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 therapeutic 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 November 2008. Interim data, based on an analysis after one-third of deaths expected in the trial, demonstrated an approximately 25% lower risk of death in the TNFerade plus standard of care (SOC) arm relative to the SOC arm alone (Hazard Ratio = 0.753; 95% Confidence Interval [0.494-1.15]). An independent Data Safety Monitoring Board reviewed the interim analysis data and recommended the trial continue as planned. In November 2008, TNFerade was granted Fast Track designation by the U.S. Food and Drug Administration (FDA) for its proposed use in the treatment of locally advanced pancreatic cancer. Fast Track designation can potentially expedite the regulatory review of TNFerade by the FDA.

TNFerade is also being evaluated for possible use in the treatment of other types of 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. Encouraging results have previously been reported in studies for esophageal cancer and head and neck cancer. Encouraging preliminary data also emerged from a trial in rectal cancer, and the program is currently under review. Our melanoma program was suspended in order to dedicate resources to near-term indications.

Our core technology has the important 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. Our lead vaccine candidate targets the prevention of a major animal health problem, foot-and-mouth disease (FMD). Development efforts for this program are supported by the U.S. Department of Homeland Security and the U.S. Department of Agriculture. It is anticipated that a license application for an FMD vaccine will be filed within a year. We have a collaboration with the National Institute of Allergy and Infectious Diseases (NIAID) to develop a human immunodeficiency virus (HIV) vaccine and a program with the U.S. Naval Medical Research Center and the PATH Malaria Vaccine Initiative (MVI) to develop vaccines for malaria. GenVec also has grant-supported preclinical programs to develop vaccine candidates for the prevention of respiratory syncytial virus (RSV) and herpes simplex virus type 2 (HSV-2).

Our research and development activities have yielded additional therapeutic product candidates that utilize our technology platform and we believe they represent potential commercial opportunities. 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 product candidates also have not yet received regulatory approvals, either from the FDA for the United States or from regulatory agencies outside of the United States, which approvals are required before we can market them as therapeutic and/or vaccine products. In order to proceed to subsequent clinical trial stages and to ultimately achieve regulatory approval in the United States, the FDA must conclude that our clinical data establish safety and efficacy. Historically, the results from preclinical testing and early clinical trials have often not been predictive of results obtained in later clinical trials. A number of new drugs and biologic products have shown promising results in early clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals.

An element of our business strategy is to pursue, as resources permit, the research and development of a range of product candidates for a variety of indications. This is intended to allow us to diversify the risks associated with our research and development expenditures. To the extent we are unable to maintain a broad range of product candidates, our dependence on the success of one or a few product candidates would increase.

Furthermore, our business strategy includes the option of entering into collaborative arrangements with third parties to complete the development and commercialization of our product candidates. In the event that third parties take over the clinical trial process for one or more of our product candidates, the estimated completion date would largely be under the control of that third party. We cannot forecast with certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements, in whole or in part, and how such arrangements would affect our development plan or capital requirements. Our programs may also benefit from subsidies, grants, or government or agency-sponsored studies that could reduce our development costs.

As a result of the uncertainties discussed above, among others, we are unable to estimate the duration and completion costs of our research and development projects or when, if ever, and to what extent we will receive cash inflows from the commercialization and sale of a product. Our inability to complete our research and development projects in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue with our business strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business.

Furthermore, the current domestic and global economic conditions have made it more difficult for companies like us to access capital from the financial and credit markets. Prolonged negative changes in domestic and global economic conditions, such as the current economic conditions, or further disruptions of either or both of the financial and credit markets will further adversely affect our ability to access additional capital. While our estimated future capital requirements are uncertain and will depend on, and could increase or decrease as a result of many factors, including the extent to which we choose to advance our research, development, clinical, manufacturing, and commercialization activities, it is clear we will need significant additional capital to develop our product candidates through clinical development, manufacturing, and commercialization. The continued advancement of TNFerade through the Phase III portion of the pivotal trial for locally advanced pancreatic cancer, the FDA regulatory review process, and the establishment of manufacturing capabilities will continue to require capital, and we expect to have to incur significant additional costs to manufacture and commercialize TNFerade if we receive marketing approval. We do not know whether we will be able to access additional capital when needed or on terms favorable to us or our stockholders.

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

In light of the difficulties in accessing capital, we have taken and are continuing to take steps to lower our operating costs in order to reduce costs. These steps included announcing on January 29, 2009 that we eliminated 22 positions, as a result of which we incurred $269,000 of expenses in the first quarter of 2009. Further, where possible we are minimizing our unfunded expenditures on activities not critical to the clinical development of TNFerade. This includes reducing our current spending on contract manufacturing. In March 2009, we entered into a letter agreement amending the manufacturing development agreement that we had previously entered into with Cobra Biomanufacturing Plc in January 2008 to produce commercial quantities of TNFerade. Under the terms of the amendment, Cobra will suspend its activities under the original agreement until the end of the second quarter of 2009, when at our sole discretion, we may terminate the original agreement, or we may resume performance pursuant to a newly negotiated schedule of services and fees.

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, 2008. 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 MONTHS ENDED MARCH 31, 2009 AND 2008

Results of Operations

GenVec's net loss was $5.7 million (or $0.06 per share) on revenues of $3.8 million for the three months ended March 31, 2009. This compares to a net loss of $6.3 million (or $0.08 per share) on revenues of $3.7 million in the same period in the prior year. Included in our net loss for the first three months of 2009 was stock-based compensation expense of $427,000 as compared to $563,000 for the same period in the prior year. GenVec ended the first quarter of 2009 with $12.0 million in cash and investments.

Revenue

Revenues for the three-month period ended March 31, 2009 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 HSV-2.

In March 2009, we signed a one-year contract with the MVI to support the development of vaccines to fight malaria. We will receive approximately $770,000 in program funding, and this contract will continue work funded by MVI that began in 2004. The scope of work under this contract includes the development and testing of novel adenovirus-based vaccines. There have been no revenues recognized under this agreement in the three months ending March 31, 2009.

Revenues for the three-month period ended March 31, 2009 were $3.8 million, which represent an increase of 2 percent when compared to revenues of $3.7 million in the comparable prior year period.

The increase in revenues for the three-month period ended March 31, 2009 are primarily due to increases in revenues associated with our grant programs and our HIV program of $255,000 and $135,000, respectively, as compared to the comparable prior year period. Higher revenues under our grant programs result, in part, from work performed under our HSV-2 and RSV grants in the three-month period ended March 31, 2009 that had not begun in the comparable prior year period. In addition, higher revenues are a result of an increased effort in our hearing loss and balance disorders program in the first quarter of 2009 period compared to the same period in 2008. Higher revenues associated with our HIV program are due to increased efforts associated with the development of an alternate adenovirus serotype as a vector. Partially offsetting the increases is a decrease in revenue of $274,000 under our malaria program as compared to the prior year period.

Expenses

Operating expenses were $9.2 million for the three-month period ended March 31, 2009, which represents a decrease of 9 percent as compared to $10.1 million in the comparable prior year period. In January 2009, we announced we eliminated 22 positions, as a result of which we incurred $269,000 of expense. Of these 22 positions, 15 positions were classified in our research and development area and 7 positions were classified in our general and administrative area.

Research and development expenses for the three-month period ended March 31, 2009 decreased 5 percent to $7.3 million as compared to $7.7 million for the comparable prior year period. The decrease is primarily due to lower personnel costs, reduced patient site and lab costs related to our TNFerade program and reduced materials costs related to our funded programs and to a lesser extent TNFerade and general lab materials and supplies. These decreases are partially offset by increased costs related to the manufacturing costs of TNFerade, as it relates to the amendment to our Cobra amendment more fully described in the following paragraph, and our FMD program. Included in the personnel costs are $193,000 in severance costs as a result of our reduction of 15 positions in January 2009. There were no severance costs in the comparable period in 2008. Additionally, stock-based compensation expense allocated to research and development decreased $91,000 as compared to the comparable prior year period.

In January 2008, we entered into a manufacturing development agreement with Cobra Biomanufacturing Plc to produce commercial quantities of TNFerade, our lead product candidate. The manufacturing development agreement covers technology transfer, scale-up, and validation of the manufacturing process for TNFerade through cGMP consistency lots. Under the terms of the agreement, we made an advance payment of $1.0 million. This advance payment was recorded in accordance with EITF 07-3, Accounting for Nonrefundable Advance Payments, which requires us to defer and capitalize nonrefundable advance payments until the related services are performed.

In March 2009, we entered into a letter agreement amending the original agreement and the associated services. Under the terms of the amendment, Cobra suspended its activities under the original agreement until the end of the second quarter of 2009, when at our sole discretion, we may terminate the original agreement, or we may resume performance pursuant to a newly negotiated schedule of services and fees. Under the terms of the amendment, we paid Cobra an initial payment of $700,000 in March, and will pay an additional $1.1 million through June 30, 2009. These payments will provide us with access to the Cobra facility in 2009 through June 30th. In addition, we waived our rights to amounts remaining unused as of the date of the amendment relating to the advanced payment. As a result, in March 2009 we expensed the remaining $669,000 of the advance payment. Prior to the amendment being signed, we made an additional advance payment of $425,000. All amounts paid to Cobra on or before March 31, 2009 have been charged to expense. If we decide to terminate the agreement at the end of the second quarter of 2009, we will be obligated to pay Cobra a termination fee of $350,000.

General and administrative expense for the three-month period ended March 31, 2009 decreased 21 percent to $1.9 million as compared to $2.4 million for the comparable prior year period. The decrease is primarily due to lower personnel costs, seminar and conference costs, travel costs, professional costs, and depreciation costs, partially offset by higher insurance costs and facility costs in the period. Included in the personnel costs are $76,000 in severance costs as a result of our reduction of 7 positions in January 2009. There was $81,000 in severance costs in the comparable period in 2008. Additonally, stock-based compensation expense allocated to general and administrative expenses, which is included in the personnel costs, decreased $45,000 for the three-month period ended March 31, 2009 as compared to the same period in 2008.

Other Income (Expense)

Total other income (expense) decreased $401,000 for the three-month period ended March 31, 2009 as compared to the prior year period. 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 period ending March 31, 2009 was $27,000 compared to $261,000 in the comparable prior year period. 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 period ending March 31, 2009 was $13,000 compared to $121,000 in the comparable prior year period. The decrease in interest expense was primarily due to a decrease in expense associated with the Kingsbridge warrant of $90,000 as compared to the corresponding period in the prior year. Additionally, in the three-month period ending March 31, 2009, interest expense associated with our debt obligations has decreased due to the declining balances of these obligations as compared to the corresponding period in the prior year.

Other income (expense) for the three-month period ending March 31, 2009 was a net expense for the period of $271,000 as compared to net income of $4,000 in the comparable prior year period. The decrease resulted primarily from the expensing of the remaining $273,000 of deferred financing charges when our Committed Equity Financing Facility (CEFF) with Kingsbridge Capital Ltd. (Kingsbridge) expired on March 15, 2009.

Liquidity and Capital Resources

We have experienced significant losses since our inception. As of March 31, 2009 we have an accumulated deficit of $219.3 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 March 31, 2009, cash and investments totaled $12.0 million as compared to $17.4 million at December 31, 2008.

For the three months ended March 31, 2009, we used $5.2 million of cash for operating activities. This consisted of a net loss for the period of $5.7 million, which included approximately $221,000 of non-cash depreciation and amortization, $427,000 of non-cash stock option expenses, and $273,000 from the write off of our deferred financing charges due to the expiration of our CEFF with Kingsbridge. Net cash was used primarily for the advancement of our TNFerade pancreatic clinical trial, including our manufacturing activities, and to a lesser extent general and administrative activities.

Net cash provided from investing activities during the three months ended March 31, 2009 was $998,000. There were no purchases of property and equipment during the period.

Net cash used in financing activities during the three months ended March 31, 2009 was $142,000, which included $68,000 of cash provided from the issuance of common stock under our Employee Stock Purchase Plan. This cash provided was offset by cash used in financing activities of $210,000 for the repayment of our debt obligations.

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 our common stock within a three-year period, subject to certain conditions and limitations. During the three-year term of the CEFF, which expired on March 15, 2009, we sold 3,284,830 shares of common stock to Kingsbridge for total gross proceeds of $6.5 million.

On February 1, 2007, we 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 us to obtain financing through the issuance of any combination of common stock, preferred stock, warrants, or debt securities. However, SEC rules limit our ability to use the shelf registration, including by generally providing that until such time as the aggregate market value of our common stock held by non-affiliates is $75 million or more, we may only sell pursuant to the shelf registration statement up to one-third of the aggregate market value of our common stock held by non-affiliates in any 12-month period.

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 have also taken and are continuing to take steps to lower our operating costs in order to reduce our expenses. These steps included our announcement on January 29, 2009 that we were eliminating 22 positions, as a result of which we incurred $269,000 of expenses in the first quarter of 2009. Further, where possible, we are minimizing our unfunded expenditures on activities that are not critical to the clinical development of TNFerade. This includes reducing our current spending on contract manufacturing, which is reflected in the amendment to our manufacturing development agreement with Cobra as described above. We currently estimate we will use approximately $9.0 to $10.0 million of cash in the 12 months ending March 31, 2010. Our estimated cash to be used includes approximately $2.1 million in contractual obligations, including amounts due under our Cobra amendment, and, $0.1 million for capital expenditures. Based on this estimate we have sufficient resources to fund our operations into the second quarter of 2010.

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 pivotal trial for locally advanced pancreatic cancer, the FDA regulatory review process for TNFerade and the establishment of manufacturing capabilities for TNFerade. 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. The current domestic and global economic conditions have made it more difficult for companies like us to access capital from the financial and credit markets, and have made it more likely we will have to pursue additional strategic alliances, licensing arrangements or collaborations for our product candidates, including for TNFerade. 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 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 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, strategic alliances, or collaborators, we may be required to delay, reduce the scope of or eliminate our research, development, clinical programs, manufacturing, or commercialization efforts, effect additional changes to our facilities or personnel, or obtain funds through other arrangements that may require us to relinquish some of our assets or rights to certain of our existing or future technologies, product candidates, or products on terms 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, 2008.

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, 2008. 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, 2008. There has been no significant change in our significant accounting policies or critical accounting estimates since the end of 2008.

Recently Issued Accounting Pronouncements

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 . . .