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VICL > SEC Filings for VICL > Form 10-Q on 2-May-2012All Recent SEC Filings

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Form 10-Q for VICAL INC


2-May-2012

Quarterly Report


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

This Quarterly Report on Form 10-Q, or Report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our business, our financial position, the research and development of biopharmaceutical products based on our patented DNA delivery technologies, the funding of our research and development efforts, and other statements describing our goals, expectations, intentions or beliefs. Such statements reflect our current views and assumptions and are subject to risks and uncertainties, particularly those inherent in the process of developing and commercializing biopharmaceutical products based on our patented DNA delivery technologies. Actual results could differ materially from those projected herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2011, and in our other filings with the SEC, and those identified in Part II, Item 1A entitled "Risk Factors" beginning on page 21 of this Report. As a result, you are cautioned not to rely on these forward-looking statements. We disclaim any duty to update any forward-looking statement to reflect events or circumstances that occur after the date on which such statement is made.

Overview

We research and develop biopharmaceutical products based on our patented DNA delivery technologies for the prevention and treatment of serious or life-threatening diseases. We believe the following areas of research offer the greatest potential for near-term commercialization for us and our partners:

• Vaccines for use in high-risk populations for infectious disease targets for which there are significant needs;

• Vaccines for general pediatric, adolescent and adult populations for infectious disease applications;

• Cancer vaccines or immunotherapies that complement our existing programs and core expertise; and

• Gene-based delivery of therapeutic proteins, such as angiogenic growth factors for treatment of cardiovascular diseases.

We currently have three active independent clinical and preclinical development programs in the areas of infectious disease and cancer including:

• A fully enrolled ongoing Phase 3 clinical trial using our Allovectin® immunotherapeutic in patients with metastatic melanoma which has been funded, up to certain limits, by AnGes MG, Inc., or AnGes, through cash payments and equity investments under a research and development agreement;

• A completed preclinical program, with an allowed investigational new drug application, or IND, using our CyMVectin™ prophylactic vaccine formulated with our proprietary Vaxfectin® adjuvant to prevent cytomegalovirus, or CMV, infection before and during pregnancy; and

• A preclinical program with therapeutic and prophylactic vaccines for herpes simplex virus type 2 formulated with our proprietary Vaxfectin ® adjuvant.

We have leveraged our patented technologies through licensing and collaboration arrangements, such as our licensing arrangements with Astellas Pharma Inc., or Astellas, Merck & Co., Inc., or Merck, Sanofi, AnGes, Aqua Health Ltd. of Canada, or Aqua Health, an affiliate of Novartis Animal Health, and Merial Limited, or Merial, a subsidiary of Sanofi, among other biopharmaceutical companies.

In addition, we have licensed complementary technologies from leading research institutions and biopharmaceutical companies. We also have granted non-exclusive, academic licenses to our DNA delivery technology patent estate to 11 leading research institutions including Stanford, Harvard, Yale and the Massachusetts Institute of Technology, or MIT. The non-exclusive academic licenses allow university researchers to use our technology free of charge for educational and internal, non-commercial research purposes. In exchange, we have the option to exclusively license from the universities potential commercial applications arising from their use of our technology on terms to be negotiated.


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Product Development

We, together with our licensees and collaborators, are currently developing a
number of DNA-based vaccines and therapeutics for the prevention or treatment of
infectious diseases, cancer and cardiovascular diseases. The table below
summarizes our independent programs and corporate and government collaborations.



Product/Concept                         Intended Use                  Development Status1                Lead Developer
Independent Programs

Allovectin® cancer             First-line treatment for          Phase 3                          Vical
immunotherapeutic              metastatic melanoma

CyMVectin™ prophylactic        Prevent infection before          Preclinical complete             Vical
vaccine for cytomegalovirus    pregnancy to preclude fetal
                               transmission

Therapeutic and prophylactic   Prevent and protect against       Preclinical                      Vical
vaccines for herpes simplex    recurring flare-ups, reduce
type 2 virus                   viral shedding and
                               transmission

Corporate Collaborations

TransVax™ therapeutic          Protect against CMV infection     Phase 3 preparation              Astellas
vaccine for cytomegalovirus    after stem cell transplants

TransVax™ therapeutic          Protect against CMV infection     Phase 2 preparation              Astellas
vaccine for cytomegalovirus    after solid organ transplants

Collategene™ angiogenic        Induce local growth of blood      Phase 3 preparation              AnGes
therapy encoding Hepatocyte    vessels to restore blood
Growth Factor                  flow to limbs affected by
                               critical limb ischemia

Apex®-IHN prophylactic         Prevent infection and disease     Marketed in Canada               Aqua Health (Novartis)
vaccine for infectious         in farm-raised salmon when
hematopoietic necrosis virus   exposed to infected wild
                               salmon

ONCEPT™ therapeutic cancer     Adjunct treatment to increase     Marketed in the United States    Merial
vaccine encoding human         survival time of dogs with
tyrosinase                     oral melanoma

Government Collaborations

Prophylactic and/or            Prevent and/or treat infection,   Phase 2b                         NIH
therapeutic HIV vaccine        disease, and/or viral shedding

Tetravalent dengue vaccine     Prevent dengue disease            Phase 1                          Naval Medical Research Center
                               caused by all 4 dengue
                               serotypes

1 "Research" indicates exploration and/or evaluation of a potential product candidate in a nonclinical laboratory setting. "Preclinical" indicates that a specific product candidate in a nonclinical setting has shown functional activity that is relevant to a targeted medical need, and is advancing toward initial human clinical testing. "Phase 1" clinical trials are typically conducted with a small number of patients or healthy subjects to evaluate safety, determine a safe dosage range, identify side effects, and, if possible, gain early evidence of effectiveness. "Phase 2" clinical trials are conducted with a larger group of patients to evaluate effectiveness of an investigational product for a defined patient population, and to determine common short-term side effects and risks associated with the product candidate. "Phase 3" clinical trials involve large scale, multi-center, comparative trials that are conducted with patients afflicted with a target disease to evaluate the overall benefit-risk relationship of the investigational product and to provide an adequate basis for product labeling.


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Recent Events

The following events have recently occurred with respect to our business and our development programs:

TransVax™ Program Update

• We recently announced that Astellas Pharma Inc. has finalized the general design of a pivotal, multinational Phase 3 trial of TransVax™, a therapeutic cytomegalovirus vaccine for transplant recipients which we licensed to Astellas. This progress triggered a $10 million milestone payment to Vical. Based on guidance from the U.S. Food and Drug Administration and the European Medicines Agency, the companies have confirmed that CMV disease will not be the primary endpoint in the Phase 3 trial.

• During preparations for the Phase 3 TransVax™ therapeutic vaccine trial, an error was noted in the TransVax™ Phase 2 article published in The Lancet Infectious Diseases, in that the time effect p-values from the repeated measures linear regression model had been reported for TransVax™ immunogenicity in place of the treatment effect. A reanalysis of the data with revised p-values did not result in any changes to the conclusions. A corrigendum statement has been submitted to The Lancet Infectious Diseases.

Other significant Events

• We recently announced that the Naval Medical Research Center, or NMRC initiated a Phase 1 clinical trial of a tetravalent dengue DNA vaccine formulated with our Vaxfectin® adjuvant. The trial is based on exciting efficacy data from a nonhuman primate study published in the journal Vaccine. We manufactured the vaccine and the adjuvant for both the preclinical and clinical studies, and we are providing regulatory and clinical expertise to the NMRC for the dengue program.

• We recently announced that researchers at Ehime University in Japan and their collaborators have developed a Vaxfectin ®-formulated DNA vaccine candidate with the potential to prevent transmission of malaria. Results of the initial testing, published in the journal Vaccine, demonstrated that the malaria parasite life cycle was interrupted in mosquitoes fed with malaria-infected human red blood cells incubated with serum from vaccinated mice. We provided the DNA vaccine plasmid backbone and the adjuvant used in the research.

Research, Development and Manufacturing Programs

To date, we have not received revenues from the sale of our independently developed pharmaceutical products and have received minimal revenues from the sale of commercially marketed products by our licensees. We earn revenues by performing services under research and development and manufacturing contracts, from grants and from licensing access to our proprietary technologies. Since our inception, we estimate that we have received approximately $209.7 million in revenues from these sources. Revenues by source were as follows (in millions):

                                                      Three Months Ended
                                                           March 31,
           Source                                      2012           2011
           Astellas supply and services contract    $      1.0       $   -
           RapidResponse™ DNA manufacturing grant           -           0.4
           HSV-2 grant                                      -           0.1
           Other contract and grants                       0.2           -

           Total contract and grant revenues               1.2          0.5

           Astellas license                         $     10.1       $   -
           Other royalties and licenses                    0.2          0.1

           Total royalty and license revenues             10.3          0.1

           Total revenues                           $     11.5       $  0.6


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Research, development, manufacturing and production costs by major program, as well as other costs, were as follows (in millions):

                                                               Three Months Ended
                                                                    March 31,
Program                                                       2012            2011
Allovectin®                                                 $     4.0       $     4.6
CMV                                                               3.8             1.4
Other research, development, manufacturing and production         1.1             1.0

Total research, development, manufacturing and production   $     8.9       $     7.0

Since our inception through March 31, 2012, we estimate that we have spent approximately $451 million on research, development, manufacturing and production. Our current independent development focus is on our cancer immunotherapeutic Allovectin®, novel DNA vaccines for CMV and HSV-2, and other clinical and preclinical targets.

We are conducting a Phase 3 clinical trial using Allovectin® in patients with recurrent metastatic melanoma which has been funded, up to certain limits, by AnGes through cash payments and equity investments under a research and development agreement. We are also developing TransVax™, CyMVectin™, and HSV-2 vaccine candidates and these programs, excluding TransVax™ which we recently licensed to Astellas, will require significant additional funds to advance through development to commercialization. From inception through March 31, 2012, we have spent approximately $154 million on our Allovectin® program and $68 million on our CMV programs.

We have other product candidates in the research stage. It can take many years to develop product candidates from the initial decision to screen product candidates, perform preclinical and safety studies, and perform clinical trials leading up to possible approval of a product by the FDA or comparable foreign agencies. The outcome of the research is unknown until each stage of the testing is completed, up through and including the registration of clinical trials. Accordingly, we are unable to predict which potential product candidates we may proceed with, the time and cost to complete development, and ultimately whether we will have a product approved by the FDA or comparable foreign agencies.

As a result, we expect to incur substantial operating losses for at least the next several years, due primarily to the advancement of our research and development programs, the cost of preclinical studies and clinical trials, spending for outside services, costs related to maintaining our intellectual property portfolio, costs due to manufacturing activities, costs related to our facilities, and possible advancement toward commercialization activities.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires that management make a number of assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses in our financial statements and accompanying notes. Management bases its estimates on historical information and assumptions believed to be reasonable. Although these estimates are based on management's best knowledge of current events and circumstances that may impact us in the future, actual results may differ from these estimates.

Our critical accounting policies are those that affect our financial statements materially and involve a significant level of judgment by management. Our critical accounting policies regarding revenue recognition are in the following areas: license and royalty agreements, manufacturing contracts, contract services and grant revenues. Our critical accounting policies also include recognition of research and development expenses and the valuation of long-lived and intangible assets.

Revenue Recognition

Revenue is recognized when the four basic criteria of revenue recognition are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or determinable; and
(4) collectability is reasonably assured. Certain of our revenue is generated through manufacturing contracts and stand-alone license agreements.

We have entered into multiple-element arrangements. In order to account for the multiple-element arrangements, we identify the deliverables included within the agreement and evaluate which deliverables represent separate units of accounting. Analyzing the arrangement to identify deliverables requires the use of judgment, and each deliverable may be an obligation to deliver services, a right or license to use an asset, or another performance obligation.


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Multiple-element arrangements prior to January 1, 2011

Prior to adopting the revised multiple element guidance on January 1, 2011, we analyzed our multiple element arrangements to determine whether the identified deliverables could be accounted for individually as separate units of accounting. The delivered item(s) were considered a separate unit of accounting if all of the following criteria were met: (1) the delivered item(s) has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of the undelivered item(s); and (3) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in our control. If these criteria were not met, the deliverable was combined with other deliverables in the arrangement and accounted for as a combined unit of accounting.

Multiple-element arrangements after January 1, 2011

Effective January 1, 2011, we followed the provisions of ASU No. 2009-13 for all multiple element agreements, including contract manufacturing, contract services and license agreements. Under the revised guidance, the delivered item(s) has value to the customer on a standalone basis and, if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in our control.

A delivered item is considered a separate unit of accounting when the delivered item has value to the partner on a standalone basis based on the consideration of the relevant facts and circumstances for each arrangement. Factors considered in this determination include the research capabilities of the partner and the availability of research expertise in this field in the general marketplace. Arrangement consideration is allocated at the inception of the agreement to all identified units of accounting based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective evidence, or VSOE, of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists, we use our best estimate of the selling price for the deliverable. The amount of allocable arrangement consideration is limited to amounts that are fixed or determinable. The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria are applied to each of the separate units. Changes in the allocation of the sales price between delivered and undelivered elements can impact revenue recognition but do not change the total revenue recognized under any agreement. If facts and circumstances dictate that the license has standalone value from the undelivered items, which generally include research and development services and the manufacture of drug products, the license is identified as a separate unit of accounting and the amounts allocated to the license are recognized upon the delivery of the license, assuming the other revenue recognition criteria have been met. However, if the amounts allocated to the license through the relative selling price allocation exceed the upfront license fee, the amount recognized upon the delivery of the license is limited to the upfront fee received. If facts and circumstances dictate that the license does not have standalone value, the transaction price, including any upfront license fee payments received, are allocated to the identified separate units of accounting and recognized as those items are delivered.

The terms of our partnership agreements provide for milestone payments upon achievement of certain regulatory and commercial events. Effective January 1, 2011, we adopted on a prospective basis the Milestone Method of accounting under ASU 2010-17. Under the Milestone Method, we recognize consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone is substantive in its entirety. A milestone is considered substantive when it meets all of the following three criteria: 1) The consideration is commensurate with either the entity's performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the entity's performance to achieve the milestone, 2) The consideration relates solely to past performance, and 3) The consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. A milestone is defined as an event (i) that can only be achieved based in whole or in part on either the entity's performance or on the occurrence of a specific outcome resulting from the entity's performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to us.

Contract Services, Grant and Royalty Revenue

We recognize revenue from contract services and federal government research grants during the period in which the related expenditures are incurred and related payments for those services are received or collection is reasonably assured. Royalties to be received based on sales of licensed products by our partners incorporating our licensed technology are recognized when received.


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Research and Development Expenses

Research and development expenses consist of expenses incurred in performing research and development activities including salaries and benefits, facilities and other overhead expenses, clinical trials, contract services and other outside expenses. Research and development expenses are charged to operations as they are incurred.

We assess our obligations to make milestone payments that may become due for licensed or acquired technology to determine whether the payments should be expensed or capitalized. We charge milestone payments to research and development expense when:

• The technology is in the early stage of development and has no alternative uses;

• There is substantial uncertainty of the technology or product being successful;

• There will be difficulty in completing the remaining development; and

• There is substantial cost to complete the work.

Capitalization and Valuation of Long-Lived and Intangible Assets

Intangible assets with finite useful lives consist of capitalized legal costs incurred in connection with patents, patent applications pending and technology license agreements. Payments to acquire a license to use a proprietary technology are capitalized if the technology is expected to have alternative future use in multiple research and development projects. We amortize costs of approved patents, patent applications pending and license agreements over their estimated useful lives, or terms of the agreements, whichever are shorter.

For patents pending, we amortize the costs over the shorter of a period of twenty years from the date of filing the application or, if licensed, the term of the license agreement. We re-assess the useful lives of patents when they are issued, or whenever events or changes in circumstances indicate the useful lives may have changed. For patents and patent applications pending that we abandon, we charge the remaining unamortized accumulated costs to expense.

Intangible assets and long-lived assets are evaluated for impairment at least annually or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. If the review indicates that intangible assets or long-lived assets are not recoverable, their carrying amount would be reduced to fair value. Factors we consider important that could trigger an impairment review include the following:

• A significant change in the manner of our use of the acquired asset or the strategy for our overall business; and/or

• A significant negative industry or economic trend.

In the event we determine that the carrying value of intangible assets or long-lived assets is not recoverable based upon the existence of one or more of the above indicators of impairment, we may be required to record impairment charges for these assets. As of March 31, 2012, our largest group of intangible assets with finite lives included patents and patents pending for our DNA delivery technology, consisting of intangible assets with a net carrying value of approximately $2.8 million.

Recent Accounting Pronouncements

For information on the recent accounting pronouncements which may impact our business, see Note 1 of the Notes to Financial Statements included in this Report.

Results of Operations

Three Months Ended March 31, 2012, Compared with Three Months Ended March 31, 2011

Total Revenues. Total revenues increased $10.8 million to $11.5 million for the three months ended March 31, 2012, from $0.6 million for the three months ended March 31, 2011. Our license and royalty revenue increased by $10.1 million which was primarily the result of the recognition of $10.1 million of revenue related to our TransVax™ license agreements with Astellas. Our contract and grant revenue increased by $0.7 million which was primarily the result of an increase of $1.0 million in contract service revenue recognized under our agreements with Astellas, which was partially offset by a decrease in our grant revenues.


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Research and Development Expenses. Research and development expenses increased $2.1 million, or 49.8%, to $6.4 million for the three months ended March 31, 2012, from $4.3 million for the three months ended March 31, 2011. This increase was primarily due to a sub-license payment obligation to the City of Hope related to the TransVax™ license milestone payment we earned during the three months ended March 31, 2012.

Manufacturing and Production Expenses. Manufacturing and production expenses decreased $0.3 million, or 10.0%, to $2.5 million for the three months ended March 31, 2012, from $2.8 million for the three months ended March 31, 2011. This decrease was primarily the result of the capitalization of $0.6 million in manufacturing costs related to the production of TransVax™ under our service and supply agreements with Astellas which was partially offset by an increase in headcount.

General and Administrative Expenses. General and administrative expenses increased $0.4 million, or 16.0%, to $2.7 million for the three months ended March 31, 2012, from $2.3 million for the three months ended March 31, 2011. This increase was primarily the result of higher overall wages.

Investment and Other Income, Net. Investment and other income, net increased . . .

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