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VICL > SEC Filings for VICL > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for VICAL INC

Form 10-Q for VICAL INC


7-Nov-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 22 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 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, Merck & Co., Inc., or Merck, Sanofi, Bristol-Myers Squibb Company, or Bristol-Myers Squibb, 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 Status 1        Lead Developer
Independent Programs
Allovectin® cancer           First-line treatment for   Phase 3                     Vical
immunotherapeutic            metastatic melanoma

CyMVectin™ prophylactic      Prevent infection before   Allowed Investigational     Vical
vaccine for                  pregnancy to preclude      New Drug
cytomegalovirus              fetal transmission         Application

Therapeutic and              Prevent and protect        Preclinical                 Vical
prophylactic vaccines for    against recurring
herpes simplex type 2        flare-ups, reduce viral
virus                        shedding and
                             transmission
Corporate Collaborations
TransVax™ therapeutic        Protect against CMV        Phase 3 preparation         Astellas
vaccine for                  infection after stem
cytomegalovirus              cell transplants

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

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

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

ONCEPT™ therapeutic cancer   Adjunct treatment to       Marketed in the United      Merial
vaccine encoding human       increase survival time     States
tyrosinase                   of dogs with oral
                             melanoma
Government Collaborations
Prophylactic and/or          Prevent and/or treat       Phase 2b                    NIH
therapeutic HIV vaccine      infection, disease,
                             and/or viral shedding
Tetravalent dengue vaccine   Prevent dengue disease     Phase 1                     Naval Medical
                             caused by all 4 dengue                                 Research Center
                             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:

• In September 2012, we entered into a worldwide, nonexclusive license with Bristol-Myers Squibb for our patented platform DNA immunization technology and our Vaxfectin® adjuvant for use in the production of antibodies. Under the agreement, Bristol-Myers Squibb will use our technology to generate antibodies with potential therapeutic uses in humans. We will also provide specified quantities of the Vaxfectin® adjuvant to Bristol-Myers Squibb from time to time.

• In October 2012, George J. Morrow, former Executive Vice President of Global Commercial Operations at Amgen, Inc., was appointed to Vical's Board of Directors. Mr. Morrow's previous career encompassed significant accomplishments in commercial operations, sales and marketing through a progression of executive management positions at Merck and Glaxo Wellcome plc.

• In September 2012, we conducted a comprehensive sweep of all active clinical sites in our Phase 3 Allovectin ® melanoma trial to eliminate any time lag in death event reporting. The sweep confirmed that the target number of events has not been reached. Based on the moving average monthly event rate, we revised our projection for reaching the target number of death events to mid-2013.

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 $213.4 million in revenues from these sources. Revenues by source were as follows (in millions):

                                            Three Months Ended           Nine Months Ended
                                               September 30,               September 30,
Source                                     2012            2011          2012           2011
Astellas supply and services contract    $    1.6       $      1.2     $     3.9       $  1.2
RapidResponse™ DNA manufacturing grant         -                -             -           0.9
HSV-2 grant                                    -                -             -           0.2
Other contract and grants                     0.1              0.2           0.4          0.3

Total contract and grant revenues             1.7              1.4           4.3          2.6

Astellas license                         $    0.2       $     25.1     $    10.5       $ 25.1
Other royalties and licenses                  0.3              0.1           0.4          0.4

Total royalty and license revenues            0.5             25.2          10.9         25.5

Total revenues                           $    2.2       $     26.6     $    15.2       $ 28.1

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

                                                    Three Months Ended            Nine Months Ended
                                                       September 30,                September 30,
Program                                            2012            2011           2012           2011
Allovectin®                                      $     4.0       $     4.7      $    11.7       $ 13.9
CMV                                                    2.2             2.4            7.3          5.1
Other research, development, manufacturing
and production                                         1.3             0.7            4.2          2.7

Total research, development, manufacturing
and production                                   $     7.5       $     7.8      $    23.2       $ 21.7

Since our inception through September 30, 2012, we estimate that we have spent approximately $466 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


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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 September 30, 2012, we have spent approximately $162 million on our Allovectin® program and $72 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 U.S. Food and Drug Administration, or 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.

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


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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.

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.


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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 September 30, 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 $2.7 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 September 30, 2012, Compared with Three Months Ended September 30, 2011

Total Revenues. Total revenues decreased $24.4 million to $2.2 million for the three months ended September 30, 2012, from $26.6 million for the three months ended September 30, 2011. This decrease was primarily the result of the recognition of $25.1 million of license revenue related to the license of our TransVax™ program to Astellas in 2011 which was partially offset by a $0.4 million increase in contract service revenue in 2012 related to our agreements with Astellas.

Research and Development Expenses. Research and development expenses decreased $1.8 million, or 33.1%, to $3.7 million for the three months ended September 30, 2012, from $5.5 million for the three months ended September 30, 2011. This decrease was primarily due to a sub-license payment we made to the City of Hope related to the license of our TransVax™ program to Astellas during the three months ended September 30, 2011.

Manufacturing and Production Expenses. Manufacturing and production expenses increased $1.5 million, or 64.4%, to $3.9 million for the three months ended September 30, 2012, from $2.3 million for the three months ended September 30, 2011. This increase was primarily the result of the recognition of capitalized costs during the three months ended September 30, 2012, related to the shipment of clinical trial material we manufactured for Astellas.

General and Administrative Expenses. General and administrative expenses increased $41,000, or 1.7%, to $2.4 million for the three months ended September 30, 2012, from $2.4 million for the three months ended September 30, 2011. This increase was primarily the result of higher employee related compensation and facilities costs.

Nine Months Ended September 30, 2012, Compared with Nine Months Ended September 30, 2011

Total Revenues. Total revenues decreased $12.9 million to $15.2 million for the nine months ended September 30, 2012, from $28.1 million for the nine months ended September 30, 2011. Our license and royalty revenue decreased by $14.5 million, which was primarily the result of the recognition of $25.1 million of license revenue related to the license of our TransVax™ program to Astellas in 2011, which was partially offset by $10.0 million of license revenue related to the achievement of a trial design milestone under our TransVax™ license agreements with Astellas during 2012.

Research and Development Expenses. Research and development expenses decreased $0.1 million, or 0.7%, to $13.9 million for the nine months ended September 30, 2012, from $14.0 million for the nine months ended September 30, 2011. This decrease was primarily due to lower overall wages and safety study costs which were offset by the higher sub-license payment we made to the City of Hope related to the license of our TransVax™ program to Astellas.


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Manufacturing and Production Expenses. Manufacturing and production expenses increased $1.6 million, or 20.3%, to $9.3 million for the nine months ended September 30, 2012, from $7.7 million for the nine months ended September 30, 2011. This increase was primarily the result of higher wages due to an increase in headcount and higher scientific supplies used in manufacturing.

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