectual property rights of third parties;
o are superior to products offered by third parties; or
o can be marketed successfully.
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
23
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 products. We may be unable to successfully select those
genes with the most potential for commercial development.
WE ARE RELYING ON OUR COLLABORATIVE RELATIONSHIP WITH WARNER-LAMBERT TO DEVELOP
AND COMMERCIALIZE OUR BIOBYPASS ANGIOGEN; IF WARNER-LAMBERT TERMINATES ITS
AGREEMENT WITH US, WE MAY NOT BE ABLE TO CONTINUE TESTING AND DEVELOPING
BIOBYPASS ANGIOGEN
We entered into a corporate collaboration with Warner-Lambert to conduct
research, development, marketing, commercialization and some manufacturing
activities relating to gene-based product candidates incorporating the VEGF gene
for use in forming new blood vessels to treat insufficient blood flow in the
vessels of the heart and legs.
As a result, we are substantially dependent on Warner-Lambert for the
continued development, funding, and commercial success of any of our
therapeutic angiogenesis product candidates, including BIOBYPASS angiogen. In
June 2000, Pfizer Inc. acquired Warner-Lambert, and Warner-Lambert became a
wholly-owned subsidiary of Pfizer. Because of the acquisition, however, our
relationship with the new combined company may not be as strong as our
relationship with Warner-Lambert was in the past. Pfizer could cause
Warner-Lambert to devote fewer resources to the research, development,
manufacturing and commercialization of the product candidates that are the
subject of our collaboration. In addition, Pfizer could cause Warner-Lambert
to change the nature of the BIOBYPASS program.
As previously announced in January 2001, Warner-Lambert terminated the final
(fifth) year of the preclinical program under our collaboration agreement.
The clinical development of BIOBYPASS(R) angiogen, currently in Phrase II
trials for the treatment of coronary artery disease and peripheral vascular
disease, continues. Warner-Lambert may terminate the development of a
collaboration product for safety or efficacy concerns. It may also terminate
the agreement for breach.
This collaboration accounted for approximately 96% of our revenues in 2000. In
addition, payments from Warner-Lambert are expected to constitute a substantial
portion of our revenues for the next several years. If Warner-Lambert were to
terminate its agreement with us or otherwise fail to conduct its collaborative
activities successfully and in a timely manner, the clinical development or
commercialization of BIOBYPASS angiogen, or any other potential therapeutic
angiogenesis product candidates being developed in collaboration with
Warner-Lambert, could be delayed or terminated.
WE HAVE ENCOUNTERED DELAYS IN ENROLLING PATIENTS IN OUR PHASE II CLINICAL
STUDIES AND MAY ENCOUNTER FURTHER DIFFICULTIES IN OUR BIOBYPASS ANGIOGEN
CLINICAL TRIALS, WHICH MAY DELAY OR PRECLUDE THE COMMERCIAL USE OF BIOBYPASS
ANGIOGEN
We have begun Phase II clinical trials of BIOBYPASS angiogen for the treatment
of insufficient blood flow in the vessels of the heart and the legs. In order to
commercialize BIOBYPASS angiogen for these diseases or other indications, we
must obtain regulatory approvals for each indication. To obtain regulatory
approvals, we must, among other requirements, complete clinical
24
trials showing that BIOBYPASS angiogen is safe and effective for a particular
indication. Current or future clinical trials may show that BIOBYPASS angiogen
is not safe or effective. We have encountered some delays to date in enrolling
patient candidates for clinical trials. Any future delays or difficulties we
encounter in our BIOBYPASS angiogen clinical trials may delay or preclude the
commercialization of BIOBYPASS angiogen, which may negatively affect our
operations and cause our stock price to decline, perhaps significantly. In
addition, we or the FDA might delay or halt any of our clinical trials of
BIOBYPASS angiogen at any time for various reasons, including:
o presence of unforeseen adverse side effects of BIOBYPASS angiogen or
its delivery system;
o death of patients during a clinical trial, even though those deaths
may not have been caused by BIOBYPASS angiogen;
o BIOBYPASS angiogen's failure to be more effective than current
therapies;
o BIOBYPASS angiogen's failure to be effective at all;
o longer than expected time required to determine whether BIOBYPASS
angiogen is effective;
o failure to enroll a sufficient number of patients in our clinical
trials; or
o our failure to produce sufficient quantities of BIOBYPASS angiogen to
complete the trials.
WE HAVE NOT INITIATED CLINICAL TRIALS FOR ALL OUR PRODUCT CANDIDATES, AND IF WE
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 risks of failure involved in developing therapies based on new
technologies. We will need to conduct significant additional research and animal
testing, referred to as preclinical testing, before any of our product
candidates can advance to clinical trials. It may take us many years to complete
preclinical testing and clinical trials, and failure could occur at any stage of
testing. Acceptable results in early testing or trials may not be repeated
later. Not all products in preclinical testing or early stage clinical trials
will become approved products. Before we can file applications with the FDA for
product approval, we must show that a particular product candidate is safe and
effective. Our failure to adequately show the safety and efficacy of our product
candidates would prevent FDA approval of our product candidates. Our product
development costs will increase if we experience delays in testing or regulatory
approvals or if we need to perform more or larger clinical trials than planned.
If the delays are significant, they could negatively affect our financial
results and the commercial prospects for our product candidates.
25
OUR ABILITY TO DEVELOP, OBTAIN REGULATORY APPROVAL OF AND COMMERCIALIZE OUR
POTENTIAL PRODUCTS DEPENDS ON COLLABORATIONS WITH OTHER COMPANIES. IF WE ARE
UNABLE TO RENEW EXISTING COLLABORATIONS AND FIND NEW COLLABORATORS IN THE
FUTURE, WE MAY NOT BE ABLE TO DEVELOP OUR TECHNOLOGIES OR PRODUCTS
Since we do not currently have the resources necessary to develop and
commercialize potential products that may result from our technologies, or the
resources to complete any approval processes that may be required for these
products, we enter into collaborative agreements to develop, obtain regulatory
approval of and commercialize products. We have entered into collaborative
agreements with other companies to fund the development of products for specific
purposes. These contracts will expire after a fixed period of time. For example,
we have entered into a collaboration agreement with the Warner-Lambert Company
to research, develop and commercialize gene-based products incorporating the
VEGF gene for the treatment of insufficient blood flow in vessels of the heart
and legs. Under the agreement, Warner-Lambert's research and development funding
obligations to us extend through July 2001. We have also established a
collaboration with Fuso Industries, Ltd. to conduct research and to identify,
evaluate and develop gene therapy products for the treatment of cancer. This
agreement expires in 2002. Please refer to "Business--Our Collaborative
Relationships" for more information about these agreements. If our
collaborations are not renewed or if we do not enter into new collaborative
agreements, we may not be able to develop our technologies and we may be unable
to commercialize our products.
We cannot control the resources that any collaborator may devote to our
products. Our present or future collaborators may not perform their obligations
as expected. These collaborators may breach or terminate their agreements with
us or otherwise fail to conduct their collaborative activities successfully and
in a timely manner. In addition, our collaborators may elect not to develop
products arising out of our collaborative arrangements or to devote sufficient
resources to the development, regulatory approval, manufacture, marketing or
sale of these products. If any of these events occur, we may not be able to
develop our technologies or commercialize our products.
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. Any conflict with our
collaborators could reduce our ability to obtain future collaboration agreements
and negatively impact our relationship with existing collaborators. A conflict
could also lead to delays in collaborative research, development, regulatory
approval or commercialization of various products or could require or result in
litigation or arbitration, which would be time consuming and expensive 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; THIS COULD NEGATIVELY AFFECT
OUR ABILITY TO DEVELOP PRODUCTS AND, ULTIMATELY, FROM ACHIEVING A CONTINUING
SOURCE OF REVENUES
Some of our corporate or academic collaborators are conducting multiple product
development efforts within each disease area that is the subject of the
collaboration with us. Generally, we have agreed not to conduct independently or
with any third party any research that is competitive with
26
the research conducted under our collaborations. Therefore, our collaborations
may have the effect of limiting the areas of research that we may pursue, either
alone or with others. 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. For
example, under our 1997 collaboration agreement with Warner-Lambert, both
Warner-Lambert and GenVec are restricted in commercializing products for the
treatment of coronary artery disease and peripheral vascular disease outside of
our collaboration that are similar to the products developed within our
collaboration. However, Warner-Lambert has and continues to develop and sell
products for the treatment of cardiovascular disease that might compete with or
decrease the medical need for products developed within our collaboration. In
addition, competing products, either developed by the collaborators or to which
the collaborators have rights, may result in their withdrawal of support for our
product candidates.
Generally under our academic collaborations, we retain the right to exclusively
license any technologies developed using funding we provided. If we elect to not
license a particular technology, the academic collaborator is typically free to
use the technology for any purpose, including the development and
commercialization of products that might compete with our product.
BECAUSE OUR COLLABORATORS OR WE MUST OBTAIN REGULATORY APPROVAL TO MARKET OUR
PRODUCTS IN THE UNITED STATES AND NON-U.S. JURISDICTIONS, WE CANNOT PREDICT
WHETHER OR WHEN WE WILL BE PERMITTED TO COMMERCIALIZE OUR PRODUCTS
The pharmaceutical industry is subject to stringent regulation by a wide range
of authorities. We cannot predict whether our collaborators or we will obtain
regulatory approval for any product we develop. No one can market a
pharmaceutical product in the United States until it has completed rigorous
preclinical testing and clinical trials of the product and an extensive
regulatory approval process implemented by the FDA. To date, neither the FDA nor
any other regulatory agency has approved a gene therapy product for sale in the
United States or internationally. 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 must submit to and receive
approval from the FDA of an Investigational New Drug application. Clinical
trials are subject to oversight by Institutional Review Boards and the FDA.
Clinical trials are also subject to:
o informed consent;
o good clinical practices;
o continuing FDA oversight;
o potentially large numbers of test subjects; and
o potential suspension by us, our collaborators or the FDA at any time
if it is believed that the subjects participating in these trials are
being exposed to unacceptable health risks or
27
if the FDA finds deficiencies in the Investigational New Drug
application or the conduct of these trials.
We may encounter delays or rejections in the regulatory approval process because
of additional government regulation from future legislation or administrative
action or changes in FDA policy during the period of product development,
clinical trials and FDA regulatory review. 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 shown
through clinical trials to be safe and effective. The FDA also strictly
regulates promotion and labeling after approval. Outside the United States, our
ability to market a product is contingent upon receiving clearances from the
appropriate regulatory authorities. This non-U.S. regulatory approval process
includes all of the risks associated with FDA clearance described above.
IF OUR COLLABORATORS OR WE ARE UNABLE TO MANUFACTURE OUR PRODUCTS IN SUFFICIENT
QUANTITIES OR ARE UNABLE TO OBTAIN REGULATORY APPROVALS FOR OUR MANUFACTURING
FACILITY, WE MAY BE UNABLE TO MEET DEMAND AND LOSE POTENTIAL REVENUES
Completion of our clinical trials and commercialization of our product
candidates require access to, or development of, facilities to manufacture a
sufficient supply of our product candidates. We have limited experience
manufacturing any of our proposed products in the volumes that will be necessary
to support large-scale clinical trials or commercial sales. We have transferred
our production and assay technology to Warner-Lambert's newly constructed pilot
manufacturing facility in Dublin, Ireland, in connection with Warner-Lambert's
obligation to manufacture BIOBYPASS angiogen. If we or our collaborators are
unable to manufacture our product candidates in clinical or, when necessary,
commercial quantities, then we will need to rely on third-party manufacturers to
manufacture compounds for clinical and commercial purposes.
These third-party manufacturers must receive FDA approval before they can
produce clinical material or commercial product. Our products may be in
competition with other products for access to these facilities and may be
subject to delays in manufacture if third parties give other products greater
priority than ours. In addition, we may not be able to enter into any necessary
third-party manufacturing arrangements on acceptable terms, or on a timely
basis. There are very few contract manufacturers who currently have the
capability to produce our proposed products, and the inability of any of these
contract manufacturers to deliver our required quantities of product candidates
timely and at commercially reasonable prices would negatively affect our
operations.
Before our collaborators or we can begin commercially manufacturing any of our
product candidates, our collaborators or we must obtain regulatory approval of
our manufacturing facility and process. Manufacturing of our proposed products
must comply with the FDA's current Good Manufacturing Practices requirements,
commonly known as cGMP, and non-U.S. regulatory requirements. The cGMP
requirements govern quality control and documentation policies and procedures.
In complying with cGMP and non-U.S. regulatory requirements, we will be
obligated to expend time, money and effort in production, record keeping and
quality control to assure that
28
the product meets applicable specifications and other requirements. Our
collaborators or we must also pass a pre-approval inspection before FDA
approval. If our collaborators or we fail to comply with these requirements, our
product candidates would not be approved. If our collaborators or we failed to
comply with these requirements after approval, we would be subject to possible
regulatory action and may be limited in the jurisdictions in which we are
permitted to sell our products. The FDA and non-U.S. regulatory authorities also
have the authority to perform unannounced periodic inspections of our
manufacturing facility to ensure compliance with cGMP and non-U.S. regulatory
requirements.
We intend to develop our own manufacturing capability, which will require
significant resources and will be subject to ongoing government approval and
oversight. Our efforts may not be successful.
IF SUCCESSFUL LARGE-SCALE MANUFACTURING OF GENE-BASED THERAPIES IS NOT POSSIBLE,
WE MAY BE UNABLE TO MANUFACTURE ENOUGH OF OUR PRODUCT CANDIDATES TO ACHIEVE
REGULATORY APPROVAL OR MARKET OUR PRODUCTS
Very few companies have showed successful large-scale manufacturing of
gene-based therapy products, and it is anticipated that significant process
development changes will be necessary for the commercial process. We may be
unable to manufacture commercial-scale quantities of gene-based therapy
products, or receive appropriate governmental approvals on a timely basis or at
all. Failure to successfully manufacture or obtain appropriate government
approvals on a timely basis would prevent us from achieving our business
objectives.
WE MAY EXPERIENCE DIFFICULTIES OR DELAYS IN PRODUCT MANUFACTURING, WHICH ARE
BEYOND OUR CONTROL AND COULD HARM OUR BUSINESS, BECAUSE WE RELY ON THIRD-PARTY
MANUFACTURERS
We currently expect to produce our product candidates through third-party
manufacturers. Problems with any manufacturing processes could result in product
defects, which could require us to delay shipment of products or recall products
previously shipped. In addition, any prolonged interruption in the operations of
our or a third party's manufacturing facilities could result in the cancellation
of shipments. A number of factors could cause interruptions, including equipment
malfunctions or failures, or damage to a facility due to natural disasters or
otherwise. Because our manufacturing processes are or are expected to be highly
complex and subject to a lengthy FDA approval process, alternative qualified
production capacity may not be available on a timely basis or at all.
Difficulties or delays in our manufacturing could increase our costs and damage
our reputation.
The manufacture of pharmaceutical products can be an expensive, time-consuming,
and complex process. Manufacturers often encounter difficulties in scaling-up
production of new products, including problems involving the transfer of
manufacturing technology, production yields, quality control and assurance, and
shortages of personnel. Delays in formulation and scale-up to commercial
quantities could result in additional expense and delays in our clinical trials,
regulatory submissions and commercialization.
29
WE RELY ON ONLY ONE SUPPLIER FOR SOME OF OUR MANUFACTURING MATERIALS. ANY
PROBLEMS EXPERIENCED BY ANY OF THESE SUPPLIERS COULD NEGATIVELY AFFECT 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. Currently, we procure raw materials, known as
resins, for our product purification and testing methods from Applied
Biosystems. We also obtain nutrients we use to support the growth of
microorganisms or other cells from JRH Biosciences, Inc. Any significant problem
experienced by one of our sole-source 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. 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
CANDIDATE'S TARGET, AND WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY
We compete with pharmaceutical and biotechnology companies that are pursuing
other forms of treatment for the diseases BIOBYPASS angiogen and our other
product candidates target. We may also face competition from companies that may
develop competing technology internally or acquire it from universities and
other research institutions. As these companies develop their technologies, they
may develop proprietary positions, which may prevent or limit our product
commercialization efforts.
Some of our competitors are established companies with greater financial and
other resources than we have. We expect that competition in our business will
intensify. Our competitors may succeed in:
o identifying important genes or delivery mechanisms before us;
o developing products or product candidates earlier than we do;
o forming collaborations before we do, or precluding us from forming
collaborations with others;
o obtaining approvals from the FDA or other regulatory agencies for such
products more rapidly than we do;
o developing and validating manufacturing processes more rapidly than we
do;
o obtaining patent protection or other intellectual property rights that
would limit our ability to use our technologies or develop products;
or
o developing products that are safer or more effective than those we
develop or propose to develop.
30
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.
RISKS RELATED TO OUR INDUSTRY
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 biotechnology patent situation in the United States and other
countries is uncertain and is currently undergoing review and revision. Changes
in, or different interpretations of, patent laws in the United States 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-based
therapy, delivery systems, 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-based therapy products that are the
same as or similar to the subject matter of our patent applications. For
example, while we have pending patent applications pertaining to various types
of adenovectors that cannot reproduce themselves, adenovectors modified to alter
cell binding characteristics and special cell lines used to grow adenovectors,
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 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 United
States and other countries. In the event a company, institution or researcher
infringes upon our or our collaborators' patent rights, enforcing these rights
may be difficult and can be 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. Thus, for example, although we have an issued U.S. patent
broadly covering stocks of adenovectors that cannot reproduce themselves, our
competitors may find ways to get around this patent. In addition, our
competitors may legally challenge our patent and it may be held to be invalid.
In addition, various components used in developing gene-based therapy products,
such as particular genes, vectors, promoters, cell
31
lines and construction methods, used by others and 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, our
collaborators or we have decided not to pursue patent protection outside the
United States. Accordingly, our competitors could develop, and receive non-U.S.
patent protection for gene-based therapies or technologies for which our
collaborators or we have or are seeking U.S. patent protection. Our competitors
may be free to use these gene-based therapies or technologies outside the United
States in the absence of patent protection.
Where we believe patent protection is not appropriate we 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 of our
trade secrets. In addition, other companies or institutions may independently
develop substantially equivalent information and techniques.
IF OUR POTENTIAL PRODUCTS CONFLICT WITH INTELLECTUAL PROPERTY RIGHTS OF
COMPETITORS, UNIVERSITIES OR OTHERS, THEN WE MAY BE PREVENTED FROM DEVELOPING
THOSE PRODUCT CANDIDATES
Other companies and institutions have issued patents and have filed and 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-based
therapy products used in or similar to our product candidates and technologies.
For example, we are aware of issued patents and pending patent applications
relating to the delivery, including through the use of adenovectors, of
medically beneficial substances to the heart and other tissues, similar to our
BIOBYPASS angiogen, and special cell lines required for the production of
certain adenovectors, including a cell line we use in the production of our
BIOBYPASS angiogen. It could be alleged that our BIOBYPASS angiogen conflicts
with these patents. We also are aware of other issued patents and pending patent
applications that relate to various aspects of our product candidates and
systems, and it could be alleged that our product candidates conflict with these
patents. We have not conducted freedom to use patent searches on all aspects of
our product candidates or potential product candidates, and may be unaware of
relevant patents and patent applications of third parties. In addition, those
freedom to use patent searches that have been conducted may not have identified
all relevant issued patents or all relevant 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 instances, until issuance as patents.
An issued patent gives rise to a rebuttable presumption of validity under U.S.
law and the laws of some other countries. The holders of these or other patents
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
our ability 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. Since we have
32
concentrated our resources on developing only a limited numbers of products, the
inability to market one of our products would disproportionately affect us as
opposed to a competing company with many products in development.
We believe that there will be significant litigation in our industry regarding
intellectual property rights. Many of our competitors have 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 OUR RIGHT TO USE INTELLECTUAL PROPERTY WE LICENSE FROM OTHERS IS AFFECTED,
OUR ABILITY TO DEVELOP AND COMMERCIALIZE OUR PRODUCT CANDIDATES MAY BE HARMED
We rely, in part, on licenses to use some technologies that are material to
our business. For example, to create our product candidates, we combine our
vectors with genes intended to produce proteins. For our current product
candidates, we have secured licenses to use the VEGF(121), iNOS, TNF(alpha),
and PEDF genes. We do not own the patents that 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 to
prevent infringement of those 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 if we become insolvent. In
addition, some of our licenses require us to achieve specific milestones.
Our product candidates and potential product candidates will require several
components that may each be the subject of a license agreement. The cumulative
license fees and royalties for these components may make the commercialization
of these product candidates uneconomical.
ADVERSE EVENTS IN THE FIELD OF GENE THERAPY MAY NEGATIVELY AFFECT REGULATORY
APPROVAL OR PUBLIC PERCEPTION OF OUR PRODUCTS OR PRODUCT CANDIDATES
In September 1999 a patient undergoing gene therapy using an adenoviral vector
to deliver a therapeutic gene died as a result of an adverse reaction to the
treatment. This death was widely publicized. His family has since filed lawsuits
against his doctors and the University of Pennsylvania. Other patient deaths
have occurred in other gene-based clinical trials. These deaths and the
resulting publicity surrounding them, as well as any other serious adverse
events in the field of gene therapy that may occur in the future, may result in
greater governmental regulation of our product candidates and potential
regulatory delays relating to the testing or approval of our product candidates.
As a result of the incident in September 1999, the United States Senate has
commenced
33
hearings to determine whether additional legislation is required to protect
volunteers and patients who participate in gene therapy clinical trials.
Additionally, the National Institutes of Health and its advisory bodies
routinely review the field of gene therapy and issue reports on the adverse
events reported by investigators. In addition, the NIH director is considering a
proposal to establish a Gene Transfer Safety Assessment Board to review serious
adverse event reports, annual reports and other safety information in order to
assess toxicity and safety and report these findings at NIH Recombinant DNA
Advisory Committee (RAC) meetings. Likewise, the FDA is considering a proposed
rule to require submission of redacted INDs and required IND safety and annual
reports for the purpose of making this information public. Any increased
scrutiny could delay or increase the costs of our product development efforts or
clinical trials.
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 human
disease. 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 therapies and could cause a
decrease in the demand for any products we may develop.
WE MAY BE SUED FOR PRODUCT LIABILITY, WHICH COULD DAMAGE OUR REPUTATION AND
EXPOSE US TO UNANTICIPATED COSTS
We, alone or with our collaborators, may be held liable if any product our
collaborators or we develop, or any product which is made with the use or
incorporation of any of our technologies, causes injury or is found otherwise
unsuitable during product testing, manufacturing, marketing or sale. Regardless
of the merit or eventual outcome, product liability claims may result in:
o withdrawal of product candidates from our clinical trials;
o damage to our reputation;
o costs of litigation;
o substantial monetary awards to plaintiffs; and
o decreased demand for our products or product candidates.
Although we currently have and intend to maintain product liability insurance,
this insurance may become prohibitively expensive, or may not fully cover our
potential liabilities. Inability to obtain sufficient insurance coverage at an
acceptable cost or otherwise to protect against potential product liability
claims could prevent or inhibit the commercialization of products developed by
us or in collaboration with others. If we are sued for any injury caused by our
products or our products made in collaboration with others, our liability could
exceed our total resources.
34
WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR
BUSINESS; ANY 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 materials,
including chemicals and radioactive and biological materials, and also produce
hazardous waste products. Hazardous chemicals used in our processes include, but
are not limited to, flammable solvents such as methanol and ethanol, toxic
chemicals such as ethidium bromide and formaldehyde, and corrosive chemicals
such as acetic acid and sodium hydroxide. We also use several radioactive
compounds, including phosphorous-32, carbon-14, sulfur-35, phosphorous-33,
iodine-125, hydrogen-3, and chromium-51.
The hazardous biological material used in our research and development
activities 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.
Compliance with environmental laws and regulations may be expensive, and current
or future environmental regulations may impair our research, development or
production efforts.
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. However, we believe that we are currently in compliance
with all applicable environmental and occupational health and safety
regulations.
ITEM 2. PROPERTIES
We currently lease 42,900 square feet for our corporate offices and research and
development laboratories located at 65 West Watkins Mill Road in Gaithersburg,
Maryland. The lease expires on November 1, 2009. We have options to extend the
term of this lease for an additional fourteen years, through October 2023. We
believe that this facility is sufficient for our current needs. We have
additional space in our current facility to accommodate our anticipated growth
over the next several years.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
On November 15, 2000, prior to our initial public offering, we held a special
meeting of stockholders for the purposes of amending and restating our
certificate of incorporation and bylaws and approving certain employee and
director stock and incentive plans. At the special meeting, stockholders voted
and approved the following matters by the votes indicated:
- ----------------------------------------------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
- ----------------------------------------------------------------------------------------------------------------------
Amended and Restated Certificate of Incorporation 8,359,723 206 10,649
Amended and Restated ByLaws 8,358,961 968 10,649
2000 Employee Stock Purchase Plan 8,321,307 43,134 6,137
2000 Director Stock Option Plan 8,293,824 48,049 28,705
Amended and Restated 1993 Stock Incentive Plan 8,322,069 42,372 6,137
On November 20, 2000, our stockholders also approved, by written consent, a
proposal to reclassify each share of our Common Stock into one and one-half
shares of Common Stock. Holders of 6,387,349 shares, representing approximately
71% of our outstanding securities, approved this reclassification.
Prior to our initial public offering, holders of Common Stock and of our
Preferred Stock voted together as a single class on all matters. There were not
any broker non-votes because our securities were not publicly traded.
EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------------------------------------------------------------------------
NAME AGE PRESENT POSITION WITH THE REGISTRANT
--------------------------------------------------------------------------------------------------------------------
Paul H. Fischer, Ph.D..................... 51 President, Chief Executive Officer and Director
Jeffrey W. Church......................... 44 Chief Financial Officer, Treasurer and Corporate Secretary
C. Richter King, Ph.D..................... 46 Vice President, Research
Imre Kovesdi, Ph.D........................ 54 Vice President, Chief Scientific Officer
Henrik S. Rasmussen, M.D., Ph.D........... 42 Vice President, Clinical Operations and Regulatory Affairs
Thomas E. Smart........................... 37 Senior Vice President, Corporate Development
Grant A. Yonehiro......................... 37 Vice President, Commercial Operations
PAUL H. FISCHER, PH.D. has been our President and Chief Executive Officer and a
director since November 1996, and has served in various positions with us since
March 1995, including Executive Vice President and Chief Operating Officer and
Vice President of Research and Development. Before joining us, he was Executive
Vice President of Research and Development at
36
Aronex Pharmaceuticals, Inc., formerly Oncologix, Inc., a biotechnology company.
Dr. Fischer's previous experience included Manager, Cancer Research at Pfizer
Inc., a pharmaceutical company. Dr. Fischer received his B.S. in biology from
the University of Denver, his Ph.D. in pharmacology from the University of
California at San Francisco and performed post-doctoral research in pharmacology
at the Yale University School of Medicine and was an Associate Professor of
Human Oncology at the University of Wisconsin.
JEFFREY W. CHURCH has served as our Chief Financial Officer since August 1998.
From September 1997 to August 1998, Mr. Church served as Executive Vice
President and Chief Financial Officer of Biospherics, Inc., a telecommunications
and biotechnology company. From 1986 to August 1997, Mr. Church served in
various positions at Meridian Medical Technologies, Inc., formerly Survival
Technology, Inc., a medical device and drug delivery company, including
Controller and Senior Vice President of Finance and Chief Financial Officer.
From 1979 to 1986, Mr. Church was an Audit Manager at PriceWaterhouseCoopers
LLP. Mr. Church received his B.S. in accounting from the University of Maryland
and is a Certified Public Accountant.
C. RICHTER KING, PH.D. has served as our Vice President, Research since May
1999. From May 1998 to May 1999, Dr. King served as our Vice President, New
Products Research. From April 1995 to April 1998, Dr. King was an Associate
Professor of Biochemistry at Georgetown University Medical School's Lombardi
Cancer Research Center in Washington, D.C. From April 1992 to April 1995, Dr.
King was the Director of Drug Discovery at Aronex Pharmaceuticals, Inc.,
formerly Oncologix, Inc., a biotechnology company. Dr. King holds a Ph.D. in
biochemistry from Johns Hopkins University.
IMRE KOVESDI, PH.D. has served as our Vice President and Chief Scientific
Officer since April 1999. From September 1995 to April 1999, he served as our
Vice President of Discovery Research and from July 1993 to September 1995, he
served as our Director of Vector Biology. From 1987 to 1993, he led projects in
eukaryotic gene expression and neurotrophic factors at the Medical Research
Division of the American Cyanamid Company. Dr. Kovesdi received a B.S. in
electrical engineering from the University of British Columbia, a Ph.D. in
molecular biology from Simon Fraser University and did his post-doctoral
training at The Rockefeller University.
HENRIK S. RASMUSSEN, M.D., PH.D. has served as our Vice President of Clinical
Operations and Regulatory Affairs since April 1999. From 1994 to April 1999, Dr.
Rasmussen served as Vice President for Clinical Research/Senior Vice President
for Clinical Research and Regulatory Affairs at British Biotech in Annapolis,
Maryland. From 1989 to 1994, Dr. Rasmussen served in various positions at Pfizer
Central Research, including Global Study Director and Global Candidate Leader.
Dr. Rasmussen has been involved in drug development in a number of different
therapeutic areas, including cardiology, oncology, inflammation, acute care,
neurology and dermatology and has authored or co-authored over 120 scientific
papers and abstracts. Dr. Rasmussen received his M.D. and Ph.D. degrees from the
University of Copenhagen and spent four years practicing medicine in the fields
of cardiology, gastroenterology, infectious disease, immunology and rheumatology
at a major university hospital in Copenhagen.
37
THOMAS E. SMART joined us in March 1995 to lead our corporate development
function and currently serves as our Senior Vice President of Corporate
Development. Mr. Smart's previous experience included Director of Business
Development at Cell Genesys, Inc., a biotechnology company; various positions
within the Corporate Strategic Planning and Allied Business Group at G.D.
Searle, a pharmaceutical company; and Business Development Analyst at Genetics
Institute, a biotechnology company. Mr. Smart received his B.S. in the
biological sciences from Cornell University and his M.B.A. from the University
of Chicago.
GRANT A. YONEHIRO was named Vice President, Commercial Operations effective
January 1, 2001. From 1997 to 2000, he served as our Vice President, Product
Management. From March 1996 to April 1997, Mr. Yonehiro served as our Associate
Director of Corporate Development and from April 1997 to September 1997, he
served as our Director of Corporate Development. From January 1994 to March
1996, Mr. Yonehiro served as a Manager, Corporate Development for Cell Genesys,
Inc., a biotechnology company. Mr. Yonehiro received a Bachelor of
Individualized Studies from the University of Minnesota and his M.B.A. from the
University of California at Berkeley.
38
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Our common stock is traded in the over-the-counter market and is included for
quotation on the Nasdaq National Market under the symbol GNVC. Our common stock
began trading on December 12, 2000.
Set forth below is the range of high and low closing sale prices for our common
stock as reported on the Nasdaq National Market following the December 12, 2000
completion of our initial public offering. Prior to the initial public offering
on December 12, 2000, there was no established public trading market for our
common stock.
2000 HIGH LOW
---- ---- ---
Fourth Quarter $9.875 $9.50
As of February 28, 2001, there were approximately 118 holders of record of our
common stock. We have not paid any cash dividends since our inception and we do
not anticipate paying any cash dividends in the foreseeable future.
The Securities and Exchange Commission declared our Registration Statement on
Form S-1 (File No. 333-47408) relating to our common stock, $.001 par value per
share, effective on December 11, 2000. J.P. Morgan & Co., UBS Warburg LLC, and
A.G. Edwards & Sons, Inc. acted as representatives of the underwriters for our
initial public offering. We raised net proceeds of approximately $34.0 million
after deducting underwriters' discounts and commissions of $2.7 million and
other fees and expenses of $1.3 million. In connection with our initial public
offering, we did not make direct or indirect payments to (i) any of our
directors, officers, or their associates; (ii) any person owning 10 percent or
more of our equity securities, (iii) any affiliate of us, or (iv) any others.
Concurrently with our initial public offering, we also raised $5.0 million
through a private sale transaction of our common stock to Warner-Lambert as part
of the 1997 research development and collaboration agreement. We completed this
transaction in reliance on the exemption from registration afforded by Section
4(2) under the Securities Act of 1933, as amended.
Since completion of the public offering in December 2000, the net offering
proceeds have been invested in cash equivalents and short and long-term
investments. The cash equivalents consist of commercial paper having maturities
of less than one year. Our investment portfolio consists of investment grade
government agency notes, corporate bonds and certificates of deposit having
maturities of less than three years.
39
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected financial data for each of the years
in the five-year period ended December 31, 2000. The information below should be
read in conjunction with our financial statements and notes thereto included
elsewhere in this report and "Management Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Form 10-K. The
historical results are not necessarily indicative of results to be expected for
future periods.
--------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
IN THOUSANDS, EXCEPT PER SHARE DATA
SUMMARY STATEMENTS OF OPERATIONS:
Revenues:
Ongoing research and development support $698 $3,188 $6,750 $14,075 $8,835
Contract, license and milestone payments -- 2,500 3,000 2,875 5,050
----- ----- ----- ----- -----
Total revenues...................... 698 5,688 9,750 16,950 13,885
----- ----- ----- ----- -----
Operating expenses:
Research and development............... 5,896 8,085 10,592 14,198 15,356
General and administrative............. 3,915 4,031 5,903 5,278 6,912
----- ----- ----- ----- -----
Total operating expenses............ 9,811 12,116 16,495 19,476 22,268
----- ----- ----- ----- -----
Loss from operations...................... (9,113) (6,428) (6,745) (2,526) (8,383)
Other income, net......................... 496 263 398 607 534
----- ----- ----- ----- -----
Net loss.................................. $(8,617) $(6,165) $(6,347) $(1,919) $(7,849)
======= ======= ======= ======= =======
Basic and diluted net loss per share...... $(7.16) $(4.30) $(4.10) $(1.22) $(2.80)
======= ======= ======= ======= =======
Shares used in computing basic and diluted
net loss per share........................ 1,203 1,435 1,549 1,576 2,808
-----------------------------------------------------------------
AS OF DECEMBER 31,
-----------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
IN THOUSANDS
SUMMARY BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.............................. $7,725 $9,364 $8,919 $13,884 $39,790
Working capital.......................... 6,378 8,081 5,621 8,348 35,837
Total assets............................. 8,638 10,547 11,721 28,636 57,179
Long-term obligations, less current portion 158 47 -- 6,822 6,026
Deferred compensation.................... (974) (1,360) (836) (850) (5,063)
Accumulated deficit...................... (28,464) (34,630) (40,977) (42,896) (50,745)
Total stockholders' equity............... 6,864 4,144 5,280 11,931 44,316
40
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 "Business
- -- Risks and Uncertainties" 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, proprietary protection of our gene therapy products, and
their market success relative to alternative products.
OVERVIEW
We develop gene-based products that cause the production of therapeutic proteins
at the site of disease. We believe that local production of proteins over a
sustained period will allow the proteins to deliver their potential therapeutic
benefit while minimizing side effects. Our current areas of focus are
cardiovascular disease, particularly coronary artery disease and peripheral
vascular disease, oncology and ophthalmology. We are developing BIOBYPASS
angiogen as part of our collaboration with Warner-Lambert, under which we may
receive more than $100.0 million, excluding royalties, in license fees, research
and development funding, milestone payments and equity purchases. As of December
31, 2000, Warner-Lambert had paid us $60.3 million under this collaboration. The
following table summarizes actual payments received under our collaboration with
Warner-Lambert as of December 31, 2000.
- --------------------------------------------------------------------------------
ONGOING RESEARCH AND CONTRACT, LICENSE AND
DEVELOPMENT SUPPORT MILESTONE PAYMENTS
------------------------------- ----------------------
PROCESS LICENSE MILESTONE EQUITY
YEAR RESEARCH DEVELOPMENT(2) FEES(1) PAYMENTS PURCHASES TOTAL
---- -------- -------------- ------- -------- --------- -----
1997 $3,000,000 $-- $5,000,000 $2,000,000 $2,000,000 $12,000,000
1998 6,000,000 -- -- 2,000,000 -- 8,000,000
1999 5,500,000 6,250,000 3,750,000 -- 8,000,000 23,500,000
2000 4,500,000 3,000,000 -- 2,000,000 5,000,000 14,500,000
----------- ---------- ---------- ---------- ----------- -----------
Total as of
December 31, 2000 $19,000,000 $9,250,000 $8,750,000 $6,000,000 $15,000,000 $58,000,000
=========== ========== ========== ========== =========== ===========
(1) For financial reporting purposes, the $5.0 million license fee received in
July 1997 is being amortized over four years and the $3.75 million license
fee received in January 1999 is being amortized over two years based on the
terms of the sponsored research and development agreements. As of December
31, 2000, unearned revenue was $2.0 million.
(2) Excludes $1.6 million and $0.9 million in expense reimbursements recognized
in 1999 and 2000, respectively.
We have generated no product revenues and have funded our operations primarily
through the private placement of equity securities and the proceeds of our
corporate collaboration agreements. For more information about our collaboration
with Warner-Lambert, see "Business -- Our Collaborative Relationships."
41
Revenues from ongoing research and development support consist of
cost-reimbursement activities under our collaboration agreements. We recognize
collaborative research and development revenue from these activities as the
related expenses are incurred and when we have no future performance
obligations.
Contract, license and milestone payments consist of license fees and specific
performance-based milestone payments. We recognize contract and license revenue
when milestones are met and our specific performance obligations have been
satisfied in accordance with the terms of the respective agreements. Research
and development, contract, license and milestone revenue recognized in our
financial statements is not subject to repayment.
In accordance with Staff Accounting Bulletin 101, we have deferred recognition
of up-front contract or license payments received under our collaboration and
license agreements and are amortizing the related unearned revenues over the
terms of the collaboration agreements, generally ranging from two to four years.
During 1997 and 1999, we received $5.0 million and $4.1 million, respectively,
in upfront contract and license fees. Our results of operations included $1.0
million, $2.9 million and 3.0 million during the years ended 1998, 1999 and 2000
of amortization of these upfront contract and license fees. As of December 31,
2000, we have unearned revenue of $2.0 million, of which $1.9 million and $0.1
million will be amortized into income in 2001 and 2002, respectively.
Our results of operations for the years ended December 31, 1998 and 2000
included $2.0 million in milestone revenues recognized in each of these periods.
Our results of operations in the future may fluctuate based upon the timing and
progress of developmental efforts resulting in performance-based milestone
payments.
We expect our sources of revenue for the next several years to consist primarily
of payments under corporate collaborations and interest income. We will not
receive revenue from product sales until one or more of our product candidates
are commercialized. In order to accelerate product commercialization and finance
our research and development activities, we are currently engaged in and are
actively seeking collaborations with leading pharmaceutical and biotechnology
companies.
We have incurred operating losses each year since inception and, as of December
31, 2000, had an accumulated deficit of approximately $50.7 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 and other expenses related to our
product development and research programs. We expense our research and
development costs as they are incurred. General and administrative expenses
consist primarily of salaries and related expenses for executive, finance and
other administrative personnel, professional fees and other corporate expenses
including business development and general legal activities. We expect to incur
substantial additional operating losses for at least the next few years as a
result of increases in our expenses for research and development activities.
42
Our quarterly operating results will depend upon many factors. These factors
include variations in payments received or made by us under strategic alliances,
which include milestone payments, royalties, license fees and other revenues,
our ability to maintain and establish corporate collaborations and the amount
and timing of operating expenses relating to research and development,
preclinical testing and clinical trials. As a consequence, our quarterly
operating results have fluctuated in the past and are likely to do so in the
future.
Through December 31, 2000, we had recorded an aggregate of $9.1 million of
deferred compensation expense resulting from the granting of stock options to
employees, directors or consultants covering shares of our common stock, which
stock options had exercise prices below the fair value of the underlying common
stock at the date of their grant. Net of prior amortization and cancellations,
net deferred compensation of $5.1 million at December 31, 2000 will be amortized
over the vesting periods of the respective options, typically four years. We
anticipate recording total compensation charges resulting from the amortization
of the deferred compensation expense recorded as of December 31, 2000
approximately as follows: $1.5 million in 2001, $1.4 million in 2002, $1.3
million in 2003 and $0.9 million in 2004. During 2000 the Company amortized $1.1
million of deferred compensation expense.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999
REVENUES:
ONGOING RESEARCH AND DEVELOPMENT SUPPORT. Ongoing research and development
support decreased 37% to $8.8 million in 2000 from $14.1 million in 1999 as a
result of scheduled reductions in research and development support under our
collaboration agreement with Warner-Lambert. Revenue from ongoing research and
development support in 1999 included additional revenues resulting from an
amendment to the collaboration agreement with Warner-Lambert effective January
1, 1999. Pursuant to the amendment, Warner-Lambert received the right, at its
expense, to manufacture collaboration products for clinical and commercial sales
worldwide, excluding Asia. Before the amendment, we were expending funds to
develop manufacturing capability for which we were not entitled to
reimbursement. In connection with the amendment, we are entitled to receive
additional payments from Warner-Lambert for process development support
activities. These payments aggregated $6.3 million in 1999, which included $1.3
million for reimbursement of expenditures incurred by us before 1999. Payments
for process development support in 2000 totaled $3.0 million during which time
we successfully showed the establishment of a manufacturing process suitable for
clinical manufacturing. Over 94% of our ongoing research and development support
in 2000 and 1999 were earned under our collaboration agreement with
Warner-Lambert.
CONTRACT, LICENSE AND MILESTONE PAYMENTS. Recognition of contract, license and
milestone payments increased to $5.1 million in 2000 from $2.9 million in 1999.
Revenues in 2000 consisted primarily of $3.1 million from the amortization of
upfront contract and license fees and a
43
$2.0 million technology success fee related to the development of a production
process and testing methods suitable for Phase III clinical trial manufacturing.
Revenues in 1999 consisted of amortization of upfront contract and license fees.
OPERATING EXPENSES:
RESEARCH AND DEVELOPMENT. Research and development expenses increased 8% to
$15.4 million in 2000 from $14.2 million in 1999. The increase in our research
and development activities related primarily to internal product development
programs including the initiation of clinical development of TNFerade and
preclinical development efforts for our PEDF product and GENSTENT programs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 31% to
$6.9 million in 2000 from $5.3 million in 1999. The increase was primarily
attributable to higher levels of expenditures related to legal and consulting
fees associated with our new product development initiatives, including
acquiring and maintaining our intellectual property portfolio, higher operating
expenses related to our new facility and higher compensation charges resulting
from the amortization of the deferred compensation expense from stock options
granted.
OTHER INCOME. Other income, consisting primarily of interest income, net of
interest expense, decreased 12% to $534,000 in 2000 from $607,000 in 1999. The
$73,000 decrease was due to increased interest expense related to the financing
of our new facility and lower levels of cash available for investing as compared
to 1999.
YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES:
ONGOING RESEARCH AND DEVELOPMENT SUPPORT. Ongoing research and development
support increased 107% to $14.1 million in 1999 from $6.8 million in 1998 due to
the execution of an amendment to our collaboration agreement with Warner-Lambert
referred to above. In 1999, we recognized $6.3 million in the form of ongoing
development support funding under the amendment, which included $1.25 million
for reimbursement of process development expenditures incurred by us before the
effective date of the amendment. Over 94% of our ongoing research and
development support in 1999 and over 88% in 1998 were earned under our
collaboration agreement with Warner-Lambert.
CONTRACT, LICENSE AND MILESTONE PAYMENTS. Recognition of contract, license and
milestone payments remained relatively constant at $2.9 million in 1999 and $3.0
million in 1998. Revenues of $2.9 million in 1999 resulted from the amortization
of upfront contract and license fees. Revenues in 1998 consisted of $1.0 million
of amortization of upfront contract and license fees and a $2.0 million
milestone payment related to the filing of our Investigational New Drug
application for the peripheral vascular disease indication of our BIOBYPASS
angiogen project.
44
OPERATING EXPENSES:
RESEARCH AND DEVELOPMENT. Research and development expenses increased 34% to
$14.2 million in 1999 from $10.6 million in 1998. The increase of $3.6 million
was attributed to continued growth in our research and development activities
related to our therapeutic angiogenesis program, other product development
programs and research activities relating to our core adenovector systems.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased 11% to
$5.3 million in 1999 from $5.9 million in 1998. The decrease was primarily
attributable to the one-time expense of $1.2 million for registration and filing
fees, printing expenses and legal and accounting fees and expenses associated
with a proposed equity offering in 1998 which was withdrawn due to market
conditions, partially offset by increases in salaries and benefits as we
expanded our management team, and legal fees associated with acquiring and
maintaining our intellectual property portfolio.
OTHER INCOME. Other income, consisting primarily of interest income, net of
interest expense, increased 53% to $607,000 in 1999 from $398,000 in 1998. The
$209,000 increase was due to increases in our cash available for investing as a
result of our convertible Series F preferred stock equity financing in December
1998 and payments received under the amendment to our collaboration agreement
with Warner-Lambert in the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
In December 2000 we raised $34.0 million, net of underwriters discounts and
commissions of $2.7 million and offering costs of $1.3 million, from our initial
public offering. Concurrent with the closing of this offering, we sold $5.0
million of our common stock to Warner-Lambert in a private transaction as part
of the 1997 research, development and collaboration agreement.
As of December 31, 2000, we held $39.8 million in cash and cash equivalents and
short-term investments, as compared to $13.9 million as of December 31, 1999.
Net cash used in operating activities was approximately $9.0 million in 2000.
Net cash used in investing activities was approximately $4.4 million, which
consisted principally of the purchases of investment securities and property and
equipment offset by the proceeds from the sale of investment securities.
We have contracted with various academic institutions and research
organizations to perform research and development activities. We have
commitments to pay up to approximately $1.6 million and $0.4 million related
to these contracts for the years ended 2001 and 2002, respectively.
As of December 31, 2000, our net operating loss carry forwards were
approximately $43.4 million. If not utilized, our loss carry forwards will
expire at various dates through 2020. Utilization of our net operating losses to
offset future taxable income, if any, may be substantially limited due to
"change of ownership" provisions in the Internal Revenue Code of 1986. We have
not yet determined the extent to which limitations may have been triggered as a
result of past or future financings, including our initial public offering. This
annual limitation may result in the expiration of certain net operating losses
before their use.
45
We anticipate that annual expenditures for research and development, including
clinical trials, product development and preclinical studies, and general and
administrative activities will increase significantly in future years. In the
future, our liquidity and capital resources will depend upon, among other
things, the level of our research, development, clinical, regulatory and
marketing expenses and funding from collaborations.
As of December 31, 2000, we held $46.5 million in cash and investments. We
believe that our cash reserves and anticipated cash flow from our current
corporate collaborations will be sufficient to support our operations for
approximately 24 months. Without new corporate collaborations, we would use
approximately $37.5 million in capital over the next two years, including
approximately $3.0 million for capital expenditures related to expansion of
facilities and internal research and development capabilities. We expect that
significant additional financing will be required in the future, which we may
seek to raise through public or private equity offerings, debt financing,
additional strategic alliance and licensing arrangements or some combination of
these financing alternatives.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended, is currently
effective January 1, 2001. The standard requires that all derivative instruments
be recorded on the balance sheet at fair value. Gains and losses on derivatives
designated as cash flow hedges will be recorded in other comprehensive income
and will be reclassified to earnings in a manner that matches the timing of the
earnings impact of the hedged transactions. The ineffective portion of the
hedges will be recognized in earnings.
Management believes adoption of this standard and related transaction
adjustments will not have a material impact on the Company's consolidated
financial position, results of operations or cash flows. In accordance with the
transaction provisions of SFAS 133, the Company recorded on January 1, 2001, a
net-of-tax cumulative-effect-type adjustment of $167,000 in accumulated other
comprehensive income.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The primary objective of our investment activities is to preserve our capital
until it is required to fund operations while at the same time maximizing the
income we receive from our investments without significantly increasing risk. As
of December 31, 2000, we had cash and cash equivalent and short-term and
long-term investments of $46.5 million as follows:
Cash and cash equivalents $ 33.6 million
Short-term investments $ 6.2 million
Long-term investments $ 6.7 million
Our exposure to market risk is confined to our cash and cash equivalents, which
consist of commercial paper having maturities of less than one year, and our
investment portfolio. We
46
maintain an investment portfolio of investment grade government agency notes,
corporate bonds and certificates of deposit. The securities in our investment
portfolio are not leveraged, are classified as available-for-sale and are, due
to their predominantly short-term nature, subject to minimal interest rate risk.
We currently do not hedge interest rate exposure. As of December 31, 2000,
securities totaling $6.2 million mature in 2001, $1.9 million mature in 2002 and
$4.8 million mature in 2003. While we do not believe that an increase in market
rates would have any significant negative impact on the realizable value of our
investment portfolio, changes in interest rates affect the investment income we
earn on our investments and, therefore, impact our cash flow and results of
operations.
We have operated primarily in the United States and all revenues to date have
been received in U.S. dollars. Accordingly, we have not had any material
exposure to foreign currency rate fluctuations.
At December 31, 2000, we had an outstanding bond payable of $5.0 million. This
bond bears interest at a variable rate based on LIBOR. During 2000, we entered
into a swap agreement that effectively fixed the interest rate over the life of
the bond at 6.68% plus a remarketing fee. We also have outstanding loans and
capital lease obligations totaling $1.8 million at fixed interest rates ranging
from 5.0% to 10.8%. Principal and interest on these loans is due and payable
monthly.
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 below for a list of the financial
statements being filed herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information required by this item, with the exception of information on our
executive officers, is incorporated by reference from our Proxy Statement
relating to the 2001 Annual Meeting of Stockholders to be filed pursuant to
General Instruction G(3) to Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from our
Proxy Statement relating to the 2001 Annual Meeting of Stockholders to be filed
pursuant to General Instruction G(3) to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from our
Proxy Statement relating to the 2001 Annual Meeting of Stockholders to be filed
pursuant to General Instruction G(3) to Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from our
Proxy Statement relating to the 2001 Annual Meeting of Stockholders to be filed
pursuant to General Instruction G(3) to Form 10-K.
48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1) Financial Statements - See index to Financial Statements
on page F below for a list of the financial statements
being filed herein.
(2) Financial Statement 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.
(3) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Amended & Restated Certificate of Incorporation of GenVec, Inc.(1)
3.1(a) Amendment to Amended and Restated Certificate of Incorporation. (1)
3.2 Amended & Restated Bylaws of GenVec, Inc. (1)
10.1 Form of Indemnification Agreement for Directors and Officers. (1)
10.2 Amended and Restated 1993 Stock Incentive Plan and forms of agreements thereunder.* (2)
10.3 2000 Employee Stock Purchase Plan, and form of agreement thereunder.* (1)
10.4 2000 Director Option Plan.* (1)
10.5 Research, Development and Collaboration Agreement dated July 21, 1997 between the Warner-Lambert Company and the
Registrant. (1)
10.5.1 Amendment 1 to Research, Development and Collaboration Agreement between the Warner- Lambert Company and Registrant
effective January 1, 1999. (1)
10.6 Stock Purchase Agreement dated July 21, 1997 between the Warner-Lambert Company and the Registrant. (1)
10.7 License Agreement dated May 31, 1996 between Scios, Inc. and the Registrant. (1)
10.8 Collaboration Agreement dated September 26, 1997 between Fuso Pharmaceutical Industries, Ltd.
and the Registrant. (1)
10.9 Commercialization Agreement dated September 26, 1997 between Fuso Pharmaceutical Industries Ltd. and the
Registrant. (1)
10.10 License Agreement dated February 1, 1998 between Asahi Chemical Industry Co., Ltd. and the Registrant. (1)
10.11 Sponsored Research Agreement dated April 1, 1998 between Cornell University and the Registrant. (1)
10.12 Amended and Restated Exclusive License Agreement dated April 1, 1993 between Cornell University
and the Registrant. (1)
10.13 Lease Agreement dated May 4, 1999 between MOR BENNINGTON LLP and Registrant. (1)
10.14 Consulting Agreement dated March 17, 1999 between the Registrant and Herbert J. Conrad, and amendment number 1
thereto dated March 1, 2000.* (1)
10.15 Amended and Restated Registration Rights Agreement dated December 2, 1998 between the Registrant and certain
stockholders. (1)
49
10.16 Patent License Agreement dated January 8, 2000 between the Registrant and the Public Health Service,
as amended, and amendment number 1 hereto dated March 9, 2000. (1)
10.16.1 Patent License Agreement dated December 20, 2000 between the Registrant and Northwestern University
(filed herewith).
10.17 License Agreement dated June 30, 1996 between the Registrant and the University of Pittsburgh -- of
the Commonwealth system of Higher Education, and amendments thereto.+ (1)
10.18 Employment Agreement between the Registrant and Paul H. Fischer, Ph.D. dated March 1, 1995.* (1)
10.19 Employment Agreement between the Registrant and Imre Kovesdi, Ph.D. dated June 3, 1993*(1)
10.20 Employment Agreement between the Registrant and Thomas E. Smart dated March 7, 1995.* (1)
10.21 Employment Agreement between the Registrant and Henrik Rasmussen, M.D., Ph.D. dated April 13, 1999.* (1)
10.22 Employment Agreement between the Registrant and C. Richter King, Ph.D. dated April 8, 1998.* (1)
10.23 Employment Agreement between the Registrant and Jeffrey W. Church dated July 28, 1998.* (1)
23.1 Consent of Independent Auditors (filed herewith).
24.1 Power of Attorney (filed herewith).
- ---------
* 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.
(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.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the fourth quarter of
2000.
50
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/ PAUL H. FISCHER, PH.D.
--------------------------
Paul H. Fischer, Ph.D.
President, Chief Executive Officer and Director
March 29, 2001
SIGNATURES
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/ PAUL H. FISCHER, PH.D. Director, President and March 29, 2001
- ------------------------------------ Chief Executive Officer
Paul H. Fischer, Ph.D. (Principal Executive Officer)
/s/ JEFFREY W. CHURCH Chief Financial Officer, March 29, 2001
- ------------------------------------ Treasurer & Secretary
Jeffrey W. Church (Principal Financial and
Accounting Officer)
* Director March 29, 2001
- ------------------------------------
Hal S. Broderson, M.D.
* Director March 29, 2001
- ------------------------------------
Herbert J. Conrad
* Director March 29, 2001
- ------------------------------------
Wayne T. Hockmeyer, Ph.D.
* Director March 29, 2001
- ------------------------------------
Harry T. Rein
* Director March 29, 2001
- ------------------------------------
Wendell Wierenga, Ph.D.
Director March 29, 2001
- ------------------------------------
Gregory Zaic
By: * /S/ PAUL H. FISCHER, PH.D.
--------------------------
Paul H. Fischer, Ph.D.
Attorney-in-Fact
GENVEC, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE NO.
--------
Independent Auditors' Report F-1
Balance Sheets as of December 1999 and 2000 F-2
Statements of Operations and Comprehensive Loss - Years Ended December 31, 1998, 1999 and 2000 F-4
Statements of Stockholders' Equity - Years Ended December 31, 1998, 1999 and 2000 F-5
Statements of Cash Flows - Years Ended December 31, 1998, 1999 and 2000 F-6
Notes to Financial Statements F-7-29
F
INDEPENDENT AUDITORS' REPORT
The Board of Directors
GenVec, Inc.:
We have audited the accompanying balance sheets of GenVec, Inc. as of December
31, 1999 and 2000, and the related statements of operations and comprehensive
loss, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2000. 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 auditing standards generally accepted
in the United States of America. 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,
1999 and 2000, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
McLean, Virginia
March 1, 2001
F-1
GENVEC, INC.
Balance Sheets
ASSETS 1999 2000
-------------- ---------------
Current assets:
Cash and cash equivalents $ 8,470,353 33,623,689
Short-term investments (note 3) 5,413,651 6,166,583
Prepaid expenses 438,754 725,276
Receivables from related party (note 6) 778,250 210,426
Other current assets 148,899 370,707
Bond sinking fund (note 5) -- 212,500
-------------- ---------------
Total current assets 15,249,907 41,309,181
Property and equipment, net (note 4) 9,333,074 8,707,359
Bond investment trust (note 5) 1,423,066 --
Long-term investments (note 3) 2,484,893 6,682,315
Other assets (note 2) 145,491 479,949
-------------- ---------------
Total assets $ 28,636,431 57,178,804
============== ===============
See accompanying notes to financial statements.
F-2
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 2000
--------------- ---------------
Current liabilities:
Accounts payable $ 1,435,085 487,682
Accrued expenses 809,992 657,883
Accrued construction in progress 482,474 --
Accrued technological license and intellectual property expenses 624,320 348,007
Accrued payroll, bonus and related expenses 208,794 639,632
Accrued offering costs -- 567,794
Unearned revenue 2,975,000 1,900,000
Current portion bond payable (note 5) -- 425,000
Current portion of notes payable and capital lease
obligation (notes 5 and 7) 366,320 445,811
--------------- ---------------
Total current liabilities 6,901,985 5,471,809
--------------- ---------------
Notes payable and capital lease obligations, less current portion (note 5) 1,822,195 1,451,490
Bond payable (note 5) 5,000,000 4,575,000
Deferred credit (note 7) 1,280,780 1,242,653
Unearned revenue 1,700,000 100,000
Other non-current liabilities -- 22,131
--------------- ---------------
Total noncurrent liabilities 9,802,975 7,391,274
--------------- ---------------
Commitments (notes 5 and 7)
Stockholders' equity (notes 6 and 8):
Convertible preferred stock, $.001 par value, 7,736,158 and -0- shares
authorized at December 31, 1999 and 2000, 7,695,402 and -0- shares
issued and outstanding (liquidation preference of $52,052,177 at
December 31, 1999) 7,695 --
Preferred stock, $0.001 par value, 4,346,861 and 5,000,000 shares authorized
at December 31 1999 and 2000, no shares issued and outstanding -- --
Common stock, $0.001 par value, 50,000,000 and 60,000,000 shares authorized at
December 31, 1999 and 2000, 1,598,593 and 17,995,444 shares issued at
December 31, 1999 and 2000 and 1,527,643 and 17,924,494 shares outstanding
at December 31, 1999 and 2000 1,598 17,995
Additional paid-in capital 55,716,237 100,069,852
Accumulated deficit (42,896,083) (50,745,238)
Deferred compensation (note 8) (850,419) (5,063,240)
Accumulated other comprehensive income - unrealized (loss) gain on securities (47,486) 36,423
(note 3)
Treasury stock, 70,950 common shares (71) (71)
--------------- ---------------
Total stockholders' equity 11,931,471 44,315,721
--------------- ---------------
Ttotal liabilities and stockholders' equity 28,636,431 57,178,804
=============== ===============
$
F-3
GENVEC, INC.
Statements of Operations and Comprehensive Loss
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1998 1999 2000
----------------- ----------------- -----------------
Revenues (note 6):
Ongoing research and development support $ 6,750,000 14,074,949 8,835,014
Contract, license and milestone payments 3,000,000 2,875,000 5,050,000
----------------- ----------------- -----------------
Total revenues 9,750,000 16,949,949 13,885,014
----------------- ----------------- -----------------
Operating expenses:
Research and development 10,592,366 14,198,611 15,356,303
General and administrative 5,902,844 5,278,018 6,911,925
----------------- ----------------- -----------------
Total operating expenses 16,495,210 19,476,629 22,268,228
----------------- ----------------- -----------------
Loss from operations (6,745,210) (2,526,680) (8,383,214)
----------------- ----------------- -----------------
Other income (expense):
Interest income 408,026 742,387 1,063,607
Interest expense (9,890) (135,197) (529,548)
----------------- ----------------- -----------------
Total other income 398,136 607,190 534,059
----------------- ----------------- -----------------
Net Loss $ (6,347,074) (1,919,490) (7,849,155)
================= ================= =================
Other comprehensive (loss) gain, net of tax -unrealized holding gains
(losses) arising during the period $ -- (47,486) 83,909
================= ================= =================
Comprehensive loss $ (6,347,074) (1,966,976) (7,765,246)
================= ================= =================
Basic and diluted net loss per share (note 2) $ (4.10) $ (1.22) $ (2.80)
================= ================= =================
Shares used in computing basic and diluted net loss per share (note 2) 1,548,677 1,576,443 2,807,809
================= ================= =================
See accompanying notes to financial statements.
F-4
GENVEC, INC.
Statements of Stockholders' Equity
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ ------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------- --------- ------------- ---------- --------------
Balance, December 31, 1997 6,042,263 $ 6,042 1,531,500 1,531 40,126,101
Issuance of Class F convertible preferred shares,
net of issuance costs of $80,562 (note 8) 1,000,000 1,000 -- -- 5,888,438
Issuance of 375,000 common stock warrants in connection
with Class F convertible preferred shares -- -- -- -- 1,030,000
Exercise of options -- -- 23,353 23 26,263
Deferred compensation resulting from grant of options
below fair value -- -- -- -- 12,908
Amortization of deferred compensation -- -- -- -- --
Net loss -- -- -- -- --
------------- --------- ------------- ---------- --------------
Balance, December 31, 1998 7,042,263 7,042 1,554,853 1,554 47,083,710
Issuance of Class E2 convertible preferred shares, net of
issuance costs of $6,191 (note 8) 266,666 267 -- -- 2,993,535
Issuance of Class E3 convertible preferred shares, net of
issuance costs of $6,472 (note 8) 386,473 386 -- -- 4,993,136
Exercise of options -- -- 43,740 44 67,526
Deferred compensation resulting from grant of options
below fair value -- -- -- -- 578,330
Amortization of deferred compensation -- -- -- -- --
Net loss -- -- -- -- --
------------- --------- ------------- ---------- --------------
Balance, December 31, 1999 7,695,402 7,695 1,598,593 1,598 55,716,237
Conversion of convertible preferred shares into
common shares (note 8)
(7,695,402) (7,695) 11,543,092 11,543 (3,848)
Issuance of common shares through intial public offering,
net of issuance costs of $1,373,116 (note 8) -- -- 4,000,000 4,000 33,962,882
Issuance of common shares through private sale
concurrent with initial public offering (note 6) -- -- 421,052 421 4,999,572
Payout of fractional shares from share reclassification -- -- -- -- (266)
Exercise of options and warrants -- -- 432,707 433 66,008
Deferred compensation resulting from grant of options
below fair value -- -- -- -- 5,329,267
Amortization of deferred compensation -- -- -- -- --
Net loss -- -- -- -- --
------------- --------- ------------- ---------- --------------
Balance, December 31, 2000 -- $ -- 17,995,444 17,995 100,069,852
============= ========= ============= ========== ==============
See accompanying notes to financial statements.
ACCUMULATED
TREASURY OTHER
DEFERRED ACCUMULATED STOCK COMPREHENSIVE
COMPENSATION DEFICIT AMOUNT INCOME TOTAL
--------------- ------------ --------- -------------- -----------
Balance, December 31, 1997 (1,359,897) (34,629,519) (71) -- 4,144,187
Issuance of Class F convertible preferred shares,
net of issuance costs of $80,562 (note 8) -- -- -- -- 5,889,438
Issuance of 375,000 common stock warrants in connection
with Class F convertible preferred shares -- -- -- -- 1,030,000
Exercise of options -- -- -- -- 26,286
Deferred compensation resulting from grant of options
below fair value (12,908) -- -- -- --
Amortization of deferred compensation 537,164 -- -- -- 537,164
Net loss -- (6,347,074) -- -- (6,347,074)
--------------- ------------ --------- -------------- -----------
Balance, December 31, 1998 (835,641) (40,976,593) (71) -- 5,280,001
Issuance of Class E2 convertible preferred shares, net of
issuance costs of $6,191 (note 8) -- -- -- -- 2,993,802
Issuance of Class E3 convertible preferred shares, net of
issuance costs of $6,472 (note 8) -- -- -- -- 4,993,522
Exercise of options -- -- -- -- 67,570
Deferred compensation resulting from grant of options
below fair value (578,330) -- -- -- --
Amortization of deferred compensation 563,552 -- -- -- 563,552
Net loss -- (1,919,490) -- (47,486) (1,966,976)
--------------- ------------ --------- -------------- -----------
Balance, December 31, 1999 (850,419) (42,896,083) (71) (47,486) 11,931,471
Conversion of convertible preferred shares into
common shares (note 8) -- -- -- -- --
Issuance of common shares through intial public offering,
net of
issuance costs of $1,373,116 (note 8) -- -- -- -- 33,966,882
Issuance of common shares through private sale
concurrent with initial public offering (note 6) -- -- -- -- 4,999,993
Payout of fractional shares from share reclassification -- -- -- -- (266)
Exercise of options and warrants -- -- -- -- 66,441
Deferred compensation resulting from grant of options
below fair value (5,329,267) -- -- -- --
Amortization of deferred compensation 1,116,446 -- -- -- 1,116,446
Net loss -- (7,849,155) -- 83,909 (7,765,246)
--------------- ------------ --------- -------------- -----------
Balance, December 31, 2000 (5,063,240) (50,745,238) (71) 36,423 44,315,721
=============== ============ ========= ============== ===========
See accompanying notes to financial statements.
F-5
GENVEC, INC.
Statements of of Cash Flows
YEARS ENDED DECEMBER 31,
------------------------------------------------
1998 1999 2000
---------------- ---------------- --------------
Cash flows from operating activities:
Net loss $ (6,347,074) (1,919,490) (7,849,155)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization expense 407,602 746,895 1,589,111
Stock option and warrant compensation expense (note 8) 537,164 563,552 1,116,446
Loss on disposal of assets -- 30,297 41,956
Changes in operating assets and liabilities:
Receivables from related party -- (778,250) 567,824
Accounts payable and accrued expenses 892,324 531,000 (859,934)
Unearned revenue (1,000,000) 1,175,000 (2,675,000)
Other assets and liabilities, net (109,967) 144,549 (934,515)
---------------- ---------------- --------------
Net cash (used in) provided by operating activities (5,619,951) 493,553 (9,003,267)
---------------- ---------------- --------------
Cash flows from investing activities:
Purchases of property and equipment (1,908,481) (6,120,210) (907,200)
Purchases of investments available-for-sale -- (9,143,094) (11,026,555)
Purchases of investments held-to-maturity (5,835,644) (2,217,660) --
Purchases of investment bond trust -- (5,000,000) --
Proceeds from maturities of investments held-to-maturity 2,555,987 2,500,000 --
Proceeds from sale of investment securities available-for-sale -- 6,644,305 6,125,735
Proceeds from sale of investment bond trust -- 3,576,934 1,423,066
Proceeds from sale of assets -- -- 11,954
---------------- ---------------- --------------
Net cash used in investing activities (5,188,138) (9,759,725) (4,373,000)
---------------- ---------------- --------------
---------------- ---------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs 26,286 67,570 39,033,317
Proceeds from issuance of preferred stock, net of issuance costs 6,919,438 7,987,324 --
Loans proceeds -- 7,484,404 93,263
Payments under capital lease obligation (175,241) (45,933) (24,097)
Loan payments -- (295,889) (360,380)
Bond financing payments -- (209,735) --
Bond sinking funds payments -- -- (212,500)
Change in bank overdraft payable 334,593 (334,593) --
---------------- ---------------- --------------
Net cash provided by financing activities 7,105,076 14,653,148 38,529,603
---------------- ---------------- --------------
(Decrease) increase in cash and cash equivalents (3,703,013) 5,386,976 25,153,336
Cash and cash equivalents, beginning of year 6,786,390 3,083,377 8,470,353
---------------- ---------------- --------------
---------------- ---------------- --------------
Cash and cash equivalents, end of year $ 3,083,377 8,470,353 33,623,689
================ ================ ==============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 10,767 250,329 495,138
================ ================ ==============
Supplemental disclosure of non-cash investing and financing activities:
Property and equipment and other assets financed by lessor $ -- 1,280,780 --
================ ================ ==============
See accompanying notes to financial statements.
F-6
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
(1) ORGANIZATION AND BUSINESS DESCRIPTION
GenVec, Inc. (GenVec or the Company) develops gene-based products that
cause the production of therapeutic proteins at the site of disease.
The Company's current areas of focus are cardiovascular disease,
oncology and ophthalmology. The Company's products in development are
made up of genes and vehicles to deliver those genes into cells at the
site of the disease, commonly called "vectors." The Company's product
candidates are administered directly to the site of disease through
devices, such as catheters and syringes.
GenVec has the ability to build vectors that enable the Company to test
the therapeutic benefit of genes in a broad range of animal models of
human disease and to advance product candidates to clinical testing in
generally less time than traditional drug discovery methods.
GenVec uses its technology to convert advances in genomics into
therapeutic product candidates. The Company intends to develop and
commercialize these product candidates through corporate collaborations
and internally.
GenVec has developed a portfolio of product candidates. The Company's
lead product candidate, BIOBYPASS(R) angiogen, which is being developed
in collaboration with Warner-Lambert is intended to treat patients with
coronary artery disease and peripheral vascular disease by inducing the
formation of new blood vessels in tissues with inadequate blood flow.
The Company is also developing TNFerade, which is intended to treat
patients with various injectible solid tumors such as rectal cancer and
head and neck cancer.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) REVENUE RECOGNITION
The Company currently generates substantially all of its
revenue through a collaborative research and development
agreement with a related party (note 6).
Research and development revenue from cost-reimbursement
agreements are recognized as revenue as the related expenses
are incurred and the Company has no future performance
obligations. Contract, license and milestone payments are
recognized as revenue when the Company's specific performance
obligations have been satisfied in accordance with the terms
of the respective agreements. Research and development,
contract, license and milestone revenue recognized in the
accompanying statements of operations is not subject to
repayment. The Company's revenue recognition policy is
consistent with the provisions of SAB 101 and the accompanying
financial statements reflect the policy for all periods
presented.
F-7
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
(b) RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as
incurred. Such costs include proprietary research and
development activities and expenses associated with
collaborative research agreements.
(c) TECHNOLOGICAL LICENSE AND INTELLECTUAL PROPERTY
Technological license and intellectual property costs consist
of payments associated with license agreements and legal costs
associated with the acquisition and development of
intellectual property. Costs associated with the acquisition
and development of intellectual property are expensed when
incurred.
(d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and
equipment is depreciated using the straight-line method over
the estimated useful lives of assets, 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 the straight-line method over the term of the lease.
(e) INCOME TAXES
Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES.
Under the asset and liability method of Statement of Financial
Accounting Standards No. 109, deferred tax assets and
liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that are
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled.
(f) CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with
original maturities of three months or less, and are recorded
at amortized cost, which approximates fair value. Cash
equivalents consist primarily of money market funds and
commercial paper.
(g) SHORT-TERM INVESTMENTS
The Company's short-term investments consist primarily of
bonds and commercial paper. Through April 1999, these
investments were classified as a held-to-maturity portfolio as
the Company had both the ability and intent to hold securities
until maturity. The portfolio was
F-8
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
carried at amortized cost, which approximated fair value.
During April 1999, the Company signed a management agreement
allowing an institutional trustee limited power to buy and
sell individual issues to take advantage of market changes. At
that time all existing securities, totaling $5,555,832 on an
amortized cost-basis with unrealized losses of $33,205, were
transferred to an account under control of the trustee and are
classified as available-for-sale securities.
Available-for-sale securities are carried at fair value, with
the unrealized holding gains and losses, net of the related
tax effect, reported as a separate component of other
comprehensive income 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 or
held-to-maturity 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. Premiums and
discounts are amortized or accreted over the life of the
related held-to-maturity or available-for-sale security as an
adjustment to yield using the effective interest method.
Dividend and interest income are recognized when earned.
(h) COSTS OF BORROWING
Interest costs incurred on borrowed funds during the period of
construction of capital assets are capitalized as a component
of the cost of acquiring those assets.
(i) OTHER ASSETS
Other assets consist primarily of direct financing costs that
are deferred and amortized over the life of the financing on a
straight-line basis and prepayments on long-term insurance
contracts that are amortized over the life of the agreement.
(j) ACCRUED TECHNOLOGICAL LICENSE AND INTELLECTUAL PROPERTY
EXPENSES
Accrued technological license and intellectual property
expenses consists of expenses related to the acquisition and
maintenance of the Company's intellectual property portfolios.
(k) NET LOSS PER SHARE
Basic and diluted net loss per share have been computed using
the weighted average number of shares of common stock
outstanding during the period.
Had the Company been in a net income position, diluted
earnings per share would have been presented and would have
included the shares used in the computation of basic net loss
per share as well as additional potential common shares
related to outstanding options and warrants. The diluted EPS
computation is not included, as all potential common shares
are antidilutive.
F-9
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
The Company had securities outstanding which could potentially
dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share,
as their effect would have been anti-dilutive. These
securities outstanding consisted of the following:
1998 1999 2000
---------- ---------- ---------
Convertible preferred stock 10,563,384 11,543,092 --
Outstanding options 1,467,123 1,458,053 2,362,301
Warrants 387,543 384,660 53,823
(l) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles may require
management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
(m) INTEREST RATE SWAP
The Company has an interest rate swap agreement to manage
interest rate exposure. The agreement is accounted for on an
accrual basis. Amounts to be paid or received under this
agreement are recognized over the life of the related debt and
are included in interest expense.
(n) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments,
as reflected in the accompanying balance sheets, approximate
fair value. Financial instruments consist of cash and cash
equivalents, short-term investments, receivables from related
party, bond investment trust, long-term investments, bond
sinking fund, accounts payable, accrued technological license
and intellectual property expenses, accrued expenses, accrued
payroll and related expenses, notes payable and capital lease
obligations.
(o) STOCK OPTION PLAN
The Company accounts for stock-based compensation in
accordance with the provisions of Accounting Principle Board
("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES (APB 25), and related interpretations, and complies
with the disclosure provisions of SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION. Under APB 25, compensation expense
is based on the difference, if any, on the date of grant,
between the fair value of the Company's stock and the exercise
price. All stock-based awards to non-employees (including
options granted to members of the Scientific Advisory Board)
are accounted for at their fair value in accordance with the
provisions of SFAS No. 123.
F-10
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
(p) COMPREHENSIVE LOSS
Comprehensive loss consists of net loss and unrealized holding
gains from available-for-sale securities and is presented in
the statements of stockholders' equity. Components of
comprehensive loss, as detailed on the statements of
operations and comprehensive loss, are reported net of tax.
(q) RECLASSIFICATIONS
Certain amounts from the prior year have been reclassified to
conform with current year presentation
(r) NEW ACCOUNTING PRONOUNCEMENTS (UNAUDITED)
Statement of Financial Accounting Standards (SFAS) No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
as amended, is currently effective January 1, 2001. The
standard requires that all derivative instruments be recorded
on the balance sheet at fair value. Gains and losses on
derivatives designated as cash flow hedges will be recorded in
other comprehensive income and will be reclassified to
earnings in a manner that matches the timing of the earnings
impact of the hedged transactions. The ineffective portion of
the hedges will be recognized in earnings.
Management believes adoption of this standard and related
transaction adjustments will not have a material impact on the
Company's financial position, results of operations or cash
flows. In accordance with the transition provisions of SFAS
133, the Company recorded on January 1, 2001, a net-of-tax
cumulative-effect-type adjustment of $167,000 in accumulated
other comprehensive income.
F-11
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
(3) INVESTMENTS
The amortized cost, gross unrealized holding gains and losses and fair
value of available-for-sale securities by major security type at
December 31, 1999 and 2000, are as follows:
1999
------------------------------------------
Gross
unrealized
holding
Amortized gains Fair
cost (losses) value
---------- ------------ -----------
Available for sale:
Government agency notes $1,501,703 (1,478) 1,500,225
Corporate bonds 6,444,327 (46,008) 6,398,319
---------- ------------ -----------
$7,946,030 (47,486) 7,898,544
========== ============ ===========
Classified as cash equivalents:
Commercial paper $7,996,917 -- 7,996,917
========== ============ ===========
2000
------------------------------------------
Gross
unrealized
holding
Amortized gains Fair
cost (losses) value
---------- ------------ -----------
Available for sale:
Certificate of Deposits $1,000,179 78 1,000,257
Asset backed securities 1,499,919 3,831 1,503,750
Corporate bonds 10,312,377 32,514 10,344,891
---------- ------------ -----------
$12,812,475 36,423 12,848,898
========== ============ ===========
Classified as cash equivalents:
Commercial paper $33,786,166 -- 33,786,166
---------- ------------ -----------
Maturities of debt securities classified as available-for-sale were as follows
at December 31, 2000:
Amortized Fair
cost value
------------ -----------
Available for sale:
Due within one year $6,167,969 6,166,583
Due after one year through three years 6,644,506 6,682,315
------------ -----------
$12,812,475 12,848,898
============ ===========
F-12
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
1999 2000
---------- ----------
Equipment $5,111,520 5,465,685
Leasehold improvements 93,887 6,398,592
Furniture and fixtures 303,928 244,795
Construction-in-progress 6,257,907 --
---------- ----------
11,767,242 12,109,072
Less accumulated depreciation and amortization (2,434,168) (3,401,713)
---------- ----------
Property and equipment, net $9,333,074 8,707,359
========== ==========
In May 1999, the Company entered into a lease agreement for a new
42,900 square foot executive office and laboratory facility. In
connection with this lease agreement, the Company incurred $7.3 million
in expenditures for leasehold improvements, equipment and fixtures,
which were financed by a $5.0 million Industrial Revenue Bond with the
State of Maryland (the "Bond"), a $125,000 economic development loan
from Montgomery County, Maryland, approximately $1.3 million in lease
incentives provided by the landlord and an $858,000 term loan from the
landlord.
Although the building was substantially complete by December 31, 1999,
the Company did not take possession of the building until January 2000.
Therefore, the building-related costs were included in
construction-in-progress on the balance sheet as of December 31, 1999.
The ten year lease term commenced on November 1, 1999 (see note 7 for
discussion of lease agreement). At December 31, 1999, the Company
accrued approximately $1.1 million of unbilled construction costs which
were included in accrued construction in progress and notes payable in
the accompanying balance sheet. Applicable interest charges incurred
during the buildout of the new facility are capitalized as one of the
elements of cost and will be amortized over the estimated useful life.
Interest capitalized during 1999 was approximately $48,000.
Depreciation and amortization expense related to property and equipment
were $386,276, $637,962 and $1,474,177 for the years ended December 31,
1998, 1999 and 2000, respectively.
F-13
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
(5) NOTES PAYABLE, BOND PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes payable, bond payable and capital lease obligations consist of
the following:
1999 2000
---------- ---------
Industrial revenue bond $5,000,000 5,000,000
Notes payable:
Term loan 858,000 812,682
Equipment financing 1,205,515 890,453
Economic development loan 125,000 125,000
Capital lease obligations -- 69,166
---------- ---------
7,188,515 6,897,301
Less current maturities (366,320) (870,811)
---------- ---------
$6,822,195 6,026,490
---------- ---------
(a) INDUSTRIAL REVENUE BOND
In June 1999, in connection with the lease of the new
building, the Company borrowed $5.0 million under an
Industrial Revenue Bond with the State of Maryland to fund
leasehold improvements and additional equipment needs of the
Company. The Bond is secured by a first priority lien on all
equipment and fixtures financed. The Bond is secured by a $2.5
million letter of credit facility guaranteed by the Maryland
Industrial Development Finance Authority and a $2.5 million
guarantee from Warner-Lambert. The Company incurs an annual
fee for the letter of credit equal to one percent of the
outstanding balance which totaled $50,822 and $52,278 for the
years ended December 31, 1999 and 2000. Warner-Lambert's
guarantee will remain as long as the outstanding principal
balance on the Bond is greater than $2.5 million.
Warner-Lambert's guarantee will be reduced in value dollar for
dollar as the principal balance decreases below $2.5 million.
The Bond bears interest at a variable rate and matures on June
1, 2009. The weighted-average interest rate during 2000 was
6.45 percent. The Bond is subject to mandatory sinking fund
redemption beginning July 2001. The Company began making
sinking fund payments in July 2000, the balance of the sinking
fund at December 31, 2000 was $212,500.
In October 2000, the Company entered into an interest rate
swap agreement to reduce its exposure to adverse fluctuations
in interest rates related to the Company's outstanding bond
payable. The Company does not utilize financial instruments
for trading or other speculative purposes. The agreement
entitles the Company, on a monthly basis, to receive a
LIBOR-based floating rate of interest and pay a fixed rate of
interest of 6.68 percent. The interest rate swap has a total
notional amount of $5.0 million and extends through the life
of the outstanding bond.
F-14
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
The differential to be paid or received under the swap
agreement is accrued as the interest rates change and is
recognized over the life of the agreement. As a result of the
swap agreement, interest expense decreased by approximately
$380 in 2000.
The $5.0 million Bond proceeds were held in a trust for the
sole purpose of funding construction. The balance of the trust
was $1,423,066 and $0 at December 31, 1999 and 2000.
(b) TERM LOAN
In connection with the lease of the new building (see note 7),
the landlord contributed $858,000 towards the construction of
leasehold improvements in the form of a term loan. This loan
is payable in monthly installments of $11,864, including
interest at a fixed rate of 10.5 percent, which commenced in
April 2000, over the remaining term of the building lease.
(c) EQUIPMENT FINANCING
On January 27, 1999, the Company secured $1.5 million in
financing for certain assets purchased by the Company at an
interest rate of 10.8 percent. The note is payable in monthly
installments of $35,845 commencing January 1999 through
December 2002, followed by a balloon payment of $150,140
payable in January 2003. The loan is secured by the equipment
financed by the note.
(d) ECONOMIC DEVELOPMENT LOAN
On September 29, 1999, the Company entered into an economic
development fund agreement with Montgomery County, Maryland
(the County) and received $125,000 for the purpose of
relocation and expansion related expenses. The $125,000
received is considered a loan which accrues interest on the
principal balance at 5 percent a year until December 31, 2001.
Quarterly payments on the principal and interest commence
January 15, 2002. The final payment on the loan is due January
15, 2007.
Loan payments may be deferred or forgiven by the County if the
Company achieves certain incentive provisions outlined in the
loan agreement related to the hiring of new employees within
the Company. No guarantee can be made that the Company will
achieve the targets that would result in a deferral or
forgiveness of the loan.
Should the Company sell, close, or relocate a majority of its
business interest outside the County within 5 years from the
commencement date of the loan, the Company must repay the
entire balance of the outstanding loan plus all accrued
interest.
(e) CAPITAL LEASES
In 2000, the Company entered into two capital lease
obligations at an interest rate of 10.5 percent. The capital
lease obligations are payable in monthly installments of
$3,390 payable through 2005.
F-15
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
These capital lease obligations are collateralized by certain
assets with a gross book value of $93,728 and related
accumulated amortization of $14,924 at December 31, 2000.
Aggregate maturities and sinking fund obligations for the
Bond, notes payable and capital leases are as follows:
Bond and Capital
Notes Payable Leases
------------- -----------
2001 $ 835,741 $40,676
2002 932,069 19,765
2003 728,721 9,307
2004 624,344 9,307
2005 669,768 --
Thereafter 3,037,493 --
------------- -----------
6,828,136 79,055
Less interest payments -- 9,890
------------- -----------
$6,828,136 $69,165
============= ===========
(6) STRATEGIC ALLIANCES
The Company has established collaborations with pharmaceutical and
biotechnology companies to enhance its ability to discover, evaluate,
develop and commercialize multiple product opportunities.
(a) WARNER-LAMBERT COMPANY
In July 1997, the Company entered into a collaboration with
Warner-Lambert, a related party, to research, develop and
commercialize gene-based products incorporating the VEGF gene
for the treatment of coronary artery disease and peripheral
vascular disease. The agreement was amended effective January
1, 1999. Warner-Lambert has the primary responsibility for
clinical development, regulatory approval, manufacturing and
commercialization of products that the Company develops under
this collaboration, including BIOBYPASS(R) angiogen.
Under the terms of the collaboration, the Company may receive
more than $100.0 million in non-refundable research and
development funding, milestone payments, equity purchases and
license fees. As of December 31, 2000, the Company has
received $43.0 million and has recognized an aggregate of
$41.5 million in research and development funding, license
fees and milestone payments. The Company has incurred research
and development expenses in conjunction with this
collaboration agreement of $7.7 million, $11.6 million and
$11.2 million, in 1998, 1999 and 2000, respectively.
Warner-Lambert has agreed to provide the Company a total of
$30.3 million of research and development funding over the
first four years of the
F-16
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
collaboration, and the Company has the potential to receive an
aggregate of $50.0 million in milestone payments related to
the development of the first collaboration product for
coronary artery disease and peripheral vascular disease.
Warner-Lambert will make additional milestone payments to the
Company upon the achievement of events related to the conduct
of pivotal clinical studies and filings for and receiving
regulatory approvals to market collaboration products and, for
other collaboration products developed for these indications.
In consideration for these payments, the Company granted
Warner-Lambert an exclusive, royalty-bearing license to
manufacture and sell collaboration products worldwide,
excluding Asia, subject to the Company's right to co-promote
in the United States and Canada for coronary artery disease
applications (See note 7(b)). This license is also subject to
the Company's exclusive right to manufacture and sell any
collaboration products for uses other than coronary artery
disease and peripheral vascular disease. Warner-Lambert's
research and development funding obligations to the Company
extend through July 2001. The collaboration expires on a
product-by-product and country-by-country basis until there
are no remaining royalty obligations.
As part of the collaboration, Warner-Lambert has agreed to
purchase an aggregate of $20.0 million of the Company's
capital stock upon the achievement of specific milestones. As
of December 31, 2000, Warner-Lambert has purchased $15.0
million of the Company's capital stock including $2.0 million
of the Company's capital stock in December 1997, consisting of
154,963 shares of the Company's Class E1 preferred stock at a
price of approximately $12.91 per share, $3.0 million of the
Company's capital stock in March 1999, consisting of 266,666
shares of Class E2 preferred stock at a price of $11.25 per
share and 386,473 shares of Class E3 convertible preferred
stock for $5.0 million at a price of $12.94 per share in July
1999. All preferred shares were converted into common shares
in December 2000 in connection with the Company's initial
public offering at a rate of 1.5 common to each preferred
share. In addition, Warner-Lambert purchased $5.0 million of
the Company's capital stock in a private placement concurrent
with the initial public offering, consisting of 421,052 shares
at a price of $11.875 per share. Warner-Lambert is required to
purchase, at the Company's election, up to $5.0 million of the
Company's capital stock upon showing that a process has been
established for the production of bulk product at a scale and
site suitable for pivotal clinical studies as shown by the
preparation of three consecutive lots of the first
collaboration product. The purchase price for all these equity
purchases is 125 percent of the fair market value of the
securities. Warner-Lambert has also committed to guaranteeing
a loan to the Company in a principal amount of $5.0 million.
In 1999, the Company used $2.5 million of the loan guarantee
to assist in the financing of leasehold improvements to the
Company's new research and development/corporate headquarters
facility.
(b) FUSO PHARMACEUTICALS INDUSTRIES, LTD.
In September 1997, the Company established a collaboration
with Fuso to conduct research and to identify, evaluate and
develop gene therapy products for the treatment of cancer.
Under the terms of the contract, the Company will receive
$750,000 annually for five years, subject to Fuso's right to
terminate the collaboration upon 90 days prior written notice.
The annual payments are non-refundable. As part of the
collaboration, the Company granted Fuso an exclusive,
royalty-bearing license to develop and commercialize
products developed under the
F-17
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
collaboration for the treatment of cancer in Japan and at
Fuso's option, Korea and Taiwan. Fuso will be responsible for
the development and commercialization of any products in its
territory. The Company will receive additional payments for
the achievement by Fuso of specific product development and
regulatory milestones, with the earliest of such payments not
expected in the near term. The Company will also receive
royalties on the sale of any such products commercialized by
Fuso. The Company has retained all rights to develop and
commercialize these products for the treatment of cancer in
the rest of the world, and generally for all other uses
worldwide, subject to certain restrictions, independently and
with third parties. In connection with establishment of the
collaboration, Fuso purchased $1.0 million of the Company's
capital stock consisting of 75,329 shares of the Company's
Class E convertible preferred stock for $13.28 per share. All
preferred shares were converted into common shares in December
2000 in connection with the Company's initial public offering
at a rate of 1.5 common shares to each preferred share. The
Company recognized contract revenues from Fuso of $750,000 for
each of the years ended December 31, 1998 and 1999 and
$450,000 for the year ended December 31, 2000.
(c) SCIOS, INC.
In May 1996, the Company entered into an exclusive, worldwide
license agreement with Scios for rights to all gene therapy
applications of its proprietary form of the VEGF gene. Scios
will share in certain profits the Company realizes from the
research, development and commercialization of products
incorporating the VEGF gene. The Company has agreed to provide
a minimum royalty on revenues generated from the development
of these products, which is creditable against the profits to
be shared. In connection with the license agreement, Scios
purchased 96,852 shares of the Company's Class D convertible
preferred stock at a price of $10.33 per share. All preferred
shares were converted into common shares in December 2000 in
connection with the Company's initial public offering at a
rate of 1.5 common shares to each preferred share. In
addition, the Company granted Scios a warrant to purchase
shares of the Company's common stock, which vests upon the
earlier of the achievement of specified product development
milestone events or certain dates. The warrants remain
outstanding as of December 31, 2000.
(d) CANTAB PHARMACEUTICALS RESEARCH LIMITED
In November 1999, the Company and Cantab Pharmaceuticals
Research Limited (Cantab) entered into a three-year
non-exclusive license agreement and an option agreement for an
exclusive license to develop and commercialize products
utilizing the Company's herpes simplex virus patent portfolio.
In consideration, Cantab paid the Company a non-refundable,
non-creditable license fee totaling $300,000, which is being
amortized over the three-year term of the license agreement,
and may make additional payments totaling $300,000 over the
remaining term of the option agreement, which will be
recognized into revenue when earned.
As part of the agreement, should Cantab exercise the option
and obtain an exclusive license, the Company will receive a
license exercise fee, additional payments for the achievement
by Cantab
F-18
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
of specific product development and regulatory
milestones, and royalties on the sale of any products
commercialized by Cantab. Payment of such license exercise
fee, milestones and royalties may result in payments having to
be made by the Company of between 5 percent and 7.5 percent of
the license exercise fee and milestone payments and up to 25
percent of royalties to the University of Pittsburgh, from
whom the Company has licensed the herpes simplex virus
technology.
(e) ASAHI CHEMICAL INDUSTRY COMPANY LIMITED
In February 1998, the Company entered into a non-exclusive
license agreement with Asahi Chemical Industry Co., Ltd.
(Asahi) for rights to all gene therapy applications in the
United States to its proprietary form of the TNF-alpha gene.
In exchange for this license, the Company paid a $200,000
non-refundable fee to Asahi and has committed to additional
payments upon the achievement of specified clinical
milestones, as well as product royalties based on net sales of
a licensed product.
(7) COMMITMENTS
(a) LEASE AGREEMENTS
The Company has a ten-year noncancelable operating lease for
its office and laboratory space. The agreement includes a
provision for a 3 percent annual increase in base rent. The
lease contains renewal options for up to fourteen years and
requires the Company to pay all executory costs such as
maintenance and insurance. As part of the lease, the
landlords' initial contribution of $1,290,000 is considered a
reduction of rental expense that is recognized on a
straight-line basis over the term of the lease.
Rent expense under all operating leases was approximately
$379,000, $571,000 and $616,000 for the years ended December
31, 1998, 1999 and 2000.
Future minimum lease payments under all non-cancelable
operating leases are as follows:
2001 $ 658,841
2002 671,008
2003 690,882
2004 709,673
2005 725,153
Thereafter 2,985,124
-------------
$6,440,681
=============
F-19
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
(b) RESEARCH AND DEVELOPMENT AGREEMENTS
The Company has agreed to provide grants for certain research
projects under agreements with several universities and
research organizations. Under the terms of these agreements,
the Company has received exclusive licenses to the resulting
technology. Total grants paid by the Company were $2,487,000,
$2,667,000 and $2,010,000 for the years ended December 31,
1998, 1999 and 2000, respectively. The Company has commitments
to pay up to approximately $1,588,000 and $356,000 related to
these grants for the years ended 2001 and 2002, respectively.
Additionally, certain agreements disclosed in note 6 require
the Company to pay royalties upon commercial sales, if any, of
specified products. The royalties are generally based on a
percentage of net sales or other product fees earned by the
Company. Royalties will become due when sales are generated.
(8) STOCKHOLDERS' EQUITY
(a) CAPITAL CHANGES
On November 29, 2000, the Company amended and restated its
Certificate of Incorporation which effected the authorization
of the following classes and amounts of stock each having a
par value of $.001 per share:
Class
Shares
----------
Common stock 60,000,000
Undesignated preferred stock 5,000,000
Convertible preferred stock:
Class A 226,099
Class B 1,959,444
Class C 3,570,332
Class D 96,852
Class E 75,329
Class E1 154,963
Class E2 266,666
Class E3 386,473
Class F 1,000,000
On December 11, 2000, GenVec issued 4,000,000 shares of common
stock at $9.50 per share through its initial public offering.
Net proceeds from the initial public offering, after deducting
underwriting commissions and offering expenses, were
approximately $34.0 million. At December 31, 2000, the Company
had accrued offering costs of $567,794 recorded on its balance
sheet, including $150,000 payable to underwriters. Concurrent
with the initial public offering, Warner Lambert purchased
421,052 shares of common stock at a price of $11.875 per share
for which the Company raised $5.0 million.
F-20
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
(b) STOCK SPLIT
On November 16, 2000, the Board of Directors of the Company
authorized a reclassification of each share of common stock
into 1.5 shares of common stock, which was approved by the
stockholders on November 20, 2000. On December 8, 2000 the
Company filed with the Secretary of State of Delaware an
amendment to its Amended and Restated Certificate of
Incorporation to effect this reclassification before the
effectiveness of the Company's initial public offering. All
common share and per share amounts in the accompanying
financial statements have been retroactively adjusted to
reflect this reclassification.
(c) CONVERTIBLE PREFERRED STOCK
The following table summarizes information regarding the
number of shares issued, cash consideration received and
liquidation value per share for each class of convertible
preferred stock.
Number Cash Liquidation
of shares consideration value per
Class issued received share
- ----- --------- ------------- ------------
A 226,099 $667,000 $2.95
B 1,918,688 11,320,000 5.90
C 3,570,332 21,065,000 5.90
D 96,852 1,000,000 10.33
E 75,329 1,000,000 13.28
E1 154,963 2,000,000 12.91
E2 266,666 3,000,000 11.25
E3 386,473 5,000,000 12.94
F 1,000,000 7,000,000 7.00
All convertible preferred shares were converted into common
shares in December 2000 in connection with the Company's
initial public offering at a rate of 1.5 shares of common
stock to each share of preferred stock. A total of 7,695,402
preferred shares were converted into 11,543,092 common shares.
Upon the conversion, all series of convertible preferred stock
were cancelled and retired.
(d) RESTRICTED COMMON STOCK
In 1993 the Company issued to a former officer a total of
278,908 shares of restricted common stock at a purchase price
equal to the fair market value on the date of grant in 1993,
and recorded a note receivable as a reducing component of
equity (reduction in additional paid-in capital). As of
December 31, 2000, 202,636 shares are still restricted and the
Company has a note receivable with the former officer for
$79,704 plus accrued interest of $46,301 related to this
restricted common stock. This note receivable is due July 12,
2001.
F-21
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
(e) STOCK INCENTIVE PLAN
The Company adopted its 1993 Stock Incentive Plan (the Stock
Plan) in October 1993. The Stock Plan was amended and restated
in October 2000. An aggregate of 4,650,000 shares of common
stock has been reserved for issuance under the Stock Plan. The
Stock Plan will continue in effect for a term of ten years,
unless terminated by the Board of Directors at an earlier
date.
Options granted to employees to purchase common stock under
the Stock Plan are exercisable at the rate of 12.5 percent of
the shares six months from the vesting commencement date and
approximately 1/48th of the shares monthly thereafter, such
that the option is fully exercisable four years from the
vesting commencement date. Options granted to consultants vest
over the terms of their contractual agreements which is
generally one to four years. No optionee shall be granted, in
any fiscal year of the Company, options to purchase more than
553,865 shares.
The maximum term for options granted under the Stock Plan is
ten years, except that if, at the time of the grant, the
optionee possesses more than ten percent of the combined
voting power of the Company, the maximum term of the option is
five years. For options granted to a ten percent stockholder,
then the exercise price must be equal to at least 110 percent
of the fair value of the stock on the date of grant. Options
granted under the Stock Plan expire three months after the
termination of an optionee's service to the Company.
The Company applies SFAS No. 123 for options granted to
consultants. In adopting SFAS No. 123 for options granted to
consultants, gross deferred compensation recorded during the
years ended December 31, 1998, 1999 and 2000 totaled $12,908,
$99,780 and $1,193,163 and related amortization amounted to
$158,092, $125,071 and $527,313, respectively.
The Company applies APB 25 in accounting for its Stock Plan
for options granted to employees. As a result, the Company
recorded deferred compensation for the difference between the
exercise price of stock options granted and the fair value of
the Company's common stock at the date of issuance or grant.
The deferred compensation will be amortized over the vesting
period of the related options, which is generally four years.
Gross deferred compensation recorded during the years ended
December 31, 1998, 1999, and 2000 totaled $0, $478,550 and
$4,136,104, and related amortization amounted to $379,072,
$438,481 and $589,133, respectively. This deferred
compensation is subject to reduction for any employee who
terminates employment prior to the expiration of such
employee's option vesting period.
F-22
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
Had the Company determined compensation expense based on the
fair value at the grant date for its stock options issued to
employees under SFAS No. 123, the Company's net loss would
have been adjusted to the pro forma amounts indicated below.
The full impact of calculating compensation expense for stock
options under SFAS No. 123 is not reflected in the pro forma
net loss amounts presented below because compensation expense
is reflected over the options' vesting period.
1998 1999 2000
------------ ----------- -----------
Net loss
As reported $(6,347,074) (1,919,490) (7,849,155)
Pro forma $(6,459,920) (2,108,246) (8,166,392)
Basic net loss per common share
As reported $(4.10) (1.22) (2.80)
Pro forma $(4.17) (1.34) (2.91)
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in:
1998 1999 2000
---------- ---------- ----------
Expected volatility 0.10% 0.10% 0.10%
Dividend yield -- -- --
Risk free interest rate 4.94% 5.86% 6.07%
Expected life 3-5 years 1-4 years 1-4 years
F-23
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
A summary of the status of the Company's stock options as of
December 31, 1998, 1999 and 2000, and changes during the year
ending on those dates is presented below:
1998 1999 2000
-------------------- ------------------ -----------------
Weighted- Weighted- Weighted-
average average average
Shares exercise Shares exercise Shares exercise
(000)'s price (000)'s price (000)'s price
---------- ---------- ------- ---------- ------ ----------
Outstanding at beginning of year 1,671 $1.30 2,201 $1.67 2,922 $2.37
Granted 553 2.75 891 4.05 668 5.15
Cancelled (1) 0.39 (126) 2.31 (98) 2.23
Exercised (22) 0.39 (44) 1.55 (58) 1.11
---------- ---------- ------- ---------- ------ ----------
Outstanding at end of year 2,201 1.67 2,922 2.37 3,434 2.93
---------- ---------- ------- ---------- ------ ----------
Options exercisable at
end of year 1,199 1.08 1,765 1.63 2,214 2.16
Weighted-average fair value of
options granted during
the year $0.51 $1.31 $9.23
========== ========== ==========
The following table summarizes information about stock options
outstanding at December 31, 2000:
Options outstanding Options exerciseable
------------------------------ --------------------------
Weighted- Weighted- Weighted-
Range of average average average
exercise remaining exercise exercise
prices Number contractual life price Number price
- ------------ ---------- ---------------- --------- --------- -----------
$0.39 775,775 4.2 years $0.39 775,775 $0.39
$0.98 82,621 5.4 0.98 82,621 0.98
$2.36 256,391 5.9 2.36 250,167 2.36
$2.75 810,974 7.3 2.75 575,375 2.75
$3.67 225,786 8.2 3.67 206,501 3.67
$4.20 627,566 8.7 4.20 225,875 4.20
$4.67 539,922 9.6 4.67 72,576 4.67
$7.47 115,049 9.2 7.47 25,240 7.47
- ------------ ---------- ---------------- --------- --------- -----------
$0.39-$7.47 3,434,084 7.2 years $2.93 2,214,130 $2.16
- ------------ ---------- ---------------- --------- --------- -----------
(f) DIRECTOR OPTION PLAN
The Company adopted the 2000 Director Option Plan, referred to
as the "Director Plan," in October 2000. The Director Plan
provides for the automatic grant of options to purchase shares
of common stock to non-employee directors. The Company
reserved a total of 200,000 shares of common stock for
issuance under the Director Plan.
F-24
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
Each non-employee director who joins the board of directors
after the effective date of the Director Plan will receive an
option to purchase 10,000 shares of common stock on the date
such non-employee director joins the board. In addition, each
non-employee director who has served on the board for at least
six months shall receive an option to purchase 6,000 shares of
our common stock on the date of each annual stockholders'
meeting. Also, on the date of his or her appointment or
re-appointment to a committee, the Director Plan provides that
each non-employee director will receive additional options to
purchase 3,000 shares of common stock for each committee such
director serves on. The options vest over a four-year period,
with an exercise price equal to the fair market value of the
common stock on the date of grant. The maximum term of the
options granted under our Director Plan is ten years. Options
granted under the Director Plan are generally
non-transferable. Unless otherwise terminated by the Board of
Directors, the Director Plan terminates automatically in
October 2010.
In December 2000 an option to purchase 10,000 shares was
granted to an incoming director.
(g) EMPLOYEE STOCK PURCHASE PLAN
In December 2000, the Company adopted the 2000 Employee
Stock Purchase Plan, referred to as the "Purchase Plan".
The Company reserved a total of 350,000 shares of common
stock for issuance under the Purchase Plan, plus annual
increases on the first day of each fiscal year beginning
2001 equal to the lesser of 350,000 shares; 2 perent of our
outstanding shares as of such date; or a lesser amount
determined by the Board of Directors.
Substantially all employees are eligible to participate.
Participants may purchase common stock through payroll
deductions of up to 15 percent of the participant's
compensation. The maximum number of shares a participant may
purchase during a six-month offering period is 6,250 shares.
The price of stock purchased under the purchase plan is 85
percent of the lower of the fair market value of the common
stock at the beginning of the offering period or end of the
offering period.
The Purchase Plan will terminate on October 18, 2010, unless
sooner terminated by the Board of Directors. No shares were
purchased under the Purchase Plan in 2000.
(h) WARRANTS
Warrants to purchase common stock are granted to organizations
and institutions in conjunction with certain licensing and
funding activities. The warrants vest according to a
combination of time and events as prescribed in the
agreements. The Company applies the provisions of APB 25 to
warrants issued prior to 1996. During the year ended December
31, 1998, 375,000 common stock warrants were granted at an
exercise price of $0.01 in connection with the private
placement of Series F convertible preferred stock and 101,694
common stock warrants were granted at an exercise price of
$11.80 to a university research foundation. The Class B
preferred stock warrants were converted to common stock
warrants in December 2000, upon the close of the
F-25
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
Company's initial public offering. At December 31, 1998, 1999,
and 2000, the Company had the following warrants outstanding.
1998 1999 2000
----------------------- ----------------------- -----------------------
Exercise
price Outstanding Vested Outstanding Vested Outstanding Vested
-------- ----------- ------- ----------- ------- ----------- -------
Class B preferred
stock warrants $5.90 40,756 23,807 40,756 40,756 -- --
=========== ======= =========== ======= =========== =======
Common stock
warrants $3.93 -- -- -- -- 61,133 61,133
9.83 101,694 50,847 101,694 76,270 101,694 101,694
8.85 317,796 317,796 317,796 317,796 317,796 317,796
0.01 375,000 375,000 375,000 375,000 -- --
11.80 101,694 17,796 101,694 26,694 101,694 35,592
----------- ------- ----------- ------- ----------- -------
Total common
stock warrants 896,184 761,439 896,184 795,760 582,317 516,215
=========== ======= =========== ======= =========== =======
(9) INCOME TAXES
A reconciliation of tax credits computed at the statutory federal tax
rate on loss from operations before income taxes to the actual income
tax expense is as follows:
1998 1999 2000
------------ --------- -----------
Tax provision computed at the statutory rate $(2,158,000) (652,600) (2,668,700)
State income taxes, net of federal income
tax provision (293,300) (88,800) (332,300)
Book expenses not deductible for tax
purposes 12,500 9,700 23,000
Research and experimentation tax credit (342,800) (403,800) (459,000)
Nondeductible compensation expense 128,900 120,400 200,400
Change in the beginning of the period
valuation allowance for deferred tax
assets allocated to tax expense 2,535,400 911,000 3,236,600
Other, net 117,300 104,100
------------ --------- -----------
Income tax expense $ -- -- --
============ ========= ===========
F-26
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
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 the
Company's deferred tax assets as of December 31, 1998, 1999, and 2000,
are as follows:
1998 1999 2000
------------ ----------- ------------
Deferred tax assets:
Net operating loss carryforwards $12,647,000 12,973,200 16,767,800
Research and experimentation tax credit 1,029,000 1,432,400 1,891,300
Cumulative effect of using cash basis
method of accounting for income tax
purposes 510,000 393,700 296,900
Deferred revenue 1,351,700 1,805,500 733,300
Property and equipment, principally due
to differences in depreciation (16,000) (251,600) (311,300)
Deferred compensation expense 291,000 373,000 576,200
Other 29,600 27,100 21,768
------------ ----------- ------------
Total deferred tax assets 15,842,300 16,753,300 19,975,968
Valuation allowance (15,842,300) (16,753,300) (19,975,968)
------------ ----------- ------------
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
comprehensive income.
The valuation allowance for deferred tax assets increased approximately
$2,535,400, $911,000 and $3,236,700 for the years ended December 31,
1998, 1999, and 2000, respectively.
At December 31, 2000, the Company has net operating loss carryforwards
of approximately $43.4 million for federal income tax purposes of which
$25.6 million expire at various dates through 2012, and $17.8 million
expire at various dates through 2020. The Company also has research
and experimentation tax credit carryforwards of $1,891,300 at
December 31, 2000, of which $686,000 expire through 2012 and
$1,205,300 expire through 2020. These carryforwards may be
significantly limited under the Internal Revenue Code as a result of
ownership changes experienced by the Company.
(10) DEFINED CONTRIBUTION PLAN -- 401(k)
The Company has a defined contribution plan (the Plan) under Internal
Revenue Code Section 401(k). All full-time employees who have completed
three months of service and are over age 21 are eligible for
participation in the Plan. Participants may elect to have up to 15
percent of compensation
F-27
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
contributed to the Plan. Under the Plan, the Company's contributions
are discretionary. During the years ended December 31, 1998 and 1999,
the Company made no contributions. During the year ended December 31,
2000, the Company made contributions of approximately $75,000.
11) QUARTERLY RESULTS (UNAUDITED)
The Company's unaudited quarterly information is as follows:
Total Net Income Basic Income Diluted Income
Revenue (Loss) (Loss) Per Share (Loss) Per Share
---------- ------------ ---------------- ----------------
Quarter Ended:
March 31, 2000 $3,346,408 $(2,336,059) $(1.45) $(1.45)
June 30, 2000 5,190,680 220,394 0.11 0.01
September 30, 2000 2,802,863 (2,541,615) (1.27) (1.27)
December 31, 2000 2,545,063 (3,191,875) (0.56) (0.56)
Quarter Ended:
March 31, 1999 $5,027,544 $(222,192) $(0.14) $(0.14)
June 30, 1999 4,070,125 (273,313) (0.18) (0.18)
September 30, 1999 3,686,880 (898,110) (0.56) (0.56)
December 31, 1999 4,165,400 (525,875) (0.33) (0.33)
F-28
GENVEC, INC.
Notes to Financial Statements
December 31, 1999 and 2000
Earnings (loss) per share was calculated for each three month and the
twelve month period on a stand alone basis. As a result, the sum of the
earnings (loss) per share for the four quarters does not equal the
earnings (loss) per share for the twelve months.
F-29