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VICL > SEC Filings for VICL > Form 10-K on 14-Feb-2014All Recent SEC Filings

Show all filings for VICAL INC

Form 10-K for VICAL INC


14-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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; and

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

We currently have three active, independent or partnered, development programs in the area of infectious disease comprised of:

• An ongoing Phase 3 clinical trial of ASP0113 for prevention of cytomegalovirus, or CMV, reactivation in stem cell transplant recipients and an ongoing Phase 2 clinical trial of ASP0113 for prevention of CMV infection in kidney transplant recipients, both in collaboration with Astellas Pharma Inc., or Astellas;

• An ongoing Phase 1/2 clinical trial using our Vaxfectin®-formulated therapeutic vaccine for herpes simplex virus type 2, or HSV-2, a cause of recurrent genital herpes; and

• 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.

We have leveraged our patented technologies through licensing and collaboration arrangements, such as our licensing arrangements with Astellas, Sanofi, AnGes, Aqua Health and Merial, 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 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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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 contracts, grants, manufacturing contracts, and from licensing access to our proprietary technologies. Since our inception, we estimate that we have received approximately $223.4 million in revenues from these sources. Revenues by source for each of the three years ended December 31, 2013, were as follows (in millions):

          Source                                    2013       2012       2011
          Astellas contract                           5.6     $  5.7        2.7
          Manufacturing process development grant      -          -         0.9
          HSV grants                                   -          -         0.2
          Other contracts and grants                  0.2        0.5        0.4

          Total contract and grant revenues           5.8        6.2        4.2

          Astellas license                            0.7       10.7       25.3
          AnGes license                               0.5         -          -
          Other royalties and licenses                0.7        0.6        0.5

          Total royalty and license revenues          1.9       11.3       25.8

          Total revenues                            $ 7.7     $ 17.5     $ 30.0

Research, development, manufacturing and production costs by major program, as well as other expenses for each of the three years ended December 31, 2013, were as follows (in millions):

 Program                                                      2013       2012       2011
 Allovectin®                                                   14.7     $ 16.0     $ 17.3
 HSV                                                            4.2        2.7        0.1
 CMV                                                            6.4        9.2        7.5
 Other research, development, manufacturing and production      2.0        2.5        3.3

 Total research, development, manufacturing and production   $ 27.3     $ 30.4     $ 28.2

Since our inception through December 31, 2013, we estimate that we have spent approximately $500 million on research, development, manufacturing and production. Our current independent development focus is on a DNA vaccine for CMV, a vaccine to treat HSV-2, and other clinical and preclinical targets.

We are also developing ASP0113, CyMVectin™ and HSV-2 drug candidates, and these programs, excluding ASP0113 which we licensed to Astellas, will require significant additional funds to advance through development to commercialization. From inception through December 31, 2013, we have spent approximately $9 million on our HSV-2 program and $80 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 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,


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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 informed 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.

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.

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) had value to the customer on a standalone basis; (2) there was objective and reliable evidence of the fair value of the undelivered item(s); and (3) if the arrangement included a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) was 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 follow the provisions of ASU No. 2009-13 for all multiple element agreements, including contract manufacturing, contract services and license agreements. Under the revised guidance, if 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.


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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.

Research and Development Expenses

Research and development expenses consist of expenses incurred in performing research and development activities including salaries and personnel-related costs, supplies and materials, outside services, costs of conducting preclinical and clinical trials, facilities costs and amortization of intangible assets. 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;


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• 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 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 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 research and development 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 December 31, 2013, 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 $2.0 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 Annual Report on Form 10-K.

Results of Operations

Year Ended December 31, 2013, Compared to Year Ended December 31, 2012

Total Revenues. Total revenues decreased $9.8 million, or 55.9%, to $7.7 million in 2013 from $17.5 million in 2012. Our license and royalty revenue decreased by $9.5 million which was primarily the result of the recognition of $10.7 million of revenue related to our ASP0113 license agreement with Astellas in 2012, compared to $0.7 million in license revenue recognized under the agreement in 2013.

Research and Development Expenses. Research and development expenses decreased $2.8 million, or 16.0%, to $14.6 million for 2013 from $17.3 million for 2012. This decrease was primarily due to a sub-license payment we made to the City of Hope related to the achievement of a milestone under the license of our ASP0113 program to Astellas during the year ended December 31, 2012, as well as a decrease in clinical trial


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and employee related expenses recognized during the year ended December 31, 2013. These decreases were partially offset by the recognition of restructuring costs associated with our August 2013 restructuring.

Manufacturing and Production Expenses. Manufacturing and production expenses decreased $0.4 million, or 2.7%, to $12.7 million for 2013 from $13.1 million for 2012. This decrease was primarily due to a reduction in employee related costs as a result of our August 2013 restructuring combined with a decrease in costs recognized related to the production of ASP0113 under our service and supply agreement with Astellas. These decreases were substantially offset by increases in scientific supplies, contract services and contract equipment costs recognized during the year ended December 31, 2013.

General and Administrative Expenses. General and administrative expenses increased $1.3 million, or 11.9%, to $11.8 million for 2013 from $10.6 million for 2012. This increase was primarily the result of the recognition of restructuring costs associated with our August 2013 restructuring combined with higher legal and accounting expenses.

Investment and Other Income. Investment and other income decreased $0.4 million, or 78.7%, to $0.1 million for 2013 from $0.5 million for 2012. This decrease was primarily the result of a gain recognized on the sale of auction rate securities during the year ended December 31, 2012.

Year Ended December 31, 2012, Compared to Year Ended December 31, 2011

Total Revenues. Total revenues decreased $12.5 million, or 41.6%, to $17.5 million in 2012 from $30.0 million in 2011. Our license and royalty revenue decreased by $14.5 million which was primarily the result of the recognition of $25.3 million of revenue related to our ASP0113 license agreement with Astellas in 2011, compared to $10.7 million in license revenue recognized under the agreement in 2012. Our contract and grant revenue increased by $2.0 million which was primarily the result of a $3.0 million increase in contract service revenue recognized under our contracts with Astellas, which was partially offset by $1.1 million decrease in grant revenue.

Research and Development Expenses. Research and development expenses decreased $0.6 million, or 3.5%, to $17.3 million for 2012 from $18.0 million for 2011. This decrease was primarily due to lower costs related to contract services for various sub-studies and safety studies primarily related to Allovectin®.

Manufacturing and Production Expenses. Manufacturing and production expenses increased $2.8 million, or 27.2%, to $13.1 million for 2012 from $10.3 million for 2011. This increase was primarily the result of a $1.6 million increase in costs recognized related to the production of ASP0113 under our service and supply agreement with Astellas. In addition, employee related expenses increased $0.9 million as a result of a higher average head count in 2012.

General and Administrative Expenses. General and administrative expenses increased $1.0 million, or 10.0%, to $10.6 million for 2012 from $9.6 million for 2011. This increase was primarily the result of higher overall wages during the year ended December 31, 2012.

Investment and Other Income. Investment and other income decreased $5,000, or 0.9%, to $534,000 for 2012 from $539,000 for 2011.

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 December 31, 2013, we have received approximately $223.4 million in revenues from performing services under research and development and manufacturing contracts, from grants and from licensing access to our proprietary technologies,


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and we have raised net proceeds of approximately $420.8 million from the sale of equity securities. Cash, cash equivalents, marketable securities, and long-term investments, including restricted securities, totaled $55.5 million at December 31, 2013, compared with $86.1 million at December 31, 2012. The decrease in our cash, cash equivalents and marketable securities for the year ended December 31, 2013, was due primarily to the use of cash to fund our operations.

Net cash used in operating activities was $29.8 million and $17.2 million for the years ended December 31, 2013 and 2012, respectively. The increase in net cash used in operating activities for the year ended December 31, 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 and a $2.4 million increase in receivables.

Net cash provided by (used in) investing activities was $25.1 million and $(27.0) million for the years ended December 31, 2013 and 2012, respectively. The increase in net cash provided by investing activities for the year ended December 31, 2013, compared with the prior year, was primarily the result of a decrease in net purchases of investments.

Net cash provided by financing activities was $0.3 million and $48.7 million for the years ended December 31, 2013 and 2012, respectively. The decrease in net cash provided by financing activities for the year ended December 31, 2013, compared with the prior year period, was the result of net proceeds received from the sale of our common stock during the year ended December 31, 2012.

A discussion of our exposure to auction rate securities is included in Part II, Item 7A of this Annual Report on Form 10-K under the heading "Quantitative and Qualitative Disclosures About Market Risk."

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 a shelf registration statement that allows us to raise up to an aggregate of $150.0 million from the sale of common stock, preferred stock, debt securities and/or warrants and we have also entered into an At-The-Market Equity Offering Sales Agreement with Stifel under which we may issue and sell up to $50.0 million of shares of our common stock. However, additional financing may not be available on favorable terms or at all. If additional financing is not available, we anticipate that our current available cash and existing sources of funding will be adequate to satisfy our cash needs at least through December 31, 2015.


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Contractual Obligations and Off-Balance Sheet Arrangements

The following table sets forth our contractual obligations, including all
off-balance sheet arrangements, as of December 31, 2013 (in thousands):



                                                              Payment Due by Period
                                                       Less than         2-3          4-5          After
                                         Total          1 Year          Years        Years        5 Years
Contractual Obligations1
Operating lease obligations             $ 13,021      $     3,466      $ 7,133      $ 2,422            $-
Unconditional purchase obligations2          561              561           -            -              -

Total contractual obligations           $ 13,582      $     4,027      $ 7,133      $ 2,422            $-

1 Certain long-term liabilities reflected on our balance sheet are not presented in this table because they are already reflected in operating lease commitments or do not require cash settlement in the future.

2 Unconditional purchase obligations represent contractual commitments entered into for goods and services in the normal course of our business. The purchase obligations do not include potential severance payment obligations to our executive officers. For information regarding these severance arrangements, refer to the final paragraph in this Item 7.

Under our Merck, Sanofi, Merial and Aqua Health agreements, we are required to pay up to 10% of certain initial upfront monetary payments, and a small . . .

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