Summary of GENVEC INC - Yahoo! Finance

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

STRATEGIC AND CLINICAL OVERVIEW

GenVec, Inc. ("GenVec," "we," "our," or the "Company") is a clinical stage biopharmaceutical company developing novel gene-based therapeutic drugs and vaccines. Our lead product candidate, TNFerade™ biologic (TNFerade), is being developed for use in the treatment of cancer. TNFerade is currently the subject of a randomized, controlled, Phase III pivotal trial, known as PACT, for first-line treatment of inoperable, locally-advanced pancreatic cancer. Interim data supporting a potential survival advantage in the TNFerade group were disclosed in 2006 and 2007. Based on data available from these first 51 patients, median survival was 19.3 months for patients receiving TNFerade plus standard of care versus 11.1 for patients receiving only standard of care. Enrollment in the Phase III trial is ongoing.

TNFerade is also being evaluated for possible use in the treatment of other types of cancer. Clinical trials are in progress in head and neck cancer, rectal cancer, and metastatic melanoma. Encouraging results have previously been reported in studies for esophageal cancer and head and neck cancer. Using our core adenovector technology, TNFerade stimulates the production of tumor necrosis factor alpha (TNF?), a known anti-tumor protein, in cells of the tumor.

In partnership with our collaborators, we also have multiple vaccines in development. All of these funded programs utilize our core adenovector technology. We have a collaboration with the National Institute of Allergy and Infectious Diseases (NIAID) to develop an HIV vaccine, a program with the U.S. Naval Medical Research Center and the PATH Malaria Vaccine Initiative to develop vaccines for malaria and development efforts for a foot-and-mouth disease (FMD) vaccine with the U.S. Department of Homeland Security and the U.S. Department of Agriculture.

Our research and development activities have yielded additional novel product candidates that utilize our technology platform and we believe they represent potential commercial opportunities. We have conducted initial clinical testing of AdPEDF for the treatment of wet age-related macular degeneration (AMD), a leading cause of vision loss in people over 50. In the fields of hearing loss and balance disorders, preclinical research has been published suggesting that delivery of the atonal gene using a GenVec adenovector may re-establish sensory cells in the inner ear and restore both hearing and balance. There are currently no effective treatments available for patients who have lost all balance function, and hearing loss remains a major unmet medical problem.

Our core technology has the key advantage of localizing protein delivery in the body. This is accomplished by using our adenovector platform to locally deliver genes to cells, which then direct production of the desired protein. In the case of TNFerade, for example, this approach reduces the side effects typically associated with systemic delivery of the TNF? protein. For vaccines, the goal is to induce a broad immune response against a target protein or antigen. This is accomplished by using the adenovector to deliver a gene that causes production of antigen, which then stimulates the desired immune reaction by the body.

As a clinical stage biopharmaceutical company, our business and our ability to execute our strategy to achieve our corporate goals are subject to numerous risks and uncertainties. Material risks and uncertainties relating to our business and our industry are described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (the "10-K"). The description of our business in this Form 10-Q should be read in conjunction with the information described in Item 1A of the 10-K.

FINANCIAL OVERVIEW FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007

Results of Operations

GenVec's net loss was $6.6 million (or $0.08 per share) on revenues of $3.9 million for the three months ended June 30, 2008. This compares to a net loss of $4.2 million (or $0.06 per share) on revenues of $3.7 million in the same period in the prior year. GenVec's net loss was $12.8 million (or $0.17 per share) on revenues of $7.6 million for the six months ended June 30, 2008. This compares to a net loss of $10.2 million (or $0.14 per share) on revenues of $6.6 million for the six months ended June 30, 2007. Included in our net loss for the first six months of 2008 was stock-based compensation expense of $1.1 million, which is comparable to the same period in the prior year. GenVec ended the second quarter of 2008 with $31.0 million in cash and investments.

Revenue

Revenues for the three-month and six-month periods ended June 30, 2008 were primarily derived from the Company's funded research and development programs with the Department of Homeland Security (DHS), National Institute of Allergy and Infectious Diseases (NIAID), and the National Institutes of Health (NIH), all of which use GenVec's proprietary adenovector technology for the development of either vaccine candidates against foot-and-mouth disease for livestock or vaccines against malaria, HIV, and influenza.

In February 2007, the Company signed a three-year agreement with the DHS under which the Company received $6 million in program funding for the first year and had the potential to receive up to $15.1 million in total if annual renewal options under the contract were exercised. In August 2007, the Company signed a modification to the previously signed agreement with the DHS, under which the Company received $5.6 million in January 2008, with the possibility to receive additional program funding of approximately $2 million, bringing the total value of the program up to $17.5 million if annual renewal options under the contract are exercised. From inception through June 30, 2008, we have received approximately $11.6 million of this commitment and have recognized revenue under this agreement of approximately $8.0 million, of which $1.7 million and $3.6 million was recognized in the three-month and six-month periods ended June 30, 2008. In July 2008, the Company signed an additional modification to the previously signed agreement with the DHS, with the possibility of an additional $700,000 in funding, bringing the potential total value of the program up to approximately $18.2 million.

Our HIV and influenza vaccine development program with NIH is funded under a cost-plus-fixed-fee contract initiated in 2002 and extending through September 2008. Committed funding under this program, from inception through June 2008, now totals up to $55 million; approximately $53.3 million has been earned since inception.

In October 2006, the Company announced a new five-year HIV vaccine technology transfer and development contract with NIH. The agreement provided for up to an additional $52 million of funding if NIH exercises all annual renewal options. From inception through June 30, 2008, approximately $8 million has been earned under the agreement. The initial commitment under this agreement was approximately $7 million. In September 2007, the NIH exercised option year 1 under this agreement for $5.1 million.

Revenues for the three-month and six-month periods ended June 30, 2008 were $3.9 million and $7.6 million respectively, which represent increases of 4 percent and 15 percent respectively, when compared to revenues of $3.7 million and $6.6 million in the comparable prior year periods.

The increase in revenues for the three-month and six-month periods ended June 30, 2008 is primarily due to $391,000 and $1.8 million, respectively, in increases in revenues associated with our agreement with the DHS as compared to the comparable prior year periods. The higher revenues under the DHS agreement result from increased work scope and efforts in the 2008 periods as a result of the exercise of the first renewal option under the agreement as compared to the same periods in 2007. Also contributing to the increase in revenues in both the three-month and six-month periods ended June 30, 2008, are an increase in revenue associated with our malaria programs of $188,000 and $255,000, respectively. These increases are due to expanded relationships with the U.S. Naval Medical Research Center (NMRC). The increase in revenue has been partially offset by $456,000 and $1.0 million relative decrease in revenues as compared to the comparable prior year periods under our HIV program due to the successful completion of assay validation activities, designated process development work and lot release testing in the first two quarters of 2007.

Expenses

Operating expenses were $10.6 million and $20.8 million for the three-month and six-month periods ended June 30, 2008, which represent increases of 25 percent and 18 percent as compared to $8.5 million and $17.6 million in the comparable prior year periods.

Research and development expenses for the three-month and six-month periods ended June 30, 2008 increased 34 percent and 25 percent respectively to $8.4 million and $16.0 million as compared to $6.2 million and $12.9 million for the comparable prior year periods. The increase is primarily due to higher costs related to the development of TNFerade including manufacturing costs, materials costs, costs related to our TNFerade pancreatic clinical trial, increased personnel costs and to a lesser extent pass through costs associated with our funded programs. Additionally, stock-based compensation expense allocated to research and development increased $113,000 and $48,000 over the comparable prior year periods.

General and administrative expense for the three-month period ended June 30, 2008 were $2.3 million, which is comparable to the corresponding period in the prior year. General and administrative expenses for the six-month periods ended June 30, 2008 decreased 1 percent to $4.7 million as compared to $4.8 million in the corresponding prior year period. General and administrative expenses include an increase in stock-based compensation expense allocated to general and administrative of $11,000 for the three-month period ended June 30, 2008 as compared to the same period in 2007 and a decrease of $41,000 for the six-month period ending June 30, 2008 as compared to the same period in 2007. During the six-month period ending June 30, 2008, there was also a $158,000 decrease in severance costs for former employees as compared to the corresponding period in 2007.

Other Income (Loss)

Total other income decreased to $232,000 and $376,000 for the three-month and six-month periods ended June 30, 2008 as compared to $598,000 and $816,000, respectively for the comparable prior year periods. Total other income (loss) is comprised of interest income and interest expense, net of the change in fair value of the Kingsbridge warrants.

Interest income for the three-month and six-month periods ending June 30, 2008 was $156,000 and $417,000 compared to $393,000 and $802,000, respectively in the comparable prior year periods. The decreases in interest income were due mainly to lower investment balances and, to a lesser extent, lower yields earned on our investment portfolio.

Interest expense, net of the change in the fair market value of the Kingsbridge warrants, for the three-month and six-month periods ending June 30, 2008 was ($76,000) and $41,000 compared to $(205,000) and $(14,000), respectively in the comparable prior year periods. The changes in interest expense and resulting credit amounts being reported for interest expense were primarily due to changes in the valuation of the warrant liability associated with the Kingsbridge warrant and, to a lesser extent, the declining balances of our debt obligations over the six-month period ending June 30, 2008.

Liquidity and Capital Resources

As of June 30, 2008, cash and investments totaled $31.0 million as compared to $23.7 million at December 31, 2007. This $7.3 million increase resulted primarily from the net cash provided by our financing activities during the period partially offset by the use of cash for general operating activities, including the continued clinical development of the Company's product portfolio, totaling $10.6 million.

We expect our revenue for the next several years to consist primarily of payments under government grants and contracts and, to a lesser extent, interest income. We intend to commit a significant portion of our resources to our lead product candidate, TNFerade, for the treatment of cancer. With respect to our other product candidates, we will seek to form strategic alliances under which we will share the risks and costs of development. We also will continue to look for funded research collaborations to help offset future anticipated losses from operations. Some of these arrangements may require us to relinquish rights to certain of our existing or future technologies, product candidates or products that we would otherwise seek to develop or commercialize on our own, or to license the rights to our technologies, product candidates or products on terms that are not favorable to us.

On March 15, 2006, we entered into a Committed Equity Financing Facility (CEFF) with Kingsbridge Capital Ltd. (Kingsbridge), under which Kingsbridge committed to purchase up to $30.0 million of the Company's common stock within a 3-year period, subject to certain conditions and limitations. Due to the pricing formula, however, the actual amount of additional financing available to us under the CEFF may be substantially less than the committed amount. Under the CEFF, we may require Kingsbridge to purchase shares of common stock at prices between 88 percent and 92 percent of the volume weighted average price (VWAP) on each trading day during an 8-day pricing period. Settlement for sales under the CEFF takes place in two tranches after the fourth and eighth days of the pricing period. Kingsbridge is not obligated to purchase shares at prices below the greater of $1.25 or 75 percent of the closing price of the Company's common stock on the day prior to the commencement of the pricing period. In addition, the maximum number of shares that the Company may issue under the CEFF is 12,375,050. Prior to December 31, 2007, we had drawn $3.6 million under the CEFF. In April 2008, we initiated our second draw against the CEFF. On April 18, 2008, subsequent to the first four days of the pricing period, the Company sold 777,057 shares of common stock for gross proceeds of $1.47 million. The pricing period ended on April 25, 2008, at which time we sold an additional 905,559 shares of common stock under the CEFF for gross proceeds of $1.47 million.

On February 1, 2007, the Company filed with the Securities and Exchange Commission a $100 million shelf registration statement on Form S-3. The shelf registration statement was declared effective February 12, 2007 and allows the Company to obtain financing through the issuance of any combination of common stock, preferred stock, warrants, or debt securities.

On June 11, 2008, pursuant to our shelf registration statement, we completed a registered direct offering to various investors of 11,258,279 shares of common stock and warrants to purchase 2,251,653 shares of common stock. The shares of common stock and warrants were offered in units consisting of one share of common stock and a warrant to purchase 0.20 shares of common stock at a per unit price of $1.51. The warrants, which have a term of 5 years and an exercise price of $2.016 per share, have been valued using the Black-Scholes pricing model as of the closing date and have been accounted for in permanent equity. Proceeds of this transaction, net of offering costs, totaled $15.8 million.

Our estimated capital requirements will depend on, and could increase or decrease as a result of, many factors, including the extent to which we choose to develop our research, development, clinical, manufacturing, and commercialization activities.

We expect that significant additional capital will be required to develop our product candidates through clinical development and commercialization, including the continued advancement of TNFerade through the Phase III portion of the pivotal trial for locally advanced pancreatic cancer. We may seek this additional capital through further public or private equity offerings, debt financing, additional strategic alliance and licensing arrangements, or some combination of these financing alternatives. If we are successful in raising additional funds through the issuance of equity securities, investors likely will experience dilution, or the equity securities may have rights, preferences, or privileges senior to those of the holders of our common stock. If we raise funds through the issuance of debt securities, those securities would have rights, preferences, and privileges senior to those of our common stock. In addition, if we lack adequate funding, we may be required to delay, reduce the scope of, or eliminate one or more of our research and development or clinical programs.

We are currently expecting to use approximately $23 million of our cash and cash equivalents and short-term investments between now and June 30, 2009 to accomodate accelerating enrollment in the PACT study and manufacturing expenditures under our contract with Cobra Biomanufacturing, Plc. Our estimate includes approximately $1.7 million in contractual obligations and $0.2 million in capital expenditures. We believe that our existing cash and cash equivalents, short-term investments and anticipated cash flows from our current collaborations will be sufficient to support our operations for approximately 16 months.

Recently Issued Accounting Pronouncements

In May 2008, the FASB issued FASB Statement No. 162, "The Hierarchy of Generally Accepted Accounting Principles" (SFAS No. 162). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States of America. The sources of accounting principles that are generally accepted are categorized in descending order as follows:

a. FASB Statements of Financial Accounting Standards and Interpretations, FASB Statement 133 Implementation Issues, FASB Staff Positions, and American Institute of Certified Public Accountants (AICPA) Accounting Research Bulletins and Accounting Principles Board Opinions that are not superseded by actions of the FASB

b. FASB Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and Accounting Guides and Statements of Position

c. AICPA Accounting Standards Executive Committee Practice Bulletins that have been cleared by the FASB, consensus positions of the FASB Emerging Issues Task Force (EITF), and the Topics discussed in Appendix D of EITF Abstracts
(EITF D-Topics)

d. Implementation guides (Q&As) published by the FASB staff, AICPA Accounting Interpretations, AICPA Industry Audit and Accounting Guides and Statements of Position not cleared by the FASB, and practices that are widely recognized and prevalent either generally or in the industry.

It is not expected that the provisions of SFAS No. 162 will have an impact on the Company's results of operations or financial position.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities-an Amendment of FASB Statement No 133" (SFAS No. 161). SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative instruments. The standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, and the Company does not expect the adoption of SFAS No. 161 will have a significant impact on its financial statements.

In December 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 07-1, "Accounting for Collaborative Arrangements" (EITF 07-1), which defines collaborative arrangements and establishes reporting and disclosure requirements for transactions between participants in a collaborative arrangement and between participants in the arrangements and third parties. EITF 07-1 is effective for periods beginning after December 15, 2008 and applies to arrangements in existence as of the effective date. The Company's adoption of EITF 07-01 in 2009 is not expected to have a material impact on its consolidated financial statements.

Other new pronouncements issued but not effective until after June 30, 2008, are not expected to have a significant effect on the Company's financial position or results of operations.