Summary of GENVEC INC - Yahoo! Finance

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ITEM 2. 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, TNFeradeTM 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 months for patients receiving only standard of care. Enrollment in the Phase III trial is ongoing and additional data is expected to be available in the fourth quarter of 2008.

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.

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.

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.

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 NINE MONTHS ENDED SEPTEMBER 30, 2008 AND
2007

Results of Operations

GenVec's net loss was $6.8 million (or $0.08 per share) on revenues of $4.2 million for the three months ended September 30, 2008. This compares to a net loss of $4.1 million (or $0.05 per share) on revenues of $3.8 million in the same period in the prior year. GenVec's net loss was $19.6 million (or $0.24 per share) on revenues of $11.8 million for the nine months ended September 30, 2008. This compares to a net loss of $14.3 million (or $0.19 per share) on revenues of $10.4 million for the nine months ended September 30, 2007. Included in our net loss for the first nine months of 2008 was stock-based compensation expense of $1.6 million as compared to $1.5 million for the same period in the prior year. GenVec ended the third quarter of 2008 with $22.5 million in cash and investments.

Revenue

Revenues for the three-month and nine-month periods ended September 30, 2008 were primarily derived from the Company's funded research and development programs with the Department of Homeland Security (DHS), the 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, RSV, and influenza.

In February 2007, the Company signed a three-year agreement with the DHS, for the development of a vaccine candidate against foot-and-mouth disease for livestock, 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, which included additional program funding of approximately $2.4 million. This brought the total value of the program up to $17.5 million if annual renewal options under the contract are exercised. In July 2008, the Company signed an additional modification to the previously signed agreement with the DHS for $6.6 million, which included additional program funding of approximately $700,000. This brought the total value of the program up to approximately $18.2 million. As of September 30, 2008, we have received approximately $11.6 million of this commitment and have recognized revenue under this agreement through September 30, 2008 of approximately $10.1 million, of which $2.0 million and $5.6 million was recognized in the three-month and nine-month periods ended September 30, 2008.

Our HIV and influenza vaccine development program with NIH is funded under a cost-plus-fixed-fee contract initiated in 2002 and extends through September 2009. In October 2008, we executed the seventh option period, year eight, under this agreement. The total value of the contract, issued and managed by Science Applications International Corporation - Frederick, Inc. (SAIC-Frederick), has increased to approximately $56.7 million. Approximately $54.3 million has been earned since inception under this agreement.

In September 2006, the Company announced a new five-year HIV vaccine technology transfer and development contract with the NIAID of the NIH. The agreement provided for up to an additional $52.0 million of funding if NIH exercises all annual renewal options. The initial commitment under this agreement was $7.5 million. In September 2007, the NIAID exercised option year 1 under this agreement for $5.1 million. In September 2008, the NIH exercised option year 2 under this agreement for $3.9 million. As of September 30, 2008, approximately $8.6 million has been earned under this agreement.

Revenues for the three-month and nine-month periods ended September 30, 2008 were $4.2 million and $11.8 million, respectively, which represent increases of 11 percent and 14 percent, respectively, when compared to revenues of $3.8 million and $10.4 million in the comparable prior year periods.

The increases in revenues for the three-month and nine-month periods ended September 30, 2008 are primarily due to increases in revenues associated with our agreement with the DHS of $792,000 and $2.6 million, respectively, 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 and second renewal options under the agreement as compared to the same periods in 2007. The increases in revenues have been partially offset by decreases in revenues of $293,000 and $1.3 million, respectively, under our HIV program as compared to the comparable prior year periods. These decreases are mostly due to the successful completion of the defined process development, technology transfer, and analytical method transfer activities under our HIV agreements.

Expenses

Operating expenses were $11.2 million and $32.0 million for the three-month and nine-month periods ended September 30, 2008, which represent increases of 32 percent and 22 percent as compared to $8.5 million and $26.2 million in the comparable prior year periods.

Research and development expenses for the three-month and nine-month periods ended September 30, 2008 increased 50 percent and 33 percent respectively to $9.5 million and $25.6 million as compared to $6.4 million and $19.2 million for the comparable prior year periods. The increase is primarily due to higher costs related to the development of TNFerade including manufacturing and, materials costs, related to our TNFerade pancreatic clinical trial, and 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 $69,000 and $117,000 over the comparable prior year periods.

General and administrative expense for the three-month period ended September 30, 2008 decreased 21 percent and 7 percent respectively to $1.7 million and $6.4 million as compared to $2.2 million and $6.9 million for the comparable prior year periods. The decrease in both periods is primarily due to lower personnel costs, recruiting costs, and depreciation expense, partially offset by higher professional services in the nine-month period and facility costs in both periods. Stock-based compensation expense allocated to general and administrative expenses, which is included in the personnel costs, increased $6,000 for the three-month period ended September 30, 2008 and decreased $35,000 for the nine-month period ending September 30, 2008 as compared to the same periods in 2007. During the nine-month period ending September 30, 2008, severance costs for former employees, also included in the personnel costs, decreased from $318,000 for the same period in 2007 to $76,000.

Other Income (Loss)

Total other income decreased to $202,000 and $578,000 for the three-month and nine-month periods ended September 30, 2008 as compared to $697,000 and $1.5 million, respectively, for the comparable prior year periods. Total other income is composed of interest income, interest expense, net of the change in fair value of the Kingsbridge warrants, and other income.

Interest income for the three-month and nine-month periods ending September 30, 2008 was $183,000 and $600,000 compared to $383,000 and $1.2 million, 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 nine-month periods ending September 30, 2008 was ($19,000) and $23,000 compared to $22,000 and $8,000, respectively, in the comparable prior year periods. The decrease in interest expense for the comparative three-month period ending September 30, 2008 was primarily due to a decrease in expense associated with the Kingsbridge warrant of $52,000. The increase in interest expense for the comparative nine-month period ending September 30, 2008 was due to an increase in interest expense associated with the Kingsbridge warrant of $45,000. Additionally, in both the three-month and nine-month periods ending September 30, 2008, interest expense associated with our debt obligations have decreased due to the declining balances of these obligations as compared to the corresponding period in the prior year.

The decrease in other income for both the three and nine-month periods ending September 30, 2008 resulted from a one time receipt of equity, valued at $337,000, from an outside party in exchange for the release of security interests in the third quarter of 2007.

Liquidity and Capital Resources

We have experienced significant losses since our inception, and as of September 30, 2008, we have an accumulated deficit of $207.2 million. The process of developing and commercializing our product candidates requires significant research and development work and clinical trial work, as well as significant manufacturing and process development efforts. These activities, together with our general and administrative expenses, are expected to continue to result in significant operating losses for the foreseeable future.

As of September 30, 2008, cash and investments totaled $22.5 million as compared to $23.7 million at December 31, 2007.

For the nine months ended September 30, 2008, we used net cash of $18.8 million for operating activities. This consisted of a net loss for the period of $19.6 million, which included approximately $800,000 of non-cash depreciation and amortization and non-cash stock option expense of $1.6 million. Net cash was used primarily for the advancement of our TNFerade pancreatic clinical trial and to a lesser extent general and administrative activities.

Net cash provided from investing activities during the nine months ended September 30, 2008 was $10.7 million, which included approximately $300,000 of property and equipment purchases.

Net cash provided from financing activities during the nine months ended September 30, 2008 was $18.1 million, which included $15.8 million from the issuance of common stock and warrants, net of issuance costs and $2.9 million from the issuance of common stock under the our Committed Equity Financing Facility (CEFF) with Kingsbridge Capital Ltd. (Kingsbridge). Partially offsetting the cash provided by our financing activities is the repayment of our debt obligations of approximately $600,000.

On March 15, 2006, we entered into a CEFF, 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 day 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 and issued 1,602,214 shares of common stock 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 offering, net of offering costs, totaled $15.7 million.

Our estimated future capital requirements are uncertain and could change materially as a result of many factors, including the progress of our research, development, clinical, manufacturing, and commercialization activities. We currently estimate we will use approximately $6 million to $7 million of cash per quarter. Based on this estimate we have sufficient resources to fund our operations into the third quarter of 2009. A significant portion of our resources will be used to fund the clinical trial for our lead product candidate, TNFerade, for the treatment of cancer. During the fourth quarter of 2008, we expect to receive data from an interim analysis of this trial.

However, we expect that significant additional capital will be required to develop our product candidates through clinical development, manufacturing, 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 additional capital through further public or private equity offerings, debt financing, additional strategic alliance and licensing arrangements, collaborative arrangements or some combination of these financing alternatives. If we are successful in raising additional funds through the issuance of equity securities, investors will likely 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. If we seek strategic alliances, licenses or other alternative arrangements, such as arrangements with collaborative partners or others, we may need 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. The overall status of the economic climate could also result in the terms of any equity offering, debt financing or alliance, license or other arrangement, being even less favorable to us and our stockholders than might otherwise be the case if the overall economic climate were stronger. We also will continue to look for government sponsored research collaborations and grants to help offset future anticipated losses from operations, as we expect to continue to rely on government funding for a significant portion of our revenues for the next few years and, to a lesser extent, interest income.

If adequate funds are not available through either the capital markets or strategic alliances, we may be required to delay, reduce the scope of or eliminate our research, development, clinical programs, manufacturing, or commercialization efforts, effect changes to our facilities or personnel, or obtain funds through other arrangements that may require us to relinquish rights to certain of our existing or future technologies, product candidates, or products on terms that are not favorable to us.

Off-Balance Sheet Arrangements and Contractual Obligations

We have no off-balance sheet financing arrangements other than in connection with our operating leases, which are disclosed in the contractual commitments table in our Form 10-K for the year ended December 31, 2007.

Significant Accounting Policies and Estimates

We describe our significant accounting policies in Note 2, Summary of Significant Accounting Policies, of the Notes to Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2007. We discuss our critical accounting estimates in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended December 31, 2007. There has been no significant change in our significant accounting policies or critical accounting estimates since the end of 2007.

Recently Issued Accounting Pronouncements

In October 2008, the FASB issued FSP FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market For That Asset Is Not Active" (FSP FAS 157-3), with an immediate effective date, including prior periods for which financial statements have not been issued. FSP FAS 157-3 amends FAS 157 to clarify the application of fair value in inactive markets and allows for the use of management's internal assumptions about future cash flows with appropriately risk-adjusted discount rates when relevant observable market data does not exist. The objective of FAS 157 has not changed and continues to be the determination of the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date. The adoption of FSP FAS 157-3 did not have a material effect on our results of operations, financial position, or liquidity.

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 our results of operations or financial position.

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. Our adoption of EITF 07-01 in 2009 is not expected to have a material impact on our financial position or results of operations.

Other new pronouncements issued but not effective until after September 30, 2008 are not expected to have a significant effect on our financial position or results of operations.