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VICL > SEC Filings for VICL > Form 10-Q on 1-Aug-2013All Recent SEC Filings

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Form 10-Q for VICAL INC


1-Aug-2013

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, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, 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, 2012, and in our other filings with the SEC, and those identified in Part II, Item 1A entitled "Risk Factors" beginning on page 20 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, or HSV-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, 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. 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.



                                                 Development
  Product/Concept           Intended Use           Status1          Lead Developer
  Independent Programs

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

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

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

  Corporate
  Collaborations

  ASP0113 therapeutic    Protect against      Phase 3              Astellas
  vaccine for CMV        CMV infection
                         after stem cell
                         transplants

  ASP0113 therapeutic    Protect against      Phase 2              Astellas
  vaccine for CMV        CMV infection        preparation
                         after solid organ
                         transplants

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

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

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

  Government
  Collaboration

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

1 "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 June 2013, we announced that Astellas had initiated a multinational Phase 3 registration trial of ASP0113 in approximately 500 hematopoietic cell transplant recipients. In 2011, we entered into exclusive worldwide license agreements with Astellas to develop and commercialize ASP0113, our investigational therapeutic vaccine designed to control CMV in transplant recipients. Astellas is conducting the trial, and we are providing development, regulatory and manufacturing support. Astellas expects to begin a separate Phase 2 trial of ASP0113 in solid organ transplant recipients later this year.

• In May 2013, we announced the appointment of two additional members to our Board of Directors: Richard M. Beleson, a former analyst and institutional investor in the life sciences industries, and Stephen A. Sherwin, M.D., a broadly accomplished and highly respected medical oncologist and biotechnology entrepreneur.

• Also in May 2013, we announced the online publication of preclinical evaluations of our Vaxfectin® adjuvant by Baxter International Inc., or Baxter, in combination with Baxter's cell culture-derived seasonal and pandemic influenza vaccines. The addition of Vaxfectin® to the influenza vaccines substantially increased both antibody and T-cell responses compared with nonadjuvanted vaccines in mice and guinea pigs.

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 $218.8 million in revenues from these sources. Revenues by source were as follows (in millions):

                                                   Three Months Ended               Six Months Ended
                                                        June 30,                        June 30,
Source                                            2013            2012            2013            2012
Astellas supply and services contract          $       1.1     $       1.3     $       2.2     $       2.3
Other contract and grants                              0.1             0.1             0.1             0.3

Total contract and grant revenues                      1.2             1.4             2.3             2.6

Astellas license                               $       0.1     $       0.1     $       0.3     $      10.2
Other royalties and licenses                           0.2             0.1             0.4             0.2

Total royalty and license revenues                     0.3             0.2             0.7            10.4

Total revenues                                 $       1.5     $       1.6     $       3.0     $      13.0

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

                                                  Three Months Ended               Six Months Ended
                                                       June 30,                        June 30,
Program                                          2013            2012            2013            2012
Allovectin®                                   $       5.5     $       3.7     $      10.4     $       7.7
CMV                                                   1.3             1.3             2.6             5.1
Other research, development, manufacturing
and production                                        1.0             1.7             2.2             2.8

Total research, development, manufacturing
and production                                $       7.8     $       6.7     $      15.2     $      15.6

Since our inception through June 30, 2013, we estimate that we have spent approximately $488 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.


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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 CyMVectin™ and HSV-2 vaccine candidates, and these programs will require significant additional funds to advance through development to commercialization. From inception through June 30, 2013, we have spent approximately $177 million on our Allovectin® program and $76 million on our CMV programs including ASP0113.

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 and presentation 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, they are inherently uncertain and actual results may differ materially 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.

There have been no material changes to our critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

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 June 30, 2013, Compared with Three Months Ended June 30, 2012

Total Revenues. Total revenues decreased $0.1 million to $1.5 million for the three months ended June 30, 2013, from $1.6 million for the three months ended June 30, 2012. This decrease was primarily due to a reduction in contract revenue recognized related to our ASP0113 license agreements with Astellas.

Research and Development Expenses. Research and development expenses increased $0.1 million, or 3.7%, to $3.9 million for the three months ended June 30, 2013, from $3.8 million for the three months ended June 30, 2012. This increase was primarily due to an ASP0113 sub-license milestone being achieved during the three months ended June 30, 2013.

Manufacturing and Production Expenses. Manufacturing and production expenses increased $1.0 million, or 32.7%, to $3.9 million for the three months ended June 30, 2013, from $2.9 million for the three months ended June 30, 2012. This increase was primarily the result of an increase in scientific supplies expenses to support the Allovectin® and ASP0113 programs combined with a decrease in capitalized manufacturing costs associated with our license agreements with Astellas.

General and Administrative Expenses. General and administrative expenses increased $0.7 million, or 25.2%, to $3.5 million for the three months ended June 30, 2013, from $2.8 million for the three months ended June 30, 2012. This increase was primarily the result of higher legal and consulting costs related to our Allovectin® program.


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Investment and Other Income, Net. Investment and other income, net decreased $107,000 to $(38,000) for the three months ended June 30, 2013, from $69,000 for the three months ended June 30, 2012. This decrease was primarily the result of tax losses recognized related to the revaluation of auction rate securities during the three months ended June 30, 2013.

Six Months Ended June 30, 2013, Compared with Six Months Ended June 30, 2012

Total Revenues. Total revenues decreased $10.0 million to $3.0 million for the six months ended June 30, 2013, from $13.0 million for the six months ended June 30, 2012. This decrease was primarily the result of a $10.0 million decrease in license revenue related to an achievement of a milestone under our ASP0113 license agreements with Astellas.

Research and Development Expenses. Research and development expenses decreased $2.6 million, or 25.8%, to $7.6 million for the six months ended June 30, 2013, from $10.2 million for the six months ended June 30, 2012. This decrease was primarily due to a sub-license payment we made to the City of Hope related to an achievement of a milestone under the license of our ASP0113 program to Astellas during the six months ended June 30, 2012.

Manufacturing and Production Expenses. Manufacturing and production expenses increased $2.2 million, or 40.7%, to $7.6 million for the six months ended June 30, 2013, from $5.4 million for the six months ended June 30, 2012. This increase was primarily the result of an increase in contract manufacturing expenses and a decrease in capitalized manufacturing costs associated with our license agreements with Astellas during the six months ended June 30, 2013.

General and Administrative Expenses. General and administrative expenses increased $1.5 million, or 27.7%, to $7.0 million for the six months ended June 30, 2013, from $5.5 million for the six months ended June 30, 2012. This increase was primarily the result of post-termination benefit costs accrued related to the resignation of our Chief Financial Officer and higher legal and consulting costs related to our Allovectin® program.

Investment and Other Income, Net. Investment and other income, net decreased $466,000 to $(13,000) for the six months ended June 30, 2013, from $453,000 for the six months ended June 30, 2012. This decrease was primarily the result of a gain recognized on the sale of auction rate securities during the six months ended June 30, 2012.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through private placements and public offerings of equity securities, and revenues from our operations. From our inception through June 30, 2013, we have received approximately $218.8 million in revenues from performing services under research and development and manufacturing contracts, from grants and from licensing access to our proprietary technologies, and we have raised net proceeds of approximately $420.4 million from the sale of equity securities. Cash, cash equivalents, marketable securities, and long-term investments, including restricted cash, totaled $69.5 million at June 30, 2013, compared with $86.1 million at December 31, 2012. The decrease in our cash, cash equivalents and marketable securities for the six months ended June 30, 2013, was primarily the result of the use of cash to fund our operations.

Net cash used in operating activities was $15.9 million and $7.0 million for the six months ended June 30, 2013 and 2012, respectively. The increase in net cash used in operating activities for the six months ended June 30, 2013, compared with the prior year period, was primarily the result of a $10.0 million decrease in license revenue related to our ASP0113 license agreements.

Net cash provided by (used in) investing activities was $17.8 million and $(14.6) million for the six months ended June 30, 2013 and 2012, respectively. The increase in net cash provided by investing activities for the six months ended June 30, 2013, compared with the prior year period, was primarily the result of an increase in net maturities of marketable securities.

Net cash (used in) provided by financing activities was $(21,000) and $48.6 million for the six months ended June 30, 2013 and 2012, respectively. The decrease in net cash provided by financing activities for the six months ended June 30, 2013, compared with the prior year period, was the result of net proceeds received from the sale of our common stock in a public offering during the six months ended June 30, 2012.

A discussion of our exposure to auction rate securities is included in Part 1, Item 3 of this Report under the heading "Quantitative and Qualitative Disclosures About Market Risk."


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We expect to incur substantial additional research and development expenses, manufacturing and production expenses, and general and administrative expenses, including continued increases in costs related to personnel, preclinical and clinical testing, outside services, facilities, intellectual property and possible commercialization. Our future capital requirements will depend on many factors, including continued scientific progress in our research and development programs, the scope and results of preclinical testing and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting, enforcing and defending patent claims, the impact of competing technological and market developments, the cost of manufacturing scale-up and validation, and possible commercialization activities and arrangements. We may seek additional funding through research and development relationships with suitable potential corporate collaborators. We may also seek additional funding through public or private financings. We currently have on file an effective shelf registration statement that allows us to raise up to $150.0 million from the sale of common stock, preferred stock, debt securities and/or warrants. However, additional financing may not be available on favorable terms or at all. If additional financing is not available, we anticipate that our available cash and existing sources of funding will be adequate to satisfy our cash needs at least through December 31, 2014.

In November 2012, we entered into an At-The-Market Equity Offering Sales Agreement, or Sales Agreement, with Stifel, Nicolaus & Company, Incorporated, or Stifel, under which we may issue and sell up to $50.0 million of shares of our common stock from time to time. Under the Sales Agreement, we will set the parameters for the sale of shares, including the number of shares to be issued and any minimum price below which sales may not be made. Subject to the terms and conditions of the Sales Agreement, shares may be sold through Stifel acting as sales agent or directly to Stifel acting as principal, by means of ordinary brokers' transactions on the Nasdaq Global Select Market, in privately negotiated transactions or otherwise at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices. Any sales other than by methods deemed to be an "at the market" offering as defined in Rule 415 promulgated under the Securities Act will require our prior consent. Stifel is obligated to use commercially reasonable efforts in conducting sales activities consistent with its normal trading and sales practices. The Sales Agreement may be terminated by us upon prior notice to Stifel or by Stifel upon prior notice to us, or at any time under certain circumstances, including but not limited to the occurrence of a material adverse change in the company.

The Sales Agreement provides that Stifel will be entitled to compensation for its services in an amount of 2.5% of the gross proceeds from the sale of shares sold through Stifel under the Sales Agreement. We have no obligation to sell any shares under the Sales Agreement, and may at any time suspend offers under the Sales Agreement. We agreed in the Sales Agreement to provide indemnification and contribution to Stifel against certain liabilities, including liabilities under the Securities Act, and to reimburse Stifel for certain legal expenses incurred in connection with the Sales Agreement.

Contractual Obligations

Under our Merck & Co., Inc., Sanofi, AnGes, Merial and Aqua Health agreements, we are required to pay up to 10% of certain initial upfront monetary payments, and a small percentage of some royalty payments, to the Wisconsin Alumni Research Foundation and/or the University of Michigan. Under our license agreements with Astellas, we are required to make certain payments to the City of Hope and CytRx Corporation in connection with the development and commercialization of our products licensed by Astellas. In addition, certain technology license agreements require us to make other payments if we or our sublicensees advance products through clinical development. For programs developed with the support of U.S. government funding, the U.S. government may have rights to resulting products without payment of royalties to us.

We may be required to make future payments to our licensors based on the achievement of milestones set forth in various in-licensing agreements. In most cases, these milestone payments are based on the achievement of development or regulatory milestones, including the exercise of options to obtain licenses related to specific disease targets, commencement of various phases of clinical trials, filing of product license applications, approval of product licenses from the FDA or a foreign regulatory agency, and the first commercial sale of a related product. Payment for the achievement of milestones under our in-license agreements is highly speculative and subject to a number of contingencies.

The aggregate amount of additional milestone payments that we could be required to pay under all of our in-license agreements in place at June 30, 2013, is approximately $16.4 million, of which approximately $7.8 million is related to our independent programs and corporate and government collaborations which are currently in clinical development. These amounts assume that all remaining milestones associated with the milestone payments are met. In the event that . . .

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