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VICL > SEC Filings for VICL > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for VICAL INC

Form 10-Q for VICAL INC


2-May-2014

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, 2013, 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; 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, AnGes MG, Inc., or AnGes, 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. The table below summarizes our independent programs and
corporate and government collaborations.



                                                  Development
  Product/Concept            Intended Use           Status1         Lead Developer
  Independent Programs

  Therapeutic and         Prevent and          Phase 1/2           Vical
  prophylactic vaccines   protect against
  for HSV-2               recurring
                          flare-ups, reduce
                          viral shedding and
                          transmission

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

  Corporate
  Collaborations

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

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

  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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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 $225.9 million in revenues from these sources. Revenues by source were as follows (in millions):

                                                     Three Months Ended
                                                         March  31,
          Source                                    2014            2013
          Astellas supply and services contract   $     2.1       $     1.1
          Other contract and grants                     0.0             0.1

          Total contract and grant revenues             2.1             1.2

          Astellas license                        $     0.3       $     0.1
          Other royalties and licenses                  0.0             0.3

          Total royalty and license revenues            0.3             0.4

          Total revenues                          $     2.4       $     1.6

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                                                       2014            2013
Allovectin®                                                 $     0.1       $     5.0
CMV                                                               2.6             1.3
HSV-2                                                             0.7             0.0
Other research, development, manufacturing and production         0.3             1.1

Total research, development, manufacturing and production   $     3.7       $     7.4

Since our inception through March 31, 2014, we estimate that we have spent approximately $504.0 million on research, development, manufacturing and production. Our current independent development focus is on our novel DNA vaccines for HSV-2 and CMV, and other targets.

We are developing HSV-2 and CyMVectin™ vaccine candidates, and these programs will require significant additional funds to advance through development to commercialization. From inception through March 31, 2014, we have spent approximately $9.7 million on our HSV-2 program and $82.4 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


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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, 2013.

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, 2014, Compared with Three Months Ended March 31, 2013

Total Revenues. Total revenues increased $0.9 million to $2.4 million for the three months ended March 31, 2014, from $1.6 million for the three months ended March 31, 2013. This increase was primarily due to an increase in contract revenue recognized related to our ASP0113 license agreements with Astellas.

Research and Development Expenses. Research and development expenses decreased $1.5 million, or 41.2%, to $2.1 million for the three months ended March 31, 2014, from $3.7 million for the three months ended March 31, 2013. This decrease was primarily due to a decrease in employee-related expenses as a result of our August 2013 restructuring.

Manufacturing and Production Expenses. Manufacturing and production expenses decreased $2.2 million, or 59.2%, to $1.5 million for the three months ended March 31, 2014, from $3.7 million for the three months ended March 31, 2013. This decrease was primarily due to an increase in deferred contract costs capitalized during the three months ended March 31, 2014 related to in-process clinical trial materials manufactured under our ASP0113 license agreements with Astellas combined with a decrease in employee-related expenses as a result of our August 2013 restructuring.

General and Administrative Expenses. General and administrative expenses decreased $1.2 million, or 35.5%, to $2.3 million for the three months ended March 31, 2014, from $3.5 million for the three months ended March 31, 2013. This decrease was primarily due to a decrease in employee-related expenses as a result of our August 2013 restructuring.

Investment and Other Income, Net. Investment and other income, net, increased $3,000 to $28,000 for the three months ended March 31, 2014, from $25,000 for the three months ended March 31, 2013.

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 March 31, 2014, we have received approximately $225.9 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 $420.8 million from the sale of equity securities. Cash, cash equivalents, marketable securities, and long-term investments, including restricted cash, totaled $52.9 million at March 31, 2014, compared with $55.5 million at December 31, 2013. The decrease in our cash, cash equivalents and marketable securities for the three months ended March 31, 2014, was primarily the result of the use of cash to fund our operations.

Net cash used in operating activities was $2.4 million and $8.3 million for the three months ended March 31, 2014 and 2013, respectively. The decrease in net cash used in operating activities for the three months ended March 31, 2014, compared with the prior year period, was primarily the result of a $5.8 million decrease in our net loss which decrease was primarily the result of our August 2013 restructuring.


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Net cash provided by investing activities was $4.3 million and $11.9 million for the three months ended March 31, 2014 and 2013, respectively. The decrease in net cash provided by investing activities for the three months ended March 31, 2014, compared with the prior year period, was primarily the result of a decrease in net maturities of marketable securities.

Net cash (used in) provided by financing activities was ($29,000) and $0.2 million for the three months ended March 31, 2014 and 2013, respectively. The decrease in net cash provided by financing activities for the three months ended March 31, 2014, compared with the prior year period, was the result of a decrease in net proceeds received from the exercise of stock options by our employees.

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."

In the long-term, we expect to incur substantial additional research and development expenses, manufacturing and production expenses, and general and administrative expenses, including 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, 2015.

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 our Company.

The Sales Agreement provides that Stifel will be entitled to compensation for its services in an amount equal to 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.

In April 2014, we entered into an At-the-Market Issuance Sales Agreement, or ATM Agreement, with Meyers Associates, L.P. (doing business as Brinson Patrick, a division of Meyers Associates, L.P.), or Brinson Patrick, under which we may issue and sell up to $25.0 million of shares of our common stock from time to time. Under the ATM Agreement, we may deliver placement notices that will set the parameters for the sale of shares, including the number of shares to be issued, the time period during which sales are requested to be made, any limitation on the number of shares that may be sold in any one trading day and any minimum price below which sales may not be made. Subject to the terms and conditions of the ATM Agreement, Brinson Patrick may sell the shares only by methods deemed to be an "at the market" offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, including without limitation sales made directly through the Nasdaq Global Market, on any other existing trading market for our common stock or to or through a market maker. Brinson Patrick will use commercially reasonable efforts consistent with its normal trading and sales practices to sell the shares in accordance with the terms of the ATM Agreement and any applicable placement notice. The ATM Agreement may be terminated by us upon prior notice to Brinson Patrick or by Brinson Patrick upon prior notice to us, or at any time under certain circumstances, including but not limited to the occurrence of a material adverse effect on our Company.


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The ATM Agreement provides that Brinson Patrick will be entitled to compensation for its services in an amount up to 2.5% of the gross proceeds from the sale of shares sold through Brinson Patrick under the ATM Agreement. We have no obligation to sell any shares under the ATM Agreement, and both we and Brinson Patrick may at any time suspend the sale of shares under the ATM Agreement. We have also agreed to provide indemnification and contribution to Brinson Patrick against certain liabilities.

Contractual Obligations

Under our Sanofi and Merial 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 March 31, 2014, is approximately $11.9 million, of which approximately $7.6 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 product license approval for any of the related products is obtained, we may be required to make royalty payments in addition to these milestone payments. Although we believe that some of the milestones contained in our in-license agreements may be achieved, it is highly unlikely that a significant number of them will be achieved. Because the milestones are contingent, we are not in a position to reasonably estimate how much, if any, of the potential milestone payments will ultimately be paid, or when. Additionally, under the in-license agreements, many of the milestone events are related to progress in clinical trials which will take several years to achieve.

In addition, we have undertaken certain commitments under license agreements with collaborators and under indemnification agreements with our officers and directors. Under the license agreements with our collaborators, we have agreed to continue to maintain and defend the patent rights licensed to the collaborators and, in the case of our agreements with Astellas, have agreed to undertake certain development and manufacturing activities. Under the indemnification agreements with our officers and directors, we have agreed to indemnify those individuals for any expenses and liabilities in the event of a threatened, pending or actual investigation, lawsuit, or criminal or investigative proceeding.

We have employment agreements that contain severance arrangements with our Chief Executive Officer, or CEO, and three of our other executives. If our executive officers, other than our CEO, are terminated without "cause" or they resign for "good reason" (as defined in their employment agreements), they will be entitled to severance consisting of continued base salary payments at the then-current rate for a period of 6 months. In addition, our Senior Vice President, Corporate Development receives the payment of health insurance premiums for 6 months and accelerated vesting on all his unvested stock awards if his employment is terminated without "cause" or if he resigns for "good reason" (as defined in his employment agreement). Our CEO's employment agreement provides for severance consisting of 18 months of continued base salary, including the payment of health insurance premiums, plus a payment equal to one and one half times any cash bonus paid in the prior year, if his employment is terminated without "cause" or if he resigns for "good reason" (as defined in his employment agreement). In addition, our CEO receives accelerated vesting on all his unvested stock awards as if he had remained employed by us for 18 months from the date of termination. In the event that the termination occurs within 24 months of a "change in control" (as defined in his employment agreement), the employment agreement for our CEO provides for severance of a lump sum equal to 24 months of base salary at the then-current rate, the payment of health insurance premiums for 18 months, plus a payment equal to one and one half times any cash bonus paid in the prior year. In addition, all outstanding unvested stock awards held by our CEO will vest immediately.All of the agreements specify that any earnings from employment or consulting during this period will offset any salary continuation payments due from us. The maximum payments due under these employment agreements would have been $1.5 million if our CEO and other executives were terminated at March 31, 2014.


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