-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HHIQmvb33GHAq/HkKRo95Dii3p3MslgMEHCqEMGaYzWqbtKyAZgRdrXh6ToQJ3rH XBirfObDw1pwEH7CUVKaJg== 0000912057-99-009679.txt : 19991217 0000912057-99-009679.hdr.sgml : 19991217 ACCESSION NUMBER: 0000912057-99-009679 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19991216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VICAL INC CENTRAL INDEX KEY: 0000819050 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 930948554 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: SEC FILE NUMBER: 333-92921 FILM NUMBER: 99776104 BUSINESS ADDRESS: STREET 1: 9373 TOWNE CENTRE DR STREET 2: STE 100 CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6194539900 MAIL ADDRESS: STREET 1: 9373 TOWNE CENTER DR STREET 2: STE 100 CITY: SAN DIEGO STATE: CA ZIP: 92121 S-3 1 FORM S-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 16, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ VICAL INCORPORATED (Exact name of registrant as specified in its charter) -------------------------- DELAWARE 93-0948554 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.)
9373 TOWNE CENTRE DRIVE, SUITE 100 SAN DIEGO, CA 92121 (858) 646-1100 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) -------------------------- ALAIN B. SCHREIBER, M.D. PRESIDENT AND CHIEF EXECUTIVE OFFICER VICAL INCORPORATED 9373 TOWNE CENTRE DRIVE, SUITE 100 SAN DIEGO, CA 92121 (858) 646-1100 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------------------- COPIES TO: THOMAS E. SPARKS, JR., ESQ. LANCE W. BRIDGES, ESQ. JOHN L. DONAHUE, ESQ. ADAM C. LENAIN, ESQ. ALAN G. SMITH, ESQ. COOLEY GODWARD LLP PILLSBURY MADISON & SUTRO LLP 4365 EXECUTIVE DRIVE, SUITE 1200 P.O. BOX 7880 SAN DIEGO, CALIFORNIA 92121 SAN FRANCISCO, CALIFORNIA 94120
-------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. -------------------------- If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: / / -------------------------- CALCULATION OF REGISTRATION FEE PROPOSED PROPOSED MAXIMUM MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) OFFERING PRICE REGISTRATION FEE Common Stock, $0.01 par value..... 2,875,000 shares $20.66 $59,397,500 $15,681
(1) Includes 375,000 shares that the underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c), based upon the average of the high and low price reported on the Nasdaq National Market on December 13, 1999. -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION. DATED DECEMBER 16, 1999. 2,500,000 Shares [LOGO] Common Stock ------------------ This is an offering of 2,500,000 shares of common stock of Vical Incorporated. All of the 2,500,000 shares of common stock are being sold by Vical. The common stock is listed on the Nasdaq National Market under the symbol "VICL." The last reported sale price of the common stock on December 13, 1999, was $21.00 per share. SEE "RISK FACTORS" ON PAGE 6 TO READ ABOUT FACTORS YOU SHOULD CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------
Per Share Total --------- ---------- Initial price to public................................ $ $ Underwriting discount.................................. $ $ Proceeds, before expenses, to Vical.................... $ $
To the extent that the underwriters sell more than 2,500,000 shares of common stock, the underwriters have the option to purchase up to an additional 375,000 shares from Vical at the initial price to public less the underwriting discount. ------------------------ The underwriters expect to deliver the shares against payment in New York, New York on , 2000. GOLDMAN, SACHS & CO. ROBERTSON STEPHENS SG COWEN FIRST UNION SECURITIES, INC. ------------------------ Prospectus dated , 2000. GRAPHICS' DESCRIPTIONS FOR EDGAR
[Numerous Product Opportunities Graphic, Inside Front Cover] Header: Vical's Naked DNA Technology Offers Numerous Product Opportunities. Description: Graphic illustration of the gene-based drug candidates identifying their use in DNA Vaccine, Immunotherapy and DNA Therapeutics for Infectious Diseases, Oncology and Protein Delivery, respectively. [Stages of Clinical Trial Graphic, Inside Back Cover] Header: Advanced Clinical Trials With Multiple Cancer Therapies Description: Graphic illustration of the various stages of clinical trials of Vical's products Allovectin-7, Leuvectin, Vaxid and gp100 vaccine for various cancer diseases. [Naked DNA Technology Graphic, Inside Back Cover] Header: Vical's Naked DNA Technology Description: Graphic illustration of the process by which Vical's Naked DNA Technology enters the target cell and expresses the desired protein.
PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE DECIDING TO INVEST IN OUR COMMON STOCK. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" SECTION, THE FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS AND THE DOCUMENTS INCORPORATED BY REFERENCE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "UNDERWRITING." OUR BUSINESS OVERVIEW We develop biopharmaceutical products based on our patented naked DNA gene transfer technologies for the prevention and treatment of life-threatening diseases. We currently focus our development on innovative cancer therapies designed to induce an immune response against cancer cells without causing serious side effects. We have retained all rights to our internally developed cancer product candidates. Our lead candidates, ALLOVECTIN-7 and LEUVECTIN, are both in late-stage clinical trials for multiple indications. We also license our technologies to pharmaceutical companies for the development of applications typically outside our focus such as vaccines for infectious diseases and optimized delivery of therapeutic proteins. These strategic collaborations provide us with the opportunity to receive royalties and profit sharing, if products are successfully developed and commercialized. In addition, proceeds from these license agreements help fund development of our product candidates. TARGET MARKETS We focus on developing cancer therapies which may offer safer and more cost-effective treatments than are currently available. Our development programs address a number of cancers which in aggregate threaten the lives of millions of people worldwide. The high public and patient awareness of the need for improved therapies, coupled with the limited efficacy of existing treatments such as chemotherapy, provides Vical with an attractive market. Potential applications of our naked DNA gene delivery technology include DNA therapeutics for cancer, DNA vaccines for infectious diseases and DNA therapeutic protein delivery for other types of disease. We also believe a significant potential exists for a number of veterinary applications. OUR TECHNOLOGIES We pioneered and continue to develop naked DNA gene delivery technologies. Our DNA technologies are protected by a number of patents. Our approach involves the design and construction of stable, closed loops of DNA. These DNA segments contain genes that promote production of desired proteins for periods ranging from weeks to several months. We believe the potential benefits of our technology include: - BROAD APPLICABILITY. Our naked DNA gene delivery technology may be useful in developing novel treatments for cancer, DNA vaccines to prevent or treat infectious diseases and methods to efficiently deliver human and animal therapeutic proteins. - CONVENIENCE. Our naked DNA therapeutics are intended to be administered like conventional pharmaceuticals on an outpatient basis. - SAFETY. Our product candidates contain no viral components which may cause unwanted immune responses, infections, or malignant and permanent changes in the cell's genetic makeup. 3 - EASE OF MANUFACTURING. Our product candidates are manufactured using conventional fermentation techniques and standard purification procedures. - COST-EFFECTIVENESS. Our naked DNA gene delivery technology may prove to be more cost-effective than therapies which require genetic modification and controlled propagation of viral vectors. The DNA, once introduced into the body, is intended to stimulate the production of a therapeutic protein over a prolonged period of time, which may be more cost-effective than administering the protein itself. OUR PRODUCT CANDIDATES We have several unpartnered cancer product candidates in clinical trials: - ALLOVECTIN-7 for the treatment of metastatic melanoma, in Phase III and Phase II registration trials, and head and neck cancer, in Phase II, - LEUVECTIN, for the treatment of kidney cancer, Phase II, and prostate cancer, Phase II, - VAXID, for the prevention of recurrence of B-cell lymphoma, Phase I/II, and - a DNA vaccine for the treatment of metastatic melanoma, Phase I/II. OUR COLLABORATIVE PARTNERS We have established relationships, through the licensing of our technology, with a number of corporate partners and collaborators, including: - Merck, in the fields of infectious disease vaccines and cardiovascular disease, - Two divisions of Aventis S.A., formerly Rhone-Poulenc S.A., - Aventis Pasteur, formerly Pasteur Merieux Connaught, in the field of infectious disease vaccines, - Aventis Pharma, formerly Rhone-Poulenc Rorer Pharmaceuticals, Inc., in the field of neurodegenerative disorders, - Pfizer, in the field of animal health therapeutics, - Merial, a joint venture between Merck and Rhone Merieux, in the field of animal health vaccines, - Centocor, a wholly-owned subsidiary of Johnson & Johnson, in the field of cancer vaccines, and - Boston Scientific, in the field of cardiovascular disease. OUR HISTORY We were incorporated in Delaware in 1987. Our offices are located at 9373 Towne Centre Drive, Suite 100, San Diego, California 92121-3088, and our telephone number is (858) 646-1100. THE OFFERING
Common stock offered by us................... 2,500,000 shares Common stock to be outstanding after the offering................................... 18,698,723 shares Use of Proceeds.............................. For research and development and general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol................ VICL
The above information is based on shares outstanding as of September 30, 1999. 4 SUMMARY FINANCIAL INFORMATION See Note 1 of Notes to Audited Financial Statements for an explanation of the method used to determine the number of shares used in computing per share data below.
NINE MONTHS FISCAL YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30, -------------------------------------------------------------- ----------------------- 1994 1995 1996 1997 1998 1998 1999 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Revenues: License/royalty revenue.......... $4,509 $5,402 $5,679 $6,477 $5,044 $4,617 $3,770 Contract revenue................. 1,005 900 1,061 1,326 876 371 1,992 ---------- ---------- ---------- ---------- ---------- ---------- ---------- 5,514 6,302 6,740 7,803 5,920 4,988 5,762 Operating expenses: Research and development......... 8,336 8,997 11,318 11,936 12,054 9,311 10,866 General and administrative....... 2,615 2,902 3,168 3,733 3,650 2,836 3,201 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total operating expenses........... 10,951 11,899 14,486 15,669 15,704 12,147 14,067 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Loss from operations............... (5,437) (5,597) (7,746) (7,866) (9,784) (7,159) (8,305) Interest income.................... 1,159 1,687 2,773 2,447 2,465 1,879 1,688 Interest expense................... 80 73 108 192 162 126 97 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net loss........................... $(4,358) $(3,983) $(5,081) $(5,611) $(7,481) $(5,406) $(6,714) ========== ========== ========== ========== ========== ========== ========== Basic and diluted net loss per share............................ $(0.34) $(0.29) $(0.33) $(0.36) $(0.47) $(0.34) $(0.42) ========== ========== ========== ========== ========== ========== ========== Shares used in computing basic and diluted net loss per share....... 12,831,585 13,504,790 15,382,848 15,484,952 15,797,585 15,786,838 16,114,024
The balance sheet data excludes 3,114,744 shares of common stock reserved but unissued under our stock plans under which options to purchase an aggregate of 1,930,229 shares of common stock at an average exercise price of $13.29 per share were outstanding at September 30, 1999. In the "As Adjusted" column below, we have adjusted the balance sheet data to give effect to receipt of the net proceeds from the sale in this offering of 2,500,000 shares of common stock at an assumed public offering price of $ per share, after deducting the estimated underwriting discount and estimated offering expenses.
SEPTEMBER 30, 1999 ----------------------- ACTUAL AS ADJUSTED -------- ------------ (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and marketable securities............ $38,935 Working capital............................................. 36,421 Total assets................................................ 43,880 Long-term obligations, less current portion................. 712 Total stockholders' equity.................................. 38,855
5 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, TOGETHER WITH ALL OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, BEFORE DECIDING WHETHER TO INVEST IN OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE HARMED. IN THIS CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. NONE OF OUR PRODUCTS HAVE BEEN APPROVED FOR SALE. IF WE DO NOT DEVELOP COMMERCIALLY SUCCESSFUL PRODUCTS, WE MAY BE FORCED TO CURTAIL OR CEASE OPERATIONS. Very little data exists regarding the safety and efficacy of DNA therapeutics. All of our potential products are either in research or development. We must conduct a substantial amount of additional research and development before any U.S. or foreign regulatory authority will approve any of our products. Results of our research and development activities may indicate that our potential products are unsafe or ineffective. In this case, regulatory authorities will not approve them. Even if approved, our products may not be commercially successful. If we fail to develop and commercialize our products, we will not be successful. WE HAVE A HISTORY OF NET LOSSES. WE EXPECT TO CONTINUE TO INCUR NET LOSSES AND WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY. We have not sold any products and do not expect to sell any products for the next several years. For the period from our inception to September 30, 1999, we have incurred cumulative net losses totaling approximately $44.5 million. Moreover, our negative cash flow and losses from operations will continue and increase for the foreseeable future. We may never generate sufficient product revenue to become profitable. We also expect to have quarter-to-quarter fluctuations in revenues, expenses and losses, some of which could be significant. WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE. IF ADDITIONAL CAPITAL IS NOT AVAILABLE, WE MAY HAVE TO CURTAIL OR CEASE OPERATIONS. We will need to raise more money to continue the research and development necessary to bring our products to market and to establish manufacturing and marketing capabilities. We plan to seek additional funds through public and private stock offerings, arrangements with corporate partners, borrowings under lease lines of credit or other sources. If we cannot raise more money we will have to reduce our capital expenditures, scale back our development of new products, reduce our workforce and license to others products or technologies that we otherwise would seek to commercialize ourselves. The amount of money we will need will depend on many factors, including: - the progress of our research and development programs, - the scope and results of our preclinical studies and clinical trials, - the time and costs involved in: - obtaining necessary regulatory approvals, - filing, prosecuting and enforcing patent claims, - scaling up our manufacturing capabilities, and - the commercial arrangements we may establish. 6 THE REGULATORY APPROVAL PROCESS IS EXPENSIVE, TIME CONSUMING AND UNCERTAIN WHICH MAY PREVENT US FROM OBTAINING REQUIRED APPROVALS FOR THE COMMERCIALIZATION OF OUR PRODUCTS. Testing of the potential drugs we develop is regulated by numerous governmental authorities in the United States and other countries. The regulations are evolving and uncertain. The regulatory process can take many years and require us to expend substantial resources. For example: - the U.S. Food and Drug Administration, the FDA, has not established guidelines concerning the scope of clinical trials required for DNA therapeutics, - the FDA has not indicated how many patients it will require to be enrolled in clinical trials to establish the safety and efficacy of DNA therapeutics, and - current regulations are subject to substantial review by various governmental agencies. Therefore, U.S. or foreign regulations could prevent or delay regulatory approval of our products or limit our ability to develop and commercialize our products. Delays could: - impose costly procedures on our activities, - diminish any competitive advantages that we attain, and - negatively affect our ability to receive royalties. We believe that the FDA and comparable foreign regulatory bodies will regulate separately each product containing a particular gene depending on its intended use. Presently, to commercialize any product we must sponsor and file a regulatory application for each proposed use. We then must conduct clinical studies to demonstrate the safety and efficacy of the product necessary to obtain FDA approval. The results obtained so far in our clinical trials may not be replicated in our on-going or future trials. This may prevent any of our potential products from receiving FDA approval. We use recombinant DNA molecules in our product candidates, and therefore we also must comply with guidelines instituted by the National Institutes of Health, the NIH, and its Recombinant DNA Advisory Committee. The NIH could restrict or delay the development of our products. ADVERSE EVENTS IN THE FIELD OF GENE THERAPY MAY NEGATIVELY IMPACT REGULATORY APPROVAL OR PUBLIC PERCEPTION OF OUR PRODUCTS. The recent death of a patient undergoing a viral-based gene therapy has been widely publicized. This death and other adverse events in the field of gene therapy that may occur in the future could result in greater governmental regulation of our non-viral naked DNA technology and potential regulatory delays relating to the testing or approval of our potential products. For example, as a result of this death, the Recombinant DNA Advisory Committee of the NIH may become more active in reviewing the clinical trials or proposed clinical trials of all companies involved in gene therapy. It is uncertain what effect such increased scrutiny will have on our product development efforts or clinical trials. The commercial success of our potential products will depend in part on public acceptance of the use of gene therapies for the prevention or treatment of human diseases. Public attitudes may be influenced by claims that gene therapies are unsafe and our naked DNA therapeutics may not gain the acceptance of the public or the medical community. Negative public reaction to gene therapy in general could result in greater government regulation and stricter labeling requirements of gene therapies, including our naked DNA therapeutics, and could cause a decrease in the demand for any products we may develop. 7 OUR PATENTS AND PROPRIETARY RIGHTS MAY NOT PROVIDE US WITH ANY BENEFIT AND THE PATENTS OF OTHERS MAY PREVENT US FROM COMMERCIALIZING OUR PRODUCTS. Patents may not issue from any of our current applications. Moreover, if patents do issue, governmental authorities may not allow claims sufficient to protect our technology. Finally, others may challenge or seek to circumvent or invalidate patents that are issued to us or to licensors of our technology. In that event, the rights granted under patents may be inadequate to protect our proprietary technology or to provide any commercial advantage. Our core DNA delivery technology is covered by a patent issued in Europe which is being opposed by several companies under European patent procedures. If we are not successful in this opposition proceeding we may lose part or all of our proprietary protection on our potential products in Europe. Others may have or may receive patents which contain claims applicable to our products. These patents may impede our ability to commercialize products. THE LEGAL PROCEEDINGS TO OBTAIN PATENTS AND LITIGATION OF THIRD-PARTY CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT COULD REQUIRE US TO SPEND MONEY AND COULD IMPAIR OUR OPERATIONS. Our success will depend in part on our ability to obtain patent protection for our products and processes both in the United States and in other countries. The patent positions of biotechnology and pharmaceutical companies, however, can be highly uncertain and involve complex legal and factual questions. Therefore, it is difficult to predict the breadth of claims allowed in the biotechnology and pharmaceutical fields. We also rely on protecting our proprietary technology in part through confidentiality agreements with our corporate collaborators, employees, consultants and certain contractors. These agreements may be breached and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or independently discovered by our competitors. Protecting intellectual property rights can be very expensive. Litigation may be necessary to enforce a patent issued to us or to determine the scope and validity of third-party proprietary rights. Moreover, if a competitor were to file a patent application claiming technology also invented by us, we would have to participate in an interference proceeding before the U.S. Patent and Trademark Office or in a foreign counterpart to determine the priority of the invention. We may be drawn into interferences with third parties or may have to provoke interferences ourselves to unblock third party patent rights so as to allow us or our licensees to commercialize products based on our technology. Litigation could result in substantial costs and the diversion of management's efforts regardless of the results of the litigation. An unfavorable result in litigation could subject us to significant liabilities to third parties, require disputed rights to be licensed or require us to cease using some technology. Our products and processes may infringe, or be found to infringe on, patents not owned or controlled by us. We do not know whether any patents held by others will require us to alter our products or processes, obtain licenses, or stop activities. If relevant claims of third-party patents are upheld as valid and enforceable, we could be prevented from practicing the subject matter claimed in the patents, or may be required to obtain licenses or redesign our products or processes to avoid infringement. A number of genetic sequences or proteins encoded by genetic sequences that we are investigating are, or may become, patented by others. As a result, we may have to obtain licenses to test, use or market these products. Our business will suffer if we are not able to obtain licenses at all or on terms commercially reasonable to us and we may not be able to redesign our products or processes to avoid infringement. 8 COMPETITION AND TECHNOLOGICAL CHANGE MAY MAKE OUR POTENTIAL PRODUCTS AND TECHNOLOGIES LESS ATTRACTIVE OR OBSOLETE. We compete with companies, including major pharmaceutical and biotechnology firms, that are pursuing other forms of treatment or prevention for the diseases we target. We also may experience competition from companies that have acquired or may acquire technology from universities and other research institutions. As these companies develop their technologies, they may develop proprietary positions which may prevent us from successfully commercializing products. Some of our competitors are established companies with greater financial and other resources than we have. Other companies may succeed in developing products earlier than we do, obtaining FDA approval for products more rapidly than we do, or developing products that are more effective than those we propose to develop. While we will seek to expand our technological capabilities to remain competitive, research and development by others will seek to render our technology or products obsolete or noncompetitive or result in treatments or cures superior to any therapy developed by us. Additionally, consumers may not prefer therapies developed by us over existing or newly developed therapies. THE METHOD OF ADMINISTRATION OF SOME OF OUR POTENTIAL PRODUCTS CAN CAUSE ADVERSE EVENTS IN PATIENTS, INCLUDING DEATH. Some of our potential products are designed to be injected directly into malignant tumors. There are medical risks inherent in direct tumor injections. For example, in clinical trials of our potential products, attending physicians have punctured patients' lungs in less than one percent of procedures, requiring hospitalization. In addition, a physician administering our product in an investigator-sponsored clinical trial inadvertently damaged tissue near the heart of a patient which may have precipitated the patient's death. These events are reported as adverse events in our clinical trials and illustrate the medical risks related to direct injection of tumors. These risks may adversely impact market acceptance of some of our products. COMMERCIALIZATION OF SOME OF OUR POTENTIAL PRODUCTS DEPENDS ON COLLABORATIONS WITH OTHERS. IF OUR COLLABORATORS ARE NOT SUCCESSFUL OR IF WE ARE UNABLE TO FIND COLLABORATORS IN THE FUTURE, WE MAY NOT BE ABLE TO DEVELOP THESE PRODUCTS. Our strategy for the research, development and commercialization of some of our product candidates requires us to enter into contractual arrangements with corporate collaborators, licensors, licensees and others. Our success depends upon the performance by these collaborators of their responsibilities under these arrangements. Some collaborators may not perform their obligations as we expect or we may not derive any revenue from these arrangements. We have collaborative agreements with several pharmaceutical companies. We do not know whether these companies will successfully develop and market any products under their respective agreements. Moreover, some of our collaborators are also researching competing technologies to treat the diseases targeted by our collaborative programs. We may be unsuccessful in entering into other collaborative arrangements to develop and commercialize our products. IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL, WE MAY NOT BE ABLE TO PURSUE COLLABORATIONS OR DEVELOP OUR OWN PRODUCTS. We are highly dependent on the principal members of our scientific, manufacturing, marketing and management personnel, the loss of whose services might significantly delay or prevent the achievement of our objectives. We face competition from other companies, academic institutions, government entities and other organizations in attracting and retaining personnel. 9 WE MAY NOT BE ABLE TO MANUFACTURE PRODUCTS ON A COMMERCIAL SCALE. We have limited experience in manufacturing our product candidates in commercial quantities. We may be dependent initially on corporate partners, licensees or others to manufacture our products commercially. We also will be required to comply with extensive regulations applicable to manufacturing facilities. We may be unable to enter into any arrangement for the manufacture of our products. WE HAVE NO MARKETING OR SALES EXPERIENCE, AND IF WE ARE UNABLE TO DEVELOP OUR OWN SALES AND MARKETING CAPABILITY, WE MAY NOT BE SUCCESSFUL IN COMMERCIALIZING OUR PRODUCTS. Our current strategy is to market our proprietary cancer products directly in the United States, but we currently do not possess pharmaceutical marketing or sales capabilities. In order to market and sell our proprietary cancer products, we will need to develop a sales force and a marketing group with relevant pharmaceutical experience, or make appropriate arrangements with strategic partners to market and sell these products. Developing a marketing and sales force is expensive and time consuming and could delay any product launch. Our inability to successfully employ qualified marketing and sales personnel and develop our sales and marketing capabilities will harm our business. HEALTH CARE REFORM AND RESTRICTIONS ON REIMBURSEMENT MAY LIMIT OUR RETURNS ON POTENTIAL PRODUCTS. Our ability to earn sufficient returns on our products will depend in part on the extent to which reimbursement for our products and related treatments will be available from: - government health administration authorities, - private health coverage insurers, - managed care organizations, and - other organizations. If we fail to obtain appropriate reimbursement, it could prevent us from successfully commercializing our potential products. There are efforts by governmental and third party payors to contain or reduce the costs of health care through various means. We expect that there will continue to be a number of legislative proposals to implement government controls. The announcement of proposals or reforms could impair our ability to raise capital. The adoption of proposals or reforms could impair our business. Additionally third party payors are increasingly challenging the price of medical products and services. If purchasers or users of our products are not able to obtain adequate reimbursement for the cost of using our products, they may forego or reduce their use. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and whether adequate third party coverage will be available. WE USE HAZARDOUS MATERIALS IN OUR BUSINESS. ANY CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF THESE MATERIALS COULD BE TIME CONSUMING AND COSTLY. Our research and development processes involve the controlled storage, use and disposal of hazardous materials, biological hazardous materials and radioactive compounds. We are subject to federal, state and local regulations governing the use, manufacture, storage, handling and disposal of materials and waste products. Although we believe that our safety procedures for handling and disposing of these hazardous materials comply with the standards prescribed by law and 10 regulation, the risk of accidental contamination or injury from hazardous materials cannot be completely eliminated. In the event of an accident, we could be held liable for any damages that result, and any liability could exceed the limits or fall outside the coverage of our insurance. We may not be able to maintain insurance on acceptable terms, or at all. We could be required to incur significant costs to comply with current or future environmental laws and regulations. WE MAY HAVE SIGNIFICANT PRODUCT LIABILITY EXPOSURE. We face an inherent business risk of exposure to product liability and other claims in the event that our technologies or products are alleged to have caused harm. These risks are inherent in the development of chemical and pharmaceutical products. Although we currently maintain product liability insurance, we may not have sufficient insurance coverage and we may not be able to obtain sufficient coverage at a reasonable cost. Our inability to obtain product liability insurance at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of any products developed by us or our collaborators. We also have liability for products manufactured by us on a contract basis for third parties. If we are sued for any injury caused by our technology or products, our liability could exceed our total assets. OUR STOCK PRICE COULD CONTINUE TO BE HIGHLY VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE PRICE YOU PAID FOR THEM. The market price of our common stock, like that of many other life sciences companies, has been highly volatile and is likely to continue to be highly volatile. The following factors, among others, could have a significant impact on the market price of our common stock: - the results of our preclinical studies and clinical trials or those of our collaborators or competitors or for DNA therapeutics in general, - evidence of the safety or efficacy of our potential products or the products of our competitors, - the announcement by us or our competitors of technological innovations or new products, - governmental regulatory actions, - changes or announcements in reimbursement policies, - developments with our collaborators, - developments concerning our patent or other proprietary rights or those of our competitors, including litigation, - concern as to the safety of our potential products, - period-to-period fluctuations in our operating results, - market conditions for life science stocks in general, and - changes in estimates of our performance by securities analysts. IF WE, OUR STRATEGIC PARTNERS OR OUR SUPPLIERS FAIL TO REMEDY YEAR 2000 ISSUES, OUR PRODUCT DEVELOPMENT PROGRAMS COULD BE INTERRUPTED AND OUR BUSINESS AND OPERATING RESULTS COULD BE HARMED. If we, our strategic partners, or our suppliers of goods and services fail to remedy any Year 2000 issues, our business operations and development programs could be interrupted. If our strategic partners or suppliers fail to maintain systems it could cause us to incur significant 11 expenses to remedy any problems, or otherwise seriously damage our business. Any of the following events could affect our operations: - if a strategic partner were unable to obtain our clinical materials or services, - if a strategic partner were unable to manage its clinical trials or research and development activities, - if a strategic partner were unable to pay any amounts owed to us, and - if a supplier were unable to manufacture and ship materials to us or provide requested contract services. We cannot predict whether an interruption is likely to occur, the duration of any interruption or the effect that an interruption would have on our future operations. We cannot guarantee that we will be able to identify and correct all Year 2000 problems on a timely basis. Similarly, we cannot guarantee that unknown or unanticipated Year 2000 issues will not arise. As a result, Year 2000 compliance efforts may involve significant time and expense and the occurrence of unknown, unanticipated or unremediated Year 2000 problems which could harm our business and operating results. OUR ANTI-TAKEOVER PROVISIONS COULD DISCOURAGE POTENTIAL TAKEOVER ATTEMPTS AND MAKE ATTEMPTS BY STOCKHOLDERS TO CHANGE MANAGEMENT MORE DIFFICULT. The approval of two-thirds of our voting stock is required to approve some transactions and to take some stockholder actions, including the calling of a special meeting of stockholders and the amendment of any of the anti-takeover provisions contained in our certificate of incorporation. Further, pursuant to the terms of our stockholder rights plan adopted in March 1995, we have distributed a dividend of one right for each outstanding share of common stock. These rights will cause substantial dilution to the ownership of a person or group that attempts to acquire us on terms not approved by our board of directors and may have the effect of deterring hostile takeover attempts. 12 FORWARD-LOOKING STATEMENTS The statements incorporated by reference or contained in this prospectus discuss our future expectations, contain projections of our results of operations or financial condition, and include other "forward-looking" information within the meaning of Section 27A of the Securities Act of 1933, as amended. Our actual results may differ materially from those expressed in forward-looking statements made or incorporated by reference in this prospectus. Forward-looking statements that express our beliefs, plans, objectives, assumptions or future events or performance may involve estimates, assumptions, risks and uncertainties. Therefore, our actual results and performance may differ materially from those expressed in the forward-looking statements. Forward-looking statements often, although not always, include words or phrases such as the following: - "will likely result," - "are expected to," - "will continue," - "is anticipated," - "estimate," - "intends," - "plans," - "projection," and - "outlook." You should not unduly rely on forward-looking statements contained or incorporated by reference in this prospectus. Actual results or outcomes may differ materially from those predicted in our forward-looking statements due to the risks and uncertainties inherent in our business, including risks and uncertainties in: - clinical trial results, - obtaining and maintaining regulatory approval, - market acceptance of and continuing demand for our products, - the attainment of patent protection for any of these products, - the impact of competitive products, pricing and reimbursement policies, - our ability to obtain additional financing to support our operations, - the continuation of our corporate collaborations, and - changing market conditions and other risks detailed below. You should read and interpret any forward-looking statements together with the following documents: - our most recent Annual Report on Form 10-K, - our Quarterly Reports on Form 10-Q, - the risk factors contained in this prospectus under the caption "Risk Factors," and - our other filings with the Securities and Exchange Commission. Any forward-looking statement speaks only as of the date on which that statement is made. We will not update any forward-looking statement to reflect events or circumstances that occur after the date on which such statement is made. 13 USE OF PROCEEDS The net proceeds to us from the sale of the 2,500,000 shares of common stock offered hereby are estimated to be $ assuming a public offering price of $ per share and after deducting the estimated underwriting discount and estimated offering expenses. The net proceeds to us would increase to $ if the underwriters exercise their over-allotment option in full. We currently anticipate using substantially all of the net proceeds of this offering for research and development, including preclinical and clinical studies. The balance of the net proceeds will be used for general corporate purposes. The cost, timing and amount of funds required for such uses by us cannot be precisely determined at this time and will be based on competitive developments, the rate of our progress in research and development, the results of preclinical studies and clinical trials, the timing of regulatory approvals, payments under collaborative agreements and the availability of alternate methods of financing. Our board of directors has broad discretion in determining how the proceeds of this offering will be applied. Proceeds may also be used to acquire businesses, technology or products that complement our business. No transactions of this type are being negotiated as of the date of this prospectus. Pending use, the net proceeds will be invested in investment grade, interest-bearing securities. 14 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY Our common stock is traded on the Nasdaq National Market, under the symbol "VICL." The following table sets forth, for the periods indicated, the high and low sale prices for the common stock as reported by Nasdaq.
HIGH LOW -------- -------- 1997 1st Quarter................................................ $18.25 $14.00 2nd Quarter................................................ 15.75 9.25 3rd Quarter................................................ 15.00 10.63 4th Quarter................................................ 17.25 11.00 1998 1st Quarter................................................ $18.00 $12.00 2nd Quarter................................................ 19.00 14.00 3rd Quarter................................................ 17.88 7.19 4th Quarter................................................ 18.00 8.00 1999 1st Quarter................................................ $17.00 $10.00 2nd Quarter................................................ 13.50 9.13 3rd Quarter................................................ 16.66 10.88 4th Quarter (through December 13, 1999).................... 22.38 13.13
On December 13, 1999, the closing sale price of our common stock as reported by Nasdaq was $21.00 per share. As of September 30, 1999, there were approximately 554 holders of record of the common stock. We have never declared or paid any cash dividends on our capital stock. We currently intend to retain our earnings, if any, for research and development activities and, therefore, do not anticipate paying any cash dividends in the foreseeable future. 15 CAPITALIZATION The following table sets forth our capitalization at September 30, 1999, and as adjusted to give effect to our receipt of the net proceeds from the sale of 2,500,000 shares of common stock offered hereby:
SEPTEMBER 30, 1999 ---------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) Long-term obligations, less current portion................. $ 712 $ 712 Stockholders' equity: Preferred stock, $0.01 par value; 5,000,000 authorized, none outstanding........................................ -- -- Common stock, $0.01 par value; 40,000,000 authorized, 16,198,723 issued and outstanding, 18,698,723 issued and outstanding, as adjusted................................ 162 187 Additional paid-in capital................................ 83,259 Accumulated other comprehensive loss...................... (116) (116) Accumulated deficit....................................... (44,450) (44,450) -------- -------- Total stockholders' equity................................ 38,855 -------- -------- Total capitalization........................................ $ 39,567 $ ======== ========
- ------------------------ - - See Note 5 of Notes to Audited Financial Statements and Note 4 of Notes to Interim Financial Statements for a description of our long-term obligations. - - The number of shares in the table above excludes 3,114,744 shares of common stock reserved but unissued under our stock plans under which options to purchase an aggregate of 1,930,229 shares of common stock were outstanding at September 30, 1999. See Note 6 of Notes to Audited Financial Statements. 16 SELECTED FINANCIAL DATA The selected financial data set forth below with respect to our statements of operations for each of the years in the three-year period ended December 31, 1998, and with respect to the balance sheets at December 31, 1998 and 1997, are derived from the audited financial statements that have been examined by Arthur Andersen LLP, independent public accountants, which are included elsewhere in this prospectus and are qualified by reference to such financial statements. The selected financial data set forth below for the nine months ended September 30, 1999 and 1998, are derived from our unaudited financial statements included elsewhere in this prospectus, and in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and of the results of operations for such interim periods. Operating results for the nine months ended September 30, 1999, are not necessarily indicative of results for the full fiscal year or any future interim period. The statement of operations for the two years ended December 31, 1995, and the balance sheet data at December 31, 1996, 1995 and 1994, are derived from audited financial statements not included in this prospectus. The data set forth below should be read in conjunction with the financial statements and related notes included elsewhere in this prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
NINE MONTHS FISCAL YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30, -------------------------------------------------------------- ----------------------- 1994 1995 1996 1997 1998 1998 1999 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: License/royalty revenue.......... $ 4,509 $ 5,402 $ 5,679 $ 6,477 $ 5,044 $ 4,617 $ 3,770 Contract revenue................. 1,005 900 1,061 1,326 876 371 1,992 ---------- ---------- ---------- ---------- ---------- ---------- ---------- 5,514 6,302 6,740 7,803 5,920 4,988 5,762 Operating expenses: Research and development......... 8,336 8,997 11,318 11,936 12,054 9,311 10,866 General and administrative....... 2,615 2,902 3,168 3,733 3,650 2,836 3,201 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total operating expenses........... 10,951 11,899 14,486 15,669 15,704 12,147 14,067 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Loss from operations............... (5,437) (5,597) (7,746) (7,866) (9,784) (7,159) (8,305) Interest income.................... 1,159 1,687 2,773 2,447 2,465 1,879 1,688 Interest expense................... 80 73 108 192 162 126 97 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net loss........................... $ (4,358) $ (3,983) $ (5,081) $ (5,611) $ (7,481) $ (5,406) $ (6,714) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Basic and diluted net loss per share............................ $ (0.34) $ (0.29) $ (0.33) $ (0.36) $ (0.47) $ (0.34) $ (0.42) ========== ========== ========== ========== ========== ========== ========== Weighted average shares used in computing net loss per share..... 12,831,585 13,504,790 15,382,848 15,484,952 15,797,585 15,786,838 16,114,024
DECEMBER 31, ---------------------------------------------------- SEPTEMBER 30, 1994 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- -------------- (IN THOUSANDS) (UNAUDITED) BALANCE SHEET DATA: Cash, cash equivalents, and marketable securities....... $27,339 $52,528 $46,846 $45,555 $40,184 $38,935 Working capital......................................... 25,956 51,541 46,315 44,856 38,398 36,421 Total assets............................................ 30,324 55,118 52,440 50,691 44,844 43,880 Long-term obligations, less current portion............. 527 339 1,617 1,232 801 712 Total stockholders' equity.............................. 27,852 53,264 48,365 47,194 40,824 38,855
- ------------------------------ - - The basic and diluted net loss per share numbers were computed on the basis described in Note 1 of Notes to Audited Financial Statements. We have never paid cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. - - See Note 5 of Notes to Audited Financial Statements and Note 4 of Notes to Interim Financial Statements for a description of our long-term obligations. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We were incorporated in April 1987 and have devoted substantially all of our resources since that time to our research and development programs. We focus our resources on the development of our naked DNA direct gene transfer and related technologies. We are developing our ALLOVECTIN-7, LEUVECTIN and VAXID cancer product candidates internally, while developing vaccine product candidates for infectious diseases primarily in collaboration with corporate partners Merck, and Aventis Pasteur, formerly Pasteur Merieux Connaught. We have a license agreement allowing Centocor to use our naked DNA technology to develop and market gene-based vaccines for the potential treatment of types of cancer. We have an agreement with Boston Scientific for the use of our technology in catheter-based intravascular gene delivery. We have an agreement with Aventis Pharma, formerly Rhone-Poulenc Rorer, to use our gene delivery technology to deliver neurological proteins for neurodegenerative diseases. We also have agreements with Pfizer for use of our technology for DNA-based delivery of therapeutic proteins in animal health applications and with Merial for use of our technology for DNA vaccines in animal infectious disease targets. To date, we have not received revenues from the sale of products. We expect to incur substantial operating losses for at least the next several years, due primarily to the expansion of our research and development programs and the cost of preclinical studies and clinical trials. As of September 30, 1999, our accumulated deficit was approximately $44.5 million. RESULTS OF OPERATIONS THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 Revenues of $1.2 million were recorded for the quarter ended September 30, 1999. License revenue primarily represented recognition of deferred license fees of $0.3 million from Merial, and royalty and other revenue of $0.2 million. Contract revenue recognized was $0.7 million, and was primarily from a contract with the Office of Naval Research for the development work on a potential naked DNA vaccine to prevent malaria. This multi-year grant could provide total funding of up to $2.7 million through 2000, of which $2.2 million was recognized as revenue through September 30, 1999. We had revenues of $1.7 million for the quarter ended September 30, 1998. License revenue primarily consisted of a license fee of $1.1 million related to a license and option agreement with Boston Scientific for the development of vascular DNA therapeutics, recognition of deferred license fees of $0.3 million from the Merial license agreement and royalty revenue of $0.2 million. In addition, for the quarter ended September 30, 1998, we recognized net contract revenue of $0.2 million. Revenues for the nine months ended September 30, 1999, were $5.8 million. In addition to the revenue recognized in the third quarter of 1999, revenue for the nine months ended September 30, 1999, also included $1.0 million of license fees and $1.2 million of equity premium pursuant to January 1999 agreements with Pfizer, recognition of deferred license fees of $0.5 million from Merial, royalty and other revenue of $0.6 million and contract revenue of $1.3 million primarily from the Office of Naval Research. Revenues for the nine months ended September 30, 1998, were $5.0 million, and in addition to the revenue recognized in the third quarter of 1998, also included license payments of $2.2 million from Centocor under a license and option agreement and reimbursement of certain costs, recognition of deferred license fees from Aventis Pasteur and Merial and royalty revenue totaling $0.9 million, and $0.2 million of contract revenues, mostly from Aventis Pasteur. 18 Our total operating expenses for the quarter ended September 30, 1999, were $4.6 million compared with $4.0 million for the second quarter of 1998. Total operating expenses for the nine months ended September 30, 1999, were $14.1 million compared with $12.1 million for the same period in 1998. Research and development expenses increased to $3.5 million for the three months ended September 30, 1999, from $3.2 million for the same period in 1998. For the nine months ended September 30, 1999, research and development expenses were $10.9 million compared with $9.3 million in the same period of 1998. The increase in research and development expenses for the three-month and nine-month periods was generally due to increased preclinical and clinical trial costs, and personnel-related costs. The increases for the three-month and nine-month periods ended September 30, 1999 were partially offset by lower license payments to third parties. General and administrative expenses increased to $1.1 million for the three months ended September 30, 1999, from $0.9 million for the same period in 1998. General and administrative expenses for the nine months ended September 30, 1999, increased to $3.2 million from $2.8 million for the same period in 1998. The increase primarily is attributable to increased personnel costs. Investment income for the three-month and nine-month periods ended September 30, 1999, was $0.5 million and $1.7 million, respectively. Investment income for the three-month and nine-month periods ended September 30, 1998, was $0.6 million and $1.9 million, respectively. The decreases primarily are a result of lower investment balances and lower rates of return on investments. YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 We had revenues of $5.9 million for the year ended December 31, 1998, compared with $7.8 million in 1997 and $6.7 million in 1996. License revenues in 1998 consisted of $2.2 million from Centocor for an agreement covering technology for the potential treatment of some types of cancer, $1.1 million from an agreement with Boston Scientific for the development of catheter-based vascular DNA therapeutics, recognition of $0.9 million of deferred license fees from a further extension of the license and option agreement with Merial, royalty revenues of $0.7 million and $0.2 million of other license revenue. Contract revenues in 1998 consisted principally of $0.7 million from an agreement with the Office of Naval Research for the development work on a potential DNA vaccine to prevent malaria. This agreement is a multi-year agreement which could provide up to an additional $2.0 million in revenues through 2000. Contract revenue in 1998 also included $0.2 million of reimbursements from Aventis Pasteur and other sources. We had revenues of $7.8 million for the year ended December 31, 1997, compared with $6.7 million in 1996. Revenues in 1997 were composed of research and license revenue of $2.0 million from a 1997 Merck agreement covering certain growth factors; the equity premium of $1.0 million on the investment Merck made in 1997 in our common stock under an amendment to the 1991 collaborative agreement; $2.4 million for the Aventis Pasteur collaboration; $1.0 million for the 1997 collaborative agreement with Aventis Pharma for neurodegenerative disease targets; and other agreements which totaled $1.4 million. In November 1997, we amended our 1991 agreement with Merck and granted Merck rights to develop and market therapeutic vaccines against human immunodeficiency virus, HIV, and hepatitis B virus, HBV. Under the November 1997 amendment, Merck made an investment of $5.0 million for approximately 262,000 shares of our common stock. The price per share reflected a twenty-five percent premium over the trading price of the common stock. The premium on the investment was reflected in revenue in 1997. The Aventis Pasteur revenue represented contract revenue of $1.1 million as payment for clinical and preclinical work and license revenue of $1.3 million, of which $1.0 million was for a milestone payment for the start 19 of the malaria clinical trial and the balance was the recognition of deferred license fees. Revenues in 1996 resulted from research and license revenue from: the Aventis Pasteur collaboration in the amount of $2.7 million, the 1991 Merck agreement in the amount of $1.5 million, a collaboration with Genzyme Corporation in the amount of $1.3 million, and several other agreements in the amount of $1.2 million. Revenue from the Aventis Pasteur agreement in 1996 was primarily the result of Aventis Pasteur's payment of licensing and option fees, and the addition of a new option, as well as the payment of fees for our performance of clinical and preclinical work. The Merck revenue resulted from milestone payments due under the 1991 Merck agreement. The Genzyme collaboration income was the result of Genzyme exercising its option to license our technology for the treatment of cystic fibrosis as well as payments for our performance of research and preclinical work. Research and development expense increased to $12.1 million in 1998 from $11.9 million in 1997 and $11.3 million in 1996. The increases in research and development expense were generally due to expansion of our research and development activities. The increase in 1998 principally was due to increased clinical trial costs and additional royalty expense for license agreements. The increase in expenses in 1997 compared to 1996 included increased clinical and preclinical efforts which resulted in increases to staffing, increased facilities-related costs and increased expenditures on laboratory supplies. Clinical trials expense increased to $1.9 million during 1998 from $1.6 million in 1997. This increase was due to the commencement of the Phase II and Phase III clinical trials of ALLOVECTIN-7 for melanoma. Clinical trials expense increased to $1.6 million during 1997 from $1.2 million in 1996 primarily due to the commencement of the malaria clinical trial and increased clinical trials activity on LEUVECTIN. During 1996, we incurred expenses of approximately $1.2 million with the commencement and progression of the multi-center Phase I/II and Phase II clinical trials of LEUVECTIN and ALLOVECTIN-7 respectively. Research and development expense is expected to increase in 1999 and thereafter as our preclinical and clinical trial activities increase. General and administrative expense decreased to $3.6 million in 1998 from $3.7 million in 1997 due to lower insurance and facilities expenses. The increase to $3.7 million in 1997 from $3.2 million during 1996 was due primarily to additional staffing and related expenses. General and administrative expenses are expected to continue to increase as research and development activities expand. Interest income increased to $2.5 million in 1998 from $2.4 million in 1997 due to higher rates of return on investments. Interest income of $2.4 million during 1997 declined from the $2.8 million in 1996, due to lower investment balances as we redeemed investments to fund operating expenses. Interest expense decreased during 1998 due to lower capital lease obligations, lower balance of bank note payable and lower interest rates on the newer capital lease obligations. Interest expense increased in 1997 compared to the previous year due to increased capital lease obligations to finance equipment needs and the addition of a debt instrument in 1996. YEAR 2000 ISSUES The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using 00 as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions of operations for any company using such computer programs or hardware, including, among other things, a temporary inability to process data or engage in normal business activities. As a result, many companies' computer systems may need to be upgraded or replaced in order to avoid Year 2000 issues. 20 STATE OF READINESS We have completed our assessment of any potential Year 2000 issues for our internal computer applications, including embedded control systems in equipment, to determine whether they will function for the Year 2000 and beyond and what modifications would be required to ensure their continuing functionality. We implemented a new financial and accounting system and related hardware to meet our growing needs into the near future. This new system is Year 2000 compliant. We performed backups of the existing and previous versions of the computer system so that in the event our new financial and accounting system and related hardware do not function properly we can continue to operate under the old system. Given the relatively small size of our systems and the predominantly new hardware, software and operating systems, we do not anticipate any significant Year 2000 problems. We are unable to control whether systems operated by our strategic partners or our suppliers of goods and services are Year 2000 compliant. The failure of systems operated by our strategic partners or suppliers could cause us to incur significant expenses to remedy any problems, or otherwise seriously damage our business. We have communicated with strategic partners and suppliers to assess the risk of Year 2000 issues. Based on these results, we do not expect any material Year 2000 issues regarding our dealings with our strategic partners or suppliers. We do not believe that Year 2000 issues will have a material impact on our business, financial condition or results of operations. BUDGET Our costs for Year 2000 compliance have been immaterial. REASONABLY LIKELY WORST CASE SCENARIO If we, our strategic partners, or our suppliers of goods and services fail to remedy any Year 2000 issues, the reasonably likely worst case scenario would be the interruption of our product development programs, which could have a material adverse effect on our business, financial condition and results of operations. We are unable to estimate the duration and extent of any such interruption, or estimate the effect such interruption may have on our future results of operations. However, we believe that the impact of any Year 2000 issue on our product development programs will be limited to the collection or communication of new data. We do not expect that any historical data will be affected. CONTINGENCY PLANS We have adopted contingency measures to ensure the uninterrupted operation of our business, including: - the maintenance of a Year 2000-compliant backup accounting system, - tape backup and paper archive copies of critical data, and - availability of information systems staff to correct any isolated problems on January 1, 2000. Additionally, most of our computer systems will be shut down between December 31, 1999, and January 2, 2000. This will allow the information systems staff to immediately identify and address any issues during systems startup on January 3, 2000. LIQUIDITY AND CAPITAL RESOURCES Since our inception, we have financed our operations primarily through private placements of preferred and common stock, three public offerings of common stock and revenues from 21 collaborative agreements. As of September 30, 1999, we had working capital of approximately $36.4 million compared with $38.4 million at December 31, 1998. Cash and marketable securities totaled approximately $38.9 million at September 30, 1999, compared with $40.2 million at December 31, 1998. In November 1999, we entered into an unsecured line of credit agreement with a bank to provide financing for leasehold improvements. Under the terms of the agreement, we may borrow up to $1.0 million through May 1, 2000. We expect to incur substantial additional research and development expenses and general and administrative expenses, including continued increases in personnel costs, costs related to preclinical testing and clinical trials, outside services and facilities. Our future capital requirements will depend on many factors, including continued scientific progress in our research and development programs, the scope and results of preclinical testing and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting and enforcing patent claims, competing technological and market developments, the cost of manufacturing and scale-up, and commercialization activities and arrangements. We intend to seek additional funding through research and development relationships with suitable potential corporate collaborators or through public or private financing. Additional funding may not be available on favorable terms or at all. If additional funding is not available, we anticipate that, including the estimated net proceeds of this offering, our available cash and existing sources of funding will be adequate to satisfy our operating needs through at least 2002. 22 BUSINESS OVERVIEW We develop biopharmaceutical products based on our patented naked DNA gene transfer technologies for the prevention and treatment of life-threatening diseases. We currently focus our development on innovative cancer therapies to induce an immune response against cancer cells without causing serious side effects. We have retained all rights to our internally developed cancer product candidates. Our lead immunotherapy product candidate, ALLOVECTIN-7, is in Phase III and Phase II registration trials for patients with advanced metastatic malignant melanoma, an aggressive form of skin cancer, and in a Phase II clinical trial for patients with persistent or recurrent cancer of the head and neck. Our second immunotherapy product candidate, LEUVECTIN, is in Phase II clinical trials for patients with advanced metastatic kidney cancer and for high-risk patients with locally confined prostate cancer. VAXID, a cancer vaccine intended to prevent recurrence of low-grade, non-Hodgkin's B-cell lymphoma, is in a Phase I/II clinical trial. We are supporting clinical testing of a cancer vaccine for the treatment of advanced metastatic melanoma in a collaboration with the National Cancer Institute, NCI. We enter into collaborations with major pharmaceutical companies to leverage our technologies primarily for non-cancer applications such as vaccines for infectious diseases and optimized delivery of therapeutic proteins. We have established relationships through the license of our technology with a growing number of corporate partners and collaborators including: - Merck and Co., Inc., - Two divisions of Aventis S.A., formerly Rhone-Poulenc S.A., - Aventis Pasteur, formerly Pasteur Merieux Connaught, - Aventis Pharma, formerly Rhone-Poulenc Rorer Pharmaceuticals, Inc., - Pfizer Inc, - Merial, the animal health joint venture between Merck and Rhone Merieux, - Centocor, a wholly-owned subsidiary of Johnson & Johnson, and - Boston Scientific Corporation. HISTORICAL APPROACHES TO GENE DELIVERY A typical living cell in the body contains thousands of different proteins essential to cellular structure, growth, and function. Proteins are produced by the cell according to a set of genetic instructions encoded by DNA, which contains all the information necessary to control the cell's biological processes. DNA is organized into segments called genes, with each gene containing the information required to produce a specific protein. Production of the protein encoded by a particular gene is known as gene expression. The improper expression of even a single gene can severely alter a cell's normal function, frequently resulting in a disease. Gene delivery is an approach to the treatment and prevention of diseases in which genes are introduced into cells to direct the production of specific proteins which have a desired biological effect. Historically, gene delivery was accomplished by inserting the desired gene into a delivery vehicle, or vector. The most common vectors were viruses that had been genetically disabled so that they could not reproduce and infect other cells. Gene delivery approaches using viruses suffer several drawbacks that may limit their widespread usefulness, including adverse immune responses and inflammation that may inhibit the activity of the virus-based therapy and prevent repeated 23 administration. In addition, viruses can induce permanent changes in the patient's genetic makeup, which may lead to cancer. Some gene delivery product candidates under development at competing companies use viral vectors, but many of the newer formulations are using non-viral or synthetic vectors such as lipids or polymers. OUR NAKED DNA TECHNOLOGY The key discovery leading to our patented naked DNA direct gene delivery technology was that some muscle tissues can absorb genetic material directly, without the use of viral components, and subsequently express a desired protein for periods ranging from weeks to several months. Our naked DNA gene delivery approach involves the design and construction of plasmids, DNA segments whose ends are attached together to form a highly stable closed loop. These plasmids contain the gene encoding the protein of interest as well as short segments of DNA that control the rate and location of protein expression. Plasmids can be manufactured through conventional fermentation and purification techniques. Since the initial discovery of the naked DNA technology, our researchers have improved the design of our plasmids to provide dramatic increases in efficiency of gene delivery and expression. In addition, we are developing other synthetic technologies to deliver DNA directly into some non-muscle tissues, including the use of lipid molecules that facilitate direct absorption of DNA into cells. A narrow definition of "naked DNA" includes only pure plasmid DNA. A broader definition includes plasmid DNA formulated with agents such as lipids or polymers. We call ourselves "The Naked DNA Company-TM-" because all of our product candidates are based on these synthetic, non-viral gene delivery methods, and because we own exclusive, broad rights to the naked DNA gene delivery technologies through our series of core patents. Our naked DNA gene delivery approach may offer novel treatment alternatives for diseases that are currently poorly addressed. Benefits of our gene delivery technology may include: - BROAD APPLICABILITY. Our naked DNA gene delivery technology may be useful in developing novel treatments for cancer, DNA vaccines to prevent or treat infectious diseases and methods to efficiently deliver human and animal therapeutic proteins. - CONVENIENCE. Our naked DNA therapeutics are intended to be administered like conventional pharmaceuticals on an outpatient basis. - SAFETY. Our product candidates contain no viral components which may cause unwanted immune responses, infections, or malignant and permanent changes in the cell's genetic makeup. - EASE OF MANUFACTURING. Our product candidates are manufactured using conventional fermentation techniques and standard purification procedures. - COST-EFFECTIVENESS. Our naked DNA gene delivery technology may prove to be more cost-effective than therapies which require genetic modification and controlled propagation of viral vectors. The DNA, once introduced into the body, is intended to stimulate the production of a therapeutic protein over a prolonged period of time, which may be more cost-effective than administering the protein itself. Potential applications of our naked DNA gene delivery technology include DNA therapeutics for cancer, in which the expressed protein is an immune system stimulant or cancer-killing agent, DNA vaccines for infectious diseases, in which the expressed protein is an antigen, and DNA therapeutic protein delivery, in which the expressed protein is a therapeutic agent. 24 BUSINESS STRATEGY There are three basic elements to our business strategy: INDEPENDENTLY DEVELOP CANCER THERAPEUTICS We currently focus our resources on the independent development of cancer therapeutics. The large and rapidly growing market for cancer products is poorly addressed by existing treatment alternatives. In addition, this market is well-suited to a development-stage company with limited resources such as Vical because: - Clinical testing usually can be conducted in a small number of patients and benefits can be detected and verified in reasonably short periods of time, - Testing occurs in patients with advanced, life-threatening diseases with limited treatment alternatives, which may expedite the regulatory approval process, - Product acceptance is driven by objective clinical data, potentially reducing marketing costs, and - Treatment decisions are made at regional cancer centers by oncologists who can be served by a small, specialized sales force. We intend to retain significant participation in the commercialization of our proprietary cancer products, although we may choose to enlist the support of a marketing partner to accelerate market penetration. EXPAND THE APPLICATIONS OF OUR TECHNOLOGY THROUGH STRATEGIC COLLABORATIONS Our naked DNA technology can potentially be applied to the treatment or prevention of a wide range of diseases in addition to cancer. In markets that would require large-scale development, high-capacity manufacturing or mass marketing, we have chosen to establish partnerships with major pharmaceutical companies. These companies have the resources necessary to develop and commercialize products for these markets. The resulting collaborations typically provide us with upfront and milestone payments during product development, as well as the potential for ongoing royalties from product sales. Our collaborations to date have involved multiple applications for DNA vaccines and DNA therapeutic protein delivery. DEVELOP FUTURE PRODUCT OPPORTUNITIES We are actively pursuing the development of future products, refinement of our plasmids and lipids, the exploration of alternative gene delivery technologies, and the evaluation of potential enhancements to our core naked DNA technologies. We also seek and develop additional applications of our technologies by testing new approaches to disease control or prevention. These efforts could lead to further independent product development or to additional licensing opportunities. In addition, we continually evaluate compatible technologies or products that may be of potential interest for in-licensing or acquisition. PRODUCT DEVELOPMENT The following table summarizes the status of our independent and collaborative product development programs and identifies corporate partners where relevant. 25 In the table below: - "Research" indicates research related to identification and synthesis of lead compounds. - "Preclinical" indicates that a specific compound is undergoing toxicology testing and manufacturing scale-up, among other things, in preparation for filing an application for an Investigational New Drug, IND. In Phase I, trials are conducted with a small number of healthy volunteers to determine the safety profile, the pattern of drug distribution and metabolism. In Phase II, trials are conducted with a larger group of patients afflicted with a target disease in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. In the case of products for life-threatening diseases, the initial human testing is generally done in patients rather than in healthy volunteers. Since these patients are already afflicted with the target disease, it is possible that these studies may provide results traditionally obtained in Phase II trials. Such trials are frequently referred to as "Phase I/II" trials. In Phase III, large scale, multi-center, comparative trials are conducted with patients afflicted with a target disease in order to provide enough data for the statistical proof of safety and efficacy required by the FDA and other regulatory authorities.
PROJECT TARGET INDICATION(S) DEVELOPMENT STATUS DEVELOPMENT RIGHTS - ------- -------------------- ------------------ ------------------ CANCER ALLOVECTIN-7 Melanoma, Phase III Vical Head and neck cancer Phase II Vical LEUVECTIN Renal cell carcinoma Phase II Vical Prostate cancer Phase II Vical VAXID B-cell lymphoma Phase I/II Vical gp100 Melanoma Phase I/II Vical/NCI Therapeutic DNA vaccines Various cancers Preclinical/Phase I Centocor INFECTIOUS DISEASES Preventive DNA vaccines Influenza Phase I Merck Malaria Phase I Aventis Pasteur, formerly Pasteur Merieux Connaught Hepatitis B, hepatitis C, Research/preclinical Merck human immunodeficiency virus, human papilloma virus, herpes simplex, tuberculosis Cytomegalovirus, Research/preclinical Aventis Pasteur, formerly HELICOBACTER PYLORI, Pasteur Merieux Connaught Lyme disease, respiratory syncitial virus, varicella zoster Therapeutic DNA vaccines Hepatitis B, human Research/preclinical Merck immunodeficiency virus, human papilloma virus OTHER DISEASES Therapeutic protein DNA Cardiovascular diseases Research/preclinical Merck Therapeutic protein DNA Neurodegenerative diseases Research/preclinical Aventis Pharma, formerly Rhone-Poulenc Rorer Catheter-based DNA therapy Cardiovascular diseases Research/preclinical Boston Scientific VETERINARY Preventive DNA vaccines Various Research Merial Therapeutic protein DNA Various Research/preclinical Pfizer
26 DNA THERAPEUTICS FOR CANCER Cancer is a group of diseases in which certain cells grow uncontrolled by the body's normal self-regulatory mechanisms. Surgery is the most effective therapy for locally confined cancers. But surgery is not practical or curative for invasive or metastatic disease that has spread beyond a few locations. Radiation therapy can shrink or eliminate individual tumors, but cannot effectively treat widespread metastases. In addition, high doses of radiation can destroy the healthy underlying tissue. Chemotherapy seeks to control cancer by killing rapidly dividing cells. However, a number of non-malignant cells in the body, such as bone marrow cells, also rapidly divide and are highly susceptible to chemotherapy. Thus, doses sufficient to eradicate the cancer often cause life-threatening side effects. None of these conventional approaches can eliminate all cancer cells in advanced disease, so recurrence after treatment is common. A therapeutic approach that selectively kills tumor cells would be far superior to currently available therapies. One approach would be to generate a specific immune response targeting cancer cells without damaging other normal tissues. It is generally believed that the immune system can selectively recognize cancer cells as abnormal and destroy them. However, the vast majority of cancers arise spontaneously in patients with an otherwise normal immune system. This observation suggests that cancer cells somehow escape the normal immune defense mechanisms or that the killer T-cell response produced by cancer patients is not powerful enough to kill all of the abnormal cells. A variety of methods can augment the immune response against tumor cells, including the systemic administration of natural immune-enhancing proteins such as interleukin-2, IL-2, and interferon-alpha either alone or in combination with other agents. These methods have shown encouraging results in some patients with some tumor types. However, systemic administration of these agents requires large and frequent doses that also cause serious side effects. Our scientists are developing novel gene-based cancer immunotherapies to address the shortcomings of existing therapies. These immunotherapeutic product candidates are summarized below. ALLOVECTIN-7 ALLOVECTIN-7 is a DNA/lipid complex containing the human gene encoding HLA-B7 antigen which is found infrequently in the human population. ALLOVECTIN-7 is designed to be injected directly into a tumor, where malignant cells absorb it and express the HLA-B7 antigen. This antigen alerts the immune system to the presence of foreign tissue, inducing the type of powerful immune response seen in organ transplant rejection. In addition, the treatment may trigger an immune response against additional tumor cells, both locally and systemically, by enabling the immune system to recognize other features of the tumor cells. ALLOVECTIN-7 is currently in advanced clinical testing for patients with metastatic melanoma and for patients with persistent or recurrent tumors of the head and neck. METASTATIC MELANOMA Melanoma is a skin cancer found predominantly in Caucasians, particularly in fair-skinned individuals who have experienced repeated sunburn. According to American Cancer Society, ACS, statistics, 44,200 new cases of melanoma will be diagnosed in the U.S. and 7,300 patients will die from this disease in 1999. NCI estimates that about 480,000 Americans currently suffer from malignant melanoma. If detected when the disease is still limited to one site, known as stage I and II, melanoma usually can be treated successfully by surgery. If untreated, the disease frequently spreads to the lymph glands, lungs, liver, brain and other organs. Stage III is defined as metastatic disease limited to one region and is treated with a combination of surgery and chemotherapy. Stage IV disease involves advanced regional or any distant tumors and treatment normally includes 27 some combination of chemotherapy, radiotherapy, and surgery. The five-year survival of patients with stage III and stage IV disease is 59 percent and 12 percent, respectively. In patients whose disease continues to progress after they have received all available treatments, the average survival is seven to nine months. We believe ALLOVECTIN-7 will provide an effective, well-tolerated alternative or supplement to available therapies. In multi-center Phase I/II and Phase II trials, ALLOVECTIN-7 was well-tolerated, and provided durable reductions in overall tumor burden or maintained stable disease in some patients. Combined results from three Phase I/II trials, summarized in May 1998 at the Annual Meeting of the American Society of Clinical Oncology, included seven out of 36 evaluable patients, or 19 percent, who had achieved clinical partial or complete responses with a duration of at least eight months. We believe results from two Phase II melanoma trials indicated the potential efficacy of ALLOVECTIN-7 in treating melanoma patients, and suggested a negative correlation between disease spread and such potential efficacy. Among the 50 evaluable patients with widespread advanced disease affecting multiple internal organs, combined results from the two Phase II trials included: - two patients who had achieved a clinical response lasting two to 12 months and continuing at the time of the announcement, and - ten patients who had achieved stable disease lasting two to 11 months and continuing at the time of the announcement. In patients with soft-tissue metastases in lymph nodes, lungs or tissues located directly beneath the skin, combined Phase II results included four of 23 evaluable patients, or 17 percent, who had achieved clinical partial responses with an average duration of 11 months. We believe the latter results compare favorably to available clinical data on other FDA-approved biological agents such as interferon-alpha and interleukin-2. Updated data from the Phase I/II and Phase II trials, were presented in November 1999 at the Mount Sinai Chemotherapy Foundation Symposium. Of 90 evaluable end-stage patients, 23, or 25 percent, demonstrated clinical benefit. Tumor regression was noted more often in patients with soft-tissue metastatic disease than in patients with multiple-internal organs affected. In the 32 patient soft-tissue subgroup 12 patients, or 37 percent, demonstrated clinical benefit. The median time to disease progression was 24 weeks in patients who responded to ALLOVECTIN-7, compared with nine weeks in all patients. The median length of survival was 99 weeks for responders compared with 38 weeks in all patients. Side effects from ALLOVECTIN-7 were primarily mild with the most common complaint being temporary pain at the injection site. No serious side effects related to ALLOVECTIN-7 were reported in these trials. This side-effect profile for ALLOVECTIN-7 compares favorably with available clinical data on other FDA-approved biological agents. Treatment with interferon-alpha or interleukin-2 frequently causes serious side effects requiring hospitalization, and occasionally causes life-threatening or fatal complications. Based on this promising data, and following discussions with the FDA, we began registration trials in May 1998. These trials are ongoing in multiple centers across the United States. In our Phase II trial we are actively recruiting patients with soft-tissue metastatic melanoma who have exhausted conventional therapies. For our Phase III trial we are actively recruiting patients that have metastatic melanoma and who have not received chemotherapy. The objective of this trial is to compare treatment with dacarbazine, the only chemotherapeutic agent approved by the FDA for metastatic melanoma, to treatment with a combination of dacarbazine plus ALLOVECTIN-7. Positive results from either or both of these trials could allow us to apply to the FDA for approval to market ALLOVECTIN-7. 28 HEAD AND NECK CANCER Head and neck cancer describes any of several types of localized tumors affecting the oral cavity, the pharynx or larynx. Head and neck cancers occur more frequently in men than in women, and most often in men over age 40. Risk factors vary with the particular location, but can include use of tobacco and excessive consumption of alcohol. The ACS estimates that, in 1999, 41,400 new cases of head and neck cancers will occur and that 12,300 individuals will die from this disease. NCI estimates that about 345,000 Americans currently suffer from head and neck cancer. Most head and neck cancers are treated by surgical removal and/or localized radiation therapy, with widely ranging degrees of success depending on the number of tumors, their size, and their specific location. In advanced disease, standard treatment may be preceded by systemic chemotherapy to improve outcomes, or followed by systemic chemotherapy to attack remaining cancer cells, most often with a combination of agents. The five-year survival rate for head and neck cancer patients, if treated, varies from more than 80 percent for localized, accessible disease to less than 20 percent for widespread malignancies not curable by surgery. Treatment with ALLOVECTIN-7 in a Phase I/II and an early Phase II study yielded encouraging results, reported in May 1998 at the Annual Meeting of the American Society of Clinical Oncology, that included both partial and complete responses. Of the 11 patients treated in an investigator-sponsored Phase I/II clinical trial, four achieved complete or partial responses lasting at least five months. Preliminary results for 23 evaluable patients in a Vical-sponsored multi-center Phase II trial yielded one clinical complete response lasting four months and continuing, and 10 patients with stable disease after two to four months and continuing. A multi-center Phase II study is ongoing. LEUVECTIN LEUVECTIN is a DNA/lipid complex designed for direct injection into a tumor. LEUVECTIN contains the gene encoding IL-2. Systemic IL-2 protein therapy is the only FDA-approved treatment for metastatic kidney disease, but its administration is associated with serious toxicity in the majority of patients. The LEUVECTIN kidney cancer program seeks to match IL-2's efficacy without major adverse events. We expect that LEUVECTIN, when injected into tumors, will cause the malignant cells to produce IL-2. Local expression of IL-2 may stimulate the patient's immune system to attack and destroy the tumor cells. Because LEUVECTIN delivers IL-2 locally rather than throughout the body, it may provide efficacy comparable to the protein treatment with fewer side effects. LEUVECTIN is being tested in Phase II clinical trials for patients with kidney cancer and prostate cancer. KIDNEY CANCER The most common type of kidney cancer, renal cell carcinoma, occurs more frequently in males than in females, and predominantly in people over 35. The greatest single risk factor is cigarette smoking. Other risk factors include exposure to asbestos, cadmium, or gasoline, and the use of some former pain medications containing phenacetin. According to ACS statistics, 29,900 new cases of kidney cancer will be diagnosed in the U.S. and 11,600 patients will die from the disease in 1999. NCI estimates that about 200,000 Americans currently suffer from kidney cancer. Primary kidney cancer frequently spreads to adjacent tissues and ultimately to other internal organs, most often the lungs, bone, brain or liver. About 30 percent of patients have metastatic disease when first diagnosed. Treatment of regional metastatic kidney cancer involves surgical removal of the affected kidney and surrounding tissue, and frequently is combined with radiation therapy to alleviate pain. There are few treatment alternatives for metastatic kidney cancer and where surgery cannot be curative the five year survival rate is less than 10 percent. Initial results from Phase I/II and Phase II testing in kidney cancer indicated that LEUVECTIN was well-tolerated and effective in delivering the IL-2 protein, with a favorable risk-benefit profile in these patients. A multi-center Phase II study initiated in May 1998 is ongoing. Initial results from the Phase 29 II trial were reported in May 1999 at the Annual Meeting of the American Society of Clinical Oncology. Four of the 22 evaluable patients, or 18 percent, experienced significant tumor reductions of 25 percent or more, including one patient who experienced 90 percent and 100 percent reductions in two non-injected tumors. Twelve additional patients, or 55 percent, had stabilization of the injected tumor for six to 28 weeks and continuing at the time of the meeting. Six of the 22 patients, or 27 percent, experienced clinical stable disease for five to seven months and continuing at the time of the meeting. Side effects from the LEUVECTIN treatment were primarily mild, with the most common complaint being flu-like symptoms of chills, low-grade fever, body aches and fatigue. The only serious side effects reported were two incidents of severe pain at the injection site. Both were resolved with pain medication during brief hospital stays. PROSTATE CANCER Prostate cancer is the most frequently diagnosed type of cancer and is the second leading cause of cancer fatalities among men in the United States. Men over age 65 account for over 75 percent of all diagnoses and African Americans are at significantly greater risk than Caucasians. According to ACS statistics, 179,300 new cases of prostate cancer will be diagnosed in the U.S. and 37,000 patients will die from this disease in 1999. NCI estimates that more than one million American men currently suffer from prostate cancer. Early detection is increasing the number of annual diagnoses and improving overall survival rates. All patients diagnosed while the disease is confined to the prostate gland have a five-year survival rate. If the disease is discovered after it spreads to connective tissue, lymph nodes, or other internal organs, survival rates decline. Treatment options include "watchful waiting" for older patients with no symptoms or with other more serious illnesses, radiation therapy or cryosurgery, and surgical removal of the prostate gland and/or affected lymph nodes. Symptoms may also be relieved by hormone therapy or surgery. A Phase I/II pilot trial tested LEUVECTIN in patients with prostate cancer. The data indicated that the treatment was safe and well-tolerated, that it may stimulate an immune response against the disease, and that it may result in an increased time to disease progression. Results of the trial were presented in May 1999 at the Annual Meeting of the American Urological Association. In eight of 12 patients scheduled for surgery, pre-surgical serum PSA levels decreased significantly after treatment with LEUVECTIN. Three patients were diagnosed with metastatic disease at the time of the surgery and were therefore excluded from the trial. All nine patients who remained in the trial after surgery maintained negligible PSA levels after 11 to 18 months and continuing at the time of the meeting. In seven of nine patients with progressive disease following radiation therapy, serum PSA levels decreased significantly after treatment with LEUVECTIN. In four of five patients receiving a second treatment course of LEUVECTIN, the rate of increase in PSA levels was reduced considerably. On the basis of these data, we initiated two multi-center Phase II clinical trials in June 1999. CANCER VACCINES In collaboration with Stanford University Medical Center, we are developing a naked DNA vaccine, VAXID, against low-grade, non-Hodgkin's, B-cell lymphoma. Non-Hodgkin's B-cell lymphoma is a disease in which cells in the lymph nodes or other lymphatic tissue grow abnormally. Low-grade non-Hodgkin's B-cell lymphoma exhibits a slow growth rate and excellent initial response to current treatments. However, a regular pattern of relapse to a widespread, aggressive lymphoma occurs for which no curative therapy has been identified. According to ACS statistics, 56,800 new cases of B-cell lymphoma will be diagnosed in the U.S. and 25,700 patients will die from this disease in 1999. NCI estimates that about 300,000 Americans currently suffer from B-cell lymphoma. VAXID contains a patient-specific gene encoding a characteristic molecule of cancerous B-cells. Preclinical studies showed that the injection into mice of a DNA vaccine that encoded a gene 30 specific to the B-cell lymphoma resulted in strong and specific immune responses and significant protection against subsequent tumor challenge. We believe that immunization of post-chemotherapy patients with VAXID could result in the elimination of residual disease and the prevention of the relapse of disease. An initial Phase I/II study of VAXID is ongoing. In collaboration with the NCI we are supporting the development of another DNA vaccine which may cause cells to produce a modified melanoma-related protein known as gp100. This protein is expected to trigger an immune response against melanoma tumor cells. In earlier studies, the NCI tested a vaccine using portions of the modified protein in combination with IL-2 protein therapy. These data indicated a 42 percent response rate in end-stage melanoma patients after treatment with systemic IL-2 and the gp100 protein. This study is being repeated with a gp100 naked DNA vaccine provided by us. We believe a DNA vaccine may be more generally applicable and may provide advantages in manufacturing and administration. DNA VACCINES FOR INFECTIOUS DISEASES According to the World Health Organization, infectious and parasitic diseases cause approximately one-third of all deaths worldwide, making it the leading cause of death. Most deaths from infectious diseases are caused by acute lower respiratory infections, tuberculosis, neonatal diarrhea, AIDS and malaria. Vaccines are generally recognized as the most cost-effective approach for infectious disease health care. However, the technical limitations of conventional vaccine approaches have constrained the development of effective vaccines for many diseases. Our naked DNA vaccine technology may overcome two deficiencies of traditional preventive vaccine approaches, which are the inability to counteract the random changes in the strains of various infectious agents and the need for safe formulations that boost an antibody response or that cause sufficient killer T-cell responses, known as adjuvants. We believe our potential vaccine products should be simpler to manufacture than vaccines that are made using cumbersome and labor-intensive techniques involving difficult tissue culture procedures and live viruses. Our scientists have shown in animal experiments that the intramuscular injection of plasmid DNA encoding a protein common to all strains of the influenza virus stimulates both antibody and killer T-cell responses against the virus itself and virus-infected cells. The immune response is potent, specific and requires no adjuvants. For over a year following vaccination, treated animals demonstrated higher survival rates than untreated control animals when challenged with various strains of inhaled influenza virus. This observed cross-strain protection, if reproducible in humans, will offer a key advantage compared with conventional vaccines. Thus, our direct gene delivery technology may be universal, not requiring frequent re-design or product modification for each new viral strain. Only a few years ago, DNA vaccines were an unproven novelty with limited acceptance in the scientific community. Today, hundreds of scientific publications have documented the efficacy of DNA vaccines in providing potent immune responses or protective immunity against viruses, bacteria and parasites in dozens of species from fish to primates, including human volunteers. Additional studies have extended these findings to other models of infectious diseases for which there are no approved vaccines, such as HIV, herpes and malaria. Because of the large-scale development programs, manufacturing capacity and distribution channels required to successfully market a vaccine, we believe collaborations with major pharmaceutical companies are the most effective way to apply our patented technology in the emerging DNA vaccine field. We have long-standing, active partnerships with two of the three largest vaccine manufacturers in the world, Merck and Aventis Pasteur. These relationships are summarized below. Further details can be found in "--Collaboration and Licensing Agreements--Corporate Partners." 31 MERCK We have licensed our naked DNA vaccination technology to Merck for a total of seven preventive vaccine targets:
- - hepatitis B virus, HBV, - herpes simplex virus, HSV, - - hepatitis C virus, HCV, - influenza virus, and - - human immunodeficiency virus, HIV, - tuberculosis, TB. - - human papilloma virus, HPV,
In addition, Merck also has a license covering three therapeutic vaccine targets, HBV, HIV and HPV. In August 1999, Merck disclosed its plans to initiate a clinical trial with a naked DNA vaccine to prevent AIDS. This candidate vaccine product is being developed by Merck under the license agreement with us. In November 1999, we received a $2.0 million payment from Merck which extends Merck's exclusive license to develop and market therapeutic vaccines against HIV and HBV. AVENTIS PASTEUR, FORMERLY PASTEUR MERIEUX CONNAUGHT We also have a license and option agreement with Aventis Pasteur, formerly Pasteur Merieux Connaught, for a total of six preventive vaccine targets:
- - cytomegalovirus (CMV), - malaria, - respiratory syncytial virus (RSV), - - HELICOBACTER PYLORI, and - - Lyme disease, - varicella zoster virus (VZV).
We are collaborating with Aventis Pasteur and the U.S. Naval Medical Research Center, NMRC, to develop a DNA vaccine against malaria. There is no effective vaccine against malaria. This is a severe infectious disease characterized by fever, headache and joint pain, which if untreated can lead to death. Infection normally occurs when the parasite enters a victim's bloodstream during a mosquito bite. Each year, 300 to 500 million people worldwide are treated for malaria and more than one million die from the disease, according to the World Health Organization. In July 1997, in collaboration with Aventis Pasteur, we began a Phase I trial of an experimental vaccine against the parasite that causes malaria. NMRC conducted the clinical trial with approximately twenty volunteers. Trial results, reported in the October 16, 1998, issue of SCIENCE, indicated that subjects immunized with a potential malaria DNA vaccine developed dose-related killer T-cell immune responses. As a result of these encouraging data, further clinical development is planned. DNA THERAPEUTIC PROTEIN DELIVERY Our naked DNA direct gene delivery technology also may permit the development of alternatives to therapeutic protein administration for diseases. Major shortcomings of some therapeutic proteins include their short duration of action and the potential side effects associated with high levels of circulating protein after intravenous administration. We believe that direct injection into muscles of genes that encode the protein of interest may enable the muscle cells to act as protein factories causing a sustained release of low levels of the therapeutic proteins, reducing side effects and the need for repeated dosing. Our technology may be most suitable for the delivery of proteins that are required in small amounts over prolonged periods of time. 32 Much attention is being focused on the emerging field of angiogenesis, which involves inducing the growth of new blood vessels to replace those blocked by disease. DNA-based delivery of growth factors has been successfully demonstrated in human trials. Other potential applications, still being tested in animal models, could involve the delivery of proteins that maintain nerve cell function for treating certain neurodegenerative diseases, or the delivery of biologically active compounds such as insulin to treat diabetes or erythropoietin to treat certain forms of anemia. In 1997, we licensed our patented naked DNA technology to Merck for the delivery of certain angiogenic growth factors that may be useful in cardiovascular applications such as coronary artery disease and peripheral vascular disease. Coronary artery disease, a narrowing of the blood vessels supplying the heart, can lead to severe chest pain and heart attack. Coronary artery disease is the single largest cause of death in the United States. Peripheral vascular disease affects the blood vessels in the limbs, most commonly narrowing of the blood vessels of the lower extremities for which therapy is very limited. In 1998, we licensed our catheter-based intravascular gene delivery technology, with potential angiogenesis applications, to Boston Scientific. We licensed our naked DNA gene delivery technology to Rhone-Poulenc Rorer, now Aventis Pharma, in 1997 for the delivery of neurologically active proteins that may be applicable in treating neurodegenerative diseases such as Alzheimer's, Parkinson's and Lou Gehrig's diseases. VETERINARY APPLICATIONS Prior to its development for human therapy, our naked DNA gene delivery technology was extensively tested in animals. Research scientists have published hundreds of papers detailing favorable results in dozens of species and covering a broad range of disease indications. Animal health encompasses two distinct market segments: livestock, or animals bred and raised for food or other products; and companion animals, or pets. Serving the animal health markets requires highly efficient manufacturing and specialized distribution channels. Consequently, we have licensed our naked DNA technology to leading animal health pharmaceutical companies for development and commercialization. DNA VACCINES FOR VETERINARY INFECTIOUS DISEASES We entered into a corporate alliance in March 1995 relating to DNA vaccines in the animal health area with Merial, a joint venture between Merck and Rhone Merieux. Merial has options to acquire exclusive licenses to our gene delivery technologies to develop and commercialize DNA-based vaccines to prevent infectious diseases in domesticated animals. Through September 30, 1999, we had received $3.2 million under this agreement. If Merial exercises its license options and markets these vaccines, cash payments and royalties on sales would be due to us. VETERINARY DNA THERAPEUTIC PROTEIN DELIVERY In January 1999, we entered into a collaborative research, license, and option agreement granting Pfizer rights to use our patented naked DNA gene delivery technologies to deliver certain therapeutic proteins for animal health applications. Pfizer made an initial investment of $6.0 million in our common stock, paid an initial fee of $1.0 million, and agreed to fund our research totaling $1.5 million for the first three years of the collaboration. We may receive milestone payments and royalties if products are successfully developed under the agreement. In addition, we may manufacture products resulting from the collaboration for Pfizer. 33 INTELLECTUAL PROPERTY Patents and other proprietary rights are essential to our business. We file patent applications to protect our technology, inventions, and improvements to our inventions that we consider important to the development of our business. We also rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position. We have filed or participated as licensee in the filing of more than 300 patent applications in the United States and foreign countries relating to our technology. Our patent applications seek to cover naked DNA gene delivery for immunization and to deliver therapeutic proteins to patients, specific gene sequences and formulations of gene-based product candidates, methods for producing pharmaceutical-grade DNA and the composition of matter of several families of lipid molecules and their uses in gene delivery. Many of these patents have been issued by the U.S. Patent and Trademark Office. Several other applications are still pending in the United States, and corresponding foreign applications have been filed. We and our exclusive licensors have received numerous U.S. and foreign patents covering various aspects of our proprietary technology. Most of these patents are recently issued and have considerable patent life remaining. These patents are described as follows: - CORE DNA DELIVERY TECHNOLOGY. We have received issued U.S. patents covering our core DNA therapeutics technology, including patents on methods of administering gene sequences for the purposes of expressing therapeutic proteins or for inducing immune responses. Other issued patents specifically cover the administration of genes into blood vessels and the heart. Patent coverage of our core DNA delivery technology has also been obtained in Europe. - CORE LIPID TECHNOLOGY. We have received issued U.S. patents covering numerous examples of cationic lipid compounds that are used to facilitate delivery of DNA therapeutics to some tissues. These patented compounds include the lipids contained in our lead product candidates, ALLOVECTIN-7 and LEUVECTIN. Patent protection of these key lipids also has been obtained in Europe and Japan. - SPECIFIC DNA THERAPEUTICS. We have supplemented the broad patent coverage described above with patents covering specific product applications of our technology. To date, we have received patents issued in the U.S. covering the DNA components of ALLOVECTIN-7 and LEUVECTIN. - DNA PROCESS TECHNOLOGY. As a result of our pioneering efforts to develop the use of pure DNA as a therapeutic agent, we have also led the development of manufacturing processes for producing pharmaceutical-grade DNA. We have received issued U.S. patents covering various steps involved in the process of economically producing pure plasmid DNA for pharmaceutical use. Two of our allowed U.S. patent applications have been suspended from issuance by the United States Patent & Trademark Office pending possible interference proceedings with one or more parties unknown to us. The suspension may be lifted or the application(s) may be drawn into interference. According to European patent procedures, issued patents may be opposed by parties interested in challenging the scope or validity of the issued claims. A European patent covering our core DNA delivery technology is currently being opposed by several companies under these procedures. We intend to vigorously defend our patent position in these proceedings. An 34 unfavorable result in these opposition proceedings could cause us to lose part or all of our proprietary protection on our potential products in Europe. Some components of our gene-based product candidates are, or may become, patented by others. As a result, we may be required to obtain licenses to conduct research, to manufacture or to market such products. Licenses may not be available on commercially reasonable terms, or at all. See "--Risk Factors--Our Patents and Proprietary Rights May Not Provide Us With Any Benefit and the Patents of Others May Prevent Us From Commercializing Our Products" and "The Legal Proceedings to Obtain Patents and Litigation of Third-Party Claims of Intellectual Property Infringement Could Require Us to Spend Money and Could Impair Our Operations." COMMERCIALIZATION AND MANUFACTURING Because of the broad potential applications of our technology, we intend to develop and commercialize products both on our own and through corporate partners. We intend to develop and market products to well-defined specialty markets, such as oncology, infectious diseases and other life-threatening diseases. Where appropriate, we intend to rely on strategic marketing and distribution partners for manufacturing and marketing products. We believe our DNA plasmids can be produced in commercial quantities through conventional fermentation and purification techniques. The separation and purification of plasmid DNA is a relatively straightforward procedure because of the inherent biochemical differences between plasmid DNA and the majority of other bacterial components. In addition, our lipid formulations consist of components that are synthesized chemically using traditional, readily scaleable, organic synthesis procedures. We produce and supply our product for all of our clinical trials and intend to produce sufficient supplies for additional clinical investigations. We may also choose to have outside organizations manufacture our product candidates for expanded clinical trials under close supervision utilizing our proprietary processes. COLLABORATION AND LICENSING AGREEMENTS We have entered into various arrangements with corporate, academic and government collaborators, licensors, licensees and others. In addition to the agreements summarized below, we conduct ongoing negotiations with potential corporate partners. CORPORATE PARTNERS MERCK & CO., INC. In May 1991, we entered into a research collaboration and license agreement with Merck to develop vaccines utilizing our intramuscular delivery technology to prevent infection and disease in humans. In connection with the 1991 agreement, we granted Merck a worldwide exclusive license to preventive vaccines using our technology against seven human infectious diseases including influenza, HIV, herpes simplex, HBV, HCV, HPV and tuberculosis. In addition, Merck has rights to therapeutic uses of preventive vaccines developed under the 1991 agreement. In December 1995 and November 1997, Merck acquired additional rights to develop and market therapeutic vaccines against HPV, HIV and HBV. Under the November 1997 amendment, Merck made an investment of $5.0 million for approximately 262,000 shares of our common stock. 35 In September 1997, we also entered into an option and license agreement granting Merck the rights to use our naked DNA technology to deliver certain growth factors as potential treatments for cardiovascular applications. The agreement resulted in an initial payment to us of $2.0 million. In connection with these agreements, Merck has paid us $19.1 million as of September 30, 1999. In November 1999, we received a $2.0 million payment from Merck which extends Merck's exclusive license to develop and market therapeutic vaccines against HIV and HBV. Merck is obligated to pay additional fees if research milestones are achieved and royalties on net sales if any products are developed and marketed. For some indications we may have an opportunity to co- promote product sales. AVENTIS PASTEUR, FORMERLY PASTEUR MERIEUX CONNAUGHT. In September 1994, we entered into a collaborative agreement with the vaccine manufacturer Pasteur Merieux Connaught, now Aventis Pasteur, covering the use of our proprietary DNA delivery and technologies for developing vaccines against CMV, RSV, Lyme disease, HELICOBACTER PYLORI and malaria. In April 1996, varicella zoster was added. Aventis Pasteur is obligated to make milestone and royalty payments to us if any products are developed and marketed. In July 1997, Aventis Pasteur paid us $1.0 million as a milestone payment upon initiation of a Phase I trial of an experimental vaccine against the parasite that causes malaria. Through September 30, 1999, we had received $7.8 million under this agreement. PFIZER INC. In January 1999, we entered into a collaborative license and option agreement with Pfizer to develop and market DNA-based delivery of therapeutic proteins for animal health applications. Under the agreement, Pfizer made an investment of $6.0 million for approximately 318,000 shares of our common stock. Pfizer also paid us a $1.0 million up-front license fee, and is obligated to pay us $1.5 million for research and development over the first three years of the agreement. MERIAL. We entered into a corporate alliance in March 1995 relating to DNA vaccines in the animal health area with Merial, a joint venture between Merck and Rhone Merieux. Merial has options to take exclusive licenses to our DNA delivery technologies to develop and commercialize DNA-based vaccines to prevent infectious diseases in domesticated animals. Through September 30, 1999, we had received $3.2 million under this agreement. If Merial exercises its license options and markets these vaccines, cash payments and royalties on sales would be due to us. AVENTIS PHARMA, FORMERLY RHONE-POULENC RORER PHARMACEUTICALS, INC. In October 1997, we entered into an agreement with Rhone-Poulenc Rorer Pharmaceuticals, Inc., now Aventis Pharma, granting Aventis Pharma an exclusive worldwide license to use our naked DNA delivery technology to deliver certain neurologically active proteins for potential treatment of neurodegenerative diseases. Under the terms of the agreement, we received $1.0 million in 1997. This agreement provides for us to receive additional payments based upon achievement of milestones and royalty payments on product sales. CENTOCOR, INC. In February 1998, we entered into a license agreement allowing Centocor, Inc. to use our naked DNA technology to develop and market certain DNA-based vaccines for the potential treatment of some types of cancer. We received an initial payment of $2.0 million plus reimbursement of $0.2 million of patent costs. We may receive additional payments based upon achievement of milestones and royalty payments on product sales. BOSTON SCIENTIFIC CORPORATION. In September 1998, we entered into a license and option agreement with Boston Scientific Corporation for the development of catheter-based intravascular gene delivery technology. We received $1.1 million in October 1998 under this agreement. The agreement provides for us to receive royalty payments on any related product sales. 36 Under the Merck, Aventis Pasteur, Merial, Aventis Pharma, Centocor and Pfizer agreements, if we were to receive milestone or royalty payments, we would be required to pay up to 10 percent of some of these payments to Wisconsin Alumni Research Foundation. See "--Research Institutions--Wisconsin Alumni Research Foundation." RESEARCH INSTITUTIONS OFFICE OF NAVAL RESEARCH. In September 1998, we entered into an agreement with the Office of Naval Research for the development work on a potential multi-gene DNA vaccine to prevent malaria. This agreement could provide total funding of up to $2.7 million through 2000, of which $2.2 million was recognized as revenue through September 30, 1999. THE UNIVERSITY OF MICHIGAN. In October 1992, we entered into a license agreement with the University of Michigan and obtained the exclusive license to products using technology for delivering gene-based products into cancer cells and blood vessels by catheters. In September 1998, we entered into a sublicense agreement with Boston Scientific Corporation for the development of catheter-based intravascular gene delivery technology. WISCONSIN ALUMNI RESEARCH FOUNDATION (WARF). Under a 1989 research agreement, scientists at the University of Wisconsin, Madison, and our scientists co-invented a core technology related to intramuscular naked DNA administration. In 1991, we licensed WARF's interest in that technology. We paid WARF an initial license fee and agreed to pay WARF a royalty on sales of any products incorporating the licensed technology and a percentage of up-front license payments from third parties. COMPETITION The field of gene-based drug development is new and rapidly evolving, and it is expected to continue to undergo significant and rapid technological change. Rapid technological development could result in our potential products or technologies becoming obsolete before we recover a significant portion of our related research, development and capital expenditures. We may experience competition both from other companies in the field and from companies which have other forms of treatment for the diseases we are targeting. We are aware of several development-stage and established enterprises, including major pharmaceutical and biotechnology firms, which are exploring gene-based drugs or are actively engaged in gene delivery research and development. These include Avigen, Targeted Genetics Corp., Transgene SA and Valentis Inc. We may also experience competition from companies that have acquired or may acquire technology from companies, universities and other research institutions. As these companies develop their technologies, they may develop proprietary positions which may materially and adversely affect us. In addition, a number of companies are developing products to address the same disease indications that we are targeting. For example, Maxim Pharmaceuticals, Inc. and Corixa Corp. are conducting advanced clinical trials for the treatment of melanoma. As another example, Aventis, Onyx Pharmaceuticals, Inc. and ImClone Systems Incorporated are conducting clinical trials of their products to treat head and neck cancer. If these or any other companies develop products with efficacy or safety profiles significantly better than our products, we may not be able to commercialize our products and sales of any of our commercialized products could be harmed. Some competitors and potential competitors have substantially greater product development capabilities and financial, scientific, marketing and human resources we do. Other companies may develop products earlier, obtain FDA approvals for products more rapidly, or develop products that are more effective than those under development by us. We will seek to expand our technological 37 capabilities to remain competitive; however, research and development by others may render our technology or products obsolete or noncompetitive or result in treatments or cures superior to ours. Our competitive position will be affected by the disease indications addressed by our potential products and those of our competitors, the timing of market introduction for these potential products and the stage of development of other technologies to address these disease indications. For us and our competitors, proprietary positions, the ability to complete clinical trials on a timely basis and with the desired results, and the ability to obtain timely regulatory approvals to market these potential products are likely to be significant competitive factors. Other important competitive factors will include the efficacy, safety, reliability, availability and price of potential products and the ability to fund operations during the period between technological conception and commercial sales. GOVERNMENT REGULATION Any products we develop will require regulatory clearances prior to clinical trials and additional regulatory clearances prior to commercialization. New human DNA therapeutics are expected to be subject to extensive regulation by the FDA and comparable agencies in other countries. The precise regulatory requirements with which we will have to comply are uncertain at this time due to the novelty of the DNA-based products and therapies currently under development. We believe that our potential products will be regulated either as biological products or as drugs. Drugs are subject to regulation under the Federal Food, Drug and Cosmetic Act, and biological products, in addition to being subject to provisions of that Act, are regulated under the Public Health Service Act. Both statutes and related regulations govern, among other things, the testing, manufacturing, safety, efficacy, labeling, storage, record keeping, advertising and other promotional practices. FDA approval or other clearances must be obtained before clinical testing, and before manufacturing and marketing of biologics or drugs. FDA approval is required prior to marketing a pharmaceutical product in the United States. To obtain this approval the FDA requires clinical trials to demonstrate the safety, efficacy, and potency of the product candidates. Clinical trials are the means by which experimental drugs or treatments are tested in humans. New therapies typically advance from laboratory, research, testing through animal, preclinical, testing and finally through several phases of clinical, human, testing. Upon successful completion of clinical trials, approval to market the therapy for a particular patient population may be requested from the FDA in the United States and/or its counterparts in other countries. Clinical trials are normally done in three phases. In Phase I, trials are conducted with a small number of patients or healthy volunteers to determine the safety profile, the pattern of drug distribution and metabolism and early evidence on effectiveness. In Phase II, trials are conducted with a larger group of patients afflicted with a target disease in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase III, large scale, multi-center, comparative trials are conducted with patients afflicted with a target disease in order to provide enough data for the statistical proof of safety, efficacy, and potency required by the FDA and other regulatory authorities. For life-threatening diseases, initial human testing generally is done in patients rather than healthy volunteers. These studies may provide results traditionally obtained in Phase II trials and are referred to as "Phase I/II" trials. Obtaining FDA approval has been a costly and time-consuming process. Generally, in order to gain FDA pre-market approval, preclinical studies must be conducted in the laboratory and in animal model systems to gain preliminary information on an agent's efficacy and to identify any major safety concerns. The results of these studies are submitted as a part of an application for an 38 Investigational New Drug, IND, which the FDA must review and allow before human clinical trials can start. The IND includes a detailed description of the clinical investigations. A company must sponsor and file an IND for each proposed product and must conduct clinical studies to demonstrate the safety, efficacy and potency that are necessary to obtain FDA approval. The FDA receives reports on the progress of each phase of clinical testing, and it may require the modification, suspension, or termination of clinical trials if an unwarranted risk is presented to patients. Human DNA therapeutics are a new category of therapeutics, and the clinical trial period may be lengthy or the number of patients may be numerous in order to establish safety, efficacy and potency. After completion of clinical trials of a new product, FDA marketing approval must be obtained. If the product is regulated as a biologic, a Biologic License Application, BLA, is required. If the product is classified as a new drug, a New Drug Application, NDA, is required. The NDA or BLA must include results of product development activities, preclinical studies and clinical trials in addition to detailed manufacturing information. Applications submitted to the FDA are subject to an unpredictable and potentially prolonged approval process. The FDA may ultimately decide that the application does not satisfy its criteria for approval or require additional preclinical or clinical studies. Even if FDA regulatory clearances are obtained, a marketed product is subject to continual review, and later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. Before marketing clearance is secured, the manufacturing facility will be inspected for current Good Manufacturing Practices, GMP, compliance by FDA inspectors. The manufacturing facility must satisfy current GMP requirements prior to marketing clearance. In addition, after marketing clearance is secured, the manufacturing facility will be inspected periodically for GMP compliance by FDA inspectors, and, if the facility is located in California, by inspectors from the Food and Drug Branch of the California Department of Health Services. In addition to the FDA requirements, the NIH has established guidelines for research involving recombinant DNA molecules. These guidelines apply to all recombinant DNA research which is conducted at or supported by the NIH, including proposals to conduct clinical research involving DNA therapeutics. The NIH review of clinical trial proposals is a public process and usually involves review and approval by the Recombinant DNA Advisory Committee of the NIH. In both domestic and foreign markets, sales of any approved products will depend on reimbursement from third party payers, such as government and private insurance plans. Third party payers are increasingly challenging the prices charged for medical products and services. If we succeed in bringing one or more products to market, these products may not be considered cost-effective, reimbursement may not be available, or reimbursement policies may adversely affect our ability to sell our products on a profitable basis. We also are subject to various federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our research. The extent of government regulation which might result from any future legislation or administrative action cannot be accurately predicted. HUMAN RESOURCES As of September 30, 1999, we had 108 full-time employees, 22 of whom hold degrees at the doctorate level. Of these employees, 80 are engaged in, or directly support, research and 39 development activities, and 28 are in administrative and business development positions. A significant number of our management and professional employees have prior experience with pharmaceutical and biotechnology companies. None of our employees is covered by collective bargaining agreements, and our management considers relations with our employees to be good. FACILITIES We lease approximately 43,000 square feet of manufacturing, research laboratory and office space in an established commercial neighborhood in northern San Diego, California at three sites and with three leases. The leases terminate in 2004. We have the option to renew these three leases for an additional five-year period. Within our existing facilities, we have manufactured sufficient quantities of pharmaceutical-grade product to supply our previous and ongoing clinical trials, including the current registration trials. In addition, we have manufactured preclinical and clinical supplies of DNA for our corporate partners, for government agencies and for numerous academic researchers. We believe that the build-out of unfinished space in our facilities will be sufficient to accommodate manufacturing of initial production quantities of our most advanced product candidates. 40 MANAGEMENT Our executive officers and directors are as follows:
NAME AGE POSITION - ---- -------- ------------------------------------------------- Alain B. Schreiber, M.D................... 44 President, Chief Executive Officer and Director Deirdre Y. Gillespie, M.D................. 43 Executive Vice President and Chief Business Officer Martha J. Demski.......................... 47 Vice President, Chief Financial Officer, Treasurer and Secretary Jon A. Norman, Ph.D....................... 51 Vice President, Research George J. Gray............................ 53 Vice President, Operations Robert H. Zaugg, Ph.D..................... 50 Vice President, Business Development R. Gordon Douglas, Jr., M.D.(2)(4)........ 65 Chairman of the Board of Directors M. Blake Ingle(1)(3)...................... 57 Director Patrick F. Latterell(1)(3)................ 41 Director Gary A. Lyons(1)(3)....................... 48 Director Dale A. Smith(2)(4)....................... 67 Director Philip M. Young(2)(4)..................... 59 Director
- ------------------------ (1) Member of Compensation Committee of the Board of Directors. (2) Member of Audit Committee of the Board of Directors. (3) Member of Stock Plan Committee of the Board of Directors. (4) Member of the Nominating Committee of the Board of Directors. ALAIN B. SCHREIBER, M.D., has been our President, Chief Executive Officer and a director since May 1992. Prior to joining us, Dr. Schreiber held various executive level positions at Rhone-Poulenc Rorer Inc. from July 1985 to April 1992, lastly as Senior Vice President of Discovery Research. From October 1982 to June 1985, Dr. Schreiber served as Biochemistry Department Head at Syntex Corp. Dr. Schreiber is a director of Spiros Development Corp. II Inc. and is also an appointed adviser for foreign trade of the Belgian Foreign Trade Counsel in the United States. He received his undergraduate degree and M.D. from the Free University of Brussels, after which he was awarded a fellowship in immunology at the Weizmann Institute. DEIRDRE Y. GILLESPIE, M.D., joined us as Executive Vice President and Chief Business Officer in March 1998. Prior to joining us, Dr. Gillespie served as Vice President of Business Development for 3-Dimensional Pharmaceuticals, Inc. From 1991 to 1996, she held various management positions with the Dupont Merck Pharmaceutical Co. From 1986 to 1990, Dr. Gillespie directed clinical research activities for Sandoz Pharma AG. Dr. Gillespie received a B.Sc. in Pharmacology and Therapeutics and an M.D. from London University. Dr. Gillespie received her M.B.A. from the London Business School with a specialization in marketing and international management. MARTHA J. DEMSKI joined us as Chief Financial Officer in December 1988 and currently serves as Vice President, Chief Financial Officer, Treasurer and Secretary. From August 1977 until joining us, Ms. Demski held various positions with Bank of America, lastly as Vice President/Section Head of the Technology Section. She also served as an adviser to Bank of America on a statewide basis regarding the biotechnology industry in California. Ms. Demski received a B.A. from Michigan State University and an M.B.A. in Finance and Accounting from The University of Chicago Graduate School of Business. JON A. NORMAN, PH.D., joined us in January 1993 as Vice President, Research. From 1986 until joining us, Dr. Norman was the Group Leader/Section Head for the Departments of Pharmacology and Biochemistry at Bristol-Myers Squibb Corporation. He was a Senior Research 41 Scientist at Ciba-Geigy Corporation from 1981 to 1986. Dr. Norman received his B.A. and M.A. from the University of California at Santa Barbara and his Ph.D. in Biochemistry from the University of Calgary, after which he was awarded a fellowship at the Friederich Miescher Institute in Basel, Switzerland. GEORGE J. GRAY joined us in October 1992 as Vice President, Operations. Prior to that time he was at Rhone-Poulenc Rorer Inc. where he held various positions since 1975, lastly as Director, Discovery Research Ventures, US/UK from January 1990 to October 1992, and prior to that as Director, Project Management from January 1988 to December 1989. Mr. Gray received a B.A. from George Washington University. ROBERT H. ZAUGG, PH.D., joined us in July 1991 as the Senior Director, Business Development and has served as the Vice President of Business Development since January 1994. Prior to joining us, Dr. Zaugg served as Director of Business Development & Licensing for Triton Biosciences from 1988 to 1991 and in various business development positions with Sandoz Pharmaceuticals Corporation from 1982 to 1988. He holds a B.A. from the University of California at Los Angeles, a Ph.D. in Biochemistry from Northwestern University and an M.B.A. from New York University. He was awarded a post-doctoral fellowship in immunology at the Massachusetts Institute of Technology. R. GORDON DOUGLAS, JR., M.D., is Chairman of our Board of Directors and has been one of our directors since May 1999. Dr. Douglas retired in April 1999 from Merck & Co., Inc., where he had been President of Merck Vaccines since 1991, and a member of the Merck Management Committee. Prior to joining Merck in 1989, Dr. Douglas was a physician and academician. His teaching and administrative affiliations included Baylor College of Medicine, University of Rochester School of Medicine, and Cornell University Medical College. His medical practice included affiliations with The New York Hospital, Memorial Sloan-Kettering Cancer Center, The Rockefeller University Hospital and North Shore University Hospital. He has served as a visiting professor at a number of medical schools and as a consultant to several pharmaceutical and biomedical companies. Dr. Douglas is a graduate of Princeton University and Cornell University Medical College. He received his medical staff training at The New York Hospital and Johns Hopkins Hospital and is Board Certified in Internal Medicine. He is a member of the Institute of Medicine, the Association of American Physicians, the Infectious Diseases Society of America and numerous other organizations. M. BLAKE INGLE, PH.D., has been one of our directors since June 1996. Dr. Ingle is a partner in Inglewood Ventures. From 1993 to 1996 Dr. Ingle was Chief Executive Officer of Canji Inc., a privately held gene therapy company acquired by Schering Plough in 1996, and he served from 1995 to 1996 as Acting Chief Executive Officer of Telios Pharmaceuticals, Inc., subsequently acquired by Integra Life Sciences. Dr. Ingle previously worked with Bayer. From 1980 to 1993, Dr. Ingle held a variety of positions with IMCERA Group, Inc., subsequently Mallinckrodt, Inc., including Chief Scientific Officer, Chief Financial Officer and President of its Pittman Moore division and most recently as President and Chief Executive Officer of IMCERA Group, Inc. Dr. Ingle also serves as a member of the Board of Directors of Corvas International, Inc., Inex Pharmaceuticals and Burnham Institute. He received his B.S. degree from Fort Lewis College and his M.S. and Ph.D. from Colorado State University. PATRICK F. LATTERELL has been one of our directors since February 1992. He has been a General Partner with Venrock Associates since 1989. From 1985 to 1989, he was a General Partner at Rothschild Ventures Inc., "Rothschild," where he was responsible for Rothschild's healthcare ventures. Prior to joining Rothschild, Mr. Latterell was Manager of Corporate Development with Syntex Corporation from 1983 through 1985. Mr. Latterell currently serves as a director of several privately held biomedical companies. He received S.B. degrees in Biological Sciences and 42 Economics from the Massachusetts Institute of Technology and an M.B.A. from the Stanford University Graduate School of Business. GARY A. LYONS has been one of our director since March 1997. He has been President, Chief Executive Officer and Director of Neurocrine Biosciences, Inc. since 1993. From 1983 to 1993, Mr. Lyons held various executive positions at Genentech, Inc., including Vice President of Business Development, Vice President of Sales, and Director of Sales and Marketing. From 1973 to 1983, Mr. Lyons worked with American Critical Care, serving as Director of Sales from 1980 to 1983. Mr. Lyons holds a B.A. in Marine Biology from the University of New Hampshire and an M.B.A. from Northwestern University, JL Kellogg Graduate School of Management. DALE A. SMITH has been one of our directors since August 1995. From 1979 until his retirement in July 1995, Mr. Smith was Group Vice President of Baxter International Inc., where he was responsible for the biotechnology group and various corporate research groups including applied sciences, blood substitutes, venture technology and Baxter International Inc.'s European research center. Currently he serves as a business advisor to several companies and as a Board Member of Cerus Corporation. Mr. Smith holds a B.A. in Business Administration from the University of Washington, Seattle. PHILIP M. YOUNG has been one of our directors since February 1992. He has been a general partner of U.S. Venture Partners, a venture capital firm, since April 1990. Mr. Young is a director of The Immune Response Corporation, Zoran Corporation, 3Dfx Interactive, Inc. and several privately held companies. He received a B.M.E. from Cornell University, an M.S. from George Washington University and an M.B.A. from the Harvard Business School. 43 UNDERWRITING Vical and the underwriters for the offering named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co., FleetBoston Robertson Stephens Inc. and SG Cowen Securities Corporation are the representatives of the underwriters.
Underwriters Number of Shares ------------ ---------------- Goldman, Sachs & Co...................................... FleetBoston Robertson Stephens Inc....................... SG Cowen Securities Corporation.......................... First Union Securities, Inc. ............................ --------- Total................................................ 2,500,000 =========
If the underwriters sell more shares than the total number set forth in the table above, the underwriters have an option to buy up to an additional 375,000 shares from Vical to cover such sales. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by Vical. Such amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase 375,000 additional shares.
Paid by Vical No Exercise Full Exercise ------------- ----------- ------------- Per Share........................................ $ $ Total............................................ $ $
Shares sold by the underwriters to the public will initially be offered at the initial price to public set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial price to public. Any such securities dealers may resell any shares purchased from the underwriters to certain other brokers or dealers at a discount of up to $ per share from the initial price to public. If all the shares are not sold at the initial price to public, the representatives may change the offering price and the other selling terms. Vical has agreed with the underwriters not to dispose of or hedge any of Vical's common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 90 days after the date of this prospectus, except with the prior written consent of the representatives. This agreement does not apply to any existing employee benefit plans. In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the common stock while the offering is in progress. The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions. 44 These activities by the underwriters may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected in the over-the- counter market or otherwise. Vical estimates that its share of the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $ . Vical has agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act of 1933. LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Pillsbury Madison & Sutro LLP, San Francisco, California. A member of Pillsbury Madison & Sutro LLP owns 12,755 shares of common stock. Cooley Godward LLP, San Diego, California, is acting as counsel for the underwriters in connection with certain legal matters relating to the sale of the common stock offered hereby. EXPERTS The audited financial statements included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report, with respect to such financial statements, and are included in this prospectus in reliance upon the authority of Arthur Andersen LLP as experts in accounting and auditing in giving said report. The statements in this prospectus under the captions "Risk Factors--Our Patents and Proprietary Rights May Not Provide Us With Any Benefit and the Patents of Others May Prevent Us From Commercializing Products; The Legal Proceedings to Obtain Patents and Litigation of Third-Party Claims of Intellectual Property Infringement Could Require Us to Spend Money and Could Impair Our Operations," and "Business--Intellectual Property," have been reviewed and approved by Sterne, Kessler, Goldstein & Fox P.L.L.C., (SKGF) patent counsel for Vical, as experts on such matters, and are included herein in reliance upon that review and approval with the exception that, because a number of matters were or are handled by different patent counsel, SKGF: (1) cannot confirm the statements made in the subsections of "Business--Intellectual Property" entitled "Core Lipid Technology," "Specific DNA Therapeutics," and "DNA Process Technology," and (2) cannot confirm that Vical has filed or participated as licensee in the filing of more than 300 patent applications in the United States and Foreign countries. WHERE YOU CAN FIND MORE INFORMATION We are subject to the reporting requirements of the Securities Exchange Act of 1934 and in accordance file annual and quarterly reports, proxy statements and other information with the Securities and Exchange Commission. These reports, proxy statements and other information may be inspected and copies of these materials may be obtained upon payment of fees at the public reference facilities maintained by the Commission at 450 Fifth Street, NW, Washington, D.C. 20549, as well as the regional offices of the Commission located at 500 West Madison Street, Chicago, Illinois, and Seven World Trade Center, New York, New York. You may obtain information on the operation of the public reference facilities by calling the Commission at 1-800-SEC-0330. In addition, we are required to file electronic versions of these materials with the Commission through the Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The Commission maintains a World Wide Web site at http://www/sec/gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. Our common stock is quoted on the Nasdaq National Market, and reports and 45 other information concerning us may be inspected at the National Association of Securities Dealers, Inc. at 1725 K Street, NW, Washington, D.C. 20006-1500. We have filed with the Commission a registration statement on Form S-3 under the Securities Act of 1933 with respect to the common stock offered in this prospectus. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to us and our common stock, you should read the registration statement and its exhibits and schedules. Statements contained in this prospectus as to the contents of any contract or any other document are not necessarily complete and, in each instance, reference is made to the copy of such contract or document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference. Copies of the registration statement, including all exhibits thereto, may be obtained from the Commission's principal office in Washington, D.C. upon the payment of the fees prescribed by the Commission, or may be examined without charge at the offices of the Commission described above. Copies of these materials may also be obtained from the EDGAR database. INCORPORATION BY REFERENCE The Commission allows us to incorporate by reference information into this prospectus. This means we can disclose important information to you by referring you to another document filed separately with the Commission. The information incorporated by reference is deemed to be part of this prospectus, except for any information superseded by information contained directly in this prospectus. This prospectus incorporates by reference the documents set forth below that we have previously filed with the Commission. These documents contain important information about us and our financial condition. The following documents previously filed with the Commission are hereby incorporated by reference into this prospectus: - our Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 0-21088), - our Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999, June 30, 1999, and September 30, 1999, - the description of our common stock contained in our registration statement on Form 8-A filed on January 8, 1993, and - the description of the rights to purchase Series A Participating Preferred Stock $0.01 par value set forth in the registration statement on Form 8-A filed on March 23, 1995. All documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this prospectus and prior to the completion of the offering of the common stock will be deemed to be incorporated by reference into this prospectus and to be part of this prospectus from the date of filing of these documents. Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for purposes of this prospectus and the registration statement of which it is a part to the extent that a statement contained herein or in any other subsequently filed document which is also incorporated herein modifies or replaces such statement. Any statement so modified or superseded shall not be deemed, in its unmodified form, to constitute a part of this prospectus or such registration statement. We will provide without charge to each person to whom a copy of the prospectus has been delivered, and who makes a written or oral request, a copy of any and all of the information that has been incorporated by reference in the registration statement (other than exhibits unless such exhibits are specifically incorporated by reference therein). Requests should be submitted in writing or by telephone to Investor Relations, Vical Incorporated, at our offices located at 9373 Towne Centre Drive, Suite 100, San Diego, CA 92121-3088, telephone (858) 646-1100. 46 VICAL INCORPORATED INDEX TO FINANCIAL STATEMENTS
PAGE AUDITED FINANCIAL STATEMENTS Report of Independent Public Accountants.................. F-2 Balance Sheets as of December 31, 1998 and 1997........... F-3 Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996..................................... F-4 Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996........................ F-5 Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996..................................... F-6 Notes to Financial Statements............................. F-7 INTERIM FINANCIAL STATEMENTS (UNAUDITED) Interim Balance Sheets as of September 30, 1999 and December 31, 1998....................................... F-18 Interim Statements of Operations for the Three Months and Nine Months ended September 30, 1999 and 1998........... F-19 Interim Statements of Cash Flow for the Nine Months ended September 30, 1999 and 1998............................. F-20 Notes to Interim Financial Statements..................... F-21
F-1 VICAL INCORPORATED INDEX TO FINANCIAL STATEMENTS (CONTINUED) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Vical Incorporated: We have audited the accompanying balance sheets of Vical Incorporated, a Delaware corporation, as of December 31, 1998 and 1997, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vical Incorporated as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Diego, California February 8, 1999 F-2 VICAL INCORPORATED BALANCE SHEETS
DECEMBER 31, --------------------------- 1998 1997 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents (Note 2)........................ $ 13,567,817 $ 12,157,149 Marketable securities--available-for-sale (Note 2)........ 26,615,939 33,397,482 Receivables and other..................................... 1,432,711 1,566,532 ------------ ------------ Total current assets........................................ 41,616,467 47,121,163 ------------ ------------ Property and Equipment (Note 5): Equipment................................................. 5,139,944 4,966,955 Leasehold improvements.................................... 1,558,554 1,587,554 ------------ ------------ 6,698,498 6,554,509 Less--accumulated depreciation and amortization........... (4,992,121) (4,334,224) ------------ ------------ 1,706,377 2,220,285 ------------ ------------ Patent costs, net of accumulated amortization of $126,638 and $74,063 (Note 1)...................................... 1,387,936 1,247,059 Other assets................................................ 133,385 102,500 ------------ ------------ $ 44,844,165 $ 50,691,007 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses (Note 4)............ $ 2,281,252 $ 1,424,603 Current portion of capital lease obligations (Note 5)..... 473,466 448,261 Current portion of notes payable (Note 5)................. 213,773 213,773 Deferred revenue (Note 3)................................. 250,000 178,261 ------------ ------------ Total current liabilities................................... 3,218,491 2,264,898 ------------ ------------ Long-Term Obligations: Long-term obligations under capital leases (Note 5)....... 747,807 911,794 Notes payable (Note 5).................................... 53,443 320,660 ------------ ------------ Total long-term obligations................................. 801,250 1,232,454 ------------ ------------ Commitments (Note 5) Stockholders' Equity (Note 6): Preferred stock, $.01 par value--5,000,000 shares authorized--none outstanding............................ -- -- Common stock, $.01 par value--40,000,000 shares authorized--15,866,544 and 15,731,316 shares issued and outstanding in 1998 and 1997, respectively.............. 158,665 157,313 Additional paid-in capital................................ 78,332,483 77,267,971 Accumulated other comprehensive income (Note 2)........... 69,440 24,028 Accumulated deficit....................................... (37,736,164) (30,255,657) ------------ ------------ Total stockholders' equity.................................. 40,824,424 47,193,655 ------------ ------------ $ 44,844,165 $ 50,691,007 ============ ============
See accompanying notes. F-3 VICAL INCORPORATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Revenues (Note 3): Contract revenue................................... $ 875,773 $ 1,325,925 $ 1,060,557 License/Royalty revenue............................ 5,044,607 6,477,244 5,679,542 ----------- ----------- ----------- 5,920,380 7,803,169 6,740,099 ----------- ----------- ----------- Expenses: Research and development........................... 12,054,367 11,936,068 11,317,908 General and administrative......................... 3,649,841 3,733,290 3,168,331 ----------- ----------- ----------- 15,704,208 15,669,358 14,486,239 ----------- ----------- ----------- Loss from operations................................. (9,783,828) (7,866,189) (7,746,140) Other income (expense): Interest income.................................... 2,465,545 2,447,139 2,772,845 Interest expense................................... (162,224) (192,181) (107,296) ----------- ----------- ----------- Net loss............................................. $(7,480,507) $(5,611,231) $(5,080,591) =========== =========== =========== Net loss per share (basic and diluted--Note 1)....... $ (0.47) $ (0.36) $ (0.33) =========== =========== =========== Weighted average shares used in computing net loss per share.......................................... 15,797,585 15,484,952 15,382,848 =========== =========== ===========
See accompanying notes. F-4 VICAL INCORPORATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1998
ACCUMULATED COMMON STOCK ADDITIONAL OTHER TOTAL ---------------------- PAID-IN DEFERRED COMPREHENSIVE ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL COMPENSATION INCOME DEFICIT EQUITY ---------- --------- ----------- -------------- --------------- ------------- -------------- BALANCE, December 31, 1995.................. 15,364,265 $153,643 $72,728,484 $(158,427) $ 104,176 $(19,563,835) $53,264,041 Stock option exercises........... 32,317 323 175,988 -- -- -- 176,311 Deferred compensation........ -- -- -- 158,427 -- -- 158,427 Unrealized loss on marketable securities arising during holding period.............. Reclassification of realized gain included in net loss................ Unrealized gain (loss) on marketable securities.......... -- -- -- -- (152,961) -- (152,961) Net loss.............. -- -- -- -- -- (5,080,591) (5,080,591) ---------- -------- ----------- --------- --------- ------------ ----------- BALANCE, December 31, 1996.................. 15,396,582 153,966 72,904,472 -- (48,785) (24,644,426) 48,365,227 Issuance of common stock at $15.28 per share (Note 3)...... 261,812 2,618 3,992,143 -- -- -- 3,994,761 Stock option exercises........... 72,922 729 371,356 -- -- -- 372,085 Unrealized gain on marketable securities arising during holding period.............. Reclassification of realized loss included in net loss................ Unrealized gain (loss) on marketable securities.......... -- -- -- -- 72,813 -- 72,813 Net loss.............. -- -- -- -- -- (5,611,231) (5,611,231) ---------- -------- ----------- --------- --------- ------------ ----------- BALANCE, December 31, 1997.................. 15,731,316 157,313 77,267,971 -- 24,028 (30,255,657) 47,193,655 Stock option exercises........... 135,228 1,352 1,064,512 -- -- -- 1,065,864 Unrealized gain on marketable securities arising during holding period.............. Reclassification of realized gain included in net loss................ Unrealized gain (loss) on marketable securities.......... -- -- -- -- 45,412 -- 45,412 Net loss.............. -- -- -- -- -- (7,480,507) (7,480,507) ---------- -------- ----------- --------- --------- ------------ ----------- BALANCE, December 31, 1998.................. 15,866,544 $158,665 $78,332,483 $ -- $ 69,440 $(37,736,164) $40,824,424 ========== ======== =========== ========= ========= ============ =========== TOTAL COMPREHENSIVE LOSS --------------- BALANCE, December 31, 1995.................. Stock option exercises........... Deferred compensation........ Unrealized loss on marketable securities arising during holding period.............. $ (136,199) Reclassification of realized gain included in net loss................ (16,762) ----------- Unrealized gain (loss) on marketable securities.......... (152,961) Net loss.............. (5,080,591) ----------- BALANCE, December 31, 1996.................. (5,223,552) =========== Issuance of common stock at $15.28 per share (Note 3)...... Stock option exercises........... Unrealized gain on marketable securities arising during holding period.............. 87,763 Reclassification of realized loss included in net loss................ (14,950) ----------- Unrealized gain (loss) on marketable securities.......... 72,813 Net loss.............. (5,611,231) ----------- BALANCE, December 31, 1997.................. (5,538,418) =========== Stock option exercises........... Unrealized gain on marketable securities arising during holding period.............. 57,041 Reclassification of realized gain included in net loss................ (11,629) ----------- Unrealized gain (loss) on marketable securities.......... 45,412 Net loss.............. (7,480,507) ----------- BALANCE, December 31, 1998.................. $(7,435,095) ===========
See accompanying notes. F-5 VICAL INCORPORATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- OPERATING ACTIVITIES: Net loss............................................ $(7,480,507) $(5,611,231) $(5,080,591) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................... 920,695 939,956 620,033 Compensation expense related to stock purchases..................................... -- -- 158,427 Write-off of abandoned patent application costs......................................... 94,800 80,994 3,247 Changes in operating assets and liabilities: Receivables and other............................. 133,821 359,463 (1,397,906) Accounts payable and accrued expenses............. 856,649 614,219 282,087 Deferred revenue.................................. 71,739 (1,013,043) 512,137 ----------- ----------- ----------- Net cash used in operating activities............... (5,402,803) (4,629,642) (4,902,566) ----------- ----------- ----------- INVESTING ACTIVITIES: Marketable securities............................... 6,826,955 912,645 10,963,363 Capital expenditures................................ (34,292) (418,507) (980,709) Other assets........................................ (1,885) 210,400 221,288 Patent expenditures................................. (288,252) (280,778) (269,682) ----------- ----------- ----------- Net cash provided from investing activities......... 6,502,526 423,760 9,934,260 ----------- ----------- ----------- FINANCING ACTIVITIES: Principal payments under capital lease obligations....................................... (487,702) (506,205) (414,176) Proceeds from (payments on) notes payable........... (267,217) (106,887) 641,320 Issuance of common stock, net....................... 1,065,864 4,366,846 176,311 ----------- ----------- ----------- Net cash provided from financing activities......... 310,945 3,753,754 403,455 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................................... 1,410,668 (452,128) 5,435,149 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR...... 12,157,149 12,609,277 7,174,128 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR............ $13,567,817 $12,157,149 $12,609,277 =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest Paid....................................... $ 167,622 $ 184,191 $ 107,296 NONCASH INVESTING AND FINANCING ACTIVITIES: Equipment acquired under capital leases............. $ 348,920 $ 434,416 $ 1,200,022
See accompanying notes. F-6 VICAL INCORPORATED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS ACTIVITY Vical Incorporated (the "Company"), a Delaware corporation, was incorporated in 1987 and has devoted substantially all of its resources since that time to its research and development programs. The Company is focusing its resources on the development of its direct gene transfer and related technologies. All of the Company's potential products are in research and development. No revenues have been generated from the sale of any of such products, nor are any such revenues expected for at least the next several years. The products currently under development by the Company will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercial use. There can be no assurance that the Company's research and development efforts will be successful and that any of the Company's potential products will prove to be safe and effective in clinical trials. Even if developed, these products may not receive regulatory approval or be successfully introduced and marketed at prices that would permit the Company to operate profitably. The Company expects to continue to incur substantial losses and not generate positive cash flow from operations for at least the next several years. No assurance can be given that the Company can generate sufficient product revenue to become profitable or generate positive cash flow from operations at all or on a sustained basis. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. PROPERTY AND EQUIPMENT Equipment is stated at cost and depreciated over the estimated useful lives of the assets (3-5 years) using the straight-line method. Leasehold improvements are stated at cost and amortized over the shorter of the life of the lease or the remaining useful life of the asset using the straight-line method. PATENT COSTS The Company capitalizes certain costs related to patent applications. Accumulated costs are amortized over the estimated economic lives of the patents using the straight-line method, commencing at the time the patents are issued. Costs related to patent applications are written off to expense at the time such costs are deemed to have no continuing value. RESEARCH AND DEVELOPMENT COSTS All research and development costs are expensed as incurred. F-7 VICAL INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE UNDER COLLABORATIVE AGREEMENTS Revenue under collaborative agreements is generally recognized over the term of the agreement or on the achievement of certain milestones. Advance payments received in excess of amounts earned are classified as deferred revenue. NET LOSS PER SHARE Basic and diluted net loss per share for each of the three years in the period ended December 31, 1998, has been computed using the weighted average number of shares of common stock outstanding during the periods pursuant to Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Diluted loss per share does not include any stock options as the effect would be antidilutive. See Note 6 for information on the number of options outstanding and the weighted average exercise price at December 31, 1998, 1997 and 1996. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of financial instruments such as accounts receivable, accounts payable and accrued expenses reasonably approximate fair value because of the short maturity of these items. The Company believes the carrying amounts of the Company's notes payable and obligations under capital leases approximate fair value because the interest rates on these instruments change with, or approximate, market interest rates. COMPREHENSIVE INCOME The Company has implemented Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income." This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Accordingly, in addition to reporting net income (loss) under the current rules, the Company was required to display the impact of any unrealized gain or loss on marketable securities as a component of comprehensive income and to display an amount representing total comprehensive income for each period presented. The Company has presented the required information in the Statements of Stockholders' Equity. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the Accounting Standards Executive Committee issued AICPA Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). This statement provides guidance on accounting for the costs of computer software developed or obtained for internal use. The statement identifies characteristics of internal use software and assists in determining when computer software is for internal use. SOP 98-1 is F-8 VICAL INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) effective for fiscal years beginning after December 15, 1998, with earlier application permitted. The Company has not determined the impact of the adoption of SOP 98-1 as this is highly dependent upon the nature, timing and extent of future internal use software development. The Company has adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" and, has determined that it operates in one business segment dedicated to research in gene delivery technology. 2. CASH EQUIVALENTS AND MARKETABLE SECURITIES The Company invests its excess cash in debt instruments of financial institutions, corporations with strong credit ratings, and in U.S. government obligations. The Company has established guidelines relative to diversification and maturities that maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. Cash equivalents are short-term, highly liquid investments with original maturities of less than three months. Cash equivalents at December 31, 1998 and 1997, consist primarily of $11,671,743 and $12,080,473, respectively, in commercial paper, federal agency discount notes and money market funds. The Company has adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities," which requires that the Company's marketable securities be classified as available-for-sale and that unrealized holding gains or losses are recorded as a separate component of stockholders' equity. Realized gains or losses, calculated based on the specific identification method, were not material for the years ended December 31, 1998, 1997 and 1996. At December 31, 1998, marketable securities consisted of the following:
AMORTIZED COST MARKET VALUE UNREALIZED GAIN -------------- ------------ --------------- U.S. Government Obligations...... $ 5,508,897 $ 5,529,915 $21,018 Commercial Paper................. 21,037,602 21,086,024 48,422 ----------- ----------- ------- Total Marketable Securities...... $26,546,499 $26,615,939 $69,440 =========== =========== =======
Approximately 60%, 36% and 4% of these securities mature within one, two and three years, respectively, of December 31, 1998. At December 31, 1997, marketable securities consisted of the following:
AMORTIZED COST MARKET VALUE UNREALIZED GAIN -------------- ------------ --------------- U.S. Government Obligations...... $12,978,062 $12,982,090 $ 4,028 Commercial Paper................. 20,395,392 20,415,392 20,000 ----------- ----------- ------- Total Marketable Securities...... $33,373,454 $33,397,482 $24,028 =========== =========== =======
F-9 VICAL INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 3. SIGNIFICANT CONTRACTS AND LICENSE AGREEMENTS MERCK & CO., INC. The Company has entered into three separate agreements with Merck & Co., Inc. ("Merck") which provide Merck with certain exclusive rights to develop and commercialize vaccines using the Company's "naked" DNA technology for certain disease targets. The 1991 and 1997 agreements are for human vaccine targets and the 1992 agreement is for animal vaccine targets. Prior to 1996, Merck exercised its options to seven preventive human infectious disease vaccines using the Company's naked DNA technology pursuant to the 1991 agreement. In 1996, the Company received a $1,000,000 payment from Merck upon the initiation of a Phase I clinical trial of an experimental DNA vaccine against influenza virus, one of the seven infectious disease targets covered by the agreement. Also in 1996, Vical accrued a $500,000 payment from Merck in conjunction with the issuance of the patent technology covering the agreement. The payment was subsequently received in 1997. In November 1997, the Company and Merck amended the 1991 agreement and granted Merck certain rights to develop and market therapeutic vaccines against the human immunodeficiency virus (HIV) and hepatitis B virus (HBV). Under the amended agreement, Merck made an investment of $5,000,000 for approximately 262,000 shares of the Company's common stock including a twenty-five percent premium over the average per share closing price for the twenty trading days prior to the date of the agreement. The premium of $1,000,000 on the investment was reflected in revenue in 1997 and the balance of the investment, net of costs to issue the shares of stock, was reflected in common stock and additional paid-in capital. The September 1997 agreement between the Company and Merck granted Merck the rights to use the Company's naked DNA technology to deliver certain growth factors as potential treatments for a range of applications including revascularization. The agreement resulted in an initial payment to the Company of $2,000,000. Through December 31, 1998, the Company had received a total of $19,130,000 (including the payment for the investment for common stock) under these agreements of which $0, $3,000,000, and $1,500,000 was recognized as revenue in 1998, 1997, and 1996, respectively. All three agreements provide for the Company to receive additional payments based upon achievement of certain defined milestones and royalty payments based on net product sales. PASTEUR MERIEUX CONNAUGHT In September 1994, the Company entered into an agreement with Pasteur Merieux Connaught ("PMC") that includes a research collaboration and options for PMC to take exclusive licenses to Vical's naked DNA vaccine technology for each of five vaccine targets. In order to maintain the options, PMC will be required to pay Vical option fees as specified in the agreement. In addition, Vical was paid an annual research fee through September 1997 by PMC for expenses incurred in performing certain preclinical work as defined in the agreement. PMC renewed options and exercised an option in 1995. In 1996, PMC exercised three options, extended one option, and added a new option. In 1997, PMC paid the Company $1,000,000 as a milestone payment under the agreement because the Company and PMC began a Phase I clinical trial of an experimental vaccine against the parasite that causes malaria. The Company and PMC are sponsoring the trial which is being conducted by the U.S. Naval Medical Research Institute and the U.S. Army Medical Research Institute of Infectious Diseases. Through December 31, 1998, Vical has received $7,816,000 of which $239,000, $2,399,000, and $2,746,000, was recognized as revenue in 1998, F-10 VICAL INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 3. SIGNIFICANT CONTRACTS AND LICENSE AGREEMENTS (CONTINUED) 1997, and 1996, respectively. The agreement provides for the Company to receive additional payments based upon achievement of certain defined milestones and royalty payments based on net product sales. RHONE-POULENC RORER PHARMACEUTICALS, INC. In October 1997, the Company and Rhone-Poulenc Rorer Pharmaceuticals. Inc. ("RPR") entered into an agreement granting RPR an exclusive worldwide license to use the Company's naked DNA gene delivery technology to develop certain gene therapy products for potential treatment of neurodegenerative diseases. Under the terms of the agreement, the Company received $1,000,000 which was recognized as revenue in 1997. This agreement provides for the Company to receive additional payments based upon achievement of certain defined milestones and royalty payments based on net product sales. CENTOCOR, INC. In February 1998, the Company signed an agreement allowing Centocor, Inc. ("Centocor") to use Vical's naked DNA technology to develop and market gene-based vaccines for the potential treatment of certain types of cancer. The agreement resulted in a payment to Vical of $2,200,000, which was recognized as revenue in 1998. The payment represented an initial payment of $2,000,000 under the license agreement and reimbursement of $200,000 of patent costs. The Company may receive further payments plus royalties if Centocor successfully develops products using the Vical technology. The agreement grants to Centocor exclusive worldwide licenses and options to license Vical's naked DNA technology to deliver certain antigens to induce immune responses against the associated cancer cells. BOSTON SCIENTIFIC CORPORATION In September 1998, the Company and Boston Scientific Corporation entered into a license and option agreement for the development of catheter-based intravascular gene delivery technology. The Company received $1,100,000 which was recognized as revenue in 1998. The agreement also provides for the Company to receive royalty payments on net product sales. NAVAL MEDICAL RESEARCH INSTITUTE In September 1998, the Company signed a cooperative agreement with the Office of Naval Research for funding of up to $2,700,000 to develop a multi-gene malaria DNA vaccine and test its ability to protect humans against malaria. The Company recognized $697,000 of contract revenue under this agreement in 1998. OTHER RESEARCH AND LICENSING AGREEMENTS The Company also received revenue under research and licensing agreements with other entities including the U.S. government of which approximately $1,585,000, $1,404,000, and $2,494,000, was recognized as revenue during the years ended December 31, 1998, 1997, and 1996, respectively. Included in these amounts is revenue recognized for a corporate alliance F-11 VICAL INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 3. SIGNIFICANT CONTRACTS AND LICENSE AGREEMENTS (CONTINUED) entered into in March 1995 relating to DNA vaccines in the animal health area with Merial (a joint venture between Merck and Rhone Merieux), a leading manufacturer and marketer of animal health products worldwide. The agreement includes options for Merial to take exclusive licenses to Vical's naked DNA vaccine technology and the cytofectin technology to develop and commercialize certain gene-based products for use in the prevention of infectious diseases in domesticated animals. In 1996, the agreement was extended to March 1998. In 1997, a patent milestone payment was made to the Company pursuant to the agreement. In 1998 a payment was made to the Company and the agreement was extended to March 1999. If Merial exercises its license options, cash payments and royalties on net sales would be due to the Company. In 1996, the Company received $1,100,000 and recognized revenue of $1,300,000, under a 1993 agreement with Genzyme Corporation. This agreement was for the exercise of an option to obtain exclusive worldwide license rights related to the use of the Company's lipid technology in the treatment of cystic fibrosis. No cash was received and no revenue was recognized under this agreement in 1998 or 1997. Under a U.S. government agreement that commenced in the first quarter of 1996 and ended June 30, 1997, the Company and the Naval Medical Research Institute were awarded a grant that provided $1,000,000 to support further development of a malaria vaccine based on Vical's naked DNA vaccine technology. In December 1996, the Company also recognized $92,000 of revenue under an agreement which expired in December 1996 with Baxter International, Inc. Under separate agreements, the Company is obligated to pay third parties 10 percent of certain payments received by the Company under the Merck, PMC, RPR, Merial, Centocor, Boston Scientific Corporation and Pfizer, Inc. (see "Note 10--Subsequent Event") agreements. 4. OTHER FINANCIAL DATA Accounts payable and accrued expenses consisted of the following at December 31, 1998 and 1997:
1998 1997 ---------- ---------- Employee compensation.............................. $ 692,716 $ 678,588 Accounts payable................................... 768,796 327,617 Accrued clinical trials costs...................... 492,914 310,891 Other accrued liabilities.......................... 326,826 107,507 ---------- ---------- $2,281,252 $1,424,603 ========== ==========
F-12 VICAL INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 5. COMMITMENTS LEASES The Company leases its office and research facilities and certain equipment under operating and capital leases. The minimum annual rents on the office and research facilities are subject to increases based on changes in the Consumer Price Index subject to certain minimum and maximum annual increases. The Company is also required to pay taxes, insurance and operating costs under the facilities leases. The equipment capital leases are secured by substantially all equipment of the Company.
OPERATING LEASES CAPITAL LEASES ---------- -------------- Years ended December 31, 1999............................................ $1,076,700 $ 566,014 2000............................................ 460,788 538,482 2001............................................ 116,241 186,781 2002............................................ -- 84,896 2003............................................ -- -- ---------- ---------- Total minimum lease payments...................... $1,653,729 1,376,173 ========== Less amount representing interest................. (154,900) ---------- Present value of capital lease payments........... 1,221,273 Less current portion.............................. (473,466) ---------- Long-term obligations under capital leases........ $ 747,807 ==========
Rent expense for the years ended December 31, 1998, 1997, and 1996, was $998,195, $969,899, and $807,713, respectively. Cost and accumulated depreciation of equipment under capital leases were as follows:
ACCUMULATED COST DEPRECIATION NET ---------- ------------ ---------- December 31, 1998...................... $2,163,877 $1,109,781 $1,054,096 December 31, 1997...................... 2,312,876 1,066,488 1,246,388
NOTES PAYABLE The Company has a term loan which bears interest at the bank's prime rate (8.25% at December 31, 1998) plus .5%, or the Company may alternatively choose to have its borrowings bear interest at the LIBOR rate plus 3.25%. The term loan is secured by any Company deposits at the bank, however, the Company is not required to, and does not, maintain any deposits at the bank. The term loan has a fifteen-month remaining amortization period. At December 31, 1998, the loan balance was $267,216, including $213,773 reflected in current liabilities. F-13 VICAL INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 5. COMMITMENTS (CONTINUED) RESEARCH AND LICENSE AGREEMENTS In 1998 and 1997, the Company continued research and exclusive license agreements with various universities for continuing research and license rights to technology related to gene therapy. The agreements generally grant the Company the right to commercialize any product derived from specified technology. Fees paid and future obligations on these agreements are not significant. 6. STOCKHOLDERS' EQUITY PREFERRED STOCK The Company's certificate of incorporation, as amended, authorizes the issuance of up to 5,000,000 preferred shares. No shares of preferred stock were outstanding at December 31, 1998 or 1997. COMMON STOCK The Company's certificate of incorporation, as amended, authorizes the issuance of up to 40,000,000 common shares. Common stock shares totaling 15,866,544, and 15,731,316 were outstanding at December 31, 1998 and 1997, respectively. STOCK PLAN AND DIRECTORS OPTION PLAN The Company has a stock plan ("Stock Incentive Plan of Vical Incorporated") under which 2,450,000 shares of common stock are reserved for issuance to employees, non-employee directors and consultants of the Company. The plan provides for the grant of incentive and nonstatutory stock options and the direct award or sale of shares. The exercise price of stock options must equal at least the fair market value on the date of grant. The maximum term of options granted under the plan is ten years. Except for annual grants to directors which vest at the next annual meeting, options generally vest 25% on the first anniversary of the date of grant, with the balance vesting quarterly over the remaining three years. The plan has also limited the number of options that may be granted to any plan participant in a single calendar year to 300,000 shares. The Company also has a directors stock option plan ("Directors Plan") that provides for the issuance to non-employee directors of up to 210,000 shares of the Company's common stock, of which options for 202,500 shares have been granted. The initial grant to a director of options under this plan generally vests 25% on the first anniversary of the date of grant, with the balance vesting quarterly over the remaining three years. In 1997, the stockholders approved an amendment to the Stock Incentive Plan of Vical Incorporated allowing non-employee directors to receive grants under that plan and, accordingly, it is not anticipated that there will be any future grants under the Directors Plan. F-14 VICAL INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 6. STOCKHOLDERS' EQUITY (CONTINUED) The following table summarizes stock option transactions for the Company's stock option plans for the years ended December 31, 1998, 1997 and 1996:
WEIGHTED AVE. WEIGHTED AVE. SHARES EXERCISE PRICE FAIR VALUE OF GRANTS --------- -------------- -------------------- OUTSTANDING, DECEMBER 31, 1995................... 749,912 $ 7.60 Granted........................................ 456,350 $15.99 $11.95 Exercised...................................... (32,317) $ 5.48 Forfeited...................................... (14,264) $10.97 --------- OUTSTANDING, DECEMBER 31, 1996................... 1,159,681 $10.92 Granted........................................ 403,845 $14.14 $10.17 Exercised...................................... (72,922) $ 5.10 Forfeited...................................... (48,106) $13.25 --------- OUTSTANDING, DECEMBER 31, 1997................... 1,442,498 $12.04 Granted........................................ 580,875 $15.56 $11.12 Exercised...................................... (135,228) $ 7.88 Forfeited...................................... (73,100) $13.99 --------- OUTSTANDING, DECEMBER 31, 1998................... 1,815,045 $13.39 =========
The following table summarizes information about stock options outstanding under the Company's stock option plans at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - -------------------------------------------------------------------------- ------------------------------- WEIGHTED NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES AS OF 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/98 EXERCISE PRICE - --------------------- -------------- ---------------- -------------- -------------- -------------- 0$.1600 - $13.2500... 457,284 6.1 $ 7.50 376,850 $ 6.75 1$3.3750 - $15.0000.. 455,050 7.8 $14.00 241,363 $13.82 1$5.1875 - $15.5000.. 582,238 9.1 $15.36 96,838 $15.20 1$5.6250 - $20.5000.. 320,473 8.5 $17.40 129,778 $18.39 --------- ------- 0$.1600 - $20.5000... 1,815,045 7.9 $13.39 844,829 $11.53
The number of shares and weighted average price of options exercisable at December 31, 1998, 1997 and 1996 were 844,829 shares at $11.53, 688,126 shares at $9.90, and 487,750 shares at $6.82, respectively. The Company has adopted the disclosure-only provisions of SFAS 123. Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined consistent with the provisions of SFAS 123, the F-15 VICAL INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 6. STOCKHOLDERS' EQUITY (CONTINUED) Company's net loss and loss per share would have increased to the pro forma amounts indicated below:
1998 1997 1996 ----------- ---------- ---------- Net loss--as reported................. $ 7,480,507 $5,611,231 $5,080,591 Net loss--pro forma................... $11,645,607 $8,878,712 $6,497,447 Net loss per share--as reported....... $ .47 $ .36 $ .33 Net loss per share--pro forma......... $ .74 $ .57 $ .42
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants: risk free interest rates of 5.09% (1998), 5.99% (1997) and 6.57% (1996) and, expected volatility of 71% (1998), 70% (1997) and 74% (1996). An expected option life of 5 years and a dividend rate of zero is assumed for all years presented. Because SFAS 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. 7. RELATED PARTIES Included in other assets at December 31, 1998 and 1997, is the long-term portion of notes receivable, representing amounts due from certain officers and employees of the Company. Imputed interest is applied at the applicable federal rate. The loan agreements allow for the notes to be forgiven under certain circumstances over the next three years. The long-term portion is $60,000 and $25,000 at December 31, 1998 and 1997, respectively. The current portion, included in receivables and other, is $55,000 and $25,000 at December 31, 1998 and 1997, respectively. 8. INCOME TAXES As of December 31, 1998, the Company has available net operating loss carryforwards of approximately $36,700,000 and research and development credit carryforwards of approximately $1,700,000 to reduce future federal income taxes, if any. These carryforwards expire through 2018 and are subject to review and possible adjustment by the Internal Revenue Service. The Tax Reform Act of 1986 limits a company's ability to utilize certain net operating loss and tax carryforwards in the event of cumulative change in ownership in excess of 50%, as defined. The Company has completed numerous financings that have resulted in a change in ownership in excess of 50%, as defined. The utilization of net operating loss and tax credit carryforwards may be limited due to these ownership changes. The Company has a deferred tax asset of approximately $17,400,000 related primarily to its net operating loss and tax credit carryforwards. A valuation allowance has been recognized to offset the entire amount of the deferred tax asset as realization of such asset is uncertain. F-16 VICAL INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 9. EMPLOYEE BENEFIT PLANS The Company has a defined contribution savings plan under section 401(k) of the Internal Revenue Code. The plan covers substantially all employees. The Company matches employee contributions made to the plan according to a specified formula. The Company's matching contributions totaled approximately $95,000, $94,000, and $78,000, in 1998, 1997, and 1996, respectively. 10. SUBSEQUENT EVENT In January 1999, Pfizer Inc. entered into a license and option agreement and a stock purchase agreement with the Company. Under the terms of the agreements Pfizer Inc. paid the Company $1,000,000 in license fees and $6,000,000 for the purchase of approximately 318,000 shares of common stock at $18.87 per share, reflecting a 25% premium. The license fee and the $1,200,000 premium on the purchase of stock will be recognized as revenue in 1999, and the balance of the common stock investment, net of any cost to issue the shares of stock, will be reflected in common stock and additional paid-in capital in 1999. 11. SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 1998 and 1997 (in thousands, except per share amounts):
QUARTER ENDED ------------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ------------ ----------- 1998 Revenues..................................... $ 2,732 $ 560 $ 1,696 $ 932 Research and development costs............... 3,095 3,058 3,158 2,743 Total operating costs and expenses........... 4,062 4,072 4,012 3,558 Net loss..................................... (721) (2,935) (1,750) (2,075) Net loss per common share (basic and diluted)................................... (.05) (.19) (.11) (.13) Shares used in per share calculation......... 15,753 15,789 15,817 15,892 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ------------ ----------- 1997 Revenues..................................... $ 1,126 $ 867 $ 3,480 $ 2,330 Research and development costs............... 2,794 2,797 3,319 3,026 Total operating costs and expenses........... 3,691 3,678 4,247 4,054 Net loss..................................... (2,002) (2,267) (225) (1,117) Net loss per common share (basic and diluted)................................... (.13) (.15) (.01) (.07) Shares used in per share calculation......... 15,423 15,448 15,458 15,609
F-17 VICAL INCORPORATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents................................. $ 11,186,838 $ 13,567,817 Marketable securities--available-for-sale................. 27,748,337 26,615,939 Receivables and other..................................... 1,797,903 1,432,711 ------------ ------------ Total current assets.................................... 40,733,078 41,616,467 ------------ ------------ Property and Equipment: Equipment................................................. 5,468,711 5,139,944 Leasehold improvements.................................... 1,646,023 1,558,554 ------------ ------------ 7,114,734 6,698,498 Less--accumulated depreciation and amortization......... (5,487,129) (4,992,121) ------------ ------------ 1,627,605 1,706,377 ------------ ------------ Patent costs, net of accumulated amortization............... 1,371,529 1,387,936 Other assets................................................ 147,377 133,385 ------------ ------------ Total Assets............................................ $ 43,879,589 $ 44,844,165 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses..................... $ 2,881,079 $ 2,281,252 Current portion of capital lease obligations.............. 613,460 473,466 Current portion of notes payable.......................... 106,887 213,773 Deferred revenue.......................................... 710,637 250,000 ------------ ------------ Total current liabilities............................... 4,312,063 3,218,491 ------------ ------------ Long-Term Obligations: Long-term obligations under capital leases................ 712,360 747,807 Notes payable............................................. -- 53,443 ------------ ------------ Total long-term obligations............................. 712,360 801,250 ------------ ------------ Stockholders' Equity: Preferred stock, $0.01 par value--5,000,000 shares authorized--none outstanding............................ -- -- Common stock, $0.01 par value--40,000,000 shares authorized--16,198,723 and 15,866,544 shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively............................................ 161,987 158,665 Additional paid-in capital................................ 83,259,509 78,332,483 Accumulated other comprehensive income (loss)............. (116,123) 69,440 Accumulated deficit....................................... (44,450,207) (37,736,164) ------------ ------------ Total stockholders' equity.............................. 38,855,166 40,824,424 ------------ ------------ Total Liabilities and Stockholders' Equity.............. $ 43,879,589 $ 44,844,165 ============ ============
See accompanying notes. F-18 VICAL INCORPORATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Revenues: License/royalty revenue............. $ 495,024 $ 1,536,992 $ 3,770,731 $ 4,617,138 Contract revenue.................... 733,817 158,834 1,991,750 370,694 ----------- ----------- ----------- ----------- 1,228,841 1,695,826 5,762,481 4,987,832 ----------- ----------- ----------- ----------- Expenses: Research and development............ 3,514,247 3,157,774 10,866,310 9,310,700 General and administrative.......... 1,066,402 854,716 3,201,137 2,836,114 ----------- ----------- ----------- ----------- 4,580,649 4,012,490 14,067,447 12,146,814 ----------- ----------- ----------- ----------- Loss from operations.................. (3,351,808) (2,316,664) (8,304,966) (7,158,982) Interest income..................... 548,490 607,846 1,687,750 1,879,342 Interest expense.................... 33,489 41,057 96,827 126,051 ----------- ----------- ----------- ----------- Net loss.......................... $(2,836,807) $(1,749,875) $(6,714,043) $(5,405,691) =========== =========== =========== =========== Net loss per share (basic and diluted--Note 2).................... $ (0.18) $ (0.11) $ (0.42) $ (0.34) =========== =========== =========== =========== Weighted average shares used in computing net loss per share (Note 2).................................. 16,196,078 15,817,412 16,114,024 15,786,838 =========== =========== =========== ===========
See accompanying notes. F-19 VICAL INCORPORATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 1999 1998 ----------- ----------- OPERATING ACTIVITIES: Net loss.................................................. $(6,714,043) $(5,405,691) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................... 795,742 694,653 Write-off of abandoned patent application costs......... -- 94,800 Change in operating assets and liabilities: Receivables and other................................... (365,192) (769,729) Accounts payable and accrued expenses................... 599,827 152,134 Deferred revenue........................................ 460,637 321,739 ----------- ----------- Net cash used in operating activities................. (5,223,029) (4,912,094) ----------- ----------- INVESTING ACTIVITIES: Marketable securities..................................... (1,317,960) 5,045,860 Capital expenditures...................................... (182,509) (25,388) Deposits and other........................................ 15,008 (2,854) Patent expenditures....................................... (53,800) (155,509) ----------- ----------- Net cash provided from (used in) investment activities.......................................... (1,539,261) 4,862,109 ----------- ----------- FINANCING ACTIVITIES: Principal payments under capital lease obligations........ (388,707) (369,375) Payments on notes payable................................. (160,329) (213,773) Issuance of common stock, net............................. 4,930,347 888,378 ----------- ----------- Net cash provided from financing activities........... 4,381,311 305,230 ----------- ----------- Net increase (decrease) in cash and cash equivalents........ (2,380,979) 255,245 Cash and cash equivalents at beginning of period............ 13,567,817 12,157,149 ----------- ----------- Cash and cash equivalents at end of period.................. $11,186,838 $12,412,394 =========== =========== Supplemental Disclosure of Non-Cash Investing and Financing Activities: Equipment acquired under capital leases................... $ 493,254 $ 273,792 =========== ===========
See accompanying notes. F-20 VICAL INCORPORATED NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1999 (UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION ORGANIZATION Vical was incorporated in April 1987 and has devoted substantially all of its resources since that time to its research and development programs. The Company is currently focusing its resources on the development of its naked DNA and related technologies. BASIS OF PRESENTATION The information contained herein has been prepared in accordance with instructions for Form 10-Q. The information at September 30, 1999, and for the three-month and nine-month periods ended September 30, 1999 and 1998, is unaudited. In the opinion of management, the information reflects all adjustments necessary to present fairly the financial position and results of operations for the interim periods. All such adjustments are of a normal recurring nature. Interim results are not necessarily indicative of results for a full year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. For a presentation including all disclosures required by generally accepted accounting principles, these financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 1998, included elsewhere in this prospectus. 2. NET LOSS PER SHARE Net loss per share (basic and diluted) for the three-month and nine-month periods ended September 30, 1999 and 1998, has been computed using the weighted average number of common shares outstanding during the respective periods. Diluted loss per share does not include any assumed exercise of stock options as the effect would be antidilutive. 3. COMPREHENSIVE INCOME (LOSS) Accumulated other comprehensive income (loss) represents unrealized gain or loss on marketable securities. For the three-month periods ended September 30, 1999 and 1998, other comprehensive income (loss) was ($23,641) and $148,889, respectively, and total comprehensive loss was $2,860,448 and $1,600,986, respectively. For the nine-month periods ended September 30, 1999 and 1998, other comprehensive income (loss) was ($185,563), and $129,433, respectively, and total comprehensive loss was $6,899,608 and $5,276,558, respectively. 4. COMMITMENTS Vical renewed leases on three facilities. Two leases were scheduled to terminate on November 30, 1999, but will now both expire on December 1, 2004. Vical has the option to renew both leases for an additional five-year period. Under one lease, Vical increased its office space by approximately 5,100 square feet effective August 1, 1999. A third lease was amended in F-21 VICAL INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 (UNAUDITED) 4. COMMITMENTS (CONTINUED) November 1999 and now extends to November 30, 2004. This lease can be extended for two additional five-year periods. Total leased space effective August 1, 1999, was approximately 43,000 square feet. Total monthly rental on all facilities, including common area maintenance costs, was approximately $107,000 effective August 1, 1999. Minimum lease payments for operating leases are as follows: Years ending December 31, 1999........................................................ $1,208,000 2000........................................................ 1,340,000 2001........................................................ 1,384,000 2002........................................................ 1,431,000 2003........................................................ 1,479,000 2004........................................................ 1,395,000 ---------- Total minimum lease payments for operating leases....... $8,237,000 ==========
5. SUBSEQUENT EVENTS On November 3, 1999, Vical received a $2 million payment from Merck in accordance with a 1997 license agreement. The payment extends Merck's exclusive worldwide rights to use Vical's patented naked DNA technology to develop and market therapeutic vaccines against human immunodeficiency virus (HIV) and hepatitis B virus (HBV). In November 1999, Vical entered into an unsecured line of credit agreement with a bank to provide financing for leasehold improvements. Under the terms of the agreement, Vical may borrow up to $1,000,000 through May 1, 2000. Interest is payable monthly for any borrowings beginning November 1, 1999. Commencing June 1, 2000, the outstanding principal and interest will be repaid in 42 equal monthly payments. Interest under this agreement is at the bank's reference rate minus .25 percentage points. The borrowings can be prepaid without penalty. The agreement contains certain financial covenants. F-22 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. ------------------ TABLE OF CONTENTS
Page -------- Prospectus Summary................... 3 Risk Factors......................... 6 Forward-Looking Statements........... 13 Use of Proceeds...................... 14 Price Range of Common Stock and Dividend Policy.................... 15 Capitalization....................... 16 Selected Financial Data.............. 17 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 18 Business............................. 23 Management........................... 41 Underwriting......................... 44 Legal Matters........................ 45 Experts.............................. 45 Where You Can Find More Information.. 45 Incorporation by Reference........... 46 Index to Financial Information....... F-1
2,500,000 Shares VICAL INCORPORATED Common Stock ------------- [LOGO] ------------- GOLDMAN, SACHS & CO. ROBERTSON STEPHENS SG COWEN FIRST UNION SECURITIES, INC. Representatives of the Underwriters - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered hereby, other than underwriting discounts and commissions. All amounts are estimated except the Securities and Exchange Commission registration fee and the Nasdaq National Market listing fee.
AMOUNT --------- SEC registration fee........................................ $ 15,681 NASD fee.................................................... 6,440 Blue Sky fees and expenses.................................. Accounting fees and expenses................................ Legal fees and expenses..................................... Printing and engraving...................................... Registrar and transfer agent's fees......................... NNM listing fee............................................. 17,500 Miscellaneous fees and expenses............................. -------- Total................................................... $ ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law (the "Delaware GCL") permits our board of directors to indemnify any person against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with any threatened, pending or completed action, suit or proceeding in which such person is made a party by reason of his or her being or having been a director, officer, employee or agent of ours, in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Act"). The Delaware GCL provides that indemnification pursuant to its provisions is not exclusive of other rights of indemnification to which a person may be entitled under any by-law, agreement, vote of stockholders or disinterested directors, or otherwise. Article X of our Restated Certificate of Incorporation, as amended, and Article V of our Bylaws, provide for indemnification of our directors, officers, employees and other agents to the maximum extent permitted by law. As permitted by Sections 102 and 145 of the Delaware GCL, our Restated Certificate of Incorporation eliminates a director's personal liability for monetary damages to us and our stockholders arising from a breach or alleged breach of the director's fiduciary duty, except for liability under Section 174 of the Delaware GCL or liability for any breach of the director's duty of loyalty to us or our stockholders, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law or for any transaction in which the director derived an improper personal benefit. In addition, we have entered into separate indemnification agreements with our directors and officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers to the fullest extent not prohibited by law. II-1 The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the underwriters of us, our directors and officers, and by us of the underwriters, for certain liabilities arising under the Act and affords certain rights of contribution with respect thereto. ITEM 16. EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - --------------------- ------------------------------------------------------------ 1.1 Form of Underwriting Agreement. 4.1(1) Specimen Common Stock Certificate. 4.2(2) Rights Agreement dated as of March 20, 1995 between us and First Interstate Bank of California. 5.1 Opinion of Pillsbury Madison & Sutro LLP. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of Pillsbury Madison & Sutro LLP (included in its opinion filed as Exhibit 5.1 to this Registration Statement). 23.3 Consent of Sterne, Kessler, Goldstein & Fox P.L.L.C. 24.1 Power of Attorney (see page II-3).
- ------------------------ (1) Incorporated by reference to the exhibit of the same number included in our registration statement on Form S-3 filed as of August 15, 1995 (File No. 33-95812). (2) Incorporated by reference to the exhibit of the same number in our Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 0-21088). ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, (the "Act"), may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person of ours in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. We hereby undertake: (1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430(A) and contained in a form of prospectus filed by us pursuant to Rule 424(b) (1) or (4) or 497(h) under the Act shall be deemed to be part of this registration statement as of the time it was declared effective (2) That, for the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, we certify that we have reasonable grounds to believe that we meet all of the requirements for filing on Form S-3, and have duly caused this registration statement to be signed on our behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California, December 15, 1999. VICAL INCORPORATED By /s/ ALAIN B. SCHREIBER ------------------------------------------ Alain B. Schreiber PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints Alain B. Schreiber and Martha J. Demski and each of them, his or her true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments to this registration statement and any registration statement filed pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- President, Chief Executive /s/ ALAIN B. SCHREIBER Officer, and Director ------------------------------------------- (Principal Executive December 15, 1999 Alain B. Schreiber Officer) Vice President, Chief Financial Officer, /s/ MARTHA J. DEMSKI Secretary and Treasurer ------------------------------------------- (Principal Financial and December 15, 1999 Martha J. Demski Principal Accounting Officer) /s/ R. GORDON DOUGLAS, JR. ------------------------------------------- Chairman of the Board of December 15, 1999 R. Gordon Douglas, Jr. Directors
II-3
SIGNATURE TITLE DATE --------- ----- ---- /s/ M. BLAKE INGLE ------------------------------------------- Director December 15, 1999 M. Blake Ingle /s/ PATRICK F. LATTERELL ------------------------------------------- Director December 15, 1999 Patrick F. Latterell /s/ GARY A. LYONS ------------------------------------------- Director December 15, 1999 Gary A. Lyons /s/ DALE A. SMITH ------------------------------------------- Director December 15, 1999 Dale A. Smith /s/ PHILIP M. YOUNG ------------------------------------------- Director December 15, 1999 Philip M. Young
II-4 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - --------------------- ----------------------- 1.1 Form of Underwriting Agreement. 4.1(1) Specimen Common Stock Certificate. 4.2(2) Rights Agreement dated as of March 20, 1995 between us and First Interstate Bank of California. 5.1 Opinion of Pillsbury, Madison & Sutro LLP. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of Pillsbury, Madison & Sutro LLP (included in its opinion filed as Exhibit 5.1 to this Registration Statement). 23.3 Consent of Sterne, Kessler, Goldstein & Fox P.L.L.C. 24.1 Power of Attorney (see page II-3).
- ------------------------ (1) Incorporated by reference to the exhibit of the same number included in our registration statement on Form S-3 filed as of August 15, 1995 (File No. 33-95812). (2) Incorporated by reference to the exhibit of the same number in our Annual Report of Form 10-K for the fiscal year ended December 31, 1994 (File No. 0-21088). EX-1.1 2 EXHIBIT 1.1 VICAL INCORPORATED [2,500,000 SHARES (*)] COMMON STOCK UNDERWRITING AGREEMENT ....................., 2000 Goldman, Sachs & Co., BancBoston Robertson Stephens SG Cowen Securities Corporation First Union Securities, Inc. As representatives of the several Underwriters named in Schedule I hereto, c/o Goldman, Sachs & Co. 85 Broad Street, New York, New York 10004 Ladies and Gentlemen: Vical Incorporated, a Delaware corporation (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of [2,500,000] shares and, at the election of the Underwriters, up to [375,000] additional shares of Common Stock, $.01 par value ("Stock"), of the Company. The aggregate of [2,500,000] shares to be sold by the Company is herein called the "Shares" and the aggregate of [375,000] additional shares to be sold by the Company is herein called the "Optional Shares." The Firm Shares and the Optional Shares that the Underwriters elect to purchase pursuant to Section 2 hereof are herein collectively called the "Shares." 1. (a) The Company represents and warrants to, and agrees with, each of the Underwriters that: (i) A registration statement on Form S-3 (File No. 333-_____) (the "Initial Registration Statement") in respect of the Shares has been filed with the Securities and Exchange Commission (the "Commission"); the Initial Registration Statement and any post-effective amendment thereto, each in the form heretofore delivered to you, and, excluding exhibits thereto but including all documents incorporated by reference in the prospectus contained therein, to you for each of the other Underwriters, have been declared effective by the Commission in such form; other than a registration statement, if any, increasing the size of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the "Act"), which became effective upon filing, no other document with respect to the Initial Registration Statement or document - ------------------------ * Plus an option to purchase from the Company up to 375,000 additional shares to cover over-allotments. 1. incorporated by reference therein has heretofore been filed with the Commission; and no stop order suspending the effectiveness of the Initial Registration Statement, any post-effective amendment thereto or the Rule 462(b) Registration Statement, if any, has been issued and no proceeding for that purpose has been initiated or threatened by the Commission (any preliminary prospectus included in the Initial Registration Statement or filed with the Commission pursuant to Rule 424(a) of the rules and regulations of the Commission under the Act is hereinafter called a "Preliminary Prospectus"; the various parts of the Initial Registration Statement and the Rule 462(b) Registration Statement, if any, including all exhibits thereto and including (i) the information contained in the form of final prospectus filed with the Commission pursuant to Rule 424(b) under the Act in accordance with Section 5(a) hereof and deemed by virtue of Rule 430A under the Act to be part of the Initial Registration Statement at the time it was declared effective and (ii) the documents incorporated by reference in the prospectus contained in the Initial Registration Statement at the time such part of the Initial Registration Statement became effective, each as amended at the time such part of the Initial Registration Statement became effective or such part of the Rule 462(b) Registration Statement, if any, became or hereafter becomes effective, are hereinafter collectively called the "Registration Statement"; such final prospectus, in the form first filed pursuant to Rule 424(b) under the Act, is hereinafter called the "Prospectus"; and any reference herein to any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the Act, as of the date of such Preliminary Prospectus or Prospectus, as the case may be; any reference to any amendment or supplement to any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include any documents filed after the date of such Preliminary Prospectus or Prospectus, as the case may be, under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and incorporated by reference in such Preliminary Prospectus or Prospectus, as the case may be; and any reference to any amendment to the Registration Statement shall be deemed to refer to and include any annual report of the Company filed pursuant to Section 13(a) or 15(d) of the Exchange Act after the effective date of the Initial Registration Statement that is incorporated by reference in the Registration Statement; (ii) No order preventing or suspending the use of any Preliminary Prospectus has been issued by the Commission, and each Preliminary Prospectus, at the time of filing thereof, conformed in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED, HOWEVER, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. expressly for use therein in the preparation of the answers therein to Item 7 of Form S-3; (iii) The documents incorporated by reference in the Prospectus, when they became effective or were filed with the Commission, as the case may be, conformed in all material respects to the requirements of the Act or the Exchange Act, as applicable, and the rules and regulations of the Commission thereunder, and none of such documents contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make 2. the statements therein not misleading; and any further documents so filed and incorporated by reference in the Prospectus or any further amendment or supplement thereto, when such documents become effective or are filed with the Commission, as the case may be, will conform in all material respects to the requirements of the Act or the Exchange Act, as applicable, and the rules and regulations of the Commission thereunder and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. expressly for use therein; (iv) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus will conform, in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder and do not and will not, as of the applicable effective date as to the Registration Statement and any amendment thereto and as of the applicable filing date as to the Prospectus and any amendment or supplement thereto, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; PROVIDED, HOWEVER, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. expressly for use therein in the preparation of the answers therein to Item 7 of Form S-3; (v) Neither the Company nor any of its subsidiaries has sustained since the date of the latest audited financial statements included or incorporated by reference in the Prospectus any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; and, since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus; (vi) The Company and its subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries; 3. (vii) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus, and has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification, or is subject to no material liability or disability by reason of the failure to be so qualified in any such jurisdiction; and each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; (viii) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and conform to the description of the Stock contained in the Prospectus; and all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and (except for directors' qualifying shares) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims; (ix) The unissued Shares to be issued and sold by the Company to the Underwriters hereunder have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued and fully paid and non-assessable and will conform to the description of the Stock contained in the Prospectus; (x) The issue and sale of the Shares to be sold by the Company and the compliance by the Company with all of the provisions of this Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor will such action result in any violation of the provisions of the Certificate of Incorporation or By-laws of the Company or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties; and no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Shares or the consummation by the Company of the transactions contemplated by this Agreement, except the registration under the Act of the Shares and such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters; (xi) There are no rights of any person, corporation, partnership or other entity not effectively satisfied or waived, to require registration of any shares of Common Stock or any other securities of the Company in connection with the filing of the Registration Statement; (xii) Neither the Company nor any of its subsidiaries is in violation of its Certificate of Incorporation or By-laws or in default in the performance or observance of any material 4. obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which it is a party or by which it or any of its properties may be bound; (xiii) The statements set forth in the Prospectus under the caption "Description of Capital Stock," insofar as they purport to constitute a summary of the terms of the Stock and under the caption "Underwriting," insofar as they purport to describe the provisions of the laws and documents referred to therein, are accurate, complete and fair; (xiv) Other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the current or future consolidated financial position, stockholders' equity or results of operations of the Company and its subsidiaries; and, to the best of the Company's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (xv) The Company is not and, after giving effect to the offering and sale of the Shares, will not be an "investment company", as such term is defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"); (xvi) Neither the Company nor any of its affiliates does business with the government of Cuba or with any person or affiliate located in Cuba within the meaning of Section 517.075, Florida Statutes; (xvii) The Company owns or possesses, or believes it can acquire on reasonable terms, all material patents (or foreign equivalents), trademarks, licenses, copyrights and proprietary or other confidential information currently employed by it in connection with its business except such as the failure to so own, possess or acquire would not have a material adverse effect on the Company and except that rights to use particular genes may or may not be available. In connection with the filing of its patent applications, the Company has either conducted reasonable investigations of the published literature and patent references relating to the inventions claimed in such applications or is relying on searches conducted or to be conducted by governmental authorities in connection with examination of its patent applications. Except as to the use of particular genes for particular applications, which the Company intends to investigate on a case-by-case basis, there are no enforceable United States or foreign patents known to the Company which the Company believes to be infringed by its present activities or which would preclude the pursuit of its business as described in the Prospectus. Except for matters already resolved and matters the Company has determined are without merit and which would not have a material adverse effect on the Company's business, the Company has not received any notice of infringement of or conflict with asserted rights of any third party with respect to any of the foregoing. 5. (xviii) Arthur Andersen LLP, who have certified certain financial statements of the Company and its subsidiaries, are independent public accountants as required by the Act and the rules and regulations of the Commission thereunder; and (xix) The Company has reviewed its operations and that of its subsidiaries and any third parties with which the Company or any of its subsidiaries has a material relationship to evaluate the extent to which the business or operations of the Company or any of its subsidiaries will be affected by the Year 2000 Problem. As a result of such review, the Company has no reason to believe, and does not believe, that the Year 2000 Problem will have a material adverse effect on the general affairs, management, the current or future consolidated financial position, business prospects, stockholders' equity or results of operations of the Company and its subsidiaries or result in any material loss or interference with the Company's business or operations. The "Year 2000 Problem" as used herein means any significant risk that computer hardware or software used in the receipt, transmission, processing, manipulation, storage, retrieval, retransmission or other utilization of data or in the operation of mechanical or electrical systems of any kind will not, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively as in the case of dates or time periods occurring prior to January 1, 2000. 2. Subject to the terms and conditions herein set forth, (a) the Company agrees, to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at a purchase price per share of $.............., the number of Firm Shares (to be adjusted by you so as to eliminate fractional shares) determined by multiplying the aggregate number of Firm Shares to be sold by the Company by a fraction, the numerator of which is the aggregate number of Firm Shares to be purchased by such Underwriter as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the aggregate number of Firm Shares to be purchased by all of the Underwriters from the Company hereunder and (b) in the event and to the extent that the Underwriters shall exercise the election to purchase Optional Shares as provided below, the Company agrees to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at the purchase price per share set forth in clause (a) of this Section 2, that portion of the number of Optional Shares as to which such election shall have been exercised (to be adjusted by you so as to eliminate fractional shares) determined by multiplying such number of Optional Shares by a fraction the numerator of which is the maximum number of Optional Shares which such Underwriter is entitled to purchase as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the maximum number of Optional Shares that all of the Underwriters are entitled to purchase hereunder. The Company hereby grants to the Underwriters the right to purchase at their election up to [375,000] Optional Shares, at the purchase price per share set forth in the paragraph above, for the sole purpose of covering over allotments in the sale of the Firm Shares. Any such election to purchase Optional Shares may be exercised only by written notice from you to the Company, given within a period of 30 calendar days after the date of this Agreement and setting forth the aggregate number of Optional Shares to be purchased and the date on which such Optional Shares are to be delivered, as determined by you but in no event earlier than the First Time of Delivery (as defined in Section 4 6. hereof) or, unless you and the Company otherwise agree in writing, earlier than two or later than ten business days after the date of such notice. As compensation to the Underwriters for their commitments hereunder, the Company at each Time of Delivery (as defined in Section 4 hereof) will pay to Goldman, Sachs & Co., for the accounts of the several Underwriters, an amount equal to $. . . . . . . . per share for the Shares to be delivered by the Company hereunder at such Time of Delivery. 3. Upon the authorization by you of the release of the Firm Shares, the several Underwriters propose to offer the Firm Shares for sale upon the terms and conditions set forth in the Prospectus. 4. (a) The Shares to be purchased by each Underwriter hereunder, in definitive form, and in such authorized denominations and registered in such names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior notice to the Company shall be delivered by or on behalf of the Company to Goldman, Sachs & Co., through the facilities of the Depository Trust Company ("DTC"), for the account of such Underwriter, against payment by or on behalf of such Underwriter of the purchase price therefor by wire transfer of Federal (same-day) funds to the account specified by the Company to Goldman, Sachs & Co. at least forty-eight hours in advance. The Company will cause the certificates representing the Shares to be made available for checking and packaging at least twenty-four hours prior to the Time of Delivery (as defined below) with respect thereto at the office of DTC or its designated custodian or Goldman, Sachs & Co., 85 Broad Street, New York, New York 10004 (the "Designated Office"). The time and date of such delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m., New York time, on ............., 2000 or such other time and date as Goldman, Sachs & Co. and the Company may agree upon in writing, and, with respect to the Optional Shares, 9:30 a.m., New York time, on the date specified by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs & Co. of the Underwriters' election to purchase such Optional Shares, or such other time and date as Goldman, Sachs & Co. and the Company and may agree upon in writing. Such time and date for delivery of the Firm Shares is herein called the "First Time of Delivery," such time and date for delivery of the Optional Shares, if not the First Time of Delivery, is herein called the "Second Time of Delivery," and each such time and date for delivery is herein called a "Time of Delivery." At each Time of Delivery, the Company will pay, or cause to be paid, the commission payable at such Time of Delivery to the Underwriters under Section 2 hereof by wire transfer of Federal (same-day) funds to the account specified by Goldman, Sachs & Co. (b) The documents to be delivered at each Time of Delivery by or on behalf of the parties hereto pursuant to Section 7 hereof, including the cross receipt for the Shares and any additional documents requested by the Underwriters pursuant to Section 7[(k)] hereof, will be delivered at the offices of [Pillsbury, Madison & Sutro LLP] [101 West Broadway, Suite 1800, San Diego, California 92101] (the "Closing Location"), and the Shares will be delivered at the Designated Office, all at such Time of Delivery. A meeting will be held at the Closing Location at .......p.m., New York City time, on the New York Business Day next preceding such Time of Delivery, at which meeting the final drafts of the documents to be delivered pursuant to the preceding sentence 7. will be available for review by the parties hereto. For the purposes of this Section 4, "New York Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York are generally authorized or obligated by law or executive order to close. 5. The Company agrees with each of the Underwriters: (a) To prepare the Prospectus in a form approved by you and to file such Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement, or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Act; to make no further amendment or any supplement to the Registration Statement or Prospectus prior to the last Time of Delivery which shall be disapproved by you promptly after reasonable notice thereof; to advise you, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish you with copies thereof; to file promptly all reports and any definitive proxy or information statements required to be filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of the Prospectus and for so long as the delivery of a prospectus is required in connection with the offering or sale of the Shares; to advise you, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus, of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus or suspending any such qualification, promptly to use its best efforts to obtain the withdrawal of such order; (b) Promptly from time to time to take such action as you may reasonably request to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Shares, provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction; (c) Prior to 10:00 A.M., New York City time, on the New York Business Day next succeeding the date of this Agreement and from time to time, to furnish the Underwriters with copies of the Prospectus in New York City in such quantities as you may reasonably request, and, if the delivery of a prospectus is required at any time prior to the expiration of nine months after the time of issue of the Prospectus in connection with the offering or sale of the Shares and if at such time any events shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary during such 8. period to amend or supplement the Prospectus or to file under the Exchange Act any document incorporated by reference in the Prospectus in order to comply with the Act or the Exchange Act, to notify you and upon your request to file such document and to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as you may from time to time reasonably request of an amended Prospectus or a supplement to the Prospectus which will correct such statement or omission or effect such compliance, and in case any Underwriter is required to deliver a prospectus in connection with sales of any of the Shares at any time nine months or more after the time of issue of the Prospectus, upon your request but at the expense of such Underwriter, to prepare and deliver to such Underwriter as many copies as you may request of an amended or supplemented Prospectus complying with Section 10(a)(3) of the Act; (d) To make generally available to its securityholders as soon as practicable, but in any event not later than eighteen months after the effective date of the Registration Statement (as defined in Rule 158(c) under the Act), an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Act and the rules and regulations of the Commission thereunder (including, at the option of the Company, Rule 158); (e) During the period beginning from the date hereof and continuing to and including the date 90 days after the date of the Prospectus, not to offer, sell, contract to sell or otherwise dispose of, except as provided hereunder, any securities of the Company that are substantially similar to the Shares, including but not limited to any securities that are convertible into or exchangeable for, or that represent the right to receive, Stock or any such substantially similar securities (other than pursuant to employee stock option plans existing on, or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date of this Agreement), without your prior written consent; (f) To furnish to its stockholders as soon as practicable after the end of each fiscal year an annual report (including a balance sheet and statements of income, stockholders' equity and cash flows of the Company and its consolidated subsidiaries certified by independent public accountants) and, as soon as practicable after the end of each of the first three quarters of each fiscal year (beginning with the fiscal quarter ending after the effective date of the Registration Statement), to make available to its stockholders consolidated summary financial information of the Company and its subsidiaries for such quarter in reasonable detail; (g) During a period of five years from the effective date of the Registration Statement, to furnish to you copies of all reports or other communications (financial or other) furnished to stockholders, and to deliver to you (i) as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed; and (ii) such additional information concerning the business and financial condition of the Company as you may from time to time reasonably request (such financial statements to be on a consolidated basis to the extent the accounts of the Company and its subsidiaries are consolidated in reports furnished to its stockholders generally or to the Commission); 9. (h) To use the net proceeds received by it from the sale of the Shares pursuant to this Agreement in the manner specified in the Prospectus under the caption "Use of Proceeds"; (i) To list for quotation the Shares on the National Association of Securities Dealers Automated Quotations National Market System ("NASDAQ"); and (j) If the Company elects to rely upon Rule 462(b), the Company shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement, and the Company shall at the time of filing either pay to the Commission the filing fee for the Rule 462(b) Registration Statement or give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Act. 6. The Company covenants and agrees with the several Underwriters that (a) the Company will pay or cause to be paid the following: (i) the fees, disbursements and expenses of the Company's counsel and accountants in connection with the registration of the Shares under the Act and all other expenses in connection with the preparation, printing and filing of the Registration Statement, any Preliminary Prospectus and the Prospectus and amendments and supplements thereto and the mailing and delivering of copies thereof to the Underwriters and dealers; (ii) the cost of printing or producing any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum, closing documents (including any compilations thereof) and any other documents in connection with the offering, purchase, sale and delivery of the Shares; (iii) all expenses in connection with the qualification of the Shares for offering and sale under state securities laws as provided in Section 5(b) hereof, including the fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky survey (iv) all fees and expenses in connection with listing the Shares on the NASDAQ; (b) the filing fees incident to, and the fees and disbursements of counsel for the Underwriters in connection with, securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the Shares; and (c) the Company will pay or cause to be paid: (i) the cost of preparing stock certificates; (ii) the cost and charges of any transfer agent or registrar and (iii) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section. It is understood, however, that the Company shall bear the cost of any other matters not directly relating to the sale and purchase of the Shares pursuant to this Agreement, and that, except as provided in this Section, and Sections 8 and 11 hereof, the Underwriters will pay all of their own costs and expenses, including the fees of their counsel, stock transfer taxes on resale of any of the Shares by them, and any advertising expenses connected with any offers they may make. 7. The obligations of the Underwriters hereunder, as to the Shares to be delivered at each Time of Delivery, shall be subject, in their discretion, to the condition that all representations and warranties and other statements of the Company herein are, at and as of such Time of Delivery, true and correct, the condition that the Company shall have performed all of its obligations hereunder theretofore to be performed, and the following additional conditions: (a) The Prospectus shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period prescribed for such filing by the rules and regulations under the Act and in accordance with Section 5(a) hereof; if the Company has elected to rely upon Rule 10. 462(b), the Rule 462(b) Registration Statement shall have become effective by 10:00 P.M., Washington, D.C. time, on the date of this Agreement; no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and all requests for additional information on the part of the Commission shall have been complied with to your reasonable satisfaction; (b) Cooley Godward LLP, counsel for the Underwriters, shall have furnished to you such written opinion or opinions (a draft of each such opinion is attached as Annex II(a) hereto), dated such Time of Delivery, with respect to the matters covered in paragraphs (i), (ii), (vii), (xi), [(xiii) and (xiv)] of subsection (c) below as well as such other related matters as you may reasonably request, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters; (c) Pillsbury Madison & Sutro LLP, counsel for the Company, shall have furnished to you their written opinion (a draft of such opinion is attached as Annex II(b) hereto), dated such Time of Delivery, in form and substance satisfactory to you, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; (ii) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company (including the Shares being delivered at such Time of Delivery) have been duly and validly authorized and issued and are fully paid and non-assessable; and the Shares conform to the description of the Stock contained in the Prospectus; (iii) The Company has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification, or is subject to no material liability or disability by reason of failure to be so qualified in any such jurisdiction (such counsel being entitled to rely in respect of the opinion in this clause upon opinions of local counsel and in respect of matters of fact upon certificates of officers of the Company, provided that such counsel shall state that they believe that both you and they are justified in relying upon such opinions and certificates); (iv) [Each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; and all of the issued shares of capital stock of each such subsidiary have been duly and validly authorized and issued, are fully paid and non-assessable, and (except for directors' qualifying shares) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims (such counsel being entitled to rely in respect of the opinion in this clause upon opinions of local counsel and in respect of matters of fact upon certificates of officers of the Company or its 11. subsidiaries, provided that such counsel shall state that they believe that both you and they are justified in relying upon such opinions and certificates);] (v) [The Company and its subsidiaries have good and marketable title in fee simple to all real property owned by them, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries (in giving the opinion in this clause, such counsel may state that no examination of record titles for the purpose of such opinion has been made, and that they are relying upon a general review of the titles of the Company and its subsidiaries, upon opinions of local counsel and abstracts, reports and policies of title companies rendered or issued at or subsequent to the time of acquisition of such property by the Company or its subsidiaries, upon opinions of counsel to the lessors of such property and, in respect of matters of fact, upon certificates of officers of the Company or its subsidiaries, provided that such counsel shall state that they believe that both you and they are justified in relying upon such opinions, abstracts, reports, policies and certificates);] (vi) To the best of such counsel's knowledge and other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the current or future consolidated financial position stockholders' equity or results of operations of the Company and its subsidiaries; and, to the best of such counsel's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (vii) This Agreement has been duly authorized, executed and delivered by the Company; (viii) The issue and sale of the Shares being delivered at such Time of Delivery to be sold by the Company and the compliance by the Company with all of the provisions of this Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor will such action result in any violation of the provisions of the Certificate of Incorporation or By-laws of the Company or any statute or any order, rule or regulation known to such counsel of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties; 12. (ix) No consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Shares or the consummation by the Company of the transactions contemplated by this Agreement, except the registration under the Act of the Shares, and such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters; (x) Neither the Company nor any of its subsidiaries is in violation of its Certificate of Incorporation or By-laws; (xi) The statements set forth in the Prospectus under the caption "Description of Capital Stock," insofar as they purport to constitute a summary of the terms of the Stock and under the caption "Underwriting," insofar as they purport to describe the provisions of the laws and documents referred to therein, are accurate, complete and fair; (xii) The Company is not an "investment company", as such term is defined in the Investment Company Act; (xiii) The documents incorporated by reference in the Prospectus or any further amendment or supplement thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein, as to which such counsel need express no opinion), when they became effective or were filed with the Commission, as the case may be, complied as to form in all material respects with the requirements of the Act or the Exchange Act, as applicable, and the rules and regulations of the Commission thereunder; and they have no reason to believe that any of such documents, when such documents became effective or were so filed, as the case may be, contained, in the case of a registration statement which became effective under the Act, an untrue statement of a material fact, or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or, in the case of other documents which were filed under the Exchange Act with the Commission, an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such documents were so filed, not misleading; and (xiv) The Registration Statement and the Prospectus and any further amendments and supplements thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Act and the rules and regulations thereunder; although they do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus, except for those referred to in the opinion in subsection (xi) of this Section 7(c), they have no reason to believe that, as of its effective date, the Registration Statement or any further amendment thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that, as of its date, the Prospectus or any further amendment or supplement thereto made by the Company prior to such Time of Delivery (other than the financial statements and 13. related schedules therein, as to which such counsel need express no opinion) contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or that, as of such Time of Delivery, either the Registration Statement or the Prospectus or any further amendment or supplement thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were ade, not misleading; and they do not know of any amendment to the Registration Statement required to be filed or of any contracts or other documents of a character required to be filed as an exhibit to the Registration Statement or required to be incorporated by reference into the Prospectus or required to be described in the Registration Statement or the Prospectus which are not filed or incorporated by reference or described as required; (d) [Stern, Kessler, Goldstein & Fox] patent counsel to the Company, and Marc H. Bozeman, regulatory counsel for the Company, shall have furnished to you their respective written opinions (a draft of each such opinion is attached hereto as Annex II(c) and II(d) hereto, respectively) dated such Time of Delivery, in form and substance satisfactory to you, and as to such patent counsel's opinion, to the effect that; (i) the statements in the Registration Statement and the Prospectus under the captions "Risk Factors - Patents and Proprietary Rights; Access to Proprietary Genes and Proteins," "Business - Patents and Proprietary Rights" and "Business - Access to Proprietary Genes" to the best of such counsel's knowledge and belief, are accurate and complete statements or summaries of the matters therein set forth and nothing has come to such counsel's attention that causes such counsel to believe that the above-described portions of (a) the Registration Statement contain any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein not misleading; and (b) the Prospectus contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; (ii) except for patent and trademark applications pending in governmental patent offices, to the best of such counsel's knowledge, there are no legal or governmental proceedings pending relating to patent rights, trade secrets, trademarks, service marks or other proprietary information or materials of the Company, and except for pending or future patent and trademark applications, to the best of such counsel's knowledge no such proceedings are threatened or contemplated by governmental authorities or others; (iii) except as set forth in the Registration Statement and the Prospectus, and except for certain investigational uses, to the best of such counsel's knowledge, the Company is not infringing or otherwise violating any patents, trade secrets, trademarks, service marks or other proprietary information or materials, of others, and to the best of such counsel's knowledge there are no infringements by others of any of the Company's patents, trade secrets, trademarks, service marks or other proprietary information or materials which in the judgment of such counsel could affect materially the use thereof by the Company; and 14. (iv) except as set forth in the Registration Statement and the Prospectus, to the best of such counsel's knowledge, the Company owns or possesses sufficient licenses or other rights to use all patents, trade secrets, trademarks, service marks, or other proprietary information or materials necessary to conduct the business now being or proposed to be conducted by the Company as described in the Prospectus. (e) On the date of the Prospectus at a time prior to the execution of this Agreement, at 9:30 a.m., New York City time, on the effective date of any post-effective amendment to the Registration Statement filed subsequent to the date of this Agreement and also at each Time of Delivery, Arthur Andersen LLP shall have furnished to you a letter or letters, dated the respective dates of delivery thereof, in form and substance satisfactory to you, to the effect set forth in Annex I hereto (the executed copy of the letter delivered prior to the execution of this Agreement is attached as Annex I(a) hereto and a draft of the form of letter to be delivered on the effective date of any post-effective amendment to the Registration Statement and as of each Time of Delivery is attached as Annex I(b) hereto); (f) (i) Neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements included or incorporated by reference in the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus, and (ii) since the respective dates as of which information is given in the Prospectus there shall not have been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any change, or any development involving a prospective change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus, the effect of which, in any such case described in clause (i) or (ii), is in the judgment of the Representatives so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus; (g) On or after the date hereof there shall not have occurred any of the following: (i) a suspension or material limitation in trading in securities generally on the NASDAQ; (ii) a suspension or material limitation in trading in the Company's securities on the NASDAQ; (iii) a general moratorium on commercial banking activities declared by either Federal or New York or California State authorities; or (iv) the outbreak or escalation of hostilities involving the United States or the declaration by the United States of a national emergency or war, if the effect of any such event specified in this clause (iv) in the judgment of the Representatives makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus; (h) The Shares at such Time of Delivery shall have been duly listed for quotation on the NASDAQ; and 15. (i) The Company has obtained and delivered to the Underwriters executed copies of an agreement from each officer and director of the Company and entities affiliated therewith, substantially to the effect set forth in Subsection 5(e) hereof in form and substance satisfactory to you; (j) The Company shall have complied with the provisions of Section 5(c) hereof with respect to the furnishing of prospectuses on the New York Business Day next succeeding the date of this Agreement; and (k) The Company shall have furnished or caused to be furnished to you at such Time of Delivery certificates of officers of the Company satisfactory to you as to the accuracy of the representations and warranties of the Company herein at and as of such Time of Delivery, as to the performance by the Company of all of its obligations hereunder to be performed at or prior to such Time of Delivery, and as to such other matters as you may reasonably request, and the Company shall have furnished or caused to be furnished certificates as to the matters set forth in subsections (a) and (f) of this Section. 8. (a) The Company will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; PROVIDED, HOWEVER, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Goldman, Sachs & Co. expressly for use therein. (b) Each Underwriter will indemnify and hold harmless the Company against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Underwriter through Goldman, Sachs & Co. expressly for use therein; and will reimburse the Company for any legal or other expenses reasonably 16. incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred. (c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, 17. among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other an the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (d) were determined by PRO RATA allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) The obligations of the Company under this Section 8 shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section 8 shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company and to each person, if any, who controls the Company or any Selling Stockholder within the meaning of the Act. 9. (a) If any Underwriter shall default in its obligation to purchase the Shares which it has agreed to purchase hereunder at a Time of Delivery, you may in your discretion arrange for you or another party or other parties to purchase such Shares on the terms contained herein. If within thirty-six hours after such default by any Underwriter you do not arrange for the purchase of such Shares, then the Company and shall be entitled to a further period of thirty-six hours within which to procure another party or other parties satisfactory to you to purchase such Shares on such terms. In the event that, within the respective prescribed periods, you notify the Company that you have so arranged for the purchase of such Shares, or the Company notifies you that they have so arranged for the purchase of such Shares, you or the Company shall have the right to postpone a Time of Delivery for a period of not more than seven days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments to the Registration Statement or the Prospectus which in your opinion may thereby be made necessary. The term "Underwriter" as used in this Agreement shall include any person substituted under this Section with like effect as if such person had originally been a party to this Agreement with respect to such Shares. 18. (b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased does not exceed one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, then the Company shall have the right to require each non-defaulting Underwriter to purchase the number of Shares which such Underwriter agreed to purchase hereunder at such Time of Delivery and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from liability for its default. (c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased exceeds one-eleventh of the aggregate number of all of the Shares to be purchased at such Time of Delivery, or if the Company shall not exercise the right described in subsection (b) above to require non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement (or, with respect to the Second Time of Delivery, the obligations of the Underwriters to purchase and of the Company to sell the Optional Shares) shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or the Company, except for the expenses to be borne by the Company and the Underwriters as provided in Section 6 hereof and the indemnity and contribution agreements in Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default. 10. The respective indemnities, agreements, representations, warranties and other statements of the Company and the several Underwriters, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or any controlling person of any Underwriter, or the Company, or any officer or director or controlling person of the Company, and shall survive delivery of and payment for the Shares. 11. If this Agreement shall be terminated pursuant to Section 9 hereof, the Company shall not then be under any liability to any Underwriter except as provided in Sections 6 and 8 hereof; but, if for any other reason any Shares are not delivered by or on behalf of the Company as provided herein, the Company will reimburse the Underwriters through you for all out-of-pocket expenses approved in writing by you, including fees and disbursements of counsel, reasonably incurred by the Underwriters in making preparations for the purchase, sale and delivery of the Shares not so delivered, but the Company shall then be under no further liability to any Underwriter in respect of the Shares not so delivered except as provided in Sections 6 and 8 hereof. 12. In all dealings hereunder, you shall act on behalf of each of the Underwriters, and the parties hereto shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of any Underwriter made or given by you jointly or by Goldman, Sachs & Co. on behalf of you as the representatives. 19. All statements, requests, notices and agreements hereunder shall be in writing, and if to the Underwriters shall be delivered or sent by mail, telex or facsimile transmission to you as the representatives in care of Goldman, Sachs & Co., 32 Old Slip, 21st Floor, New York, New York 10005, Attention: Registration Department; if to any Selling Stockholder shall be delivered or sent by mail, telex or facsimile transmission to counsel for such Selling Stockholder at its address set forth in Schedule II hereto; and if to the Company shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: Secretary; provided, however, that any notice to an Underwriter pursuant to Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its Underwriters' Questionnaire or telex constituting such Questionnaire, which address will be supplied to the Company by you on request. Any such statements, requests, notices or agreements shall take effect upon receipt thereof. 13. This Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters, the Company and, to the extent provided in Sections 8 and 10 hereof, the officers and directors of the Company and each person who controls the Company, any Underwriter, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign by reason merely of such purchase. 14. Time shall be of the essence of this Agreement. As used herein, the term "business day" shall mean any day when the Commission's office in Washington, D.C. is open for business. 15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 16. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 20. If the foregoing is in accordance with your understanding, please sign and return to us one for the Company and each of the Representatives counterparts hereof, and upon the acceptance hereof by you, on behalf of each of the Underwriters, this letter and such acceptance hereof shall constitute a binding agreement among each of the Underwriters and the Company. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in a form of Agreement among Underwriters, the form of which shall be submitted to the Company for examination, upon request, but without warranty on your part as to the authority of the signers thereof. Very truly yours, VICAL INCORPORATED By:___________________________________ Name:_________________________________ Title:________________________________ Accepted as of the date hereof: Goldman, Sachs & Co. BancBoston Robertson Stephens SG Cowen Securities Corporation First Union Securities, Inc. By:____________________________________ (Goldman, Sachs & Co.) On behalf of each of the Underwriters 21.
SCHEDULE I NUMBER OF OPTIONAL SHARES TO BE PURCHASED IF TOTAL NUMBER OF MAXIMUM FIRM SHARES TO BE OPTION UNDERWRITER PURCHASED EXERCISED - ---------------------------------------------------------------------------------------- Goldman, Sachs & Co................. BancBoston Robertson Stephens ...... SG Cowen Securities Corporation..... First Union Securities, Inc. ....... [NAMES OF OTHER UNDERWRITERS]....... ------------------ --------------- Total.......................... ================== ===============
Schedule I SCHEDULE II
NUMBER OF TOTAL NUMBER OF OPTIONAL SHARES FIRM SHARES TO TO BE SOLD IF BE SOLD MAXIMUM OPTION EXERCISED - ------------------------------------------------------------------------------- The Company.............................. [2,500,000] [375,000] -------------- -------------- Total.................................... [2,500,000] [375,000] ============== ==============
Schedule II ANNEX I Pursuant to Section 7(d) of the Underwriting Agreement, the accountants shall furnish letters to the Underwriters to the effect that: (i) They are independent certified public accountants with respect to the Company and its subsidiaries within the meaning of the Act and the applicable published rules and regulations thereunder; (ii) In their opinion, the financial statements and any supplementary financial information and schedules (and, if applicable, financial forecasts and/or pro forma financial information) examined by them and included or incorporated by reference in the Registration Statement or the Prospectus comply as to form in all material respects with the applicable accounting requirements of the Act or the Exchange Act, as applicable, and the related published rules and regulations thereunder; and, if applicable, they have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the consolidated interim financial statements, selected financial data, pro forma financial information, financial forecasts and/or condensed financial statements derived from audited financial statements of the Company for the periods specified in such letter, as indicated in their reports thereon, copies of which have been separately furnished to the representatives of the Underwriters (the "Representatives") and are attached hereto; (iii) They have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the unaudited condensed consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus and/or included in the Company's quarterly report on Form 10-Q incorporated by reference into the Prospectus as indicated in their reports thereon copies of which have been separately furnished to the Representatives; and on the basis of specified procedures including inquiries of officials of the Company who have responsibility for financial and accounting matters regarding whether the unaudited condensed consolidated financial statements referred to in paragraph (vi)(A)(i) below comply as to form in all material respects with the applicable accounting requirements of the Act and the Exchange Act and the related published rules and regulations, nothing came to their attention that caused them to believe that the unaudited condensed consolidated financial statements do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Exchange Act and the related published rules and regulations; (iv) The unaudited selected financial information with respect to the consolidated results of operations and financial position of the Company for the five most recent fiscal years included in the Prospectus and included or incorporated by reference in Item 6 of the Company's Annual Report on Form 10-K for the most recent fiscal year agrees with the corresponding amounts (after restatement where applicable) in the audited consolidated financial statements for such five fiscal years which were included or incorporated by reference in the Company's Annual Reports on Form 10-K for such fiscal years; (v) They have compared the information in the Prospectus under selected captions with the disclosure requirements of Regulation S-K and on the basis of limited Annex 1 1. procedures specified in such letter nothing came to their attention as a result of the foregoing procedures that caused them to believe that this information does not conform in all material respects with the disclosure requirements of Items 301, 302, 402 and 503(d), respectively, of Regulation S-K; (vi) On the basis of limited procedures, not constituting an examination in accordance with generally accepted auditing standards, consisting of a reading of the unaudited financial statements and other information referred to below, a reading of the latest available interim financial statements of the Company and its subsidiaries, inspection of the minute books of the Company and its subsidiaries since the date of the latest audited financial statements included or incorporated by reference in the Prospectus, inquiries of officials of the Company and its subsidiaries responsible for financial and accounting matters and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that: (A) (i) the unaudited condensed consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus and/or included or incorporated by reference in the Company's Quarterly Reports on Form 10-Q incorporated by reference in the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Exchange Act as it applies to Form 10-Q and the related published rules and regulations, or (ii) any material modifications should be made to the unaudited condensed consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus or included in the Company's Quarterly Reports on Form 10-Q incorporated by reference in the Prospectus, for them to be conformity with generally accepted accounting principles; (B) any other unaudited income statement data and balance sheet items included in the Prospectus do not agree with the corresponding items in the unaudited consolidated financial statements from which such data and items were derived, and any such unaudited data and items were not determined on a basis substantially consistent with the basis for the corresponding amounts in the audited consolidated financial statements included or incorporated by reference in the Company's Annual Report on Form 10-K for the most recent fiscal year; (C) the unaudited financial statements which were not included in the Prospectus but from which were derived the unaudited condensed financial statements referred to in clause (A) and any unaudited income statement data and balance sheet items included in the Prospectus and referred to in clause (B) were not determined on a basis substantially consistent with the basis for the audited financial statements included or incorporated by reference in the Company's Annual Report on Form 10-K for the most recent fiscal year; (D) any unaudited pro forma consolidated condensed financial statements included or incorporated by reference in the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and the published Annex 1 2. rules and regulations thereunder or the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements; (E) as of a specified date not more than five days prior to the date of such letter, there have been any changes in the consolidated capital stock (other than issuances of capital stock upon exercise of options and stock appreciation rights, upon earn-outs of performance shares and upon conversions of convertible securities, in each case which were outstanding on the date of the latest balance sheet included or incorporated by reference in the Prospectus) or any increase in the consolidated long-term debt of the Company and its subsidiaries, or any decreases in consolidated net current assets or stockholders' equity or other items specified by the Representatives, or any increases in any items specified by the Representatives, in each case as compared with amounts shown in the latest balance sheet included or incorporated by reference in the Prospectus, except in each case for changes, increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (F) for the period from the date of the latest financial statements included or incorporated by reference in the Prospectus to the specified date referred to in clause (E) there were any decreases in consolidated net revenues or operating profit or the total or per share amounts of consolidated net income or other items specified by the Representatives, or any increases in any items specified by the Representatives, in each case as compared with the comparable period of the preceding year and with any other period of corresponding length specified by the Representatives, except in each case for increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (vii) In addition to the examination referred to in their report(s) included or incorporated by reference in the Prospectus and the limited procedures, inspection of minute books, inquiries and other procedures referred to in paragraphs (iii) and (vi) above, they have carried out certain specified procedures, not constituting an examination in accordance with generally accepted auditing standards, with respect to certain amounts, percentages and financial information specified by the Representatives which are derived from the general accounting records of the Company and its subsidiaries, which appear in the Prospectus (excluding documents incorporated by reference) or in Part II of, or in exhibits and schedules to, the Registration Statement specified by the Representatives or in documents incorporated by reference in the Prospectus specified by the Representatives, and have compared certain of such amounts, percentages and financial information with the accounting records of the Company and its subsidiaries and have found them to be in agreement. Annex 1 3. EX-5.1 3 EXHIBIT 5.1 EXHIBIT 5.1 PILLSBURY MADISON & SUTRO LLP 2550 HANOVER STREET PALO ALTO, CALIFORNIA 94304 DECEMBER 15, 1999 Vical Incorporated 9373 Towne Centre Drive, Suite 100 San Diego, California 92121 Re: Registration Statement on Form S-3 Ladies and Gentlemen: We are acting as counsel for Vical Incorporated, a Delaware corporation (the "Company"), in connection with the registration under the Securities Act of 1933, as amended, of 2,875,000 shares of common stock, par value $0.01 per share (the "common stock"), of the Company, all of which are authorized but heretofore unissued shares are to be offered and sold by the Company (including 375,000 shares subject to the underwriters' over-allotment option). In this regard we have participated in the preparation of a Registration Statement on Form S-3 (Registration No. 333- ) relating to such 2,875,000 shares of common stock. (Such Registration Statement, as amended, and including any registration statement related thereto and filed pursuant to Rule 462(b) under the Securities Act (a "Rule 462(b) registration statement") is herein referred to as the "Registration Statement.") We are of the opinion that the shares of common stock to be offered and sold by the Company (including any shares of common stock registered pursuant to a Rule 462(b) registration statement) have been duly authorized and, when issued and sold by the Company in the manner described in the Registration Statement and in accordance with the resolutions adopted by the Board of Directors of the Company, will be legally issued, fully paid and nonassessable. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and to the use of our name under the caption "Legal Matters" in the Registration Statement and in the Prospectus included therein. Very truly yours, Pillsbury Madison & Sutro LLP EX-23.1 4 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report, and to all references to our Firm, included in or made a part of this registration statement. Arthur Andersen, LLP San Diego, California December 14, 1999 EX-23.3 5 EXHIBIT 23.3 EXHIBIT 23.3 CONSENT OF PATENT COUNSEL We hereby consent to the use of our name under the caption "Experts" in this registration statement and prospectus included herein. /s/ Sterne, Kessler, Goldstein & Fox P.L.L.C. Washington, D.C. December 15, 1999 -----END PRIVACY-ENHANCED MESSAGE-----