SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 30, 2005
VAXGEN, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 0-26483 94-3236309
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification Number)
1000 MARINA BLVD., SUITE 200, BRISBANE, CALIFORNIA 94005
(Address of Principal Administrative Offices)
Registrant's Telephone Number, Including Area Code: (650) 624-1000
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(Former name or former address, if changed since last report.)
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Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
|_| Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
SECTION 1--REGISTRANT'S BUSINESS AND OPERATIONS
Item 1.01 Entry into a Material Definitive Agreement.
The information set forth in Item 3.02 is hereby incorporated into Item 1.01 by
reference.
SECTION 2--FINANCIAL INFORMATION
Item 2.03 Creation of a Direct Financial Obligation.
The information set forth in Item 3.02 is hereby incorporated into Item 2.03 by
reference.
SECTION 3--SECURITIES AND TRADING MARKETS
Item 3.02. Unregistered Sales of Equity Securities.
On March 30, 2005, VaxGen, Inc. (the "Company") entered into individual
purchase agreements purchase agreement with a group of accredited investors for
the private placement of $31.5 million of its 5 1/2% Convertible Senior
Subordinated Notes due 2010 (the "Notes"). When issued, the notes will require
semi-annual payment of interest in cash at a rate of 5 1/2%, convert, at the
option of the holder, into VaxGen common stock at an initial conversion price of
approximately $14.76 per share subject to adjustment, and constitute senior
subordinated obligations of VaxGen. The securities were sold pursuant to Rule
506 of the Securities Act and thus were exempt from the registration
requirements of the Securities Act of 1933. The transaction is expected to close
on April 5, 2005.
SECTION 8--OTHER EVENTS
Item 8.01. Other Events.
On March 31, 2005, the Company issued a press release entitled, "VaxGen
Announces Pricing of $31.5 Million of Convertible Senior Subordinated Notes".
This press release is attached as Exhibit 99.1 to this report and is
incorporated herein by reference.
VaxGen hereby updates its Risk Factors and the description of its Business
as follows:
Forward-Looking Statements and Risk Factors
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, that are subject
to the "safe harbor" created by those sections. Any statements about our
expectations, beliefs, plans, objectives, assumptions or future events or
performance are not historical facts and may be forward-looking. These
statements are often, but not always, made through the use of words or phrases
such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing,"
"expect," "believe," "intend," "predict," "potential" and similar words or
phrases or the negatives of these words or phrases. We have based these
forward-looking statements on our current expectations about future events.
Accordingly, these statements involve estimates, assumptions and uncertainties
which could cause actual results to differ materially from those expressed in
these statements. Any forward-looking statements are qualified in their entirety
by reference to the factors discussed in the report, including those discussed
in this report under the heading "Risk Factors" below.
Because the risk factors referred to below could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by us or on our behalf, you should not place undue reliance on
any forward-looking statements. Further, any forward-looking statement speaks
only as of the date on which it is made, and we undertake no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which the statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for us to predict which factors will arise. In addition, we cannot
assess the impact of each factor on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements. When used in the report,
unless otherwise indicated, "we," "our" and "us" refers to VaxGen.
1.
RISK FACTORS
Risks Related to Our Business
We do not have current financial statements and therefore you are not
currently able to evaluate our current financial condition or operating history
and results.
We are in the process of restating our prior historical financial
statements and engaged our new independent auditors to reaudit our prior
financial statements. In July 2004, we announced that we were reauditing and
restating our financial statements for the fiscal years ended December 31, 2003
and 2002, because we determined that we should recognize revenue from certain
government contracts as costs are incurred, instead of after completing contract
milestones. In October 2004, we announced that we would also be reauditing and
restating our financial statements for the fiscal year ended December 31, 2001.
In connection with the restatement of our financial statements for the fiscal
year ended December 31, 2001, we are also making adjustments to our balance
sheet as of December 31, 2000.
Furthermore, we are currently evaluating whether it is necessary for us to
include the financial statements of Celltrion, Inc., a development stage South
Korean contract manufacturing company ("Celltrion"), with our own. If we
determine that Celltrion's results should be integrated into our own we may be
required to have the financial statements of Celltrion prepared and audited in
conformity with U.S. GAAP and U.S. Auditing Standards and to record our
investment in Celltrion at fair market value and record our share of the
venture's start-up losses and impairment reserves. This process will take
additional time to complete and will delay the completion of the reauditing and
restating our financial statements. Due to these restatements, and the potential
need for us to integrate Celltrion's financial statements into our own, you
cannot rely on our previously filed financial statements, or on the information
that was prepared therefrom for the fiscal years ended December 31, 2003, 2002
and 2001.
While we plan to have these financial statements prepared as quickly as
possible, we do not know when, if ever, our financial statements will be
completed. Until we complete the reaudit of the financial statements for fiscal
years ended December 31, 2003, 2002 and 2001, restate those financial
statements, determine our treatment of Celltrion with respect to our financial
statements, and file financial statements for the fiscal year ended December 31,
2004 and any ensuing periods, we will be delinquent in our filings required
under Sections 13 and 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
We are not currently listed on a national exchange or on the Nasdaq National
Market or Nasdaq SmallCap Market, and cannot assure you we will ever be listed.
As a result of our failure to have current financial statements for the
fiscal years ended December 31, 2003, 2002 and 2001, we have been delisted from
the Nasdaq National Market ("Nasdaq"), and our common stock is not currently
listed on any national stock exchange or on Nasdaq or the Nasdaq
2.
SmallCap Market. Until we complete the reaudit and restatement of our financial
statements for the fiscal years ended December 2003, 2002 and 2001 and make all
other necessary filings with the Securities and Exchange Commission (the "SEC")
pursuant to Sections 13 and 15(d) of the Exchange Act, we will not be able to
apply for our common stock to be re-listed on Nasdaq or for our common stock to
be listed on a national exchange or the Nasdaq SmallCap Market. We do not know
when, if ever, this will be completed, and thus, whether our common stock will
ever be listed. In addition, we cannot be certain that Nasdaq will approve our
stock for relisting. In order to be eligible for relisting we must meet Nasdaq's
initial listing criteria, and we believe we will need to be in compliance with
Sections 13 and 15(d) of the Exchange Act. Our common stock is currently traded
on the Pink Sheets, LLC.
We may not be compliant with Section 404 under the Sarbanes-Oxley Act of 2002.
Section 404 under the Sarbanes-Oxley Act of 2002 requires that we perform
an assessment of our internal controls over financial reporting, and engage our
independent auditors to perform an audit of our internal control over financial
reporting. We are required to complete the assessment as to the adequacy of our
internal control reporting as of December 31, 2004.
Our auditors have expressed serious concerns that we did not allow
sufficient time for us and our auditors to complete our and their respective
responsibilities before December 31, 2004. If our independent auditors conclude
that we failed to complete the required assessment as to the effectiveness of
our internal controls over financial reporting or if they conclude that they
were unable to complete their required audit of internal control and financial
reporting, they may disclaim an opinion as to the effectiveness of our internal
controls.
We do not believe that the SEC has provided guidance as to the effect of
such a disclaimer. If we receive such a disclaimer, our Annual Report on Form
10-K for the year ended December 31, 2004, once filed (if ever), may be deemed
to be deficient by the SEC. If our 2004 10-K were deemed to be deficient, the
SEC may conclude that we are in violation of Sections 13 and 15(d) of the
Exchange Act, which violation may not be cured until we file our Annual Report
on Form 10-K for the fiscal year ended December 31, 2005 (the "2005 10-K").
We are currently not eligible to register securities with the SEC, and may never
regain compliance.
Until we have filed current financial statements and made all the
necessary filings with the SEC pursuant to Sections 13 and 15(d) of the Exchange
Act, we will not be able to register any securities for re-sale. Until we are
able to register securities with the SEC for resale, any purchasers who purchase
our common stock or other securities directly from us, will have to rely on an
exemption from the federal and state securities laws in order to resell their
securities. We cannot estimate when, if ever, we will have, complete the
restatement of our financial statements, and regain compliance with Sections 13
and 15(d) of the Exchange Act.
We will need to raise additional capital, and any inability to raise required
funds could harm our business.
As of February 28, 2005, we had $27.67 million of cash, cash equivalents
and investment securities. We believe that our existing cash, cash equivalents
and investment securities, together with
3.
anticipated receipts from our existing government contracts and grants, and
investment income, could enable us to continue operations through the end of
June 2005. However, in order to complete our delivery requirements under our
contract to provide 75 million doses of our recombinant anthrax vaccine to the
U.S. government for civilian defense (the "SNS Contract"), we will need to
increase expenditures. Even with the net proceeds we expect to receive through
this financing, we will need to raise substantial additional capital in order to
complete our obligations under the SNS Contract and to continue operations. We
may attempt to raise these funds through equity or debt financings,
collaborative arrangements with corporate partners or from other sources. We
cannot guarantee you that additional funds will be available on acceptable
terms, or at all. If we are unable to raise additional capital when necessary,
we may be required to relinquish our rights to certain key technologies, vaccine
candidates or marketing territories under the terms of certain of our
collaborative agreements. Furthermore, if we are unable to raise additional
capital when necessary, we may be unable to perform under our existing
contracts, we may default on our contracts, our contracts may be terminated and
we may not be able to secure new contracts.
We will need to amend our Amended and Restated Certificate of Incorporation in
order to increase the amount of our authorized common stock.
As of February 28, 2005, we had 29,606,523 shares of common stock
outstanding, and outstanding options and warrants exercisable for 5,701,855
shares of common stock, and 472,356 shares of our common stock reserved for
future issuance under our 2001 Employee Stock Purchase Plan. We will have only
4,219,266 shares of common stock authorized and available for issuance under our
Amended and Restated Certificate of Incorporation (the "Restated Certificate").
We will need to increase the amount of shares of common stock available for
issuance pursuant to Restated Certificate. In order to amend and restate our
Restated Certificate, we will be required to receive the approval of our
stockholders, which we intend to seek at our next annual meeting of
stockholders. In order to hold our annual meeting of stockholders we must have a
quorum of the voting power of our outstanding common stock either present at the
meeting, or through proxy. However, we cannot solicit proxies from our
stockholders because we are delinquent in our periodic filing requirements under
the Exchange Act. We will be delayed in holding our annual meeting of
stockholders because we would not likely be able to have a quorum of the voting
power of our outstanding common stock attend our annual meeting of stockholders
in person. Once we hold our next annual meeting of stockholders, if our
stockholders do not approve the amendment of the Restated Certificate, we will
be limited in our ability to pursue equity financing in the future. If our
stockholders approve an increase to the amount of common stock authorized for
issuance, and we do issue additional shares of common stock, our stockholders
equity will be diluted.
Our internal controls may not be sufficient to ensure timely and reliable
financial information.
In response to a letter the Audit Committee of the Board of Directors
received on March 8, 2004 from KPMG LLP, our former independent auditors,
identifying material weaknesses in the effectiveness of our internal controls,
we believe we need to correct deficiencies in our internal controls and
procedures for financial reporting. These deficiencies include insufficient
staffing, inadequate controls and procedures relating to revenue recognition for
government contracts, account reconciliations, segregation of duties, journal
entries, and depth of accounting knowledge.
Working with our Audit Committee, we have identified and implemented
corrective actions where required to improve the design and effectiveness of our
internal controls, including the enhancement of systems and procedures.
Significant additional resources will be required to establish and maintain
appropriate controls and procedures and to prepare the required financial and
other information in the future.
4.
We have begun implementing these systems and controls; however, we will
need to continue to improve our operational, financial and management controls
and our reporting systems and procedures. Any failure to implement required new
or improved controls, or difficulties encountered in the implementation or
operation of these controls, could harm our operating results or cause us to
fail to meet our financial reporting obligations, which could adversely affect
our business and harm our stock price.
The effectiveness of our controls and procedures may be limited by a
variety of risks including:
o faulty human judgment and simple errors, omissions or mistakes;
o collusion of two or more people;
o inappropriate management override of procedures; and
o risk that enhanced controls and procedures may still not be adequate
to assure timely and reliable financial information.
We believe there is a high likelihood that we and our current independent
auditors will conclude we have additional material weaknesses in our internal
controls for the year ended December 31, 2004. If we fail to have effective
internal controls and procedures for financial reporting in place, we could be
unable to provide the financial information necessary to regain compliance with
the SEC requirements and maintain compliance. If our independent registered
public accounting firm is unable to provide us with an unqualified report as to
the effectiveness of our internal controls over financial reporting as of
December 31, 2004, investors could lose confidence in the reliability of our
internal controls over financial reporting. Additionally, if we fail to have
effective internal controls and procedures for financial reporting in place, it
could adversely affect our financial reporting requirements under our government
contracts.
We may fail to fulfill our obligations under our contract to supply the
Strategic National Stockpile ("SNS") of anthrax vaccines to the U.S. government,
and we may be unable to commercialize our vaccine candidates.
The U.S. government has undertaken commitments to help secure improved
countermeasures against bioterrorism, including the stockpiling of vaccines for
anthrax and smallpox. On November 4, 2004, we were awarded the SNS Contract to
supply the U.S. government with up to 75 million doses of our anthrax vaccine
candidate over five years. We expect to substantially increase our employee base
to fulfill certain obligations under the SNS Contract. There is no guarantee
that we will be able to find and hire suitable employees or that we will be able
to integrate them into our operation properly so as to enable us to fulfill the
obligations under the SNS Contract. If we fail to fulfill certain obligations
under the SNS Contract, the government may terminate the SNS Contract with us.
In addition, the U.S. government may terminate any government contract awarded
to us for its convenience at any time.
The government's determination to award the SNS Contract to us may be challenged
by an interested party, such as another bidder, at the General Accounting Office
or in federal court.
The laws and regulations governing the procurement of goods and services
by the U.S. government provide procedures by which other bidders and other
interested parties may challenge the award of a government contract. Given the
high dollar value of the SNS Contract, such protests could be filed even if
there are not any valid legal grounds on which to base the protest. If any such
protests are filed, the government agency may decide to suspend our performance
under the contract while such protests are being considered by the General
Accounting Office or the applicable federal court, thus
5.
potentially delaying delivery of and payment for the vaccines. In addition, we
may be forced to expend considerable funds to defend the award. If a protest is
successful, the government may be ordered to terminate our contract for its
convenience and resolicit bids. The government could even be directed to award
the contract to one of the other bidders. The loss of the SNS Contract would
make it difficult for us to generate sufficient revenue to continue operations
or commercialize our anthrax vaccine.
The U.S. Congress may instigate an inquiry into the award of the SNS Contract to
us.
Senator Charles Grassley, Chairman of the U.S. Senate Finance Committee,
sent a letter to the Department of Health and Human Services ("HHS") on January
28, 2005 requesting information about the SNS Contract and its award to us. The
letter alleges that HHS may have acted prematurely in awarding the SNS Contract
to us. There can be no assurance that Senator Grassley or the U.S. Senate
Finance Committee will not pursue an inquiry into the award of the SNS Contract.
Such an inquiry, if it were initiated, could include public hearings that could
lead to negative publicity, a change to the SNS Contract, and an adverse effect
on the value of our common stock.
The award of the SNS Contract does not mean there will be any future contracts
awarded.
The award of one government contract does not necessarily secure the award
of future contracts covering the same vaccine. By law, the U.S. government must
usually seek competition when procuring goods and services. In addition, if we
do not perform in accordance with the terms of the SNS Contract, we may receive
a poor performance report which would be considered in making any future awards,
thus making it more difficult for us to win the award of such future contracts.
Accordingly, we cannot be certain that we will be awarded any future contracts
to supply a government stockpile of anthrax vaccine.
It is possible that future awards to provide the U.S. government with
emergency stockpiles of anthrax vaccine will be granted solely to another
supplier. If the U.S. government makes significant future contract awards for
the supply of its emergency stockpile to our competitors, such as Avecia Limited
("Avecia"), our business will be harmed and it is unlikely that we will be able
to ultimately commercialize that particular vaccine.
In addition, the determination of when and whether a product is ready for
large scale purchase and potential use will be made by the government through
consultation with a number of governmental agencies, including the Food and Drug
Administration ("FDA"), the National Institutes of Health (the "NIH"), the
Centers for Disease Control ("CDC") and the Department of Homeland Security.
President Bush has proposed, and Congress is considering, measures to accelerate
the development of biodefense products through NIH funding, the review process
by the FDA and the final government procurement contracting authority. While
this may help speed the approval of our vaccine candidates, it may also
encourage competitors to develop their own vaccine candidates. If competitive
vaccine candidates gain approval, we could face severe competition, which could
harm our business.
If the U.S. government fails to continue funding our anthrax vaccine candidate
development efforts or fails to purchase sufficient quantities of any future
biodefense vaccine candidate, we may be unable to generate sufficient revenues
to continue operations.
We have received funding from the U.S. government for the development of
our anthrax vaccine candidate. Changes in government budgets and agendas may
result in future funding being decreased and de-prioritized, and government
contracts typically contain provisions that permit cancellation in the event
that funds are unavailable to the governmental agency. In addition, the SNS
Contract is primarily a fixed price contract and, thus, if we do not perform
efficiently, we could suffer losses under the contract. Furthermore, we cannot
be certain of the timing of any future funding, and substantial delays or
6.
cancellations of funding could result from protests or challenges from third
parties. If the U.S. government fails to continue to adequately fund our
research and development programs, we may be unable to generate sufficient
revenues to continue operations. Similarly, if we develop an anthrax vaccine
candidate that is approved by the FDA, but the U.S. government does not place
sufficient orders for this product, our future business will be harmed.
We may encounter difficulties managing the change and growth of our operations,
which could adversely affect our business.
We have experienced a period of rapid change in our business as a result
of increased emphasis on biodefense opportunities. In addition, we expect to
experience substantial growth in 2005 in manufacturing, quality systems,
clinical and regulatory functions associated with our SNS Contract. This change
and growth in our business has strained and may continue to strain our
administrative, financial and operational functions. We will need to, among
other things, expand our staff and improve our systems and procedures to manage
our expected growth and to maintain an adequate system of internal controls.
Furthermore we will have to increase our capital expenditures in order to
fulfill certain obligations under the SNS Contract, far in excess of what we
have done in the past. As a result of a rapid increase in hiring employees and
increased capital expenditures our operating budgets are significantly greater
that they have been in the past. If we are unable to manage the change and
growth of our business effectively, we may be unable to obtain future government
contracts and our results of operations and financial condition will be
adversely affected.
U.S. government agencies have special contracting requirements, which create
additional risks.
We have entered into contracts with National Institutes of Allergy and
Infectious Diseases ("NIAID") and HHS and a license agreement with U.S. Army
Medical Research Institute of Infectious Diseases ("USAMRIID"), which are U.S.
government agencies. Substantially all of our revenue is derived from government
contracts and grants. In contracting with government agencies, we are subject to
various U.S. government agency contract requirements. Future sales to U.S.
government agencies will depend, in part, on our ability to meet U.S. government
agency contract requirements, certain of which we may not be able to satisfy.
U.S. government contracts typically contain unfavorable termination
provisions and are subject to audit and modification by the government at its
sole discretion, which subjects us to additional risks. These risks include the
ability of the U.S. government to unilaterally:
o suspend or prevent us for a set period of time from receiving new
contracts or extending existing contracts based on violations or
suspected violations of laws or regulations;
o terminate our existing contracts;
o reduce the scope and value of our existing contracts;
o audit and object to our contract-related costs and fees, including
allocated indirect costs;
o control and potentially prohibit the export of our products; and
o change certain terms and conditions in our contracts.
The U.S. government may terminate any of its contracts with us either for
its convenience or if we default by failing to perform in accordance with the
contract schedule and terms. Termination for
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convenience provisions generally enable us to recover only our costs incurred or
committed, and settlement expenses and profit on the work completed prior to
termination. Termination for default provisions do not permit these recoveries
and make us liable for excess costs incurred by the U.S. government in procuring
undelivered items from another source. In addition, the U.S. government could
bring criminal and civil charges against us based on intentional or
unintentional violations of the representations and certifications that we have
made in all our government contracts.
As a U.S. government contractor, we are required to comply with applicable
laws, regulations and standards relating to our accounting practices and are
subject to periodic audits and reviews. As part of any such audit or review, the
U.S. government may review the adequacy of, and our compliance with, our
internal control systems and policies, including those relating to our
purchasing, property, estimating, compensation and management information
systems. Based on the results of its audits, the U.S. government may adjust our
contract-related costs and fees, including allocated indirect costs. In
addition, if an audit or review uncovers any improper or illegal activity, we
may be subject to civil and criminal penalties and administrative sanctions,
including termination of our contracts, forfeiture of profits, suspension of
payments, fines and suspension or prohibition from doing business with the U.S.
government.
We could also suffer serious harm to our reputation if allegations of
impropriety were made against us. Although adjustments arising from government
audits and reviews have not seriously harmed our business in the past, future
audits and reviews could cause adverse effects. In addition, under U.S.
government purchasing regulations, some of our costs, including most financing
costs, amortization of intangible assets, portions of our research and
development costs, and some marketing expenses, may not be reimbursable or
allowed under our contracts. Moreover, all of the costs that we incur under our
cost-reimbursement contracts will be subject to audit by the U.S. government,
and the U.S. government will also determine the final indirect cost rate that we
may charge. These audits could result in claims by the U.S. government for any
unallowable or unallocable costs that we charged, or excess indirect costs, and
for penalties that may be imposed for claiming unallowable costs.
In addition, if, in the future, we must comply with some or all of the
U.S. government-specific cost accounting standards, it is possible that we will
need to expend substantial resources to modify our accounting processes and
procedures. Further, as a U.S. government contractor, we are subject to an
increased risk of investigations, criminal prosecution, civil fraud,
whistleblower lawsuits and other legal actions and liabilities to which purely
private sector companies are not.
In addition, our license agreement with USAMRIID provides that USAMRIID
reserves the right to require us and our affiliates to grant a nonexclusive,
partially exclusive, or exclusive sublicense in any field of use to a
responsible applicant, upon terms that are reasonable under the circumstances
and under applicable law, to fulfill public health or safety needs. In addition,
the license agreement requires us to manufacture products licensed under the
agreement in the United States, which will result in less flexibility in
commercializing our products.
Government contracts are subject to competitive bidding.
We obtain all of our government contracts through a competitive bidding
process. We cannot assure you that we will continue to win competitively awarded
contracts or that awarded contracts will generate revenues sufficient to result
in profits. We are also subject to risks associated with:
o the frequent need to bid on programs in advance of the completion of
their design, which may result in unforeseen technological
difficulties and/or cost overruns; and
8.
o the substantial time and effort, including design and development
activities, required to prepare bids and proposals for contracts
that may not be awarded to us.
Our fixed price and cost plus contracts may commit us to unfavorable terms.
We provide our products and services primarily through fixed price and
cost plus contracts. In a fixed price contract, we must fully absorb our cost
overruns, notwithstanding the difficulty of estimating costs that are related to
performance in accordance with contract specifications. The failure to
anticipate technical problems, estimate costs accurately or control costs during
performance of a fixed price contract may reduce the profitability of a fixed
price contract or cause a loss.
In a cost plus contract, we are allowed to recover our approved costs,
plus a fee, which may be fixed or variable depending on the contract
arrangement. The total price on a cost plus contract is based primarily on
allowable costs incurred, but generally is subject to contract funding
limitations. U.S. government regulations require us to notify our customer of
any cost overruns or underruns on a cost plus contract. If we incur costs in
excess of the funding limitation in the contract, we may not be able to recover
those cost overruns.
We license our vaccine candidates from third parties. If we fail to perform our
obligations under these license agreements, we could lose our ability to develop
and commercialize our vaccine candidates.
We license our anthrax vaccine candidate from USAMRIID and we license our
smallpox vaccine candidate from Chemo-Sero Therapeutic Research Institute of
Japan ("Kaketsuken"). Each of these license agreements requires that we perform
certain obligations. If we fail to comply with our obligations under these
agreements in a timely fashion, our licensors could terminate our rights to
develop and commercialize our anthrax and smallpox vaccine candidates, which
would adversely affect our business and prospects.
Our license agreement with Kaketsuken for our smallpox vaccine candidate may
restrict our ability to develop and commercialize other smallpox vaccine
products.
For a period of five years after the termination of the our agreement with
Kaketsuken for our smallpox vaccine candidate (the "LC16m8 Agreement"), we may
not, without Kaketsuken's prior written consent, file for or obtain regulatory
approval, sell and/or otherwise deal in any product potentially in competition
with LC16m8. During the term of the LC16m8 Agreement, we may not, without the
prior written consent of Kaketsuken, develop, sell, commercialize and/or
otherwise deal in any products which may compete with LC16m8. These restrictions
will be waived if the LC16m8 Agreement is terminated due to Kaketsuken's uncured
material breach of the LC16m8 Agreement or the FDA determines that LC16m8 is not
approvable in the United States. These restrictions may adversely affect our
ability to pursue attractive business opportunities.
Our suppliers may fail to provide, or may be delayed in providing, us with the
necessary materials to produce our vaccine candidates.
We rely on suppliers to provide us with the necessary materials to produce
our vaccine candidates. Any significant delays in obtaining any of these
materials from our suppliers could cause us to fail to perform under our
contracts, which may cause us to be in breach under those contracts and cause
those contracts to be terminated. We cannot assure you that we will not face
shortages from one or more of these suppliers in the future.
9.
Our subcontractors may fail to perform, or may be delayed in performing, certain
tasks related to our ability to provide our vaccine candidates to the government
under our contracts.
We rely on subcontractors to perform certain tasks related to our
fulfilling the requirements of our contracts. In particular, to fulfill our
obligations under the SNS Contract, we will provide bulk quantities of our
anthrax vaccine candidate to subcontractors and our subcontractors will fill
sterile individual-use syringes for delivery to the U.S. government. The
processes and procedures used by our subcontractors in performing these tasks
must be validated and approved by the U.S. government as compliant with
applicable legal requirements, including the FDA's current Good Manufacturing
Practice regulations. Any significant delays in performing these tasks by our
subcontractors, or a failure to perform them in compliance with applicable FDA
or other governmental regulations, could cause us to fail to perform under our
contracts, which may cause us to be in breach under those contracts and cause
those contracts to be terminated. We cannot assure you that one or more of these
subcontractors will not be delayed in performing, or fail to perform their
obligations under these contracts in compliance with applicable legal
requirements.
We have only a limited operating history and we expect to continue to generate
losses.
To date, we have engaged primarily in research, development and clinical
testing. Since our inception in 1995, we have not been profitable, and we cannot
be certain that we will ever achieve or sustain profitability. At February 28,
2005, we had a large accumulated deficit. Developing our product candidates will
require significant additional research and development, including non-clinical
testing and clinical trials, as well as regulatory approval. We expect these
activities, together with our general and administrative expenses, to result in
operating losses for the foreseeable future. Our ability to achieve
profitability will depend, in part, on our ability to procure future contracts
to supply the anthrax and smallpox vaccines to the U.S. government, to
successfully complete development of our proposed products, to obtain required
regulatory approvals and to manufacture and market our products directly or
through business partners. We cannot assure you that we will be able to
accomplish any of these objectives.
Vaccine development is a long, expensive and uncertain process and the approval
requirements for vaccines used to fight bioterrorism are still evolving. If we
are unable to successfully develop and test our vaccine candidates in accordance
with these requirements, our business will suffer.
We are subject to rigorous and extensive regulation by the FDA and
comparable foreign regulatory authorities. In the United States, our vaccine
candidates for anthrax and smallpox are regulated by the FDA as biological drug
products, known as biologics. In order to obtain approval from the FDA to market
our vaccine candidates, we will be required to submit to the FDA a Biologics
License Application ("BLA"), which must include both preclinical and clinical
trial data as prescribed by the FDA's current regulatory criteria for vaccines
such as our product candidates, as well as extensive data regarding the
manufacturing procedures and processes for the vaccine candidates. Ordinarily,
the FDA requires a sponsor to support a BLA application with substantial
evidence of the product's safety and effectiveness in treating the targeted
indication based on data derived from adequate and well-controlled clinical
trials, including Phase III effectiveness trials conducted in patients with the
disease or condition being targeted. Because humans are not normally exposed to
anthrax or smallpox, statistically significant effectiveness of our biodefense
product candidates cannot be demonstrated in humans, but instead must be
demonstrated, in part, by utilizing animal models before they can be approved
for commercial sale. We believe that, according to the FDA's current BLA
requirements for certain biologics that cannot be feasible or ethically tested
in humans in Phase III efficacy studies, we may instead be able to obtain BLA
approval based on clinical data from Phase II and Phase III trials in healthy
subjects that demonstrate adequate safety and immune response and effectiveness
data from studies in animals. Specifically, we
10.
intend to pursue FDA approval of our anthrax and smallpox vaccine candidates
under requirements published by the FDA in 2002 that allow the FDA to approve
certain vaccines used to reduce or prevent the toxicity of chemical, biological,
radiological or nuclear substances based on human clinical data to demonstrate
safety and immune response, and evidence of effectiveness derived from
appropriate pre-clinical studies and any additional supporting data. We cannot
predict whether we will obtain regulatory approval for any of our product
candidates pursuant to these provisions, or at all. We may fail to obtain
approval from the FDA or foreign regulatory authorities, or experience delays in
obtaining such approvals, due to varying interpretations of data or failure to
satisfy current safety, efficacy, and quality control requirements. Further, our
business is subject to substantial risk because the FDA's current policies
governing biodefense vaccines may change suddenly and unpredictably and in ways
that could impair our ability to obtain regulatory approval of these products,
and we cannot guarantee that the FDA will approve our anthrax and smallpox
vaccines.
Delays in successfully completing our clinical trials could jeopardize our
ability to obtain regulatory approval or market our vaccine candidates on a
timely basis.
Our business prospects will depend on our ability to complete patient
enrollment in clinical trials, to obtain satisfactory results, to obtain
required regulatory approvals and to successfully commercialize our vaccine
candidates. Vaccine development to show adequate evidence of effectiveness in
animal models and safety and immune response in humans is a long, expensive and
uncertain process, and delay or failure can occur at any stage of our
pre-clinical studies or clinical trials. Any delay or significant adverse
clinical events arising during any of our clinical trials could force us to
abandon a vaccine candidate altogether or to conduct additional clinical trials
in order to obtain approval from the FDA or foreign regulatory bodies. These
development efforts and clinical trials are lengthy and expensive, and the
outcome is uncertain. Completion of our clinical trials, announcement of results
of the trials and our ability to obtain regulatory approvals could be delayed
for a variety of reasons, including:
o slower-than-anticipated enrollment of volunteers in the trials;
o lower-than-anticipated recruitment or retention rate of volunteers
in the trials;
o serious adverse events related to the vaccine candidates;
o unsatisfactory results of any clinical trial;
o the failure of our principal third-party investigators to perform
our clinical trials on our anticipated schedules; or
o different interpretations of our pre-clinical and clinical data,
which could initially lead to inconclusive results.
Our development costs will increase if we have material delays in any
clinical trial or if we need to perform more or larger clinical trials than
planned. If the delays are significant, or if any of our vaccine candidates do
not prove to be safe or effective or do not receive required regulatory
approvals, our financial results and the commercial prospects for our product
candidates will be harmed. Furthermore, our inability to complete our clinical
trials in a timely manner could jeopardize our ability to obtain regulatory
approval.
The independent clinical investigators that we rely upon to conduct our clinical
trials may not be diligent, careful or timely, and may make mistakes, in the
conduct of our clinical trials.
11.
We depend on independent clinical investigators to conduct our clinical
trials. The investigators are not our employees, and we cannot control the
amount or timing of resources that they devote to our vaccine development
programs. If independent investigators fail to devote sufficient time and
resources to our vaccine development programs, or if their performance is
substandard or fails to comply with the protocol and applicable laws and
regulatory standards, it may delay or prevent FDA approval of our vaccine
candidates. These independent investigators may also have relationships with
other commercial entities, some of which may compete with us. If these
independent investigators assist our competitors at our expense, it could harm
our competitive position.
If we fail to comply with extensive regulations enforced by domestic and foreign
regulatory authorities both before and after we obtain approval of our vaccine
candidates, the commercialization of our product candidates could be prevented,
delayed or suspended.
Vaccine candidates are subject to extensive government regulations related
to development, testing, manufacturing and commercialization in the United
States and other countries. Our vaccine candidates are in the pre-clinical and
clinical stages of development and have not received required regulatory
approval from the FDA to be commercially marketed and sold in the United States.
With the exception of LC16m8, which was licensed and sold in Japan, our vaccine
candidates have not received required regulatory approval from foreign
regulatory agencies to be commercially marketed and sold. The process of
obtaining and complying with FDA, other governmental and foreign regulatory
approvals and regulations is costly, time consuming, uncertain and subject to
unanticipated delays. Despite the time and expense exerted, regulatory approval
is never guaranteed. We also are subject to the following risks and obligations,
among others:
o the FDA or foreign regulators may refuse to approve an application
if they believe that applicable regulatory criteria are not
satisfied;
o the FDA or foreign regulators may require additional testing for
safety and effectiveness;
o the FDA or foreign regulators may interpret data from pre-clinical
testing and clinical trials in different ways than we interpret
them;
o if regulatory approval of a product is granted, the approval may be
limited to specific indications or limited with respect to its
distribution. In addition, many foreign countries control pricing
and coverage under their respective national social security
systems;
o the FDA or foreign regulators may not approve our manufacturing
processes or manufacturing facilities;
o the FDA or foreign regulators may change their approval policies or
adopt new regulations.
o even if regulatory approval for any product is obtained, the
marketing license will be subject to continual review, and newly
discovered or developed safety or effectiveness data may result in
suspension or revocation of the marketing license;
o if regulatory approval of the vaccine candidate is granted, the
marketing of that vaccine would be subject to adverse event
reporting requirements and a general prohibition against promoting
products for unapproved or "off-label" uses; and
12.
o in some foreign countries, we may be subject to official release
requirements that require each batch of the vaccine we produce to be
officially released by regulatory authorities prior to its
distribution by us.
Failure to comply with the regulatory requirements of the FDA and other
applicable foreign regulatory bodies may subject us to administrative or
judicially imposed sanctions, including:
o warning letters;
o civil penalties;
o criminal penalties;
o injunctions;
o product seizure or detention, including any products that we
manufacture under the SNS Contract;
o product recalls;
o total or partial suspension of production; and
o suspension or revocation of the marketing license.
We and our subcontractors are subject to ongoing regulatory review and periodic
inspection and approval of manufacturing procedures and operations, including
compliance with cGMP regulations.
The manufacturing methods, equipment and processes used by us and our
subcontractors must comply with the FDA's current Good Manufacturing Practice
("cGMP") regulations. The cGMP requirements govern, among other things,
recordkeeping, production processes and controls, personnel and quality control.
The FDA must approve the facilities used to manufacture our products before they
can be used to commercially manufacture our vaccine products or commence
deliveries under the SNS Contract, and these facilities are subject to ongoing
and periodic inspections. If we or our subcontractors fail to comply with the
cGMP requirements, or fail to pass a pre-approval inspection of our
manufacturing facility in connection with the SNS Contract, we may not receive
regulatory approval, and we would be subject to possible judicial or
administrative sanctions. In addition, preparing a manufacturing facility for
commercial manufacturing may involve unanticipated delays and the costs of
complying with the cGMP regulations may be significant. Any material changes we
make to our manufacturing processes after we obtain approval of a product may
require approval by the FDA, state or foreign regulatory authorities.
Our product development efforts may not yield marketable products due to results
of studies or trials, failure to achieve regulatory approvals or market
acceptance, proprietary rights of others or manufacturing issues.
Our success depends on our ability to successfully develop and obtain
regulatory approval to market new biopharmaceutical products. We expect that a
significant portion of the research that we will conduct will involve new and
unproven technologies. Development of a product requires substantial technical,
financial and human resources.
13.
Our potential products may appear to be promising at various stages of
development yet fail to reach the market for a number of reasons, including:
o the lack of adequate quality or sufficient prevention benefit, or
unacceptable safety during pre-clinical studies or clinical trials;
o their failure to receive necessary regulatory approvals;
o the existence of proprietary rights of third parties; or
o the inability to develop manufacturing methods that are efficient,
cost-effective and capable of meeting stringent regulatory
standards.
We face uncertainty related to coverage and reimbursement of our products by
third-party payors.
We face uncertainty in both domestic and foreign markets regarding our
ability to obtain coverage and reimbursement from third-party payors, including
private insurance plans and government health care programs. These third party
payors may not provide adequate or any coverage for the products we develop. In
addition, even if we receive reimbursement from these payors, that amount may be
inadequate to meet our business objectives. Additionally, regulatory and
legislative initiatives could decrease the price we receive for any product we
market in the future. For example, federal, state and foreign governments may
enact new legislation or adopt regulations designed to contain or reduce the
costs to their health care programs. These measures could limit the prices we
receive for our products and lead to a reduction in patient access to our
products. Accordingly, our ability to generate revenue from any product we
market in the future may be adversely affected. If we cannot realize a return on
our investment because of restrictions in coverage and reimbursement of our
products, we may be required to significantly alter our business strategy.
Political or social factors may delay or impair our ability to market our
vaccine products.
Products developed to treat diseases caused by or to combat the threat of
bioterrorism will be subject to changing political and social environments. The
political and social responses to bioterrorism have been highly charged and
unpredictable. Political or social pressures may delay or cause resistance to
bringing our products to market or limit pricing of our products, which would
harm our business.
We may fail to protect our intellectual property or may infringe on the
intellectual property rights of others, either of which could harm our business.
If we are unable to protect our intellectual property, we may be unable to
prevent other companies from using our technology in competitive products. If we
infringe on the intellectual property rights of others, we may be prevented from
developing or marketing our product candidates. We rely on patent and other
intellectual property protection to prevent our competitors from manufacturing
and marketing our product candidates. Given the rights retained and licenses
granted to the U.S. government in regard to our anthrax vaccine, to the extent
that the U.S. government or foreign governments or organizations procuring
vaccines through treaties or agreements with the U.S. government constitute the
primary market for any of our products, the licenses granted by the U.S.
government will not provide us with a competitive advantage.
In addition, under our U.S. government contracts, we have a duty to
disclose each invention that we conceive or reduce to practice in performing the
agreement, and if we wish to retain title to such invention, we must
affirmatively elect to do so. If we fail to strictly follow these disclosure
requirements,
14.
the U.S. government could take title to such inventions and preclude us from
using them. For each invention to which we retain title, the U.S. government has
both a worldwide, irrevocable, royalty-free license to practice or have
practiced such invention on behalf of the U.S. government, and certain
"march-in" rights pursuant to which the U.S. government could require us to
license the invention that we own to third parties, including our competitors.
Our technology, including technology licensed from Kaketsuken and
USAMRIID, or technology that we may license in the future, if any, will be
protected from unauthorized use by others only to the extent that it is covered
by valid and enforceable patents or effectively maintained as trade secrets. The
patent positions of pharmaceutical and biotechnology companies can be highly
uncertain and involve complex legal and factual questions. No consistent policy
regarding the breadth of claims allowed in biotechnology patents has emerged to
date. Accordingly, we cannot predict the scope and breadth of patent claims that
may be afforded to other companies' patents. In addition, we could incur
substantial costs in litigation if we are required to defend against patent
suits brought by third parties, or if we initiate these suits.
The degree of future protection for our proprietary rights is uncertain,
and we cannot ensure that:
o others will not independently develop similar or alternative
technologies or duplicate any of our technologies;
o any patents issued to us or licensed from Kaketsuken or USAMRIID or
other parties, or that we may license in the future, if any, will
provide a basis for commercially viable products or will provide us
with any competitive advantages or will not be challenged by third
parties;
o we or any of our current or future licensors will adequately protect
trade secrets;
o we will develop additional proprietary technologies that are
patentable; or
o the patents of others will not have a material adverse effect on our
business.
We cannot be certain that patents issued to us in the future, if any, or
patents that we have licensed from Kaketsuken and USAMRIID, or that we may
license in the future, if any, will be enforceable and afford protection against
competitors. In this regard, the U.S. government has the right to use, for or on
behalf of the U.S. government, any technologies developed by us under our U.S.
government contracts and we cannot prohibit third parties, including our
competitors, from using those technologies in providing products and services to
the U.S. government. Accordingly, under our license agreement with USAMRIID
granting us an exclusive license to commercialize the anthrax vaccine, the U.S.
government retains a license for any federal government agency to practice and
have practiced USAMRIID's anthrax-related inventions, by or on behalf of the
government, thereby allowing the use of the inventions in support of government
contracts with other parties, including our competitors.
In addition, we cannot assure you that our operations or technology will
not infringe intellectual property rights of others. If we infringe the
intellectual property of others, there can be no assurance that we would be able
to obtain licenses to use the technology on commercially reasonable terms or at
all.
Our South Korean manufacturing joint venture may not be successful.
If Celltrion successfully completes the construction of its South Korean
manufacturing facility, we cannot be certain that the facility will pass
domestic or foreign regulatory approvals or be able to manufacture mammalian
cell culture products in commercial quantities on a cost-effective basis or at
all.
15.
In addition, Celltrion has not secured any agreements under which products would
be produced at this facility, and it is uncertain whether there will be
sufficient demand for mammalian-cell-culture biomanufacturing to make this
facility profitable. In addition, the political, social and economic situation
in South Korea, and the stability of the Korean peninsula as a whole, may not
provide an environment in which Celltrion would be able to manufacture products
cost-efficiently or at all. The South Korean government may impose regulations
or restrictions that would make it difficult, impractical or impossible, whether
economically, legally or otherwise, for Celltrion to conduct its business there.
If Celltrion is unable to manufacture mammalian cell culture products, or if it
becomes commercially impractical for Celltrion to manufacture such products, we
may not gain financial or other benefit from the joint venture.
We face competition from several companies with greater financial, personnel and
research and development resources than ours.
Our competitors are developing vaccine candidates for anthrax and
smallpox, which could compete with the vaccine candidates we are developing. Our
commercial opportunities will be reduced or eliminated if our competitors
develop and market products for any of the diseases that we target that:
o are more effective;
o have fewer or less severe adverse side effects;
o are better tolerated;
o are more adaptable to various modes of dosing;
o are easier to administer; or
o are less expensive than the products or product candidates we are
developing.
Even if we are successful in developing effective vaccine products, and
obtain FDA and other regulatory approvals necessary for commercializing them,
our products may not compete effectively with other successful products.
Researchers are continually learning more about diseases, which may lead to new
technologies for treatment. Our competitors may succeed in developing and
marketing products either that are more effective than those that we may
develop, alone or with our collaborators, or that are marketed before any
products we develop are marketed.
Our competitors include fully integrated pharmaceutical companies and
biotechnology companies that currently have drug and target discovery efforts,
as well as universities and public and private research institutions. For
instance, Avecia, in collaboration with Baxter Healthcare Corp. and the United
Kingdom's Defense Science and Technology Laboratory, was awarded a $71.3 million
cost reimbursement plus fixed fee contract by NIAID in 2003 to make three
million doses of an anthrax vaccine for the U.S. government. Many of the
organizations competing with us may have substantially greater capital
resources, larger research and development staffs and facilities, greater
experience in drug development and in obtaining regulatory approvals, and
greater marketing capabilities than we do.
Natural disasters, including earthquakes, may damage our facilities.
Our corporate and manufacturing facilities are primarily located in
California. Our facilities in California are in close proximity to known
earthquake fault zones. As a result, our corporate, research and manufacturing
facilities are susceptible to damage from earthquakes and other natural
disasters, such
16.
as fires, floods and similar events. Although we maintain general business
insurance against fires and some general business interruptions, there can be no
assurance that the amount of coverage will be adequate in any particular case.
If we fail to manage successfully any company or product acquisitions, joint
ventures or in-licensed product candidates, we may be limited in our ability to
develop our product candidates and to continue to expand our product candidate
pipeline.
Our current vaccine product development programs were initiated through
in-licensing or collaborative arrangements. These collaborations include
licensing proprietary technology from, and other relationships with,
biotechnology companies and government research institutes and organizations. As
part of our business strategy, we intend to continue to expand our product
pipeline and capabilities through company or product acquisitions, in-licensing
or joint venture arrangements. Any such activities will be accompanied by
certain risks including:
o exposure to unknown liabilities of acquired companies;
o higher than anticipated acquisition costs and expenses;
o the difficulty and expense of integrating operations and personnel
of acquired companies;
o disruption of our ongoing business;
o diversion of management's time and attention; and
o possible dilution to stockholders.
If our competitors successfully enter into partnering or license
agreements or we are unable to reach agreement on license or partnering
agreements on terms acceptable to us, we may then be precluded from pursuing
those specific opportunities. Since each of these opportunities is unique, we
may not be able to find a substitute. In addition, if we are unable to manage
successfully any acquisitions, joint ventures and other collaboration
opportunities, we may be limited in our ability to develop new products and
therefore to continue to expand our product pipeline.
Our use of hazardous materials, chemicals and viruses require us to comply with
regulatory requirements and exposes us to potential liabilities.
Our research and development involves the controlled use of hazardous
materials, chemicals and viruses. We are subject to federal, state, local and
foreign laws governing the use, manufacture, storage, handling and disposal of
such materials. We cannot eliminate the risk of accidental contamination or
injury from these materials. In the event of such an accident, we could be held
liable for significant damages or fines. These damages could exceed our
resources and any applicable insurance coverage. In addition, we may be required
to incur significant costs to comply with regulatory requirements in the future.
We may become subject to product liability claims, which could reduce demand for
our product candidates or result in damages that exceed our insurance coverage.
We face an inherent risk of exposure to product liability suits in
connection with vaccines being tested in human clinical trials or sold
commercially. We may become subject to a product liability suit if any vaccine
we develop causes injury, or if vaccinated individuals subsequently become
infected or
17.
otherwise suffer adverse effects from our vaccines or products. Regardless of
merit or eventual outcome, product liability claims may result in decreased
demand for a vaccine or product, injury to our reputation, withdrawal of
clinical trial volunteers and loss of revenues.
If a product liability claim is brought against us, the cost of defending
the claim would be significant and any adverse determination may result in
liabilities in excess of our insurance coverage. We currently have product
liability insurance in the amount of $25.0 million for our anthrax programs
including the supply of three million doses of anthrax vaccine to NIAID, as well
as separate product liability coverage in the amount of $25.0 million for our
smallpox and AIDSVAX programs. However, we cannot be certain that our current
insurance can be maintained, or that additional insurance coverage could be
obtained on acceptable terms, if at all.
Legislation limiting or restricting liability for medical products used to fight
bioterrorism is evolving, and we cannot be certain that any such protections
will apply to our vaccines or products.
Legislation relating to medical products used to fight bioterrorism is
evolving, and may enable the U.S. government to release and use certain medical
products prior to such products obtaining FDA or other regulatory approval.
According to the terms of Project BioShield, upon a declaration of emergency,
the U.S. government may authorize the introduction and use of a qualified
medical product prior to such medical product obtaining FDA regulatory approval.
Further, Project BioShield provides that the United States government may elect
to purchase and stockpile quantities of vaccines or products prior to receipt of
regulatory approval to fight bioterrorism. However, legislation limiting or
restricting liability for the use of such vaccines is evolving, and we cannot be
certain that any such protections will apply to the vaccines or products
developed by us. If the legislation does not provide sufficient protection, and
we are not able to obtain these protections by contract, we may become subject
to product liability suits and other third party claims if vaccines or products
developed by us cause injury, or if vaccinated individuals subsequently become
infected or otherwise suffer adverse effects from such vaccines or products.
We may be subject to claims that we or our employees have wrongfully used or
disclosed alleged trade secrets of their former employers.
As is commonplace in the biotechnology industry, we employ individuals who
were previously employed at other biotechnology or pharmaceutical companies,
including our competitors or potential competitors. Although no claims against
us are currently pending, we may be subject to claims that these employees or we
have inadvertently or otherwise used or disclosed trade secrets or other
proprietary information of their former employers. Litigation may be necessary
to defend against these claims. Even if we are successful in defending against
these claims, litigation could result in substantial costs and be a distraction
to management.
Failure to hire and retain key management employees could adversely affect our
ability to obtain financing, develop our products, conduct clinical trials or
execute our business strategy.
We are highly dependent on our senior management and scientific staff.
These individuals have played a critical role in raising capital, negotiating
business development opportunities, developing the vaccine candidates,
conducting clinical trials and manufacturing products. If we lose the services
of any key members of our senior management or scientific staff and we are
unable to recruit qualified replacements where we deem it necessary, we may be
unable to achieve our business objectives.
18.
Other Risks
We are currently involved in litigation concerning the results of our AIDSVAX
Phase III clinical trial.
Since the announcement of the results of the North American/European Phase
III clinical trial for AIDSVAX, we have been named in several securities class
action lawsuits and a shareholder derivative lawsuit relating to how those
results were disclosed. We are currently engaged in defending against the
securities class actions, which have been consolidated into a single action for
pretrial purposes. If the class action is decided against us, the decision could
adversely affect our financial position. We are also engaged in defending
against the shareholder derivative lawsuit. Furthermore, it is possible that
these actions would not be resolved in less than a year. The costs incurred in
connection with these lawsuits could be significant and may not be covered by
our insurance policies. These lawsuits could also result in continued diversion
of our time and attention away from business operations, which could harm our
business.
Our stockholders could experience substantial dilution as result of the issuance
of additional preferred stock.
Our board of directors has the authority to establish the designation of
19,979,500 additional shares of preferred stock that are convertible into common
stock without any action by our stockholders, and to fix the rights,
preferences, privileges and restrictions, including voting rights, of such
shares. The issuance and conversion of any such preferred stock would further
dilute the percentage ownership of our stockholders.
19.
Our stock price is likely to be volatile.
Currently our common stock is traded on the Pink Sheets. Generally stocks
traded on the Pink Sheets are subject to greater volatility than stocks traded
on stock exchanges, Nasdaq or the Nasdaq SmallCap Market, due to the fact that
trading volumes on the Pink Sheets are generally significantly less than on
stock exchanges, Nasdaq or the Nasdaq SmallCap Market, allowing a relatively few
number of stock trades to greatly affect the stock price. As such, the trading
price of our common stock has been and is likely to continue to be extremely
volatile. Our stock price could be subject to wide fluctuations in response to a
variety of factors, including the following:
o failure to win future or the termination of existing government
contracts for anthrax or smallpox vaccines;
o adverse results or delays in clinical trials;
o delays in our product development efforts;
o real or perceived safety issues with any of our vaccine candidates;
o failure to obtain or maintain required regulatory approvals;
o delays in completion and/or validation of our manufacturing
facilities in South Korea;
o changes in financial estimates by securities analysts;
o rumors about our business prospects, product development efforts or
clinical trials;
o new products or services offered by us or our competitors or
announcements relating to product developments by our competitors;
o issuances of debt or equity securities;
o sales by our stockholders of substantial amounts of our common
stock, including shares issued upon exercise of outstanding options
and warrants; and
o other events or factors, many of which are beyond our control.
In addition, the stock market in general, and biotechnology companies in
particular, have experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of these
companies. Broad market and industry factors may negatively affect the market
price of our common stock, regardless of actual operating performance. In the
past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted against
companies.
20.
BUSINESS
The Company
We are a biopharmaceutical company focused on the development, manufacture
and commercialization of biologic products for the prevention and treatment of
human infectious disease. We are currently developing vaccines against
inhalation anthrax and smallpox for the purpose of biodefense. In 2002 and 2003
we were awarded an aggregate of $101.3 million in funding for the development of
our anthrax vaccine (the "NIAID Contracts"). On November 4, 2004, we were
awarded a contract for $877.5 million to provide 75 million doses of our
recombinant anthrax vaccine to the U.S. government Strategic National Stockpile
("SNS") for civilian defense (the "SNS Contract"). The SNS Contract also
includes up to an additional $69 million in cost-plus fixed-fee task orders,
which may be awarded at the government's discretion. We also are developing, for
use in the United States and internationally, an attenuated smallpox vaccine
that has already been licensed in Japan. We initiated a Phase I/II trial for our
smallpox vaccine candidate in October 2004, and the preliminary results from the
trial showed no serious adverse events. The vaccine is being developed as a
safer alternative to non-attenuated smallpox vaccines already in the U.S.
national stockpile of biodefense products. We expect that the U.S. government
will invite bids on one or more contracts for attenuated smallpox vaccine in
2005 and we expect to bid on any such contracts for smallpox vaccines to be used
in the general population.
We intend to build a portfolio of biologic products by leveraging the
income we expect to generate from our biodefense products and our capabilities
in biopharmaceutical product development and biopharmaceutical manufacturing.
Although we expect biodefense products to be an important component of our
product portfolio for the foreseeable future, we intend to extend our business
activities into non-biodefense products.
We were incorporated in 1995 to complete the development of an
investigational recombinant protein vaccine designed to prevent infection by
human immunodeficiency virus ("HIV"). Beginning in late 2001, we committed to
expanding our research and development to additional disease targets including
the initiation of research on anthrax vaccines. In 2002 we formed the Celltrion,
Inc. ("Celltrion") joint venture in South Korea and began our smallpox vaccine
initiative.
Why Biodefense Vaccines
Vaccination has long been recognized as one of the most cost-effective
forms of disease control. Many newly introduced vaccine products enjoy market
exclusivity due to high clinical and regulatory barriers to entry, complex
development and manufacturing processes and patent protection. Vaccines are
particularly suited to address epidemics and the threat of infection by deadly
pathogens, such as anthrax, smallpox, botulinum toxin, plague and Ebola, for a
number of reasons, including the following:
o once signs of infection are apparent, treatment options are
limited, and, for most of these, no effective therapies are
available;
o even if preventive or therapeutic medications are available,
resources could be exhausted in an epidemic or mass exposure
due to bioterrorism; and
o only vaccines have the potential for widespread prevention in
advance of exposure to these pathogens and vaccines also may
deter the use of a specific pathogen as a bioterrorism weapon.
The terrorist attacks of September through November 2001 in the United
States changed political and budgetary attitudes towards bioterrorism threats.
The U.S. government has since recognized that it must provide incentives for
private industry to develop and manufacture biodefense products. The U.S.
21.
government has identified the acquisition of biodefense products to combat
smallpox, anthrax, botulinum toxin, plague and Ebola as a priority. On October
1, 2003, Congress passed the Department of Homeland Security Appropriations Act,
2004 ("HSAA"), which includes $5.6 billion over a 10-year period for the
purchase of medical countermeasures against bioterrorist attacks.
In July 2004, President Bush signed into law Project BioShield with the
intention of accelerating the availability of effective countermeasures against
bioterrorism. Project BioShield also increases the authorities and flexibility
of the National Institute of Health (the "NIH") to facilitate the development of
new products for biodefense and provides an efficient mechanism for the
Department of Health and Human Services ("HHS") to purchase biodefense vaccines.
Our Strategy
Our goal is to be a leading commercial-stage biotechnology company focused
on the treatment and prevention of infectious diseases. Key elements of our
strategy include:
o Complete our obligations under the SNS Contract. We were
recently awarded a $877.5 million contract for the large-scale
production of our recombinant anthrax vaccine. Our obligations
include manufacturing 75 million doses of vaccine, which we
expect to produce in 2006 and 2007. We intend to complete our
obligations under this contract, to achieve substantial cash
flows, and to build substantial manufacturing infrastructure
and expertise at VaxGen.
o Win a large-scale contract for the production of smallpox
vaccine. We are preparing to bid on competing a large-scale
contract from the federal government for the production of
attenuated smallpox vaccine. We expect that this contract will
be of similar size and scope to the SNS Contract for anthrax
vaccine. We intend to compete vigorously for this contract if
eligible, and to fulfill our obligations if we are awarded it.
o Leverage our products and manufacturing capacity. Under
current federal regulations, we are able to sell our anthrax
and smallpox vaccines domestically to the military and private
individuals, if and when licensed by the Food and Drug
Administration (the "FDA"), as well as to other allied
governments, such as the U.K. government. This provides us
with the opportunity for substantial additional revenues from
our vaccines. We intend to pursue these opportunities
aggressively.
o Build our pipeline of product candidates for infectious
disease. We currently own rights to an anthrax vaccine and a
smallpox vaccine. Our expertise is in infectious disease and
manufacturing recombinant proteins. We intend to broaden our
product pipeline through the acquisition or licensing of
additional product candidates which fall within our expertise.
rPA102 Anthrax Vaccine
We are developing rPA102, a recombinant Protective Antigen anthrax vaccine
candidate, with the assistance of funding through contracts awarded to us by the
National Institutes of Allergy and Infectious Diseases (the "NIAID"). rPA102,
initially developed by the U.S. Army Medical Research Institute of Infectious
Diseases (the "USAMRIID"), combines the benefits of a vaccine made through
modern recombinant technology with the ability to stimulate immunity to anthrax
Protective Antigen ("PA").
22.
About Anthrax
Anthrax spores are naturally occurring in soil samples throughout the
world. Anthrax infections are most commonly acquired through cutaneous contact
with infected animals and animal products or, less frequently, by inhalation or
ingestion of spores. Cutaneous anthrax is caused when anthrax spores enter the
body through a cut or abrasion. The incubation period following infection can be
anywhere from one to 12 days. In contrast, the incubation period for inhalation
anthrax is generally shorter, usually one to seven days. With inhalation
anthrax, once symptoms appear, fatality rates are high even with the initiation
of antibiotic and supportive therapy. Further, a portion of the anthrax spores,
once inhaled, may remain dormant in the lung for several months and germinate
causing disease well after the discontinuation of antibiotic therapy. Vaccine
immunity is persistent and protects against the potential of such late onset
disease.
In the fall of 2001, when anthrax-contaminated mail was deliberately sent
through the U.S. Postal Service to government officials and members of the
media, five people died and many more became sick. These attacks heightened the
urgency to develop a safe and effective anthrax vaccine for use in the general
population.
Anthrax secretes three proteins, PA, Lethal Factor ("LF") and Edema Factor
("EF"), which combine on the surface of human cells. Once LF or EF bind to PA in
the proper configuration, they become active toxins, which fuse and enter
through the human cell membrane and can cause serious illness and death.
Scientists believe that anthrax infection cannot cause illness or death in
otherwise healthy individuals if these three proteins are unable to combine.
The rPA102 vaccine candidate we are developing is a recombinant version of
PA grown in a genetically altered, non-pathogenic anthrax bacterium. The
production strain lacks the genetic information to produce the EF and LF
proteins and is incapable of either capsule or spore formation. The vaccine
candidate is designed to train the human immune system to produce antibodies to
PA. In the event of infection with anthrax, these antibodies coat the surface of
PA and prevent it from attaching to the cell membrane or combining with LF or
EF.
The Anthrax Vaccine Market Opportunity
The U.S. government has recognized a need to devise appropriate and
effective measures to protect its citizens from the harmful effects of anthrax
spores used as instruments of terror. The only anthrax vaccine currently
approved by the FDA is BioThrax(R). This product requires six injections over 18
months, has limited availability and distribution, and is only indicated for
at-risk individuals. NIAID has been funding development of recombinant anthrax
vaccines designed for use in the general population with the goals of
demonstrating safety and immunogenicity in humans, efficacy against inhalation
anthrax in animal challenge studies and limiting the number of vaccine
injections to no more than three.
We were awarded our first NIAID anthrax vaccine development contract
("2002 Anthrax Contract") in the fall of 2002. Under the original terms of this
contract, NIAID agreed to pay us $13.6 million to fund the manufacture of 2,000
vaccine doses, conduct animal challenge studies and a Phase I clinical trial and
produce an initial feasibility plan for how we would manufacture an emergency
stockpile of at least 25 million doses. As most recently amended on September
30, 2003, the value of this contract was increased to $20.9 million. The
increase in the contract value reflects additional costs required to complete
the contract and a revised allowance for overhead expenses.
In February, June, July and December of 2003, we received official
notification from NIAID indicating that we had met the program requirements
associated with Milestones 1, 2, 3 and 5 of the 2002
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Anthrax Contract, respectively. Milestone 4 pertains to the conduct and
completion of a Phase I clinical trial. We announced the principal results of
such trial on March 2, 2004, which were that the rPA102 vaccine candidate had
comparable immune responses to that of Anthrax Vaccine Absorbed, the anthrax
vaccine currently licensed for use in the U.S. Completion of Milestone 4
includes following the subjects of the trial for one year after vaccination,
which was completed at the end of October 2004, and submitting a final study
report to the FDA.
On September 30, 2003, we were awarded a cost-reimbursement plus fixed-fee
contract valued at $80.3 million from NIAID for the advanced development of our
anthrax vaccine candidate (the "2003 Anthrax Contract"). This is the second
anthrax vaccine development contract awarded to us by NIAID, and it is intended
to fund development through manufacturing scale-up and completion of two Phase
II clinical studies that we believe will, in addition to two Phase III studies,
support a Biologics License Application ("BLA") with the FDA. On October 7,
2003, we entered into a license agreement with USAMRIID that, subject to certain
rights retained by the U.S. government, provides us with an exclusive, worldwide
license under USAMRIID's patented technology to develop, manufacture, use and
commercialize the rPA102 vaccine candidate. Additional steps required to support
a BLA filing not covered by the 2003 Anthrax Contract include a large-scale
safety study and may include other clinical trials.
On November 4, 2004, we entered into a SNS Contract to provide up to 75
million doses of a rPA anthrax vaccine to the SNS. The SNS is a national
repository of medical products maintained by the Centers for Disease Control and
Prevention ("CDC"). The SNS Contract was awarded to us by the Office of the
Assistant Secretary for Public Health Emergency Preparedness within the
Department of Health and Human Services ("HHS").
The SNS Contract, the first of its kind under Project BioShield, is
intended to provide enough product to vaccinate 25 million Americans in a
multiple-dose regimen against inhalation anthrax, the most deadly form of the
disease. The contract calls for us to provide 25 million doses of our
recombinant Protective Antigen anthrax vaccine to the SNS within two years of
the award and a total of 75 million doses within three years. For the remainder
of the 5-year contract, we are required to maintain active manufacturing
operations and provide stockpile-related services. All 75 million doses may be
accepted into the SNS prior to FDA licensure. We expect to recognize revenue
from the supply contract upon acceptance of the vaccine by the U.S. government
and delivery to the SNS. We will be working closely with the government to
deliver the vaccine beginning in 2006.
Under the authority of the Project BioShield Act of 2004, the U.S.
government intends to begin taking delivery of the vaccine before it is licensed
for use by the FDA. Vaccine purchased prior to FDA approval could be used in an
emergency if authorized by the Secretary of Health and Human Services. Under the
terms of the contract, we are required to continue developing the vaccine with
the goal of receiving FDA licensure for use of the vaccine both before and after
exposure to anthrax. The vaccine has already received Fast-Track designation,
meaning that the FDA will take actions that are appropriate to expedite the
development and review of a license application for the vaccine, when and if it
is submitted to the FDA. While this designation may assist in expediting the
FDA's review of our potential license application, it does not guarantee that
the anthrax vaccine will be approved more quickly, or at all.
The majority of the supply contract's value, $754.5 million, relates to a
discounted payment at a fixed base price for delivery of the vaccine in advance
of FDA approval. Payment is contingent upon delivery of useable product, defined
as having the regulatory data permitting emergency use under Investigational New
Drug status and manufactured under cGMP conditions. Supplemental milestone
payments to the fixed base price, valued at an additional $123 million, are
payable after the completion of two regulatory and one product development
milestones. The two regulatory milestones are FDA
24.
licensure of the vaccine for use before and after exposure to anthrax. The
product development milestone requires demonstration of a shelf-life of the
vaccine commensurate with industry standards.
Above the base fee and milestone amounts of $877.5 million, the contract
also includes task orders, valued at up to $69 million, which can be awarded at
the government's sole discretion. These tasks, which would be funded under
cost-plus fixed-fee arrangements, include testing the vaccine in children and
the elderly, maintaining manufacturing operations for the vaccine and
post-marketing studies.
Development costs required to license the vaccine, over and above those
covered by our two previous contracts with the NIAID, are being borne by us. We
expect these remaining development costs, which include the costs of Phase III
safety trials, will be recovered through sale of the vaccine under the SNS
Contract.
In addition to the $877.5 million contract we received on November 4,
2004, we believe that the HHS may order additional supplies of our anthrax
vaccine to replenish the SNS. According to a Congressional Budget Office ("CBO")
report from May 2003, the U.S. government expected to spend $700 million over a
seven-year period to maintain and replenish a stockpile which, at the time, was
expected to be composed of 60-million doses. We also intend to market the
vaccine to approved foreign governments prior to FDA approval and to the U.S.
military, state and local governments, and consumers if and when the vaccine
candidate receives FDA approval.
As part of our strategy, we have been and will continue to be dependent
upon contracts from U.S. government agencies. Currently, substantially all of
our revenues are obtained from these contracts. These contracts generally
contain provisions which allow the U.S. government to terminate the contract
either for its convenience or if we default by failing to perform in accordance
with the contract schedule and terms. For a further discussion please see the
section titled "Risk Factors--U.S. government agencies have special contracting
requirements, which create additional risks."
License from USAMRIID
We have entered into a license agreement with USAMRIID under which
USAMRIID granted us, subject to certain rights retained by the U.S. government,
an exclusive, worldwide license (with the right to sublicense) under its patents
pertaining to the method of making an anthrax vaccine and to a proprietary
expression system to develop, make and commercialize vaccine products for the
prevention or treatment of anthrax infection. The U.S. government has retained a
non-exclusive, irrevocable, worldwide license to practice and have practiced on
behalf of the United States and/or any foreign government or international
organization pursuant to any treaty or agreement with the United States, the
inventions claimed in the licensed patents or any improvements to those
inventions. In addition, we have granted to the U.S. government a royalty-free
license of the same scope to any patented invention that we create under the
agreement. Pursuant to the terms of the license agreement, we are obligated to
pay USAMRIID an execution fee, patent maintenance fees, anniversary fees,
milestones and royalties. The agreement continues until the later of the last to
expire patent in the licensed patent technology or the last abandonment of a
patent application in the licensed patent technology. USAMRIID can terminate the
agreement if we:
o fail to diligently develop a vaccine product in accordance
with the development plan described in the agreement;
o materially breach the agreement;
25.
o make a materially false statement (or fail to provide required
information) in a plan or report required under the agreement;
o fail to make payments required under the agreement; or
o file for bankruptcy.
In addition, USAMRIID may terminate the license agreement if it determines
that such action is necessary to meet requirements for public use specified by
government regulations issued after the effective date of the agreement and we
do not satisfy such requirements. The license agreement also provides that
USAMRIID reserves the right to require us and our affiliates to grant a
nonexclusive, partially exclusive or exclusive license in any field of use to a
responsible applicant, upon terms that are reasonable under the circumstances
and under applicable law, to fulfill public health or safety needs.
Human Clinical Trials
The FDA has published guidelines for the approval of new drugs or
biologics for potentially fatal diseases where human studies cannot be conducted
ethically or practically. Unlike most vaccines, which require large, Phase III
effectiveness trials in patients with the disease or condition being targeted,
we believe that an anthrax vaccine can be evaluated and approved by the FDA on
the basis of human clinical studies demonstrating safety and immune response,
supported by pre-clinical studies to show effectiveness, but there is no
assurance that the FDA will approve our vaccines on this basis. The rPA102
vaccine candidate was under development for more than a decade by USAMRIID prior
to its license to us, and its effectiveness and safety have previously been
documented in animals, including non-human primates. We have demonstrated the
effectiveness of rPA102 in similar pre-clinical studies of product manufactured
under our contract with NIAID. Pre-clinical studies will continue to be used to
evaluate rPA102's safety and effectiveness as we optimize the vaccine
formulation and immunization schedule. Approximately 600 human study volunteers
have participated in our clinical studies of rPA102 to date, with additional
clinical studies planned. No human study volunteers will be exposed to anthrax.
We launched a Phase I randomized, single-blind, placebo-controlled,
dose-ranging clinical trial of rPA102 in June 2003. The trial was conducted at
four leading U.S. medical centers under funding from the 2002 Anthrax Contract.
The trial was designed to evaluate rPA102's safety and its ability to stimulate
an immune response at four different dose levels of rPA102 over a 12-month
period, with a control group receiving BioThrax, the currently licensed anthrax
vaccine. All immunizations were completed in September 2003. Preliminary results
from the trial were submitted to NIAID and were used to establish our
eligibility for the advanced development contract awarded to us on September 30,
2003. A total of approximately 100 healthy volunteers 18 to 40 years of age
received a three-dose course of rPA102 immunization at 0, 4 and 8 weeks.
Volunteers were assessed for safety at 30 minutes, 60 minutes and three days
following immunization, after each of the three injections. Blood samples were
collected and immune responses assessed by standard laboratory methods 12 times
over a 48-week period.
In March 2004, we announced the results of the Phase I clinical trial,
which demonstrated that the recombinant anthrax vaccine candidate was well
tolerated, with no safety or reactogenicity issues. In addition, we believe
there was a clear dose response relationship between antigen concentration and
immune response.
In April 2004, we initiated the first of two Phase II clinical trials
funded under the 2003 Anthrax Contract. The 13-month trial is being conducted at
up to 12 medical centers in the United States and is intended to evaluate the
safety and immunogenicity of different formulations of rPA102 among 480 healthy
volunteers. Each formulation contains varying concentrations of recombinant
Protective Antigen
26.
(rPA) and aluminum hydroxide, an adjuvant designed to enhance the immune
response. The goal of the study is to determine the optimal combination of rPA
and the adjuvant required to induce the most robust immune response.
We intend to initiate a second Phase II clinical trial in mid-2005, also
funded by the 2003 Anthrax Contract, to finalize the amount of aluminum
hydroxide adjuvant required for the vaccine. Preliminary results from the first
Phase II clinical trial indicated that the rPA103 vaccine may induce higher
immune responses with less adjuvant. This result, which was unexpected, is also
currently being examined in pre-clinical studies. The second Phase II clinical
trial will also be designed to compare different dosing regimens to determine a
vaccine administration schedule to optimize the speed and magnitude of the
immune response. Based on the results of the Phase II trials, we intend to
conduct Phase III safety trials of the rPA102 in a broad and diverse population
of human volunteers, which we expect to use to support the filing of a BLA with
the FDA in 2007. The vaccine is being developed for use in people either before
or after they have been exposed to anthrax spores. When used after exposure,
speed of the immune response will be critical, while when used in those who
might be exposed to anthrax spores at some time in the future, duration of
immunity is of utmost importance.
Competition
We believe our most significant competitors in the anthrax vaccine market
include companies employing rPA-based vaccines similar to our own. In September
2002, Avecia received an rPA development contract, and in September 2003, Avecia
also received a $71.3 million advanced development contract from NIAID. Avecia
submitted a competing proposal to supply the SNS which was not accepted by the
HHS. No other companies have received contracts from NIAID to develop an rPA
anthrax vaccine.
The DynPort Vaccine Company LLC, a subsidiary of Computer Sciences Corp.,
was developing an rPA-based anthrax vaccine candidate, although it has not
received contracts from NIAID to develop such a vaccine or from the HHS for the
SNS.
A number of other companies, including BioPort Corp., Vical Incorporated,
Microscience Ltd. and AVANT Immunotherapeutics, Inc., are working on alternative
anthrax vaccine candidates. We believe that these programs do not meet the goals
stated by the U.S. government to acquire an anthrax recombinant protective
antigen protein vaccine.
A number of companies, including Alexion Pharmaceuticals, Inc., Medarex,
Inc., Human Genome Sciences, Inc. and AVANIR Pharmaceuticals, are developing
monoclonal antibody therapies to treat and prevent anthrax infection. Monoclonal
antibodies may provide a therapeutic benefit to patients infected with anthrax,
and pre-clinical studies suggest that pre-exposure administration may provide
protection from infection. The duration of this protection is typically weeks,
versus years for most vaccines. Also, the cost per dose of monoclonal antibody
therapeutics is generally much higher than a vaccine.
LC16m8 Smallpox Vaccine
In collaboration with Chemo-Sero Therapeutic Research Institute of Japan
("Kaketsuken"), we are developing LC16m8, an attenuated live virus smallpox
vaccine candidate, for use in the United States and potentially other markets.
LC16m8 has already been licensed by the Japanese regulatory authorities for the
prevention of smallpox in humans. The vaccine meets all Japanese requirements
for effectiveness and improved safety versus conventional smallpox vaccines.
Side effects were shown to be less frequent and of shorter duration than those
following conventional smallpox vaccines. LC16m8 was administered
27.
to approximately 50,000 Japanese children in clinical studies prior to its
approval in Japan and to Japanese adults post approval. Based on human clinical
data and animal experiments, we believe LC16m8 stimulates levels of protective
immunity similar to conventional smallpox vaccines while being substantially
safer than vaccines currently available in the United States and elsewhere. We
will be required to demonstrate safety and effectiveness in additional clinical
and pre-clinical studies in the United States in order to obtain FDA approval.
In December 2003, we and Kaketsuken entered into a license agreement,
pursuant to which we licensed from Kaketsuken the exclusive commercial rights to
use, develop and sell the LC16m8 smallpox vaccine in the United States (the
"LC16m8 Agreement"). The LC16m8 Agreement also provides us with a right of first
refusal for the exclusive development and commercialization rights to LC16m8 in
Europe and certain rights of negotiation for the co-commercialization of LC16m8
with Kaketsuken in any territory other than the United States, Europe and Asia.
We believe that the LC16m8 Agreement is an important development in our
biodefense vaccine business strategy because it provides us with full commercial
rights in the United States for a second important vaccine product candidate. We
believe that the vaccine, which was licensed in Japan in 1980, will have a
better safety profile, yet be equally effective, compared to smallpox vaccines
available in the United States or elsewhere.
Pursuant to the terms of the LC16m8 Agreement, Kaketsuken is providing us
with LC16m8 in bulk form and we will be responsible for creating the finished
product with such formulation, packaging and labeling as is required by the FDA.
In addition, Kaketsuken has provided us with certain amounts of bulk vaccine and
finished product to be used in our non-clinical studies and clinical trials free
of charge. For commercial purposes, Kaketsuken will sell us bulk vaccine at a
formula-based price and Kaketsuken and we will share the profits from the sale
of finished product pursuant to an agreed-upon formula. We do not have the right
to manufacture bulk vaccine, except under certain limited circumstances where
Kaketsuken is unable to supply us with bulk vaccine in sufficient quantity or as
we may otherwise agree.
We are responsible for funding and conducting all clinical and
non-clinical trials with respect to seeking and obtaining regulatory approval of
LC16m8 in the United States. However, Kaketsuken must consent to all clinical
trials and non-clinical studies with respect to LC16m8. In addition, Kaketsuken
is obligated to make certain efforts to support our regulatory approval efforts.
Kaketsuken can terminate the LC16m8 Agreement in whole or in part:
o on 60 days' notice if the FDA does not approve LC16m8 for
commercial sale in the United States within four years of the
effective date of the LC16m8 Agreement;
o on 30 days' written notice if we fail to make payments to
Kaketsuken under the LC16m8 Agreement; or
o on 60 days' written notice if we do not share certain
information required to be shared under the LC16m8 Agreement.
We can terminate the LC16m8 Agreement if the FDA does not approve LC16m8
for commercial sale in the United States within four years of the effective date
of the LC16m8 Agreement. In addition, for a period of five years after the
termination of the LC16m8 Agreement, we may not, without Kaketsuken's prior
written consent, file for or obtain regulatory approval, sell and/or otherwise
deal in any product potentially in competition with LC16m8. During the term of
the LC16m8 Agreement, we may not, without the prior written consent of
Kaketsuken, develop, sell, commercialize and/or otherwise
28.
deal in any products which may compete with LC16m8. These restrictions will be
waived if the LC16m8 Agreement is terminated due to Kaketsuken's uncured
material breach of the LC16m8 Agreement or the FDA determines that LC16m8 is not
approvable in the United States.
About Smallpox
Smallpox is a serious, contagious and often fatal infectious disease.
There is no specific treatment for smallpox disease, and the only prevention is
vaccination. There are two clinical forms of smallpox. Variola major is the more
severe and more common form of smallpox, inducing a more extensive rash and
higher fever than variola minor. Historically, variola major has had an overall
fatality rate of about 30%. Variola minor is the less common form of smallpox
and a much less severe disease, with death rates historically of 1% or less.
Generally, direct and fairly prolonged face-to-face contact is required to
transmit smallpox from one person to another. Smallpox also can be spread
through direct contact with contaminated objects such as bedding or clothing,
and, in rare instances, by virus carried in the air in enclosed settings such as
buildings, airplanes, buses and trains.
Smallpox outbreaks have occurred from time to time for thousands of years;
however, except for virus produced in laboratories, the disease was eradicated
after a successful worldwide vaccination program. The last reported case of
smallpox in the United States was in 1949. The last reported naturally-occurring
case in the world was in Somalia in 1977. After the disease was eliminated from
the world, routine vaccination against smallpox among the general public was
stopped because it was no longer necessary for prevention.
Although smallpox was officially eradicated in the 1970s, small quantities
of the virus still exist in a few research laboratories worldwide. Furthermore,
the former Soviet Union had an active program to weaponize smallpox. We believe
that increasing concerns about the use of biological agents, including smallpox,
in acts of terrorism or war have caused United States government officials to
re-evaluate the importance of widespread smallpox vaccination in order to
protect U.S. citizens from potential attacks. As a result, President Bush
initiated a program that, among other goals, sought to vaccinate "first
responders," such as people working in hospital emergency rooms and other public
health environments, and police and fire departments, with the currently
available vaccine, DryVax(R).
It is estimated that between one and seven deaths from encephalitis, or
inflammation of the brain, will occur for every one million DryVax
immunizations. Despite DryVax's poor safety profile, the U.S. government moved
forward with the vaccination program in January 2003 due to the perceived
imminent threat of bioterrorism. However, only approximately 38,000 people have
been vaccinated, with minimal on-going vaccination due to safety concerns.
Clinicians discovered a probable link between the DryVax vaccine and
myocarditis, a rare, previously unassociated heart condition implicated in up to
three deaths of DryVax recipients in 2003. Conventional smallpox vaccine has
also been recently linked to a less severe heart condition, pericarditis, which
occurred at a rate of approximately 1 in 10,000 in recently immunized, healthy
military personnel receiving smallpox vaccine. We believe that the emergence of
possible heart-related complications has led to greater urgency to develop and
stockpile a safer smallpox vaccine.
Smallpox Vaccine Development Status
We began animal efficacy studies of our smallpox vaccine candidate in the
fourth quarter of 2003 and recently initiated a Phase I/II clinical study. On
May 24, 2004, we presented results from two pre-clinical studies of the
effectiveness of our attenuated smallpox vaccine candidate, LC16m8. In both
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rabbits and mice, a single dose of LC16m8 protected all animals against a lethal
poxvirus challenge, and demonstrated efficacy equivalent to DryVax.
Detailed results from these studies were presented at the Seventh Annual
Conference on Vaccine Research sponsored by the National Foundation for
Infectious Diseases ("NFID") in Arlington, Virginia. In a study titled "The
Attenuated Vaccinia-Lister Vaccine LC16m8 Protects Mice from Severe Ectromelia
Aerosol Challenge," three groups of mice were vaccinated with LC16m8 (2 x 105
PFU), DryVax (2 x 105 PFU) or saline solution. They were subsequently challenged
with aerosolized ectromelia, a mouse orthopoxvirus. All of the placebo mice
became ill, with nine of the 10 placebo mice dying. In contrast, all mice that
received LC16m8 or DryVax survived. After vaccination but before challenge,
animals vaccinated with LC16m8 had higher antibody titers compared to those
vaccinated with DryVax, and the difference was statistically significant
(geometric mean titers of 3,020 versus 1,454 as measured by ELISA, p< 0.001).
This study was funded by the NIAID.
A separate study, titled "The Attenuated Vaccinia-Lister Vaccine LC16m8
Protects Rabbits from Lethal Rabbitpox Challenge," was funded by us and
conducted by scientists at VaxGen, University of Florida, University of
Pennsylvania and Vanderbilt University. In this study, three groups of 20
rabbits each were vaccinated with LC16m8, DryVax or a placebo. Rabbits in each
group were subsequently challenged with lethal doses (200 PFU or 1,000 PFU) of
intradermal rabbitpox. All of the rabbits vaccinated with LC16m8 or DryVax
survived, while all except one of the placebo recipients died. Levels of
neutralizing antibodies present in the rabbits following vaccination with LC16m8
or DryVax were also measured. In two of the three assays, the ELISA and IMV
Neutralizing Assay, LC16m8 recipients had higher levels of neutralizing
antibodies compared to DryVax recipients, and these differences were
statistically significant (p< 0.001). In the third assay, EEV Neutralization,
antibody levels were equivalent in DryVax and LC16m8 recipients (47% versus 45%
neutralization at day 28, p=0.756). Neutralizing antibodies are considered to be
a measure of a vaccine's ability to confer protection.
On October 20, 2004, we announced that we had initiated a Phase I/II
clinical trial to evaluate the safety and immune response of LC16m8. Sponsored
by us, the clinical trial is expected to enroll approximately 150 people at four
clinical sites: the University of Kentucky School of Medicine, Saint Louis
University Health Sciences Center, Stanford University and Vanderbilt University
Medical Center. The volunteers will be randomized 4:1, with 120 receiving LC16m8
and 30 receiving DryVax. Study volunteers will be screened carefully for safety
risk factors prior to enrollment. The screening process includes a physician's
assessment of the volunteer's medical history, a physical exam, and a panel of
cardiac and laboratory tests. All study volunteers will continue to be evaluated
for safety in the clinic after vaccination and will return for regular safety
assessments throughout the study. No one will be exposed to smallpox as a part
of the clinical study. Interim results from the trial showed no serious adverse
events related to the vaccines. The analysis looked at pooled, blinded data from
50 trial participants and was presented in an abstract published by the ASM
Biodefense Conference in March 2005. We believe the results of this study will
advance the understanding of attenuated smallpox vaccines and help the U.S.
government and other potential purchasers determine the most appropriate
attenuated smallpox vaccine for use in the general population.
We have also advised and assisted Kaketsuken in improving its
manufacturing processes. Under the LC16m8 Agreement, Kaketsuken has provided us
with vaccine for animal effectiveness studies, bulk product to support our
fill/finish process development, and one million doses for our clinical use in
the United States free of charge. As of the end of March 2004, we completed the
filling of approximately 700,000 doses of vaccine from the bulk product provided
by Kaketsuken through a contract filling organization in the United States.
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Smallpox Vaccine Market Opportunity
According to a CBO report in May of 2003 and updated in other documents,
the U.S. government expects to spend $1.9 billion for the purchase,
replenishment and maintenance of an attenuated smallpox vaccine over a 10-year
period. Of this amount, $900 million is estimated for the purchase of 60 million
doses during the first three years of the program. The report indicates the U.S.
government expects to spend another $1.0 billion during the remaining seven
years of the program to manage and replenish the vaccine stockpile as its
shelf-life expires.
We believe HHS may begin purchasing an emergency stockpile of attenuated
vaccinia smallpox vaccine, such as LC16m8, before it has been approved by the
FDA for commercial use. The actual purchase price for each dose of attenuated
vaccinia smallpox vaccine would be subject to negotiation with the U.S.
government. We intend to pursue sales of LC16m8 to the U.S. government, and, if
we receive necessary regulatory approvals for LC16m8, we plan to pursue sales to
commercial markets in the United States, possibly to certain foreign allied
governments and to certain foreign commercial markets as allowed by U.S. law
pursuant to our rights under the LC16m8 Agreement.
Competition
We are aware of two categories of products competing to meet the demand
for a smallpox vaccine--unattenuated and attenuated strains of vaccinia.
"Attenuated" refers to a strain of vaccine genetically altered to enhance its
safety, as compared to the conventional, or unattenuated, strains.
The first category of potentially competitive products is principally
based on the traditional (unattenuated) New York City Board of Health ("NYCBH")
and Lister/Elstree strains of the vaccinia virus. These vaccinia strains were
produced in live animals, typically calves, and used widely during the period
when smallpox was an endemic disease. With heightened concerns over the use of
smallpox as a bioterror weapon, a number of companies, including Acambis plc,
Chiron Corporation, Aventis Pasteur MSD Ltd. and Bavarian Nordic A/S, have
undertaken programs to produce vaccines based on these unattenuated strains in
modern cell line production systems. Many countries, including the United
States, are currently stockpiling such smallpox vaccines, although none is yet
approved by the FDA for marketing. Since these cell culture-derived vaccines are
produced using the established non-attenuated strains of vaccinia, we believe
that the side effect profile will be similar to that experienced with DryVax, a
NYCBH strain. Earlier in 2004, Acambis announced that they were suspending
clinical trials of their non-attenuated NYCBH strain cell-culture vaccine when
interim results of their clinical studies showed rates of myocarditis similar to
DryVax. We are not aware of any clinical trials of either of the NYCBH or
Lister/Elstree strain vaccines in children. As a consequence, we believe that
LC16m8 possesses a superior safety profile, where the genetic basis of
attenuation is known and pre-clinical and clinical (including pediatric) data
supports its enhanced safety. Further, the $1.9 billion of purchases of new
smallpox vaccines included in a CBO report from May 2003 is specifically
targeted to attenuated vaccines.
The second category of potentially competitive products is based on
attenuated strains of vaccinia. A number of experimental vaccines were under
development in the 1970s in response to safety concerns with traditional
smallpox vaccines as the risk-benefit profile changed with the decreasing
prevalence of smallpox. With the eradication of smallpox, most of these
development programs were terminated, and only two such products were licensed
and used in the countries where they were developed: LC16m8 and Modified
Vaccinia Ankara ("MVA"). While LC16m8 was licensed for the prevention of
smallpox in Japan, MVA was licensed in Germany only for pre-vaccination to be
followed some weeks later by immunization with a conventional unattenuated
smallpox vaccine. The purpose of
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pre-vaccination with MVA was to prime the immune system and thus reduce the rate
of adverse events caused by traditional unattenuated vaccine.
We are aware of two companies are now developing MVA as a stand-alone
smallpox vaccine candidate for use in individuals at elevated risk of adverse
events from unattenuated smallpox vaccines. The objective of these studies is to
determine if higher doses of MVA, administered in a single or multiple dose
schedule as opposed to the single dose of unattenuated vaccines or LC16m8, could
give a level of immunity associated with protection. In February 2003, the NIH
awarded two contracts to support such development to Bavarian Nordic A/S and
Acambis plc. Clinical trials of the Bavarian Nordic MVA product are underway in
the United States, and the Bavarian Nordic MVA product has also been purchased
by certain European governments.
While both LC16m8 and MVA are attenuated products, the degree and effect
of the attenuation differs. LC16m8 was designed to replicate on the skin, but
not at the higher temperatures in the blood stream or deep tissues of the human
body. In contrast, MVA does not replicate well, if at all, in humans, either on
the skin or in the deep tissues. We believe that using a virus that does not
replicate may confer some safety advantage, but also carries certain potential
disadvantages. MVA, unlike LC16m8, does not create a "pock," or a small, round
scar at the site of injection, which is generally recognized as evidence of
successful smallpox immunization. The lack of a pock makes it difficult to
evaluate quickly whether vaccination has been successful. LC16m8 is administered
as a single dose and does produce a pock. Based on published peer-reviewed
pre-clinical and clinical studies, multiple intramuscular injections of MVA are
necessary to stimulate a significant immune response. In addition, higher doses
are required compared to a vaccine that is known to replicate, such as LC16m8.
In February 2005, Bavarian Nordic announced that it had protected mice against a
"lethal dose of vaccinia" within three days of vaccination with one dose of MVA.
However, to our knowledge, these results have not been published, peer reviewed,
presented at an open scientific meeting or independently verified, and Bavarian
Nordic has not presented any detailed specifications about how the challenge
study was designed and conducted. We also believe that supplying MVA in large
quantities may present challenges, due to the potential of higher dose
requirement and the fact that manufacturing viruses that are unable to replicate
effectively in humans is difficult.
The NIH has indicated that one reason for its interest in MVA as an
approach to smallpox immunization is to provide protection to those for whom
live virus vaccine approaches, including LC16m8, may not be appropriate. This
group would include persons with weakened immune systems, certain skin
disorders, and pregnant women. LC16m8 may not be appropriate in such populations
except in response to actual exposure to smallpox.
Manufacturing
Celltrion Joint Venture
In February 2002, we formed a joint venture with Nexol Biotech Co., Ltd,
Nexol Co., Ltd., Korea Tobacco & Ginseng Corporation and J. Stephen & Company
Ventures Ltd. (the "South Korean investors") to build and operate a mammalian
cell culture biomanufacturing facility in Incheon, South Korea, and to provide
partial funding for the construction of a manufacturing facility under our
management control in California. The joint venture, Celltrion, has received
approximately $45.7 million in cash from the South Korean investors, secured a
$40.0 million loan from a South Korean bank and received technology and
manufacturing know-how from us valued at $30.0 million. As our part of the
investment in the joint venture, we provided mammalian cell culture technology
and biologics production expertise. We currently own approximately 36% of
Celltrion and are the largest stockholder.
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VaxGen's California Manufacturing Facility
We occupy an approximately 65,000 square foot manufacturing facility,
approximately 20,000 square feet of which is dedicated to cGMP manufacture. The
remainder of the space is used for quality control laboratories, quality
assurance offices, general office and expansion space. We lease the space
occupied by the manufacturing facility from third parties and own the leasehold
improvements and capital equipment in the facility.
Our manufacturing facility was originally contemplated to be used to
facilitate the transfer of cell culture manufacturing technology to Celltrion,
to conduct on-site training of Celltrion personnel and to expedite commercial
licensure and launch of AIDSVAX, a vaccine designed to prevent infection by HIV.
As of November 2003, we ceased our development efforts for AIDSVAX. We began
using the facility in the first quarter of 2004 to manufacture the three
million-dose inventory required by our 2003 Anthrax Contract with NIAID. We
intend to use the facility to manufacture the vaccine to fulfill the
requirements under the SNS Contract.
We believe that our facility, which completed validation in February 2004,
will be capable of manufacturing all of the rPA102 anthrax vaccine required by
the SNS Contact plus an additional supply of the vaccine and could be expanded
to meet additional demand, if needed. The facility was designed for the flexible
manufacture of biopharmaceutical products including those grown in bacteria,
such as rPA102, as well as products produced in mammalian cell culture, such as
monoclonal antibody therapeutic products. In addition to using the facility to
produce our anthrax vaccine, we plan to use the facility for the manufacture of
future products, both for clinical purposes and commercial sale.
As of March 18, 2005, we had completed more than 12 manufacturing runs of
recombinant PA, which represents well in excess of 5 million bulk doses of
rPA102 and which have been produced for clinical and developmental purposes. We
expect to begin manufacturing bulk vaccine for the SNS in the third quarter of
2005 and believe we remain on schedule to provide the 75 million doses rPA102
within the requirements of the SNS Contract.
South Korea Manufacturing Facility
The manufacturing facility in Incheon, South Korea, which will be operated
and financed by Celltrion is planned to include 50,000 liters of bioreactor
capacity on approximately 23 acres of land. The Incheon facility is expected to
engage in mammalian cell culture biomanufacturing, which is used to make many of
the pharmaceutical products developed by the biotechnology industry, including
monoclonal antibodies and therapeutic proteins. Depending on demand, the plant's
capacity can be expanded to approximately 150,000 liters. Celltrion has not
secured any agreements under which products would be produced at this facility,
although it is in advanced discussions with one potential customer. However, it
is uncertain whether there will be sufficient demand for mammalian cell culture
manufacturing to make this facility profitable. The initial build-out is
currently under construction and is expected to be completed in 2005. The South
Korean investors and bankers are providing the funding necessary to design,
construct, validate and operate the Incheon facility; however, Celltrion will
need to raise additional capital to fund the operation of this facility.
Celltrion currently has no commitments for the investment of additional funds,
and we are not obligated to provide such funding.
The Celltrion Joint Venture Agreement
Under the terms of the Celltrion joint venture agreement, dated February
25, 2002, between us and the South Korean investors, Celltrion is managed by a
board of directors composed of five
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individuals. We hold two seats on the Celltrion Board, including the
representative director who presides over meetings of the Board and is also
charged with the administration of Celltrion's daily business affairs. So long
as we retain 66-2/3% of our initial shareholdings in Celltrion, we will be
entitled to nominate two of the directors, including the representative
director. The laws of the Republic of Korea govern the Celltrion joint venture
agreement.
The Celltrion joint venture agreement may be terminated as follows:
o if any party commits a material breach of any of its
obligations that is not cured within 60 days from the date of
written notice of breach;
o if any party becomes incapable for a period of six months of
performing any of its obligations under the Celltrion joint
venture agreement because of a force majeure;
o if any party files for liquidation, bankruptcy or a similar
transaction or event; or
o if the license agreement, which specifies the terms and
conditions of the use of the technology we contributed to
Celltrion, is terminated by us for certain reasons described
in the license agreement.
Land Purchase and Sale Agreement
On February 25, 2002, we entered into a land purchase and sale agreement
with the City of Incheon, South Korea providing for the purchase of the land for
Celltrion's South Korean manufacturing facilities over a 10-year period. As part
of Celltrion's initial formation and as contemplated by the land purchase and
sale agreement, we and Celltrion entered into an assignment agreement on March
26, 2002 under which we assigned Celltrion our rights, liabilities and
obligations, including the purchase price payment obligations, under the land
purchase and sale agreement. Until the transfer of legal title to the land to
Celltrion, which is currently anticipated to occur in 2012, Celltrion may use
the land for construction and operation of the manufacturing facilities. Once
all of Celltrion's payment obligations under the land purchase and sale
agreement are satisfied, the City of Incheon will transfer legal title to the
land to Celltrion.
Contribution Agreement
Under the terms of the contribution agreement dated February 25, 2002
between us and Celltrion, we made an in-kind contribution to Celltrion, as a
part of the initial capitalization of Celltrion, of the license and sub-license
of certain cell culture technology used for the manufacture of a number of
pharmaceutical products including AIDSVAX, if licensed. We received 7.8 million
shares of Celltrion common stock for this contribution.
Agreements entered into in connection with acquisition of VCI
In connection with our acquisition of Celltrion's interest in VCI, we
entered into agreements pertaining to our ownership of Celltrion and our
contractual obligations to Celltrion. We entered into a Termination Agreement,
dated December 30, 2004, by and between us and Celltrion, a Revised Joint
Venture Agreement, dated December 30, 2004, by and between us and the South
Korean investors, an Agreement, dated December 30, 2004, by and between us and
the South Korean investors (the "Surrender Agreement"), and a Technical Support
and Services Agreement, dated December 30, 2004, by and between us and
Celltrion. In connection with these agreements, we have reduced our ownership in
Celltrion from 48% to 36%. We are still the single largest shareholder in
Celltrion. In exchange for
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reducing our ownership in Celltrion, we have no future obligation to transfer
our technology to Celltrion or to provide additional technical support to
Celltrion. Celltrion has the right to continue to use certain technology
previously transferred to it by us and may obtain future technical support and
certain services from us.
The Revised Joint Venture Agreement provides for future capitalization of
Celltrion, including the possible sale of additional stock to new investors, and
provides for the management of Celltrion by increasing the number of directors
of Celltrion from five to six. Furthermore, the Revised Joint Venture Agreement
provides that VaxGen and Nexol together will appoint the representative director
of Celltrion.
The Termination Agreement provides for the termination of the Supply
Agreement, dated March 25, 2002, by and between us and Celltrion, the
termination of the License Agreement, dated March 25, 2002, by and between us
and Celltrion, and the termination of the Sub-License Agreement, dated March 25,
2002 by and between us and Celltrion.
The Surrender Agreement provides for the return by us of 2,000,000 shares
of common stock of Celltrion, out of the 7,800,000 shares originally granted to
us, in exchange for the termination of certain of our obligations to continue to
transfer technical know-how to Celltrion. The Surrender Agreement also provides
for the surrender of shares of Preferred Stock in Celltrion held by J. Stephen &
Company Ventures Ltd., in exchange for the termination of the obligation of J.
Stephen & Company Ventures Ltd. to further invest in Celltrion.
The Technical Support and Services Agreement provides for the license to
Celltrion of technology owned or licensed by us. The Technical Support and
Services Agreement also provides the terms by which Celltrion may obtain
technical assistance from us in the future.
Historical Financial Statements and Status of Audits By Independent
Auditors
Revenue Recognition
In April 2004, we terminated our relationship with our independent
auditors KPMG LLP and engaged other independent auditors. As part of an
examination of our historical financial statements, we determined in July 2004
that we should recognize revenue from certain government contracts, most of
which are with NIAID, as costs are incurred. Previously we recognized NIAID
contract revenue only after completing contract milestones. The result of this
change was to accelerate the recognition of revenue and materially decrease the
net loss applicable to common stockholders for the relevant periods. The SEC has
reviewed our change in accounting policy. As a result, we determined that our
historical financial statements should not be relied upon.
KPMG was unwilling to re-issue their audit opinions for 2003 and 2002 to
reflect our new revenue recognition policy, and they have withdrawn their audit
opinions for those years. Therefore we have engaged new independent auditors to
re-audit our financial statements for 2003, 2002 and 2001 as well as conduct
their audit for 2004 and their review of the fiscal quarters of 2004. This
process of re-audit is ongoing.
Pending completion of our independent auditors' re-audits of prior years,
we have been unable to file financial statements with the SEC since March of
2004. Due to our failure to file timely financial statements with the SEC, we
were delisted from the Nasdaq National Market ("Nasdaq") in August 2004.
We have undertaken the reaudit of our annual financial statements for the
three fiscal years ended December 31, 2003, 2002 and 2001, which is
substantially complete. We anticipate the changes that will
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be reflected in our amended 2003 10-K will result in the acceleration of the
recognition of revenue, and a material decrease in the net loss applicable to
common stockholders for the combined periods.
Celltrion Consolidation
Since Celltrion's inception in February 2002, we have used footnotes in
our financial statements to describe our relationship with Celltrion. We have
not recorded an investment in the joint venture on our consolidated balance
sheet because the historical cost of the non-monetary assets that we contributed
to the joint venture was zero. We also did not recognize any share of
Celltrion's operating losses, which are associated with building a
biopharmaceutical manufacturing facility in South Korea, because we have no
further funding obligation to the joint venture.
However, we are currently evaluating whether it is necessary to include
the financial statements of Celltrion with our own. If we determine that
Celltrion's results should be integrated into our own we may be required to
record the fair value of our investment and our share of the venture's start-up
losses and impairment reserves and to prepare and audit the financial statements
for Celltrion to be in conformity with U.S. GAAP and U.S. Auditing Standards. We
do not expect the ultimate decision with respect to accounting for Celltrion to
affect our existing or previously reported cash balances.
Expected Reaudit Timeline and Relisting
If we determine that Celltrion's financial results should not be
integrated into ours, we expect to file our outstanding periodic reports with
the SEC and apply for relisting on Nasdaq in the second quarter of 2005. If we
determine that Celltrion's financial results should be integrated into our own,
we expect to file all of our outstanding periodic reports with the SEC and apply
for relisting on Nasdaq in the third quarter of 2005, and to be relisted on
Nasdaq six to eight weeks after we file our periodic reports, if our listing
application is approved. However, we cannot give any assurance that we will be
able to file our outstanding periodic reports with the SEC or that we will apply
for listing on Nasdaq, or that Nasdaq will relist our common stock if we were to
apply.
To be eligible for relisting we must meet Nasdaq's initial listing
criteria, and we believe we will need to be in compliance with Sections 13 and
15(d) of the Exchange Act. We are now subject to Section 404 of the
Sarbanes-Oxley Act of 2002, and may not be able to satisfy the requirements
thereof. If the SEC determines that we failed to comply with Section 404 of the
Sarbanes Oxley Act of 2002, we may be deemed to be in violation of Sections 13
and 15(d) of the Exchange Act, which could substantially delay our ability to
become relisted. See "Risk Factors -We do not have current financial statements
and therefore you are not currently able to evaluate our current financial
condition or operating history and results."
Section 404 under the Sarbanes-Oxley Act of 2002 requires that we perform
an assessment of our internal controls over financial reporting, and engage our
auditors to perform an audit of our internal controls over financial reporting.
We were required to complete the assessment as to the adequacy of our internal
control reporting as of December 31, 2004.
Our auditors have expressed serious concerns that we did not allow
sufficient time for us and our auditors to complete our and their respective
responsibilities before December 31, 2004.
If our independent auditors conclude that we failed to complete the
required assessment as to the effectiveness of our internal controls over
financial reporting or if they conclude that they were unable to
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complete their required audit of internal controls and financial reporting, they
may disclaim an opinion as to the effectiveness of our internal controls.
We do not believe that the SEC has provided guidance as to the effect of
such a disclaimer. If we receive such a disclaimer, our Annual Report on Form
10-K for the year ended December 31, 2004, once filed (if ever), may be deemed
to be deficient by the SEC. If our 2004 10-K were deemed to be deficient, the
SEC may conclude that we are in violation of Sections 13 and 15(d) of the
Exchange Act, which violation may not be cured until we file our Annual Report
on Form 10-K for the fiscal year ended December 31, 2005 (the "2005 10-K").
Legal Proceedings
On March 17, 2003, a civil complaint for violation of Sections 10(b) and
20(a) of the Exchange Act was filed in the United States District Court for the
Northern District of California, entitled Janice Whitkens v. VaxGen, Inc., et
al., Civil Action No. C03-1129 JSW. The plaintiff seeks to represent a class of
persons who purchased our securities between August 6, 2002 and February 26,
2003, and alleges that the defendants misled investors about the progress of
certain clinical trials and our future manufacturing and marketing plans.
Following the filing of the Whitkens complaint, several additional class action
complaints were filed in the same court, each making identical or similar
allegations against the same defendants. On April 16, 2004, Theodore Williams
was appointed Lead Plaintiff and an Amended Consolidated Complaint was filed on
May 14, 2004. The matter is captioned In re VaxGen Securities Litigation, Civil
Action No. C-03-1129-JSW, and is pending in the United States District Court for
the Northern District of California. Named as defendants are VaxGen, Inc., Chief
Executive Officer Lance K. Gordon and former President Donald P. Francis. On
June 28, 2004 defendants filed their motion to dismiss the Amended Consolidated
Complaint. This motion was heard on February 25, 2005 and on that date the Court
took the matter under submission. We believe that we have strong defenses and
intend to defend these actions vigorously.
On or about March 21, 2003, two separate but virtually identical
shareholder derivative actions were filed in California Superior Court for San
Mateo County entitled Rhodes v. Allen, et al. civil action No. CIV 430087, and
MacDonald v. Allen, et al., civil action No. CIV 430088. A consolidated
complaint was filed in June 2003. Named as defendants in the action are Company
directors Lance K. Gordon, Randall L-W. Caudill, and William D. Young, and
former Company directors Donald P. Francis, Phillip W. Berman, David W. Beier,
and Stephen C. Francis (the "Company Directors"). Also named as defendants are
Paul Allen and Vulcan Ventures, Inc. (the "Vulcan Defendants"). The allegations
of the consolidated complaint are similar to those contained in the class
action, although unlike the class action, in the derivative action the plaintiff
purports to seek recovery on behalf of VaxGen, rather than from VaxGen.
Plaintiffs allege as well that the Vulcan Defendants sold shares of our stock
while in possession of material non-public information about us. Plaintiffs,
purportedly suing on behalf of VaxGen, assert claims against all defendants for
breach of fiduciary duty, mismanagement, waste and unjust enrichment, and
against the Vulcan Defendants for breach of fiduciary duty and insider trading.
The Company Directors and the Vulcan Defendants filed demurrers challenging the
demand futility allegations in the
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consolidated complaint. The Court overruled the defendants' demurrers and the
parties have entered the discovery phase of the litigation. The parties have
entered into settlement discussions.
Employees
As of February 28, 2005, we had 229 employees: 25 were clinical staff, 48
were research and development staff, 48 were management/administration staff, 62
were regulatory and quality services staff and 46 were manufacturing staff. None
of our employees is subject to a collective bargaining agreement, and we believe
that our relations with our employees are good.
Other Information
We were incorporated in Delaware in November 1995. Our principal executive
offices are located at 1000 Marina Boulevard, Suite 200, Brisbane, California
94005, and our telephone number is (650) 624-1000. Our website is
http://www.vaxgen.com. We have not incorporated by reference into this
Current Report on Form 8-K the information contained on or accessible
through our website, and you should not consider it to be a part of this
document. Our website address is included in this document as an inactive
textual reference only.
SECTION 9--FINANCIAL STATEMENTS AND EXHIBITS
Item 9.01. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired. Not applicable.
(b) Pro Forma Financial Information. Not applicable.
(c) Exhibits.
Exhibit No. Description
- ----------- -----------
Exhibit 99.1 Press release entitled, "VaxGen Announces Pricing of $31.5
Million of Convertible Senior Subordinated Notes".
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
VaxGen, Inc.
(Registrant)
Dated: March 31, 2005 By: /s/ James M. Cunha
----------------------------
James M. Cunha
Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
Exhibit 99.1 Press release entitled, "VaxGen Announces Pricing of $31.5
Million of Convertible Senior Subordinated Notes".
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