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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-26483
VaxGen, Inc.
(Exact name of Registrant as Specified in its Charter)
Delaware
(State or other jurisdiction of incorporation or organization)
94-3236309
(I.R.S. Employer Identification Number)
1000 Marina Blvd., Suite 200
Brisbane, California 94005
(Address of Principal Administrative Offices) (Zip Code)
(650) 624-1000
(Registrants Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12 (g)
of the Securities Exchange Act of 1934:
Common Stock ($.01 par value)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the closing price on the consolidated
transaction reporting system on March 12, 2001, was $155.6 million.
The issuer has one class of common stock with 14,071,066 shares outstanding as
of March 12, 2001.
Portions of the Registrant's definitive proxy statement to be filed pursuant to
Regulation 14A no later than 120 days after the end of the fiscal year are
incorporated by reference into Part III of this Report.
TABLE OF CONTENTS
PAGE
PART I....................................................................... 2
Item 1. Business......................................................... 2
Item 2. Properties.......................................................33
Item 3. Legal Proceedings................................................33
Item 4. Submission of Matters to a Vote of Security Holders..............33
PART II......................................................................34
Item 5. Market for the Registrant's Common Stock and Related Stock
Matters.........................................................34
Item 6. Selected Financial Data..........................................36
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................37
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk............................................................43
Item 8. Financial Statements and Supplementary Data......................44
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................64
PART III.....................................................................65
Item 10. Directors and Executive Officers of the Registrant...............65
Item 11. Executive Compensation...........................................65
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................................65
Item 13. Certain Relationships and Related Transactions...................65
PART IV......................................................................66
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.............................................................66
INDEX TO FINANCIAL STATEMENTS................................................66
SIGNATURES...................................................................69
1
Item 1. BUSINESS
GENERAL
The following description of our business should be read in conjunction
with the information included elsewhere in this Annual Report on Form 10-K. The
description contains certain forward-looking statements that involve risks and
uncertainties. When used in this Annual Report on Form 10-K, the words "intend,"
"anticipate," "believe," "estimate," "plan" and "expect" and similar expressions
as they relate to us are included to identify forward-looking statements. Our
actual results could differ materially from the results discussed in the
forward-looking statements as a result of certain of the risk factors set forth
below and in the documents incorporated herein by reference, and those factors
described under " Factors Affecting Future Results". In this Annual Report on
Form 10-K, references to "VaxGen," "we," "us" and "our" refer to VaxGen, Inc.
VaxGen, Inc. (the "Company" or "VaxGen") was formed in November 1995 to
complete the development of, and commercialize, AIDSVAX (AIDSVAX(R) is a
registered trademark of VaxGen), a preventive HIV (Human Immunodeficiency Virus)
vaccine. The original AIDSVAX technology was developed by Genentech and then
licensed exclusively to us. VaxGen is currently testing AIDSVAX in humans in two
large-scale Phase III clinical trials. These are the first and so far only Phase
III clinical trials ever conducted for a preventive HIV vaccine. If the Phase
III clinical trials are considered successful, we plan to apply to the United
States Food and Drug Administration (the "FDA") and foreign regulatory
authorities for licenses to manufacture and sell AIDSVAX in the United States,
Thailand and elsewhere.
Our vaccine is designed to prevent infection by HIV, rather than treat
established infection. AIDSVAX contains synthetic copies of the proteins from
the surface of HIV. Since the vaccine contains no genetic material, AIDSVAX is
incapable of causing HIV infection. Humans vaccinated with AIDSVAX form
antibodies against HIV. In laboratory tests these antibodies bind to the virus
and neutralize its infectivity. Vaccination with AIDSVAX stimulates immune
memory, training the immune system to mobilize rapidly upon exposure to HIV.
We have commenced two Phase III clinical trials, one in North America and
Europe and one in Thailand, to determine the efficacy of AIDSVAX. In October
1999, we completed the enrollment of over 5,400 trial volunteers for the North
American/European Phase III clinical trial, which is being conducted in 61
clinical centers. In August 2000, we completed the enrollment of over 2,500
volunteers for the Thai Phase III clinical trial, which is being conducted in 17
clinical centers in Bangkok. Based on meetings and documented discussions with
the FDA and its Vaccines and Related Biological Products Advisory Committee, we
believe that the requirement for regulatory approval is 30% efficacy, at
statistical significance, of HIV infection in volunteers vaccinated with
AIDSVAX.
2
Our strategy is to develop, test and obtain regulatory approval for various
formulations of AIDSVAX. The first two approvals we plan to obtain are in the
United States for the formulation being tested in the United States trial and in
Thailand for the formulation being tested in the Thai trial. We intend to use
Genentech and/or other third parties as our partner(s) for manufacturing and
distribution. Genentech has exclusive options to manufacture and market AIDSVAX
products. If Genentech does not exercise its options, we have the right to
pursue third party arrangements, with Genentech providing the transfer of
technology necessary for manufacturing the vaccine.
VACCINES
Vaccines are preventive, not curative. As a result, vaccines are
particularly suited to address epidemics, even those of the magnitude of
HIV/AIDS.
Vaccines prevent infection by activating the immune system to neutralize
infectious viruses. The immune system's initial response to a virus includes the
production of antibodies. The antibodies bind to the virus and prevent it from
entering cells. If a virus cannot enter a cell, it is unable to multiply and
dies within a few hours in the host. This protection against infection is called
neutralization.
Most viral infections cause lifelong immunity after natural infection. This
is because the immune system remembers that it has encountered the virus before.
Upon a subsequent encounter, it mounts such a rapid immune response that it
kills the virus before it can establish a productive infection.
Vaccines also induce long-term memory against viruses. The immune system is
trained by vaccination with viral proteins or live viruses to rapidly respond to
and prevent subsequent viral infection.
OVERVIEW OF HIV AND AIDS
HIV is the virus that causes AIDS (Acquired Immunodeficiency Syndrome), a
lethal disease characterized by the gradual deterioration of the human immune
system. Although the disease is manifested in many ways, the problem common to
all patients is the destruction of essential immune cells known as T
lymphocytes, or T cells. Destruction of these T cells by HIV makes the body
particularly vulnerable to opportunistic infections and cancers that typify AIDS
and ultimately cause death. Blocking HIV infection would prevent AIDS.
HIV is transmitted by three predominant means: sexual contact; exposure to
blood from an infected person, such as sharing needles in drug use; and
transmission from infected mothers to their newborns.
The HIV/AIDS epidemic is one of the largest epidemics in human history. Its
spread across the world has been documented by the Joint United Nations
Programme on
3
HIV/AIDS (UNAIDS) and the World Health Organization (WHO). According to UNAIDS
and the WHO:
- 1.1% of the world's adult (15 to 49 years of age) population was
living with HIV/AIDS as of 2000;
- 5.3 million per year, or approximately 15,000 people per day, were
newly infected with HIV in 2000;
- 36.1 million people are living with HIV/AIDS;
- 3.0 million AIDS deaths occurred in 2000; and
- 21.8 million people have died from AIDS since the beginning of the
epidemic.
In Thailand, initial infections with HIV were not reported until the
mid-1980s. It is now estimated that almost 800,000 people (2.3% of the country's
adult population) have already been infected. HIV infection has now penetrated
China, India and Indonesia, some of the most populated areas of the world. AIDS
is currently one of the top five fatal diseases worldwide and the most deadly
infectious disease.
An estimated 1,460,000 people in North America and Western Europe are
currently infected with HIV. Approximately 75,000 new infections occur each year
in these two regions.
The table below presents the UNAIDS/WHO estimates on total population,
adults, and estimated number of HIV infections throughout the world. These
statistics lead us to believe that a market for an HIV vaccine could reach three
billion people. Should this market include pediatric use, the number could
exceed four billion.
Population
-------------------------------------------
Estimated
Current
Adults HIV
1997 Total 15-49 Infection
---------- ------ ---------
Geographical Area (thousands)
North America.......................... 302,000 156,000 920
Latin America.......................... 455,000 241,000 1,400
Western Europe......................... 400,000 201,000 540
Eastern Europe & Central Asia.......... 373,000 193,000 700
East Asia & Pacific.................... 1,452,000 815,000 640
South & Southeast Asia................. 1,860,000 955,000 5,800
North Africa & Middle East............. 322,000 164,000 400
Sub Saharan Africa..................... 593,000 268,000 25,300
--------- --------- ------
WORLD TOTAL............................ 5,757,000 2,993,000 35,700
========= ========= ======
- ----------------
Source: "AIDS Epidemic Update: December 2000" Joint United Nations Programme on
HIV/AIDS and the World Health Organization, December 2000.
4
Progress recently has been made in treating HIV infection. Current HIV
therapies slow multiplication of the virus and delay the onset of AIDS. They do
not cure HIV infection or AIDS. Costs of these drugs generally exceed $12,000
per year per patient in the industrialized world. Considering costs, toxicities,
difficulties in compliance with complex drug regimens and the development of
resistance to these drugs, we believe such therapies will be available only to a
small fraction of the HIV-infected population. Thus, we believe they will
probably have a minimal impact on the worldwide epidemic.
The HIV Infection Process
A virus cannot replicate without entering a host cell. To make new
infectious virus particles, a virus must enter a cell and overtake its metabolic
machinery. If a virus cannot gain entry to a cell, it is incapable of surviving
for more than a few hours in the body.
Viruses are varied in their structure and use different ways to enter
cells. HIV is a spherical virus that maintains its genetic information inside
its protein core. This core is surrounded by an outer coat called the envelope.
The envelope has protein projections, called glycoproteins, that extend out from
its surface. Glycoproteins enable HIV to bind to, and subsequently enter, human
cells. The principal glycoprotein on the envelope of HIV is called gp120. To
present the proper orientation for infection, the gp120 proteins are organized
on the virus surface in clusters of three.
HIV uses gp120 to bind to the surface of cells through a specific sequence
of interactions between the virus and its target cell. This involves a two-step
"lock and key" mechanism. The first step in this process involves the attachment
of gp120 onto a part of the target cell's surface called the CD4 receptor. A
second step occurs soon thereafter, as the gp120 protein changes shape and then
interacts with another target cell molecule called the chemokine receptor. When
this two-step process has been completed, the virus can fuse through the
target-cell membrane.
Once inside the cell, the viral envelope opens and the core of the virus is
released, initiating a replication cycle that produces thousands of new virus
particles per infected cell. As it multiplies, HIV kills infected T cells and
releases new infectious virus into fluid or blood surrounding the cell. This
cycle of:
- T cell infection;
- viral multiplication;
- T cell death; and
- re-infection of new T cells
5
leads to the destruction of an essential line of immunological defense.
Substantial reduction of T cells ultimately causes increased susceptibility to
the opportunistic infections and cancers that are characteristic of AIDS.
In addition to T cells, HIV also infects, and may reside in, blood
scavenger cells called macrophages. While infection of macrophages is not a
primary cause of AIDS, it is important in the biology of HIV and part of our
strategy to prevent infection by the virus.
Genetic Variation in HIV
AIDS is a single disease throughout the world. At the beginning of the
epidemic, HIV was most likely limited to Africa. HIV, like any other virus,
underwent mutation to create distinct subtypes. People infected with a single
subtype of HIV then exported their infection to other places, with different
subtypes becoming predominant in different geographical areas. Subsequently, HIV
underwent further mutation to create individual strains of each subtype.
Although the potential genetic variation in HIV might appear limitless,
only a small number of mutations confer advantage to the virus. As a result,
there are a limited number of deadly viral subtypes and strains. We believe
these fall into particular patterns providing a logical basis to formulating a
vaccine for HIV. We also believe that the major subtypes of gp120 have been
identified, although minor subtypes are identified periodically.
SUBTYPES. There are five major subtypes of HIV. These are labeled "A"
through "E," according to their order of discovery. The major difference between
each subtype is a genetic variation in regions encoding the envelope protein
(gp120) and the core antigens.
The major subtypes of HIV tend to be distributed along geographical lines.
This is consistent with the general understanding of how HIV has spread
throughout the world. Virtually all HIV in the Americas, Europe, the Caribbean
and Australia is subtype B. The vast majority of HIV in Thailand and in the
Pacific Rim countries is subtype E. Subtype C virus has emerged as the most
rapidly expanding HIV in Africa, China and India. The remaining subtypes A and D
occur primarily in Africa and in limited areas around the world.
6
To construct a successful vaccine, we need to consider the entire range of
variation in gp120 and assure that we cover each of the sites on the gp120
protein that are open to attack by antibodies. Fortunately, most of the variable
sites on gp120 have only one or two principal forms. By careful examination, we
have been able to identify pairs of HIV viruses whose gp120 proteins, when
combined together in a vaccine, enhance the overall antibody response. We
believe this antibody response covers a wide range of HIV genetic variations
currently known in North America and in countries of South Asia and the Pacific
Rim.
PRODUCT
The Design of AIDSVAX
AIDSVAX is designed to stimulate antibodies that prevent the HIV virus from
infecting target cells. The antibodies attach to specific sites on gp120 protein
on the virus' surface and prevent them from binding with receptors on the target
cell. Unable to bind with and enter the cell, HIV is neutralized.
In 1992, Genentech genetically engineered a version of the gp120 protein.
Antibodies to this gp120 protein bound to a neutralizing site found on 65% of
subtype B viruses. This virus was labeled B(MN) and was believed to represent
the majority of HIV in the United States. Subsequently, synthetic gp120 of HIV
B(MN) was incorporated into a monovalent AIDSVAX formulation, designated AIDSVAX
B. The monovalent formulations contain synthetic gp120 of a single type of HIV.
Genentech used this AIDSVAX B formulation to vaccinate humans in Phase I
and Phase II clinical trials. Phase I trials were used to test for dosage and
safety. Phase II trials were conducted to determine whether the vaccine
stimulated the desired immune system response.
7
Antibodies obtained from 100% of those vaccinated with AIDSVAX B
neutralized the B(MN) virus in laboratory tests. Further tests demonstrated that
these antibodies bound to the gp120 protein of all HIV subtype B viruses tested.
However, in laboratory tests and Phase II clinical trials, antibodies to B(MN)
neutralized, to a greater extent, HIV isolates, which were termed T-tropic
strains compared to HIV classified as M-tropic strains.
To improve the breadth of the immune response, we identified a second
virus, B(GNE8), from the M-tropic strain, and a synthetic version of its gp120
protein was added to the vaccine. The resulting bivalent vaccine, AIDSVAX B/B,
which is designed to address two HIV strains, considerably expanded the
vaccine's breadth of neutralization. We believe that these neutralizing
antibodies cover virtually all known strains of HIV in North America.
As a general strategy, we plan to develop AIDSVAX formulations that will
stimulate antibodies against multiple binding sites on gp120. Our goal is to
expand the range of antibodies that are stimulated by a vaccine to neutralize a
broader group of HIV. A practical application of this strategy has been the
conversion of AIDSVAX from a monovalent to a bivalent formulation.
Formulations of AIDSVAX
Like most vaccines, AIDSVAX consists of two biologically active
ingredients: antigen and an adjuvant. An antigen is the ingredient in vaccines
that activates the human immune system response. The antigen in AIDSVAX is
synthetic gp120 protein. Since the vaccine contains only a synthetic fragment of
the virus and no genetic material, it is incapable of causing HIV infection. An
adjuvant is an active ingredient in vaccines that improves the human immune
system response by attracting immune cells into the region where the vaccine is
injected. The adjuvant in AIDSVAX is alum, or aluminum hydroxide.
Three different formulations of the AIDSVAX vaccine have been developed and
clinically tested in Phase I/II trials. These include: monovalent AIDSVAX B for
HIV infections in North America and Europe bivalent AIDSVAX B/B for HIV
infections in North America and Europe, and bivalent AIDSVAX B/E for HIV
infections in Southeast Asia.
INITIAL TESTING OF AIDSVAX IN CHIMPANZEES
The chimpanzee is the only laboratory animal susceptible to HIV infection.
In the initial protection trials conducted by Genentech, chimpanzees were
vaccinated with three doses of monovalent AIDSVAX B. The vaccinated animals,
along with unvaccinated control animals, were then injected intravenously with
high doses of infectious HIV of the same strain that was used for the
preparation of the vaccine. None of the AIDSVAX vaccinated animals became
infected with HIV. All of the unvaccinated control chimpanzees became infected
with HIV.
8
In subsequent trials, chimpanzees were vaccinated with AIDSVAX B(MN) and
then challenged with a different strain of HIV known as B(SF2). Despite this
difference, vaccination with AIDSVAX B(MN) conferred complete immunity and
protection against infection with the B(SF2) strain. All of the vaccinated
control animals became infected with HIV. The cross-protection observed in this
experiment documented that AIDSVAX could successfully protect animals from
infectious HIV having a genetic composition distinctly different from the virus
used to make the vaccine. Based on the results of the chimpanzee trials,
Genentech sought and received regulatory approval to commence human clinical
trials to test the safety and efficacy of AIDSVAX in humans.
HUMAN CLINICAL TRIALS
Human clinical trials for vaccines involve three steps:
- Phase I -- tests for safety;
- Phase II -- larger-scale tests for safety and dosage, as well as a
determination of whether the vaccine stimulates antibodies and immune
memory; and
- Phase III -- multi-center, placebo-controlled, double-blind tests to
determine protection conferred by vaccination. These efficacy tests
are performed in volunteers who have a high risk of HIV infection.
PHASE I/II TRIALS -- DOSAGE AND SAFETY, ANTIBODY STIMULATION, MONOVALENT
AIDSVAX B
Phase I trials with monovalent AIDSVAX B vaccine were conducted by
Genentech. AIDSVAX B was clinically evaluated in 671 HIV-negative volunteers and
662 HIV-positive volunteers. None of the vaccinees reported serious side
effects. Some vaccinees occasionally experienced pain at the injection site, as
is common with many vaccines.
AIDSVAX B was tested at three doses: 100 (U)g, 300 (U)g and 600 (U)g of
gp120. The 300 (U)g dose was consistently found to be most effective,
stimulating a higher antibody response without serious side effects. The
clinical trial results also indicated that monovalent AIDSVAX B, at all three
doses tested, did not alter the progression of ongoing HIV infection.
In one study, 140 HIV-negative volunteers were vaccinated and boosted three
times with monovalent AIDSVAX B vaccine. Vaccinations were given at time 0, one
month and six months with an additional booster at 12 or 15 months. Antibodies
stimulated by vaccination with AIDSVAX B were measured for their ability to
neutralize HIV in culture tests. All of the vaccinated volunteers produced
antibodies in their blood that neutralized infectivity of HIV B(MN), the strain
that was used for preparation of
9
AIDSVAX. These neutralization tests were considered of key importance since they
measured the actual biological activity of the vaccine-stimulated antibodies.
Immune memory response to HIV in the same volunteers was measured by
examination of neutralizing antibody levels stimulated by sequential booster
shots. All vaccine recipients produced high levels of neutralizing antibody with
boosting. These antibody levels gradually declined with time. Each booster shot,
however, resulted in a rapid antibody response of even higher concentration,
demonstrating a memory recall of the antibody response. This is strong evidence
of immune memory being stimulated by the vaccine. We believe that such memory
will be key for protection, enabling the educated immune system to ward off HIV
infection before it establishes itself.
PHASE I/II TRIALS -- BIVALENT AIDSVAX B/B AND B/E
We believe that, since an antibody to a single receptor-binding site can
cause neutralization, antibodies to multiple receptor-binding sites will result
in yet broader neutralization. On this basis we developed and tested two
formulations of bivalent AIDSVAX.
We conducted two Phase II trials in the United States and Thailand in 214
HIV-negative volunteers. The trials used two bivalent formulations of AIDSVAX.
The volunteers were vaccinated and then given boosters one month later followed
at six months with another boost. The vaccine tested in the United States was
AIDSVAX B/B. The vaccine tested in Thailand was AIDSVAX B/E. Each of the
vaccines was selected for the known prevalence of these virus subtypes in the
particular countries tested. The trials were also designed to compare the
results of bivalent AIDSVAX to those of monovalent AIDSVAX. Four factors were
monitored:
- safety;
- dosage;
- antibody stimulation; and
- production of antibodies that would neutralize strains used in bivalent
AIDSVAX.
The vaccine did not cause any serious side effects. Vaccinees occasionally
experienced pain at the injection site, as is common with many vaccines. In a
dose response study, the bivalent AIDSVAX demonstrated the same results as those
observed with the monovalent vaccine.
The Phase II studies also demonstrated the stimulation of antibodies to
receptor-binding sites on gp120 proteins that were contained in the respective
vaccines. AIDSVAX B/B stimulated antibodies to M-tropic and T-tropic HIV found
in the United States. AIDSVAX B/E stimulated antibodies to M-tropic and T-tropic
HIV found in Thailand. In
10
contrast, the monovalent vaccine stimulated a narrower range of antibodies,
primarily to T-tropic strains.
We believe these findings support our hypothesis that a combination of
gp120 proteins in the bivalent vaccine would stimulate antibodies to a broader
range of HIV strains.
PHASE III CLINICAL TRIALS FOR AIDSVAX
In June 1996, we met with the FDA and its Vaccine and Related Biological
Products Advisory Committee to review the protocols for our Phase III clinical
trials. At this meeting, a discussion and vote was conducted on the issue of
whether the interim analysis could be used to determine vaccine efficacy. By a
vote of 12-0 in favor, it was agreed ". . . that the data safety monitoring
board will . . . recommend that the study be terminated if the trial detects an
efficacy of greater than 30%." In such a case, the halt of the trial would be
followed by vaccination of the placebo recipients and application for licensure
of the vaccine.
In May 1998, the FDA informed us that the data from our Phase I/II studies
were acceptable and that we could proceed to Phase III clinical trials in North
America and Europe. The first volunteers in the Phase III clinical trial were
vaccinated in June 1998. We concluded the enrollment of the trial in October
1999 with approximately 5,400 volunteers.
The Thai FDA is the governmental body involved in final approval to
manufacture and market medical products. As part of the Thai FDA review, the
Thai Ministry of Public Health has several subcommittees involved in making key
decisions. In the area of HIV/AIDS, this includes the Technical Subcommittee on
AIDS Vaccine, the Ethical Review Committee of the Research Committee, Ministry
of Public Health, and the Institutional Review Boards from the participating
institutions in the clinical trial.
In May 1998, we outlined our plans for Phase III clinical trials in
Thailand and in February 1999, we received an import license from the Thai FDA
with approval to begin Phase III clinical trials. In March 1999, the first
volunteers in Bangkok were vaccinated, initiating the Phase III clinical trial.
The enrollment for the trial was completed in August 2000 with approximately
2,500 volunteers.
The formulation of AIDSVAX that we are testing in North America and Europe
is different from the formulation being tested in Thailand. Different
formulations are necessary because the strains of HIV virus are different in the
two locations.
Trial Design
We are currently conducting two large, placebo-controlled, double-blind,
Phase III clinical trials. The test group of volunteers receives AIDSVAX while
the placebo group receives a comparable-appearing placebo containing alum alone.
All vials of vaccine and placebo are coded. During the trials, neither
volunteers nor researchers know which
11
volunteers are given the vaccine or placebo until the trials are completed or
stopped by the independent review board. Each volunteer is vaccinated a total of
seven times, during a 30-month period. The purpose of the booster doses, one
each six months, is to stimulate high antibody levels throughout the entire
trial period. During each visit, the volunteers receive counseling on how to
avoid the risk of HIV infection. Follow-up with volunteers will continue for at
least six months after the last vaccination is administered.
Volunteers in North America and Europe consist primarily of HIV-negative
homosexual men and HIV-negative women who have HIV-infected sexual partners or
high-risk sexual behavior. Volunteers in Thailand consist of HIV-negative
intravenous drug users with a high risk for blood-borne transmission of HIV. In
both the North American/European and Thai clinical trials, the volunteers are
recruited, vaccinated and monitored by clinics with HIV expertise and experience
with these particular population groups.
The size of each Phase III clinical trial was established by a statistical
model that included: (1) the statistical power to detect 30% efficacy at
statistical significance in preventing HIV infection; (2) the rate of infection
of the volunteer group; and (3) assumptions concerning the rate of retention of
the volunteers in the trial for a 36 month clinical observation period.
Within these parameters, the North American/European clinical trial
includes 5,400 volunteers, randomized 2:1 for vaccine:placebo recipients. The
trial in Thailand includes 2,500 volunteers, randomized 1:1 for vaccine:placebo
recipients. The North American/European Phase III clinical trial is taking place
in 56 clinics in the U.S., one clinic each in Puerto Rico and in the
Netherlands, and three clinics in Canada. The trial in Thailand is taking place
in 17 methadone clinics under direction of the Bangkok Metropolitan
Administration.
Each Phase III clinical trial is conducted in two overlapping steps:
(1) recruitment of volunteers during an estimated 12-to-14 month period;
and
(2) a 36-month clinical observation period.
For each individual, the 36-month observation period begins on the day of
their first vaccination. As a result, the entire clinical trial will be
completed upon recruitment of the volunteers and completion of their collective
36-month observation periods.
As part of the study design, an interim efficacy analysis will be performed
in each clinical trial. In our North American/European trial, the interim
analysis will be conducted in November 2001. The interim analysis for the Thai
trial is anticipated to be conducted during the fourth quarter of 2002.
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Enlistment of Clinical Sites and Volunteers
We enlisted clinical sites based on their ability to perform clinical
trials and to recruit the appropriate type and number of volunteers for the
Phase III clinical trials. Our North American/European trial called for
approximately 1,700 HIV-negative volunteers to be recruited from an already
established group of at-risk individuals at 12 clinical centers. These centers,
sponsored by the National Institutes of Health as part of a vaccine preparedness
trial, have over the past four years established a system for the recruitment of
at-risk volunteers. The trial design further called for recruiting the remaining
3,700 HIV-negative volunteers by the 49 additional clinical sites. Based on
experience at the 12 clinical centers, we are assuming an incidence of 1.5% HIV
infection per year, and a retention rate of at least 80% for volunteers for the
entire 36-month observation period.
In Thailand, a group of injection drug users were recruited through a
combined effort of the Bangkok Metropolitan Administration, Mahidol University
and the Centers for Disease Control and Prevention. The trial design called for
the recruitment of an estimated 600 HIV-negative volunteers from an already
established group and for 1,900 HIV-negative volunteer injection drug users from
the Bangkok population. We are assuming a 4% incidence of HIV in these
volunteers and a retention rate of over 75% during the 36-month observation
period. Retention rate refers to the degree to which volunteers continue to
participate in the study.
Conduct of the Phase III Clinical Trials
We have a clinical team of 33 full-time employees who assist and monitor
the 61 clinical sites that are engaged in the North American/European AIDSVAX
trials. This clinical team organizes and monitors:
- the clinical testing sites;
- data management;
- the central contract laboratory for HIV testing;
- sample handling and shipping; and
- bio-statistics.
Audit and monitoring functions are also conducted by an outside clinical
research organization, which audits the clinical sites for compliance with the
Phase III procedures, data recording, medical records and the use of good
clinical practice, as defined by the FDA.
For Thailand, we employ a clinical team of four and have contracted a
full-time staff of three in Bangkok. The Bangkok operations are directed by a
project manager and a Thai physician who provide interface between us and Thai
institutions involved in the Phase
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III clinical trials. Approximately 200 people in Thailand are also involved
in administration and conduct of the trials and are employed by the Bangkok
Metropolitan Authority.
Each clinical site has agreed to conduct its activities according to the
United States and Thai FDA-reviewed Phase III protocols. The protocol sets
standard procedures for all sites and laboratories. Following each visit of
volunteers to the clinical site, data are recorded in both the volunteers'
permanent medical chart, as well as on a case report form, which is forwarded to
us. The trial design calls for approximately 1,200,000 case report forms to be
gathered and entered into the database for both clinical trials. As of December
31, 2000, we have processed approximately 570,000 case report forms.
The Phase III protocol also requires clinical sites to report any serious
adverse event to VaxGen. Any serious adverse events are to be immediately
examined in detail by our clinical monitors. If deemed a serious event related
to the vaccine, the event is to be promptly reported to the FDA. The protocol
requires all other adverse events to be recorded on the case report forms and
provided to VaxGen's Data and Safety Monitoring Board (DSMB) and the FDA for
review on a periodic basis.
Interim Analysis and Completion of the Phase III Clinical Trials
The DSMB oversees the clinical trials in North America, Europe and
Thailand. The 10 person monitoring board consists of prominent clinicians, AIDS
specialists, vaccinologists and statisticians. The board contains seven members
from the United States and three from Thailand. A former Deputy Director of the
Centers for Disease Control and Prevention serves as the Chairman of the
monitoring board.
The DSMB is scheduled to evaluate the safety and trial conduct every six
months. In 1999 and 2000, a total of four reviews were conducted. Based on the
data presented to the DSMB, each time there were no significant or unexpected
findings related to safety. In both trials, the vaccine appears to be safe. In
addition, the trials continue to exhibit high retention of volunteers.
For the North American/European clinical trial, we will have our first
opportunity in November 2001 to find out how well AIDSVAX works. If the results
of the interim analysis demonstrate 30% or greater efficacy, at statistical
significance, we believe that the DSMB will recommend that we terminate the
trial. We will then begin the process of applying for regulatory approval and
begin vaccinating the placebo group to conform to ethical requirements. If the
results of the interim analysis are inconclusive, we will proceed for another 12
months to the scheduled endpoint of the trial at the end of 2002. During this
time, we will gather additional statistical power that will improve our ability
to determine the vaccine's effectiveness. An interim analysis for the Thai
clinical trial is anticipated to take place during the fourth quarter of 2002.
Following the close of the Phase III clinical trials, either at the time of
the interim efficacy analysis or at the conclusion of the complete trial,
14
we will prepare the final report, which will be entered into the Biologics
License Application used for seeking regulatory approval.
Determination of Efficacy
The primary endpoint of the Phase III clinical trials will be to determine
the quantitative effect of AIDSVAX in high-risk volunteers. To gain FDA
regulatory approval for the sale of AIDSVAX in the United States, we believe,
based on discussions with the FDA and the recommendations of its Vaccine and
Related Biological Products Advisory Committee, that we will need to demonstrate
that the AIDSVAX vaccine reduces the level of HIV infection by at least 30% at a
statistically significant level. Statistical significance means that if the
clinical trial were repeated, an efficacy of greater than 30% would be observed
95 times out of 100. While these discussions and the vote of the Vaccine and
Related Biological Products Advisory Committee are not binding on the FDA, they
are generally followed. In the context of our United States clinical trial,
which represents a small sampling from the entire population, this means that in
order to establish a 30% efficacy at a statistically significant level there
must be an observed reduction in the incidence of HIV in the group receiving the
vaccine compared to the control group of between 45% to 65%, or possibly a
higher percentage, depending on various factors that will have a bearing on the
statistical significance of the clinical trial results. These factors include
the number of patients ultimately retained in the study, the rate of HIV
infection in the control group and the length of time associated with the
clinical observation period. We anticipate that the efficacy required to obtain
regulatory approval to market AIDSVAX in foreign countries will vary from one
country to another and may differ significantly from that required by the FDA.
A secondary endpoint of the Phase III clinical trials will be to determine
qualitative effects of AIDSVAX on HIV infections. This is performed in case the
vaccine induces meaningful immunity, but the immune response is not of
sufficient strength to fully prevent infection. For this purpose, multiple blood
samples are drawn from each infected volunteer as part of the Phase III clinical
trials. Each of the blood samples can be examined for levels of circulating
virus, or viral load. From this, we can determine if vaccinated individuals have
suppressed their HIV infections relative to those in the placebo group.
If the infection is transient, or if the level of HIV is maintained in
vaccine recipients at low levels, this might indicate that the vaccine is
slowing the progression of HIV infection. In therapeutic studies it is known
that suppression of viral load correlates with an extension of life. Therefore,
should we find that AIDSVAX causes a reduction in HIV infection, we might submit
this data to support our primary regulatory application or, if justified, as a
stand-alone submission.
In addition to HIV antibody testing of all blood samples, a subset of
volunteers, 5% of the total, will be monitored throughout the trial period with
a variety of immunological tests. These tests will be performed to determine
details of the immune response, with the goal of identifying an immune correlate
of protection against infection. Such a correlate might
15
include, for example, a determination of the minimum antibody level required to
protect. We believe the finding of a correlate of protection both supports the
scientific rationale of the vaccine and provides a measurement by which the
vaccine may be improved. We believe finding a correlate of protection would be
viewed favorably in the context of any regulatory applications submitted to the
FDA.
THE MARKET FOR AIDSVAX
We have developed formulations of AIDSVAX that focus on HIV found in some
of the major regions of the world. Our first bivalent vaccine, AIDSVAX B/B, is
directed against the predominant HIV subtype in the Americas, Europe, the
Caribbean and Australia. Our second bivalent vaccine, AIDSVAX B/E, is directed
against the predominant HIV subtypes in Southeast Asia, the Pacific Rim,
Indonesia and southern portions of China. Based on the populations of these
regions, the market for the two current formulations of AIDSVAX could cover
approximately half of the world's population, or nearly three billion people.
We also have plans to develop two additional AIDSVAX vaccines: one for the
subtype C virus, which would be directed against viruses in China, India and
Africa; and one for subtype A and D viruses, which are commonly found in
Sub-Saharan Africa and parts of South America. We believe that four vaccines
directed against the A, B, C, D and E subtypes of HIV would effectively address
the worldwide spread of the HIV/AIDS epidemic. Our ultimate goal is to produce a
single vaccine for worldwide use.
Influence of Vaccine Improvements
We believe we will be able to rapidly develop new formulations of AIDSVAX.
We have accomplished this with our two bivalent formulations of AIDSVAX. This
process provides for a continued basis of product improvement.
We expect successive formulations of AIDSVAX to improve product efficacy,
as well as the breadth of protection against different HIV subtypes. In
addition, we will seek to create vaccines that require fewer booster shots and
that can be used over larger areas of the world. Thus, we expect that an initial
vaccine could be gradually enhanced, resulting in corresponding increases in the
size of the market for the vaccine.
On the basis of our ongoing discussions with the FDA, we believe that
improvements will be accomplished as amendments to our initial regulatory
license, rather than as applications for entirely new products. This approach,
if successful, would result in considerable savings of time and cost associated
with future product development.
LICENSE AND SERVICES AGREEMENTS WITH GENENTECH
We have entered into a license agreement with Genentech, which in part
defines the working relationship between the companies. The licensed technology
relates to the
16
development of a vaccine based on, containing, incorporating or using the
recombinant gp120 subunit protein developed by Genentech to prevent, but not
treat, HIV infection and/or AIDS. Genentech has granted us an exclusive license
to all patents and patent applications directly related to this technology and
to proprietary know-how necessary for this technology. Certain of the licensed
technology is sublicensed to us under licenses from third parties to Genentech.
We, as the exclusive licensee of Genentech, have assumed all of Genentech's
obligations under these third-party license agreements. The initial term of the
license agreement is 15 years from the commercial introduction date of a
licensed product and will be determined on a country-by-country,
product-by-product basis.
Genentech has an option to obtain an exclusive worldwide license to use,
market and sell licensed products. This option is exercisable for 90 days after
we make our first filing with the FDA for marketing approval of a licensed
product. If Genentech exercises the marketing option:
- Genentech is required to pay us a fee equal to 33% of our total
development costs including clinical testing, to date for the licensed
product;
- VaxGen and Genentech will share net profits from sales of the licensed
products, 30% and 70%, respectively, for sales within the United States
and 70% and 30%, respectively, for sales outside the United States;
- future developmental costs will be apportioned between the parties based
on their respective profit share in a particular country; and
- the parties will establish a committee with an equal number of
representatives from each company to oversee the development and
commercialization of additional licensed products.
While the agreement specifies the formula used to calculate net profits,
the calculation of individual components of the formula are subject to future
negotiations and/or determination.
In the event that Genentech does not exercise the marketing option, then,
in lieu of sharing net profits from the licensed products, we will pay Genentech
a royalty on all sales of licensed products equal to:
- 25% of our net sales and our sublicensees' net sales of the licensed
products worldwide, so long as any commercial vaccine component has been
manufactured and supplied by Genentech; or otherwise
- 15% of our total net sales and our sublicensees' net sales of the
licensed products worldwide.
17
Under the license agreement, we are required to use due diligence in
developing, seeking regulatory approval for, marketing and commercializing
licensed products. Development and commercialization of licensed products is our
sole business goal. In connection with reaching this goal, we are required to
achieve the filing of the first market approval for a licensed product with the
FDA no later than the fifth anniversary of the closing of our 1997 private
placement. If we are unable to meet this milestone due to certain agreed-upon
events or circumstances, we may request an extension from Genentech, subject to
a two-year limit on such extensions. If we are unable to meet a milestone for
any reason other than the agreed-upon events or circumstances, any extension
granted will be at Genentech's sole discretion. If we fail to exercise our due
diligence, Genentech has the right to convert our exclusive license to a
non-exclusive license, and may be entitled to terminate the license.
We have also entered into a services agreement with Genentech pursuant to
which Genentech has agreed to provide us with research, process science,
manufacturing, clinical and regulatory support, primarily by making the services
of certain Genentech personnel available to us. We reimburse Genentech for their
fully burdened direct costs relating to the provision of these services. Either
party may terminate the services agreement upon a breach, which continues
uncured for more than 60 days, or upon the occurrence of bankruptcy or similar
events. In addition, the services agreement will automatically terminate upon
any termination of the license agreement. The services agreement recently
terminated on December 31, 2000 and is currently being renegotiated for
extension.
LICENSED PATENTS
Under the license agreement, we have licensed from Genentech exclusive
rights to a portfolio of United States and foreign patents. These patents cover
nine families of subject matter. We have eight issued United States patents and
eight pending United States patent applications. With foreign filings, we have
83 issued patents and 37 are still pending. The technology claimed in these
patents and applications involves a range of HIV vaccine product development
activities, including the cloning and expression of recombinant virus
glycoproteins for use as vaccine products and sustained release formulations of
HIV gp120. Also claimed by patent filings are specific compositions of matter
for the components of our vaccine products, and proprietary production, recovery
and purification process technology. Together, these filings provide
intellectual property that we believe will enhance the value of our products.
Under the license agreement, Genentech has retained title to the licensed
patents and patent applications and other licensed technology previously owned
by Genentech, while we will retain title to any improvements developed by us.
Both parties will jointly own any improvements to the licensed patents and
patent applications or other licensed technology developed or invented jointly.
If Genentech exercises its marketing option under the license agreement,
Genentech will have a fully paid-up, non-exclusive, worldwide license under all
improvements to the licensed know-how or patent rights that we own. Furthermore,
Genentech will have such a license if Genentech terminates the
18
license agreement before the expiration of the 15-year term or if we voluntarily
terminate the license agreement. Genentech will remain responsible for the
filing, prosecution and maintenance of all licensed patent rights, in
consultation with us, at our expense.
We were informed in 1997 that Chiron Corporation filed oppositions against
two of Genentech's European patents that are licensed to us. With our
assistance, Genentech defended these patents, which were both upheld in amended
form in May 2000. By prevailing in both patent disputes, we confirmed our
exclusive rights to various forms of key proteins, methods for manufacturing the
proteins, and their use for the prevention and treatment of HIV/AIDS. We believe
the broad intellectual property protection afforded by these patents may allow
us to participate in, and benefit financially from, the development of any
vaccine that uses these proteins, in particular the form of gp120 that is the
main ingredient in AIDSVAX. Chiron Corporation has recently appealed both
decisions, and the appeals are pending.
We have been informed by the United States Department of Health and Human
Services (DHHS) that we may need to obtain a license under one or more of its
United States and foreign patents involving molecular clones of HIV-1 viral
strains MN-STI and BA-L. We are currently exploring the advisability of
obtaining such a license. However, we are not currently employing these
particular strains in any vaccine development. We filed an opposition to a
European counterpart of this DHHS patent. This opposition was decided recently.
Although the European patent was upheld, the patent was significantly amended
and limited to these specific strains, such that we deemed it necessary to
appeal the decision. We have been informed that the DHHS has decided not to
appeal.
SALES AND MARKETING
We intend to rely on third parties for sales and marketing of AIDSVAX.
Genentech currently has an option to obtain an exclusive worldwide license to
use, market and sell AIDSVAX. If AIDSVAX is approved for sale and Genentech does
not exercise its option to market AIDSVAX, we intend to enter into agreements
for marketing and distribution with other partners and will pay a predetermined
royalty to Genentech.
MANUFACTURING
We intend to rely on third parties to manufacture AIDSVAX or to build our
own manufacturing facility. Our license agreement with Genentech gives Genentech
an option to manufacture and supply AIDSVAX for clinical testing and commercial
sale. The license also gives Genentech an option to manufacture any AIDSVAX
formulation beyond those it has already agreed to supply. If Genentech does not
exercise its option to manufacture AIDSVAX, the license agreement allows us to
enter into manufacturing agreements with third parties and pay a predetermined
royalty to Genentech. If we utilize a third party, the license agreement
provides that Genentech must transfer the required manufacturing technology and
know-how to the third party. However, manufacturing facilities capable of
producing biological drug products using mammalian cell culture fermentation in
large-scale are limited and in high demand on a worldwide basis.
Genentech has developed a proprietary method for producing synthetic gp120
protein. This method has enabled Genentech to clone and express gp120 genes from
two dozen
19
HIV strains. Utilizing genetic engineering, a fragment of coding information
from HIV, consisting of the gp120 gene, is cloned from HIV into mammalian cells
(Chinese hamster ovary cells). We have an exclusive license from Genentech to
all of these genes and the technical know-how to produce the synthetic gp120
proteins.
Specifically, for any formulation of AIDSVAX, the gp120 gene is inserted
into Chinese hamster ovary cells which act as cellular factories that can
produce commercial quantities, measured in kilograms, of gp120 protein. The
production of gp120 in Chinese hamster ovary cells assures both genetic
consistency and structural integrity of the synthetic product. As a result, the
synthetic form is virtually identical to the natural form of gp120 that occurs
in HIV viral particles. Since only a fragment of HIV is used in this process,
there is no production of infectious HIV, and the final product is incapable of
causing infection or disease.
Genentech supplied us, cost-free, with its stock of approximately 300,000
doses of the B(MN) gp120 protein for testing in our Phase III clinical trials.
We will use the B(MN) gp120 protein following successful completion of
formulation with alum, vialing and quality assurance/control testing, for which
we will bear Genentech's costs and expenses. Genentech also supplied us with
agreed-upon amounts of up to two additional gp120 proteins, B(GNE8) and E(244),
for use in combination with the currently manufactured B(MN) gp120 for clinical
trials. For the additional antigens, we pay Genentech its fully burdened
manufacturing costs.
GOVERNMENT COLLABORATIONS
We have established collaborative relationships with two federal government
agencies: 1) The Centers for Disease Control and Prevention; and (2) National
Institute of Allergy and Infectious Diseases.
Our collaborations with the Centers for Disease Control and Prevention
(CDC) are conducted in both the United States and Thailand. In October 1999, we
entered into a collaboration with the CDC to support research at six of the 56
clinics in the United States currently conducting Phase III clinical trials of
our AIDSVAX vaccine. The CDC selected the six sites in the fourth quarter of
1999. Contractual arrangements between the CDC and the clinics were completed in
the second quarter of 2000. The participating sites will continue to implement
our Phase III protocol, as well as conduct epidemiological, social and
behavioral research, which will be shared by us and the CDC. The sites will be
compensated directly by the CDC for the clinical costs, which would have been
incurred by us, and for conducting the additional research. The CDC has agreed
to contribute approximately $8,000,000 to the participating sites over a
four-year period. In Thailand, the CDC is assisting in the measurement of viral
loads in infected vaccinees and placebo recipients, as well as examining HIV
subtypes and strains in the study populations.
On March 23, 2001, we finalized the collaborative agreement with the
National Institute of Allergy and Infectious Diseases (NIAID) to obtain and
store clinical specimens from our North American/European Phase III clinical
trial. The agreement provides that NIAID may fund approximately $3,000,000 to
$4,000,000 for this program. The majority of the funding would go to third
parties for their participation in the program.
OTHER COLLABORATIONS
VaxGen also has on-going collaborations in which we provide AIDSVAX to four
separate phase I/II clinical trials testing combination vaccines. Our vaccine is
being tested with two different formulations of an Aventis Pasteur vaccine
candidate. The trials are being conducted in the United States and abroad in
both adult and infant populations.
20
COMMERCIAL RELATIONSHIP WITH AVENTIS PASTEUR
On April 10, 1998, we signed a non-binding letter of intent with Aventis
Pasteur (formerly Pasteur Merieux Connaught) to co-develop an alternative
vaccine regimen, called the prime/boost. The prime/boost utilizes two
independent vaccines administered sequentially. An Aventis Pasteur vaccine is
administered initially, followed by a bivalent gp120 vaccine. Should it prove
efficacious, the alternative vaccine regimen would be developed, clinically
tested, and if approved by regulatory agencies, marketed by Aventis Pasteur. We
would serve as a scientific co-developer and a source for bivalent formulations
of AIDSVAX, a critical component of the regimen. We believe we would share
significantly in profits made from the sale of both vaccines -- the Aventis
Pasteur combination vaccine, as well as AIDSVAX.
Currently, Aventis Pasteur and VaxGen are discussing collaborative studies
with our respective vaccines, as well as a long-term co-development agreement.
Genentech currently holds exclusive options for the manufacture and marketing of
AIDSVAX. Thus, the long-term relationship being discussed with Aventis Pasteur
would require Genentech's approval.
COMPETITION
We estimate that approximately 30 other HIV vaccines have been tested; most
of them to date have been unsuccessful. Only AIDSVAX and two other major
vaccines have progressed to Phase II testing. AIDSVAX is the only HIV vaccine to
commence Phase III clinical trials.
We believe that we now lead all competitors worldwide in the development of
an HIV preventive vaccine. Of the two major HIV vaccines that have reached human
clinical trials, we have full control of the leading product, AIDSVAX, and we
may become a partner in the second with Aventis Pasteur.
GOVERNMENT REGULATION
AIDSVAX is subject to federal regulation, by the federal government,
principally by the FDA under the Public Health Services Act, the Food, Drug and
Cosmetic Act and other laws, and by state and local governments. Such
regulations govern or influence, among other things, the testing, manufacture,
safety and efficacy requirements, labeling, storage,
21
record keeping, licensing, advertising, promotion, distribution and export of
such products.
AIDSVAX is classified by the FDA as a biological drug product. The steps
ordinarily required before a biological drug product may be marketed in the
United States include:
- preclinical laboratory and animal testing;
- the submission to the FDA of an Investigational New Drug Application,
which must become effective before clinical trials may commence;
- adequate and well-controlled clinical trials to establish the safety,
purity and potency of the biological drug product and to characterize how
it behaves in the human body;
- the submission to the FDA of a Biologics License Application that
includes both clinical trial data and manufacturing information;
- FDA review of the Biologics License Application;
- satisfactory completion of an FDA preapproval inspection of the
manufacturing facilities; and
- FDA approval of the license application, including approval of all
product labeling.
In connection with obtaining approval to proceed with Phase III clinical
trials and in determining the trial protocol, VaxGen has met with the FDA and
its Vaccines and Related Biological Product Advisory Committee of the FDA. The
FDA's advisory committees are composed of outside experts who assist the FDA in
product reviews and provide advice on various issues. While the recommendations
of these committees are not binding on the FDA, they are commonly followed. In
connection with the Phase III clinical trials the FDA sought and received advice
from the Vaccines and Related Biological Products Advisory Committee regarding
the clinical development program and clinical study designs for AIDSVAX.
Preclinical testing includes laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety, purity and potency of each product. Preclinical safety tests must be
conducted by laboratories that comply with FDA regulations regarding Good
Laboratory Practices. The results of the preclinical tests together with
manufacturing information and analytical data are submitted to the FDA as part
of the Investigational New Drug Application and are reviewed by the FDA before
the commencement of clinical trials. Unless the FDA objects to an
Investigational New Drug Application by placing the study on clinical hold, the
Investigational New Drug Application will become effective 30 days following its
receipt by the FDA. The FDA may suspend clinical trials at any time on various
grounds, including a finding that patients are being exposed to unacceptable
health risks. If the FDA does place the study
22
on clinical hold, the sponsor must usually resolve all of FDA's concerns before
the study may proceed.
Clinical trials involve the administration of the investigational product
to humans under the supervision of qualified principal investigators. Clinical
trials are conducted in accordance with Good Clinical Practices under protocols
submitted to the FDA as part of the Investigational New Drug Application. In
addition, each clinical trial is approved and conducted under the auspices of an
institutional review board and with the patients' informed consent. The
institutional review board considers, among other things, ethical factors, the
safety of human subjects and possibility of liability of the institutions
conducting the trial.
Clinical trials are conducted in three sequential phases; however, the
phases may overlap. The goal of a Phase I clinical trial is to establish initial
data about safety and tolerance of the biological agent in humans. In Phase II
clinical trials, evidence is sought about the desired immune response of a
biological agent in a limited number of patients. Additional safety data and
dosing regimen information are also gathered from these studies. The Phase III
clinical trial program consists of expanded, large-scale, multi-center studies
of persons who are susceptible to the targeted disease. The goal of these
studies is to obtain sufficient evidence of the safety, purity and potency of
the proposed product. Our Phase III clinical trials of AIDSVAX are being
conducted on persons at risk for HIV infection but who test HIV negative prior
to enrollment in the trial. The FDA also frequently requests that sponsors
conduct Phase IV studies after licensing to gain additional information about
the biological drug product in a wider population.
All data obtained from this comprehensive program, in addition to detailed
information on the manufacture and composition of the product, would be
submitted in a Biologics License Application to the FDA for review and approval
for the manufacture, marketing and commercial shipments of AIDSVAX. FDA approval
of the Biologics License Application is required before marketing may begin in
the United States. The FDA also may, at any time, require the submission of
product samples and testing protocols for lot-by-lot confirmatory testing by the
FDA prior to commercial distribution. This means a specific lot of vaccine
cannot be released for commercial distribution until the FDA has authorized such
release. Similar types of regulatory processes will be encountered as efforts
are made to market the vaccine internationally. We will be required to assure
product performance and manufacturing processes from one country to another.
For commercialization of AIDSVAX, the manufacturing processes described in
our Biologics License Application must receive FDA approval and the
manufacturing facility must successfully pass an inspection prior to approval of
AIDSVAX for sale within the United States. The pre-approved inspection assesses
whether, for example, the facility complies with the FDA's good manufacturing
practices. These practices include elaborate testing, control, documentation,
record keeping and other quality assurance procedures. If Genentech does not
exercise its option to manufacture AIDSVAX, we must pursue third-party
manufacturing arrangements. For marketing outside the United States, we will be
subject to the regulatory requirements of other countries, which vary from
country to
23
country, including marketing approval requirements. The time needed to secure
regulatory approval in other countries may be longer or shorter than that
required for FDA approval.
EMPLOYEES
As of December 31, 2000, we had 78 employees: 37 are clinical staff, 22 are
research and development staff and 19 are management/administration staff. None
of our employees is subject to a collective bargaining agreement, and we believe
that our relations with our employees are good.
EXECUTIVE OFFICERS
The names of our executive officers as of December 31, 2000 and information
about them is presented below.
NAME AGE POSITION
- ---- --- --------
Donald P. Francis............................... 58 President, Director
George T. Baxter................................ 48 Senior Vice President, General Counsel
Phillip W. Berman............................... 52 Senior Vice President, Research & Development-- Director
John G. Curd.................................... 55 Senior Vice President, Medical Affairs
Carter A. Lee................................... 48 Senior Vice President, Finance & Administration
William L. Heyward.............................. 50 Vice President, International Clinical Research
Donald P. Francis, M.D., D.SC. Dr. Francis co-founded VaxGen in November
1995 and has served as our President and as a director since inception.
Following the resignation of Robert Nowinski, PhD, in December 2000, Dr. Francis
assumed the role of interim Chief Executive Officer.From 1993 to 1995, Dr.
Francis directed HIV vaccine clinical research at Genentech. Prior to joining
Genentech, Dr. Francis served from 1971 to 1992 in various positions at the
Centers for Disease Control. During this period, Dr. Francis established and
directed the HIV laboratory for the Centers for Disease Control and served as an
Assistant Director, Viral Diseases Program. At that time, he was also a
principal investigator in one of the two Phase III clinical trials that led to
licensure of the hepatitis B vaccine in the United States. In 1976, Dr. Francis
was the lead epidemiologist on the first clinical team to encounter and control
the Ebola virus. Prior to such time, Dr. Francis had a central role in the World
Health Organization's smallpox eradication program, which eradicated smallpox
from the world. Dr. Francis received an M.D. from Northwestern University and
completed his training in pediatrics at Los Angeles County/USC Medical Center.
Dr. Francis received a doctorate in virology from the Harvard School of Public
Health.
George T. Baxter, Mr. Baxter has served as our Senior Vice President,
General Counsel and Corporate Secretary, since September 2000. Prior to joining
VaxGen, Mr. Baxter specialized in AIDS-related litigation. In the course of more
than a decade of practice, he won five significant cases. His practice, which
was based in New Jersey, also specialized in epidemiology, biological and
corporate litigation. Before entering private
24
practice, Mr. Baxter served with a New Jersey-based law firm where he practiced
general and corporate litigation. Mr. Baxter earned his B.A. from William
Patterson University and an M.A. from John Jay College at the City University of
New York, and a J.D. from Rutgers University Law School.
Phillip W. Berman, PH.D. Dr. Berman is the inventor of AIDSVAX and has
served as our Senior Vice President, Research & Development, since April 1999.
Dr. Berman served as our Vice President of Research & Development from November
1997 to April 1999, and has served as a director since October 1997. From 1982
to 1997, Dr. Berman served in various capacities with Genentech, including
Senior Scientist, Molecular Biology Department, and Staff Scientist, Department
of Immunology and also Department of Process Sciences. From 1984 until he joined
VaxGen, Dr. Berman had research responsibilities in Genentech's AIDS Vaccine
Project. Dr. Berman received an A.B. in biology from the University of
California, Berkeley, a Ph.D. in biochemistry from Dartmouth College and
performed post doctoral research at the Neurobiology Laboratory of the Salk
Institute and the Department of Biochemistry and Biophysics at the University of
California, San Francisco.
John G. Curd, M.D. Dr. Curd has served as our Senior Vice President,
Medical Affairs, since April 1999. From 1991 to April 1999, Dr. Curd held
various positions at Genentech, including Director,
Immunology/Oncology/Infectious Disease, Senior Director and Head of Clinical
Science and Vice President of Clinical Development. From 1978 to 1991, Dr. Curd
held several research and clinical positions at The Scripps Clinic, a
world-renowned research foundation and medical clinic, including Head, Division
of Rheumatology; Vice Chairman, Department of Medicine; and President of Medical
Staff of Green Hospital of Scripps Clinic. He received a B.A. from Princeton
University and an M.D. from Harvard Medical School.
Carter A. Lee Mr. Lee has served as Senior Vice President, Finance &
Administration since April 1999. From 1991 to 1997, Mr. Lee served as Senior
Vice President and Chief Financial Officer of Diefenbach Elkins International,
Inc. (now known as FutureBrand), a corporate branding consultancy. From 1990 to
1991, Mr. Lee served as Vice President, Finance & Administration of EDAW, Inc.,
a landscape architecture and planning firm. From 1987 to 1990, Mr. Lee served as
Vice President and Corporate Controller of Landor Associates, a strategic design
consulting firm. Prior to such time, Mr. Lee served in various positions at
Coopers & Lybrand (now known as PricewaterhouseCoopers LLP). Mr. Lee received a
B.A. from the University of California, Berkeley, and an M.B.A. from California
State University, Hayward.
William L. Heyward, M.D. Dr. Heyward has served as our Vice President,
International Clinical Research, since January 2000. Dr. Heyward served at the
Centers for Disease Control and Prevention (CDC) for more than 20 years. While
at CDC, Dr. Heyward coordinated vaccine trial research in Alaska on hepatitis B
and Haemophilus influenzae type b and was involved in the investigation of the
Ebola epidemic in Kikwit, Zaire. His most recent position at the CDC entailed
coordinating domestic and international HIV vaccine development and evaluation.
Prior to that he was director of
25
the largest AIDS research project in Africa and was detailed to the World Health
Organization and UNAIDS as a specialist in HIV vaccines and vaccine trials. Dr.
Heyward received his B.A. from Emory University, an M.D. from the Medical
College of Georgia and his M.P.H. from the Johns Hopkins University School of
Hygiene and Public Health.
FACTORS AFFECTING FUTURE RESULTS
This section briefly discusses certain risks that should be considered by
stockholders and prospective investors in VaxGen. You should carefully consider
the risks described below, together with all other information included in this
Annual Report on Form 10-K and the information incorporated by reference. If any
of the following risks actually occur, our business, financial condition or
operating results could be harmed. In such case, the trading price of our common
stock could decline.
This Annual Report on Form 10-K also contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ materially
from those anticipated in the forward-looking statements as a result of factors
that are described below and elsewhere in this Annual Report on Form 10-K. When
used in this discussion, the words "intend," "anticipate," "believe,"
"estimate," "plan" and "expect" and similar expressions as they relate to us are
included to identify forward-looking statements. Such statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on such forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the results of
any revisions to such forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
If we are unable to commercialize our sole product candidate, aidsvax, we
may not have revenues to continue operations. AIDSVAX is our only product
candidate. We do not know whether the current or planned formulations of AIDSVAX
will be effective in preventing HIV infection. The overall scientific knowledge
of HIV is limited. Although our research has indicated that AIDSVAX contains a
protein that is critical in the infection process, other proteins may be
necessary to develop an effective vaccine.
Our success will depend entirely on the success of AIDSVAX. In particular,
we must be able to:
o establish the safety, purity, potency and efficacy of AIDSVAX in humans;
o obtain regulatory approvals for AIDSVAX, including a preapproval
inspection of a manufacturing facility; and
o successfully commercialize AIDSVAX through collaborative relationships.
26
If we are unable to commercialize AIDSVAX, we do not have other products
from which to derive revenue.
If we are not able to demonstrate the efficacy of aidsvax in our clinical
trials or our clinical trials are delayed, we may not be able to obtain
regulatory clearance to market aidsvax in the united states or abroad on a
timely basis, or at all. Clinical testing is a long, expensive and uncertain
process. We cannot assure you that the data collected from our clinical trials
will be sufficient to support approval of AIDSVAX by the FDA or any foreign
regulatory authorities, that the clinical trials will be completed on schedule
or, even if the clinical trials are successfully completed and on schedule, that
the FDA or any foreign regulatory authorities will ultimately approve AIDSVAX
for commercial sale.
To gain FDA regulatory approval for the sale of AIDSVAX in the United
States, we believe, based on discussions with the FDA and the vote of its
Vaccine and Related Biological Products Advisory Committee, that we will need to
demonstrate that AIDSVAX reduces the level of HIV infection by at least 30% at a
statistically significant level. These discussions and the vote of the Vaccine
and Related Biological Products Advisory Committee, however, are not binding on
the FDA. In the context of our United States clinical trial, which represents a
small sampling from the entire population, this means that in order to establish
30% efficacy at a statistically significant level there must be an observed
reduction in the incidence of HIV in the group receiving the vaccine compared to
the control group of between 45% to 65%, or possibly a higher percentage,
depending on various factors that will have a bearing on the statistical
significance of the clinical trial results. These factors include the number of
patients ultimately enrolled in the study, the rate of HIV infection in the
control group and the length of time associated with the clinical observation
period. We anticipate that the efficacy required to obtain regulatory approval
to market AIDSVAX in foreign countries will vary from one country to another and
may differ significantly from that required by the FDA. We cannot assure you
that the data collected from our United States or Thai clinical studies will
demonstrate the required level of efficacy to permit the commercialization of
AIDSVAX in the Unites States, in Thailand or in any other foreign country.
Our trials could be delayed for a variety of reasons, including:
o lower than anticipated retention rate of volunteers in the trial; or
o serious adverse events related to the vaccine.
Results of previous animal trials may not be relevant for determining the
protective effect of AIDSVAX against HIV infection in humans. Preclinical and
clinical data can be interpreted in different ways, which could delay, limit or
prevent regulatory approval. Serious adverse events related to the vaccine
during our Phase III clinical trials could
27
cause the trials to be prematurely terminated. Negative or inconclusive results
could cause the trials to be unacceptable for submission to regulatory
authorities.
If we fail to comply with extensive regulations enforced by domestic and
foreign regulatory authorities, the commercialization of AIDSVAX could be
prevented or delayed. AIDSVAX is subject to extensive government regulations
related to development, clinical trials, manufacturing and commercialization.
The process of obtaining FDA and other regulatory approvals is costly, time
consuming, uncertain and subject to unanticipated delays.
The FDA may refuse to approve an application if it believes that applicable
regulatory criteria are not satisfied. The FDA may also require additional
testing for safety and efficacy. Moreover, if regulatory approval of a product
is granted, the approval may be limited to specific indications or limited with
respect to its distribution. For instance, the FDA may approve the licenses for
only high-risk populations. Foreign regulatory authorities may apply similar
limitations or may refuse to grant any approval.
There can be no assurance that the FDA will approve the AIDSVAX
manufacturing processes or that manufacturing facilities will pass an FDA
preapproval inspection for AIDSVAX. Should Genentech elect not to manufacture
AIDSVAX, we must secure a third-party manufacturer. We cannot assure you that we
will successfully identify a third party manufacturer or that its facilities
will pass an FDA preapproval inspection for AIDSVAX. At a minimum, the FDA will
require equivalency testing between Genentech produced AIDSVAX and third-party
produced AIDSVAX if Genentech decides not to manufacture AIDSVAX itself.
Depending upon differences in manufacturing processes, the FDA may also require
additional clinical studies to establish the safety, purity and potency of
AIDSVAX. Any failure to obtain or delay in obtaining such approvals would have a
material adverse effect on our business, financial condition and results of
operation.
Even if United States regulatory approval for AIDSVAX is obtained, the
license will be subject to continual review, and newly discovered or developed
safety or efficacy data may result in revocation of the marketing license.
Moreover, if and when such approval is obtained, the marketing of AIDSVAX will
be subject to extensive regulatory requirements administered by the FDA and
other regulatory bodies, including adverse event reporting requirements and the
FDA's general prohibition against promoting products for unapproved or
"off-label" uses. The AIDSVAX manufacturing facilities are also subject to
continual review and periodic inspection and approval of manufacturing
modifications. Domestic manufacturing facilities are subject to biennial
inspections by the FDA and must comply with the FDA's Good Manufacturing
Practices regulations. In complying with these regulations, manufacturers must
spend funds, time and effort in the areas of production, record keeping,
personnel and quality control to ensure full technical compliance. The FDA
stringently applies regulatory standards for manufacturing. Failure to comply
with any of these post approval requirements can, among other things, result in
warning letters, product seizures, recalls, fines, injunctions, suspensions or
revocations of marketing licenses, operating restrictions and criminal
prosecutions. Any such enforcement action could harm our business. Unanticipated
changes in existing
28
regulatory requirements or the adoption of new requirements could also have a
material adverse effect on VaxGen.
We plan to pursue marketing authorization in Thailand based on the results
from the Thai trial. The Thai government also has a regulatory process that we
will need to follow before we can commercialize AIDSVAX in that country. No
assurances can be given that we will obtain marketing authorization from the
Thai government.
VaxGen and the manufacturer of AIDSVAX also are subject to numerous
federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and hazardous substance disposal. There can be no assurance that we will
avoid incurring significant costs to comply with such laws and regulations in
the future, or that such laws or regulations will not have a material adverse
effect on VaxGen.
The European Union, Japan and other countries also extensively regulate
pharmaceuticals, including biological drug products. No assurance can be given
that we will be able to obtain other countries' approvals for AIDSVAX.
We have only a limited operating history and we expect to continue to
generate losses. To date, we have engaged primarily in research, development and
clinical testing. At December 31, 2000, we had an accumulated deficit of
approximately $69.5 million. We sustained net losses of approximately $2.1
million in 1996, $3.1 million in 1997, $9.2 million in 1998, $23.3 million in
1999 and $31.8 million in 2000. We expect to incur substantial losses for at
least an additional four to five years.
If we needed additional funds, and are unable to raise them, we would have
to curtail or cease operations. We cannot be certain that our existing capital
resources, the funding from the Centers for Disease Control and Prevention and
the funding from the National Institute of Allergy and Infectious Diseases, will
be sufficient to support our current and planned operations through
commercialization of AIDSVAX. We do not expect AIDSVAX to be commercially
available until at least 2004. AIDSVAX has not received regulatory approval for
commercial sale. If taken to completion, the North American/European Phase III
clinical trial is anticipated to be completed in the fourth quarter of 2002.
Once the trial is completed, we will need to analyze the data and, if favorable,
prepare our Biologics License Application for submission to the FDA, which
typically takes between six and 12 months to be accomplished. The FDA review
process could take at least an additional six months. We anticipate that it
would take at least six months after obtaining regulatory approval for Genentech
or another third party to begin commercialization of AIDSVAX.
We may need to raise additional funds if:
o AIDSVAX is not sufficiently safe, pure and potent to commercialize in its
current formulation;
29
o our Phase III clinical trials are delayed, are not successful or are more
costly than currently estimated;
o commercialization of AIDSVAX is delayed for any other reason; or
o additional trials are required.
We cannot assure you that we will be able to raise sufficient funds in the
future. If we fail to raise sufficient funds, we would have to curtail or cease
operations. We believe that our existing cash and cash equivalents and
investment securities, together with investment income along with funds from
other potential collaborative arrangements, will enable us to meet our
forecasted expenditures through the anticipated completion of our North
American/European Phase III clinical trial. However, we may need to raise
additional funds to complete the Thai Phase III clinical trial and we may need
to raise additional funds to support the necessary manufacturing and development
programs.
We rely on Genentech for the manufacture of AIDSVAX. Our inability to
manufacture AIDSVAX, and our dependence on Genentech, may delay or impair our
ability to generate revenues, or adversely affect our profitability. We have no
manufacturing facilities. We are entirely dependent on third parties to produce
AIDSVAX. To date, we have relied on Genentech for this purpose. Genentech
currently has an exclusive option to manufacture AIDSVAX. We believe that
Genentech is the manufacturer best able to produce AIDSVAX. Our license
agreement with Genentech does not specify the price we will be required to pay
Genentech to manufacture AIDSVAX.
If Genentech does not manufacture AIDSVAX, we will need to identify and
engage another manufacturer. The availability and capacity of manufacturing
facilities capable of producing biological drug products using mammalian cell
culture fermentation in large-scale is in short supply and high demand on a
worldwide basis. Therefore, the cost and time to establish or locate
manufacturing facilities to produce AIDSVAX would be substantial. As a result,
using a manufacturer other than Genentech could delay bringing AIDSVAX to
market. This delay could require us to raise additional funds.
We cannot assure you that we would be able to enter into an agreement with
a third party to manufacture AIDSVAX. We also have no way to determine the price
we would be charged by a third party to manufacture AIDSVAX if Genentech does
not manufacture AIDSVAX. Any manufacturer other than Genentech would have to
prove both to us and to the FDA and to other regulatory authorities that its
manufacturing process, facilities, procedures, and personnel comply with
government regulations and that it consistently produces the same product that
was made by Genentech and tested in the Phase III clinical trials. If a company
other than Genentech does manufacturing, we may have to do additional clinical
trials to show the therapeutic equivalence of the product made by the other
company to the Genentech product.
We intend to rely on Genentech and/or other third parties for the sale,
marketing and commercialization of AIDSVAX. Our lack of sales and marketing
personnel, and of
30
distribution relationships, may impair our ability to generate revenues. We
have no sales, marketing or commercialization capability. Genentech currently
has an exclusive option to market and distribute AIDSVAX. We intend to rely on
Genentech to provide an established distribution system and sales force to
market AIDSVAX. If Genentech does not elect to exercise its option to market and
distribute the product, we may need to identify and engage another partner to
market and commercialize AIDSVAX. We cannot assure you that we would be able to
establish marketing or commercialization arrangements with third parties in a
timely manner or on favorable terms.
Political or social factors may delay or reduce revenues by delaying or
impairing our ability to market AIDSVAX. Products developed for use in
addressing the HIV/AIDS epidemic have been, and will continue to be, subject to
competing and changing political and social pressures. The political and social
response to the HIV/AIDS epidemic has been highly charged and unpredictable.
These pressures can transcend national barriers. They may delay or cause
resistance to bringing our product to market or limit pricing of our product.
If Genentech were to terminate our license agreement, we would not be able
to develop or market AIDSVAX. Our license agreement with Genentech permits
Genentech to terminate the agreement, or terminate the exclusivity of our
license, if we:
o fail to use due diligence in developing, seeking regulatory approval
for, marketing or commercializing products covered by the Genentech
license agreement;
o fail to file the first market approval application for AIDSVAX with
the FDA prior to May 2002, subject to potential extension for up to
two years in certain circumstances, with any other extension being
Genentech's sole decision;
o breach the license agreement and fail to cure the breach within the
time period provided in the agreement; and
o fail to maintain a tangible net worth of at least $1 million.
Failure to retain key management employees could adversely affect our
ability to obtain financing, develop AIDSVAX or conduct clinical trials. We are
highly dependent on our senior management and scientific staff, particularly Dr.
Donald Francis, our President and Dr. Phillip Berman, our Senior Vice President,
Research & Development. These individuals have played a critical role in raising
financing, developing the vaccine and conducting clinical trials. The loss of
the services of any of these key members of senior management may prevent us
from achieving our business objectives.
If we are unable to protect our intellectual property, we may be unable to
prevent other companies from using our technology in competitive products. If we
infringe the intellectual property rights of others, we may be prevented from
developing or
31
marketing AIDSVAX. We rely on patent and other intellectual property protection
to prevent our competitors from manufacturing and marketing AIDSVAX. Our
technology, including technology licensed from Genentech, will be protected from
unauthorized use by others only to the extent that it is covered by valid and
enforceable patents or effectively maintained as trade secrets. As a result, our
success depends on our ability, and Genentech's ability, to:
o obtain patents;
o protect trade secrets;
o operate without infringing upon the proprietary rights of others; and
o prevent others from infringing on our proprietary rights.
We cannot be certain that our patents or patents that we license from
Genentech will be enforceable and afford protection against competitors. We
cannot assure you that our operations or technology will not infringe
intellectual property rights of others. If we infringe the intellectual property
of others, there can be no assurance that we would be able to obtain licenses to
use the technology on commercially reasonable terms or at all.
If we become subject to product liability claims, they may reduce demand for
AIDSVAX or result in damages that exceed our insurance limitation. We face an
inherent risk of exposure to product liability suits in connection with AIDSVAX
vaccines being tested in human clinical trials and products that may be sold
commercially. We may become subject to a product liability suit if AIDSVAX
causes injury, or if vaccinated individuals subsequently become infected with
HIV. Regardless of merit or eventual outcome, product liability claims may
result in decreased demand for a vaccine, injury to our reputation, withdrawal
of clinical trial volunteers and loss of revenues.
32
Item 2. PROPERTIES
Our executive offices are located in Brisbane, California, in an office
building in which we lease approximately 20,000 square feet. The lease agreement
terminates in May 2007, and we have an option to renew for a successive
five-year period. We also lease approximately 10,000 square feet of laboratory
space in South San Francisco under a lease agreement that terminates in April
2006. We have an option to renew for a successive five-year period. We believe
that our facilities are sufficient to support our operations for at least the
next 18 months.
In Thailand, we lease office space at Mahidol University and at Taksin
Hospital in Bangkok. We will lease this space through the duration of the Thai
Phase III clinical trials.
Item 3. LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings or claims.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the quarter ended December 31, 2000.
33
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Our common stock began trading publicly on The NASDAQ National Market(R) on
June 30, 1999 under the symbol "VXGN." The following table lists quarterly
information on the price range of the common stock based on the high and low
reported last sale prices for our common stock as reported on The NASDAQ
National Market(R) for the periods indicated below. These prices do not include
retail markups, markdowns or commissions.
High Low
---- ---
Fiscal 2001:
First Quarter (through March 12, 2001) $27.328 $15.750
Fiscal 2000:
Fourth Quarter $32.375 $16.875
Third Quarter $26.500 $19.500
Second Quarter $25.563 $11.875
First Quarter $21.250 $15.375
Fiscal 1999:
Fourth Quarter $18.500 $10.250
Third Quarter $26.000 $13.375
Second Quarter (June 30, 1999) $16.375 $16.375
As of December 31, 2000, there were 645 holders of record of the common
stock. On March 12, 2001, the last reported sale price on The NASDAQ National
Market(R) for the common stock was $18.125 per share.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its capital
stock since its inception. The Company currently intends to retain all of its
cash and any future earnings to finance the growth and development of its
business and therefore does not anticipate paying any cash dividends in the
foreseeable future. Any future determination to pay cash dividends will be at
the discretion of the Board of Directors and will be dependent upon the
Company's financial condition, results of operations, capital requirements and
such other factors as the Board of Directors deems relevant.
USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING
The Company completed its initial public offering (the "IPO") in July 1999,
in which it issued and sold 3,565,000 shares of common stock for aggregate
proceeds to the
34
Company of $46,345,000. The effective date of the Registration Statement
(Commission File No. 333-78065) was June 29, 1999. The offering was lead-managed
by Prudential Securities and co-managed by Punk Ziegel & Company. Of the
aggregate proceeds received in the IPO, $4,373,000 was used to pay underwriting
discounts and commissions and expenses related to the IPO, resulting in net
proceeds of approximately $42,000,000. As of December 31, 2000, the Company has
utilized approximately $17,000,000 of net proceeds of the offering for operating
activities, capital expenditures, as well as for other general corporate
purposes. The Company has invested the remainder of the net proceeds from the
offering in investments such as high-quality corporate issues and government
obligations.
35
ITEM 6. SELECTED FINANCIAL DATA
This selected financial data should be read in conjunction with our
Financial Statements, related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this Annual
Report on Form 10-K.
Period
from
Inception
(November 27,
1995)
Year Ended December 31, through
--------------------------------------------------------------------- December 31,
2000 1999 1998 1997 1996 2000
----------- ----------- ----------- ----------- ----------- ------------
(in thousands, except per share data)
Statement of Operations Data:
Revenues
Contract revenue $ 275 $ -- $ -- $ -- $ -- $ 275
Operating expenses
Research and development (18,513) (18,003) (6,831) (3,146) (1,683) (48,179)
General and administrative (17,465) (7,479) (3,345) (800) (371) (29,487)
-------- -------- -------- -------- -------- --------
Loss from operations (35,703) (25,482) (10,176) (3,946) (2,054) (77,391)
Other income (expense), net 3,900 2,148 1,013 886 (28) 7,919
-------- -------- -------- -------- -------- ---------
Net Loss $(31,803) $(23,334) $ (9,163) $ (3,060) $ (2,082) $ (69,472)
======== ======== ======== ======== ======== =========
Net loss per share - basic and diluted $ (2.33) $ (2.44) $ (1.48) $ (0.60) $ (1.90)
Weighted average shares outstanding --
basic and diluted 13,636 9,568 6,185 5,096 1,093
At December 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- -------------- -------------
(in thousands)
Balance Sheet Data:
Cash, cash equivalents and investment
securities $48,524 $70,534 $19,468 $23,880 $ 38
Working capital (deficiency) 48,013 68,213 17,866 19,843 (1,458)
Total assets 56,797 75,225 21,472 24,301 229
Long-term obligations 367 89 -- -- 795
Total stockholders' equity (deficit) 51,072 71,150 19,398 19,882 (2,069)
36
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis should be read in conjunction with our
Financial Statements and related notes thereto appearing in Item 8 of this
report. In addition to historical information, this report contains
"forward-looking statements" that are within the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, and that are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. The words "believe", "expect", "intend",
"anticipate", and similar expressions are used to identify forward-looking
statements, but their absence does not mean that such statement is not
forward-looking. Many factors could affect the Company's actual results,
including those factors described under "Factors Affecting Future Results" and
"Business." These factors, among others, could cause results to differ
materially from those presently anticipated by the Company. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report. The Company undertakes no obligation
to publicly release the results of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date of
this report or to reflect the occurrence of anticipated events.
OVERVIEW
In November 1995, VaxGen was formed to continue development of AIDSVAX. At
that time, Genentech, Inc. ("Genentech") licensed to us the technology necessary
for completing development and commercialization of AIDSVAX. Currently,
Genentech owns approximately 11% of VaxGen common stock.
Since our formation, we have focused on developing and testing AIDSVAX. We
have developed formulations of AIDSVAX, which focus on the predominant HIV
subtype in North America, Europe, the Caribbean, and Australia (subtype B) and
the predominant HIV subtype in Southeast Asia and East Asia (subtype E). We have
commenced two Phase III clinical trials, one in North America and Europe and one
in Thailand to determine the efficacy of AIDSVAX. In October 1999, we completed
the initial inoculation and enrollment of over 5,400 trial volunteers for the
North American/European Phase III clinical trial, which is being conducted in 61
clinical centers. In August 2000, we completed the initial inoculation and
enrollment of over 2,500 volunteers for the Thai Phase III clinical trial, which
is being conducted in 17 clinical centers in Bangkok.
To date, we have generated $275,000 in revenue, primarily from a
preparedness grant from the National Institutes of Health for research and
development of HIV vaccines. We anticipate only modest revenues from other
governmental agencies or other grants or from collaborations with other entities
over the next three to four years. We have incurred losses since inception as a
result of research and development and general and administrative expenses in
support of our operations. As of December 31, 2000, we had a deficit accumulated
during the development stage of $69,472,000. We anticipate incurring substantial
losses over at least the next three to four years as we complete our clinical
trials, apply for regulatory approvals, continue development of our technology
and expand our operations.
37
An interim efficacy analysis of the North American/European Phase III
clinical trial is scheduled for the fourth quarter of 2001. If the analysis
yields sufficient statistical evidence to show that AIDSVAX is effective, the
Company, based upon the independent Data and Safety Monitoring Board's
recommendation, will halt the trial and begin the process of applying for
regulatory approval. If the interim analysis is inconclusive, the Company will
proceed as planned and complete the trial at the end of 2002. During this time,
we will gather additional statistical power that will improve our ability to
determine the vaccine's effectiveness. If the trials demonstrate that AIDSVAX is
effective, we anticipate that all the phases associated in obtaining regulatory
approval will take approximately 24 months, from time of application, to
complete.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
Contract revenue
Contract revenue increased to $275,000 for the year ended December 31, 2000
from $0 in December 31, 1999. Contract revenue consisted of $200,000 received
from the National Institutes of Health ("NIH") for a preparedness grant along
with $75,000 received as reimbursements under another NIH grant. Research
contract revenue earned in one period is not indicative of research contract
revenue to be earned in future periods.
Research and development expense
Research and development expense increased 3% from $18,003,000 for the year
ended December 31, 1999 to $18,513,000 for the year ended December 31, 2000. The
increase in research and development expenses was due primarily to the ramping
up of our North American/European and Thai Phase III clinical trials. These
expenses consisted principally of the cost for additional personnel, recruiting
costs for the enrollment of the clinical trials, non-cash compensation expense
related to vesting of stock options, the establishment of a new research
laboratory facility, and increases in the fees paid to third parties associated
with conducting the clinical trials.
General and administrative expenses
General and administrative expenses increased 134% from $7,479,000 for the
year ended December 31, 1999 to $17,465,000 for the year ended December 31,
2000. The increase in general and administrative expenses was due primarily to
non-cash compensation expense for the issuance of common stock to three
executives in connection with the achievement of a bonus provision in their
employment contracts along with modification of the terms of options in
connection with the separation agreement of a former executive. Additional
increases consisted of salaries and benefits associated with additional
personnel hired to support the growing infrastructure, costs related to an
executive's separation agreement and higher legal expenses.
38
Other income (expense), net
Other income (expense), net, consisting primarily of interest income,
increased 82% from $2,148,000 for the year ended December 31, 1999 to $3,900,000
for the year ended December 31, 2000. This was primarily attributable to higher
average balances of cash, cash equivalents and investment securities, as a
result of the initial public offering and a private placement of the Company's
common stock.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Research and development expense
Research and development expense increased 164% from $6,831,000 for the
year ended December 31, 1998 to $18,003,000 for the year ended December 31,
1999. The increase in research and development expenses was due primarily to the
ramping up of our North American and Thai Phase III clinical trials. These
expenses consisted principally of the cost for additional personnel, recruiting
costs for the enrollment of the clinical trials, non-cash compensation expense
related to vesting of stock options, the establishment of a new research
laboratory facility, and increases in the fees paid to third parties associated
with conducting the clinical trials.
General and administrative expenses
General and administrative expenses increased 124% from $3,345,000 for the
year ended December 31, 1998 to $7,479,000 for the year ended December 31, 1999.
The increase in general and administrative expenses was due primarily to
non-cash compensation expense for the issuance of warrants and modification of
the terms of options in connection with separation agreements with two former
employees, salaries and benefits associated with additional personnel hired to
support the growing infrastructure, and costs associated with maintaining larger
office facilities.
Other income (expense), net
Other income (expense), net, consisting primarily of interest income,
increased 112% from $1,013,000 for the year ended December 31, 1998 to
$2,148,000 for the year ended December 31, 1999. This was attributable to higher
average balances of cash, cash equivalents and investment securities, as a
result of the initial public offering and the private placement with Vulcan
Ventures, Inc.
39
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investment securities were $48,524,000 at
December 31, 2000. We have financed our operations since inception through
capital provided by Genentech and sales of our common stock. Genentech has no
obligation to provide future funding to the Company.
We completed our initial public offering ("IPO") in July 1999, in which we
issued and sold 3,565,000 shares of common stock for aggregate proceeds to us in
the amount of $46,400,000. Of the aggregate proceeds received in the IPO,
approximately $4,400,000 was used to pay underwriting discounts and commissions
and expenses related to the IPO, resulting in net proceeds of approximately
$42,000,000. In early 1999, we received net proceeds of $5,273,000 from private
placement financing activities, which were completed prior to the IPO.
In December 1999, we completed a private placement of common stock with
Vulcan Ventures, Inc., the investment organization of Paul G. Allen. The funds
from the private placement support our on-going operations along with our
current clinical trials. This private placement has also enabled us to commence
development of a formulation of AIDSVAX, that focuses on the predominant HIV
type found in Africa, China, India and South America (subtype C). Currently, we
have developed formulations of AIDSVAX, that focus on the predominant HIV type
in North America, Europe, the Caribbean and Australia (subtype B) and the
predominant HIV subtype in Southeast Asia and East Asia (subtype E). The private
placement consisted of approximately 2,174,000 shares of common stock, which
resulted in proceeds, net of expenses, to us of approximately $24,000,000.
Since our inception, investing activities, other than purchases and sales
of investment securities, have consisted entirely of equipment acquisitions and
leasehold improvements. From inception through December 31, 2000, our gross
investment in equipment and leasehold improvements was $4,422,000. The increase
in equipment and leasehold improvements has been primarily due to the
development of our research and development laboratory and the establishment of
larger office facilities. Net cash used in operating activities for 2000 was
$22,323,000 representing expenditures for research and development costs and
general and administrative expenses.
In October 1999, we entered into a collaboration with the federal Centers
for Disease Control and Prevention ("CDC") to support research at six of the 56
clinics in the United States currently conducting Phase III clinical trials of
our AIDSVAX vaccine. The CDC selected the six sites in the fourth quarter of
1999. Contractual arrangements between the CDC and the clinics were completed in
the second quarter of 2000. The participating sites will continue to implement
our Phase III protocol, as well as conduct epidemiological, social and
behavioral research, which will be shared by the Company and the CDC. The sites
will be compensated directly by the CDC for the clinical costs, which would have
been incurred by the Company, and for conducting the additional research. The
CDC has agreed to contribute approximately $8,000,000 to the participating sites
over a four-year period.
40
On March 23, 2001, we finalized the collaborative agreement with the
National Institute of Allergy and Infectious Diseases ("NIAID") to obtain and
store clinical specimens from our North American/European Phase III clinical
trial. The agreement provides that NIAID may fund approximately $3,000,000 to
$4,000,000 for this program. The majority of the funding would go to third
parties for their participation in the program.
We believe that our existing cash and cash equivalents and investment
securities, together with investment income along with funds from other
potential collaborative arrangements, will enable us to meet our forecasted
expenditures through the anticipated completion of our North American/European
Phase III clinical trial. However, we may need to raise additional funds to
complete the Thai Phase III clinical trial and we would need to raise additional
funds to support the necessary manufacturing and development programs if we
apply for regulatory approval of the vaccine.
We will also need to raise additional capital if the Phase III clinical
trials are delayed or more costly than currently anticipated, or to continue
operations if the Phase III clinical trials are not successful, or if
commercialization is delayed for any other reason. Our future capital
requirements are also dependent on several other factors, including:
o the progress of other internal research and development projects;
o the need for leasehold improvements to facilities and the purchase of
additional capital equipment;
o the ability to attract and negotiate business development
opportunities; and
o the timing of revenue, if any, from AIDSVAX.
We cannot assure you that we will be able to raise funds when needed, or
that such funds will be available on satisfactory terms. We expect that our
ability to raise additional capital will be importantly effected by whether
AIDSVAX achieves clinical success at either the interim or final analysis.
However, if clinical success is achieved at either point of analysis, we do not
expect difficulty in raising additional capital.
At December 31, 2000, we had net operating loss carryforwards of
approximately $66,216,000 to offset any future federal taxable income. If not
utilized, the net operating loss carryforwards will begin to expire in 2010. We
also had research and experimentation federal income tax credit carryforwards at
December 31, 2000, of approximately $1,263,000.
41
Market Risk
Our exposure to market rate changes is related primarily to our debt
securities included in our investment portfolio. We do not have any derivative
financial instruments. By policy, we invest in debt instruments of the U. S.
Government, Federal agencies and high-quality corporate issuers, limit the
amount of credit exposure to any one issuer, limit duration by restricting the
term, and hold investments to maturity except under rare circumstances.
Investments in both fixed rate and floating rate instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates fall. Due in
part to these factors, our future investment income may decrease due to changes
in interest rates or due to losses we may suffer when securities decline in
market value. At December 31, 2000, we held government debt instruments and
corporate obligations in the principal amount of $42,800,000. If market interest
rates were to increase immediately and uniformly by 10% from levels at December
31, 2000, the fair value of our portfolio would decline by an immaterial amount.
Our exposure to losses as a result of interest rate changes is managed through
investing primarily in securities that mature in a period of one year or less.
We have exposure to foreign exchange rate risk primarily related to our
conducting clinical trials in Thailand. Thailand is currently considered an
emerging economy. A material increase in the value of Thailand's currency
against the U.S. Dollar could cause an increase in our expenses. The majority of
our contracts associated with conducting clinical trials in Thailand are priced
in Baht. At the time these contracts were written, the Thailand exchange rate
was 37.5 Baht per one U. S. Dollar. As of December 31, 2000, we have incurred
$2,000 in foreign exchange losses.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. SFAS 133, as amended by SFAS 138, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The adoption of SFAS 133
on January 1, 2001, did not have any impact on our financial statements.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - an interpretation of APB
Opinion 25," (Interpretation No. 44) which generally became effective July 1,
2000. Interpretation No. 44 clarifies the application of APB 25 for certain
matters, specifically (a) the definition of an employee for purposes of applying
APB 25, (b) the criteria for determining whether a plan qualifies as a
non-compensatory plan, (c) the accounting consequence of various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. The
adoption of Interpretation No. 44 did not have any impact on our financial
position or results of operations.
42
In December 1999, The United States Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition in
Financial Statements." This Staff Accounting Bulletin, as amended, was adopted
in the fourth quarter of 2000. The adoption of SAB No. 101 did not have any
impact on our financial position or results of operations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosure about
market risk is set forth under the caption "Market Risk" in Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
43
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
VaxGen, Inc.:
We have audited the accompanying balance sheets of VaxGen, Inc. (a
development stage enterprise) as of December 31, 2000 and 1999, and the related
statements of operations, cash flows, and stockholders' equity (deficit) and
comprehensive loss for each of the years in the three-year period ended December
31, 2000 and the period from November 27, 1995 (inception) through December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of VaxGen, Inc. (a development
stage enterprise) as of December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2000 and the period from November 27, 1995 (inception)
through December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
Seattle, Washington
January 28, 2001
44
VaxGen, Inc.
(A Development Stage Enterprise)
BALANCE SHEETS
ASSETS
December 31, December 31,
2000 1999
------------- -------------
Current assets:
Cash and cash equivalents $5,426,000 $16,063,000
Investment securities 43,098,000 54,471,000
Interest receivable 733,000 514,000
Prepaid expenses and other current assets 4,114,000 1,151,000
------------- -------------
Total current assets 53,371,000 72,199,000
Property and equipment, net 3,202,000 2,856,000
Other assets 224,000 170,000
------------- -------------
Total assets $56,797,000 $75,225,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to Genentech $2,071,000 $817,000
Accounts payable 315,000 509,000
Accrued liabilities 2,941,000 2,629,000
Current portion of long-term obligations 31,000 31,000
------------- -------------
Total current liabilities 5,358,000 3,986,000
Long-term obligations 367,000 89,000
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $0.01 par value, 20,000,000 shares
authorized; none issued or outstanding -- --
Common stock, $0.01 par value, 20,000,000 shares
authorized; 14,045,656 and 13,511,565 shares issued
and outstanding at December 31, 2000 and
December 31, 1999, respectively 140,000 135,000
Additional paid-in capital 121,717,000 111,034,000
Deferred stock compensation (1,667,000) (2,225,000)
Accumulated other comprehensive income (loss) -
unrealized gain (loss) on investment securities 354,000 (125,000)
Deficit accumulated during the development stage (69,472,000) (37,669,000)
------------- -------------
Total stockholders' equity 51,072,000 71,150,000
------------- -------------
Total liabilities and stockholders' equity $56,797,000 $75,225,000
============= =============
See accompanying notes to financial statements.
45
VaxGen, Inc.
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
Period from
Inception
Year Ended December 31, (November 27, 1995)
---------------------------------------------------- through
2000 1999 1998 December 31, 2000
------------ ------------ ------------ -----------------
Revenue:
Contract revenue $ 275,000 $ -- $ -- $ 275,000
Operating expenses:
Research and development:
Genentech charges 3,210,000 1,679,000 681,000 9,356,000
Other 15,303,000 16,324,000 6,150,000 38,823,000
------------ ------------ ------------ ------------
Total research and development 18,513,000 18,003,000 6,831,000 48,179,000
General and administrative expenses 17,465,000 7,479,000 3,345,000 29,487,000
------------ ------------ ------------ ------------
Loss from operations (35,703,000) (25,482,000) (10,176,000) (77,391,000)
------------ ------------ ------------ ------------
Other income (expense):
Investment income, net 3,922,000 2,148,000 1,013,000 7,988,000
Interest expense (22,000) -- -- (69,000)
------------ ------------ ------------ ------------
Total other income, net 3,900,000 2,148,000 1,013,000 7,919,000
------------ ------------ ------------ ------------
Net loss $(31,803,000) $(23,334,000) $ (9,163,000) $(69,472,000)
============ ============ ============ ============
Basic and diluted loss per share $ (2.33) $ (2.44) $ (1.48)
Weighted average shares used in
computing basic and diluted
loss per share l13,636,000 9,568,000 6,185,000
============ ============ ============
See accompanying notes to financial statements.
46
VaxGen, Inc.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
Period from
Inception
Year Ended December 31, (November 27, 1995)
------------------------------------------------ through
2000 1999 1998 December 31, 2000
------------ ------------ ------------ -----------------
Cash flows from operating activities:
Net loss $(31,803,000) $(23,334,000) $ (9,163,000) $ (69,472,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 779,000 492,000 92,000 1,367,000
Amortization of premiums and discounts
on investment securities 296,000 (432,000) (154,000) (519,000)
Stock compensation expense 9,958,000 3,332,000 -- 13,290,000
Changes in assets and liabilities:
Interest receivable (219,000) (402,000) 40,000 (733,000)
Prepaid expenses and other current assets (2,963,000) (791,000) (130,000) (4,114,000)
Other assets (55,000) 101,000 (150,000) (113,000)
Payable to Genentech 1,254,000 557,000 (3,532,000) 2,071,000
Accounts payable, accrued liabilities
and other long-term obligations 430,000 1,324,000 1,187,000 3,568,000
------------ ------------ ------------ -------------
Net cash used in operating activities (22,323,000) (19,153,000) (11,810,000) (54,655,000)
------------ ------------ ------------ -------------
Cash flows from investing activities:
Purchase of investment securities (23,335,000) (62,555,000) (25,600,000) (140,447,000)
Proceeds form sale and maturities of
investment securities 34,891,000 20,998,000 36,378,000 98,222,000
Purchase of property and equipment (1,124,000) (1,949,000) (1,315,000) (4,422,000)
Long-term lease deposits -- -- (120,000) (120,000)
------------ ------------ ------------ -------------
Net cash provided by (used in)
investing activities 10,432,000 (43,506,000) 9,343,000 (46,767,000)
------------ ------------ ------------ -------------
Cash flows from financing activities:
Payments under capital lease obligations (34,000) (18,000) -- (52,000)
Stock issued to Genentech -- -- -- 1,025,000
Stock issued to other founders -- -- -- 20,000
Stock issued in private placements -- 30,547,000 9,368,000 65,164,000
Stock issued in initial public offering -- 46,345,000 -- 46,345,000
Issuance costs of private placements -- (1,196,000) (764,000) (4,208,000)
Issuance costs of initial public offering -- (4,386,000) -- (4,386,000)
Exercise of employee stock options 1,288,000 612,000 40,000 1,940,000
Loans from Genentech -- -- -- 1,000,000
------------ ------------ ------------ -------------
Net cash provided by financing activities 1,254,000 71,904,000 8,644,000 106,848,000
------------ ------------ ------------ -------------
Increase (decrease) in cash and equivalents (10,637,000) 9,245,000 6,177,000 5,426,000
Cash and cash equivalents at beginning of period 16,063,000 6,818,000 641,000 --
------------ ------------ ------------ -------------
Cash and cash equivalents at end of period $ 5,426,000 $ 16,063,000 $ 6,818,000 $ 5,426,000
============ ============ ============ =============
Supplemental schedule of non cash investing and
financing activities:
Equipment acquired through capital leases $ -- $ 138,000 $ -- $ 138,000
Issuance of stock through conversion of
Genentech note payable $ -- $ -- $ -- $ 1,000,000
See accompanying notes to financial statements.
47
VaxGen, Inc.
(A Development Stage Enterprise)
Statement of Stockholders' Equity (Deficit) and Comprehensive Loss
Deferred
Common Stock Additional Compensation
--------------------------- Paid-In For Options
Shares Amount Capital and Warrants
------------ ------------ ------------ ------------
Balance at inception (November 27, 1995) -- $ -- $ -- $ --
Net and total comprehensive loss for the
period from inception to December 31, 1995 -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1995 -- -- -- --
Shares issued at $0.02 per share
from April through October 1996:
Genentech for technology 1,150,000 11,000 12,000 --
Other founders for cash 980,000 10,000 10,000 --
Net and total comprehensive loss -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1996 2,130,000 21,000 22,000 --
Sale of shares in private placement
at $7.00 per share from March through
June 1997 for cash, net of issuance
costs of $2,248,000 3,607,047 36,000 22,965,000 --
Sale of shares to Genentech concurrent
with private placement in March 1997
at $7.00 per share for cash 285,714 3,000 1,997,000 --
Genentech exercise of warrants at
$0.02 per share in October 1997 for cash 86,640 1,000 1,000 --
Comprehensive loss:
Net loss -- -- -- --
Net unrealized gain on investment securities -- -- -- --
Total comprehensive loss -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1997 6,109,401 61,000 24,985,000 --
Exercise of employee stock options
at $7.00 per share in June and
July 1998 for cash 5,750 -- 40,000 --
Sale of shares in private placement in
December 1998 at $9.50 per share for cash,
net of issuance cost $764,000 986,097 10,000 8,594,000 --
Comprehensive loss:
Net loss -- -- -- --
Net unrealized gain on investment securities -- -- -- --
Total comprehensive loss -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1998 7,101,248 71,000 33,619,000 --
Sale of shares in private placement
in January 1999 at $9.50 per share for
cash, net of issuance costs of $274,000 583,913 6,000 5,267,000 --
Deferred compensation on options and warrants -- -- 5,557,000 (3,197,000)
Compensation expense from stock options -- -- -- 972,000
Sale of shares in initial public offering
on June 30, 1999 at $13.00 per share for
cash, net of issuance costs of $3,963,000 3,100,000 31,000 36,306,000 --
Sale of shares in over allotment on
July 13, 1999 at $13.00 per share for
cash, net of issuance costs of $423,000 465,000 5,000 5,617,000 --
Sale of shares in private placement
in December 1999 at $11.50 per share
for cash, net of issuance costs of $ 922,000 2,173,913 21,000 24,057,000 --
Exercise of employee stock options and
Warrants at $7.00 per share for cash 87,491 1,000 611,000 --
Comprehensive loss:
Net loss -- -- -- --
Net unrealized loss on investment securities -- -- -- --
Total comprehensive loss -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1999 13,511,565 135,000 111,034,000 (2,225,000)
============ ============ ============ ============
Exercise of employee stock options and warrants
at prices ranging from $7.00 to $17.69
for cash 208,334 2,000 1,286,000 --
Shares issued at $24.25 per share in
November 2000 in connection with
success bonus 325,757 3,000 7,897,000 --
Deferred compensation on stock options, net -- -- 473,000 (528,000)
Compensation expense from stock options -- -- 1,027,000 1,086,000
Comprehensive loss:
Net loss -- -- -- --
Net unrealized gain on investment
securities -- -- -- --
Total comprehensive loss -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 2000 $ 14,045,656 $ 140,000 $121,717,000 $ (1,667,000)
============ ============ ============ ============
Deficit
Accumulated Accumulated
During The Other Total
Development Comprehensive Stockholders'
Stage Income (Loss) Equity (Deficit)
------------ ------------- ------------------
Balance at inception (November 27, 1995) $ -- $ -- $ --
Net and total comprehensive loss for the
period from inception to December 31, 1995 (30,000) -- (30,000)
------------ ------------ ------------
Balance at December 31, 1995 (30,000) -- (30,000)
Shares issued at $0.02 per share
from April through October 1996:
Genentech for technology -- -- 23,000
Other founders for cash -- -- 20,000
Net and total comprehensive loss (2,082,000) -- (2,082,000)
------------ ------------ ------------
Balance at December 31, 1996 (2,112,000) -- (2,069,000)
Sale of shares in private placement
at $7.00 per share from March through
June 1997 for cash, net of issuance
costs of $2,248,000 -- -- 23,001,000
Sale of shares to Genentech concurrent
with private placement in March 1997
at $7.00 per share for cash -- -- 2,000,000
Genentech exercise of warrants at
$0.02 per share in October 1997 for cash -- -- 2,000
Comprehensive loss:
Net loss (3,060,000) -- (3,060,000)
Net unrealized gain on investment securities -- 8,000 8,000
------------
Total comprehensive loss -- -- (3,052,000)
------------ ------------ ------------
Balance at December 31, 1997 (5,172,000) 8,000 19,882,000
Exercise of employee stock options
at $7.00 per share in June and
July 1998 for cash -- -- 40,000
Sale of shares in private placement in
December 1998 at $9.50 per share for cash,
net of issuance cost $764,000 -- -- 8,604,000
Comprehensive loss:
Net loss (9,163,000) -- (9,163,000)
Net unrealized gain on investment securities -- 35,000 35,000
------------
Total comprehensive loss -- -- (9,128,000)
------------ ------------ ------------
Balance at December 31, 1998 (14,335,000) 43,000 19,398,000
Sale of shares in private placement
in January 1999 at $9.50 per share for
cash, net of issuance costs of $274,000 -- -- 5,273,000
Deferred compensation on options and warrants -- -- 2,360,000
Compensation expense from stock options -- -- 972,000
Sale of shares in initial public offering
on June 30, 1999 at $13.00 per share for
cash, net of issuance costs of $3,963,000 -- -- 36,337,000
Sale of shares in over allotment on
July 13, 1999 at $13.00 per share for
cash, net of issuance costs of $423,000 -- -- 5,622,000
Sale of shares in private placement
in December 1999 at $11.50 per share
for cash, net of issuance costs of $ 922,000 -- -- 24,078,000
Exercise of employee stock options at
$7.00 per share for cash -- -- 612,000
Comprehensive loss:
Net loss (23,334,000) -- (23,334,000)
Net unrealized loss on investment securities -- (168,000) (168,000)
------------
Total comprehensive loss -- -- (23,502,000)
------------ ------------ ------------
Balance at December 31, 1999 (37,669,000) (125,000) 71,150,000
============ ============ ============
Exercise of employee stock options at
prices ranging from $7.00 to $17.69
for cash -- -- 1,288,000
Shares issued at $24.25 per share in
November 2000 in connection with
success bonus 7,900,000
Deferred compensation on stock options -- -- (55,000)
Compensation expense from stock options -- -- 2,113,000
Comprehensive loss:
Net loss (31,803,000) -- (31,803,000)
Net unrealized gain on investment
securities -- 479,000 479,000
------------
Total comprehensive loss -- -- (31,324,000)
------------ ------------ ------------
Balance at December 31, 2000 $(69,472,000) $ 354,000 $ 51,072,000
============ ============ ============
See accompanying notes to financial statements.
48
VAXGEN, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Nature of Development Stage Activities
VaxGen, Inc. (the "Company") is a development stage biotechnology company
formed to develop a vaccine (AIDSVAX(R)) intended to eradicate HIV. The Company
was incorporated on November 27, 1995 and since that date its principal
activities have included defining and conducting research programs, conducting
human clinical trials, raising capital and recruiting scientific and management
personnel.
The Company's development activities involve inherent risks. These risks
include, among others, dependence on key personnel and determination of
patentability of the Company's products and processes. The Company is dependent
on Genentech to provide certain research and development support and vaccine
production (Note 4). In addition, the Company has only one product candidate,
which has not yet obtained Food and Drug Administration approval. Successful
future operations depend upon the Company's ability to obtain approval for and
commercialize AIDSVAX.
Cash Equivalents
All short-term investments with an original maturity at date of purchase of
three months or less are considered to be cash equivalents. Cash equivalents
consisting of commercial paper amounted to $5,180,000 and $14,954,000 at
December 31, 2000 and 1999, respectively.
Investment Securities
Investment securities are classified as available-for-sale and carried at
market value with unrealized gains and losses excluded from the statement of
operations and reported as other comprehensive income. Realized gains and losses
on sales of investment securities are determined on the specific identification
method and are included in investment income, net.
Property and Equipment
Equipment, consisting of laboratory equipment, computers and other office
equipment, is depreciated using the straight-line method over the assets'
estimated useful lives of three to ten years. Leasehold improvements and capital
lease assets are amortized using the straight-line method over the shorter of
the assets' estimated useful lives or the remaining term of the lease.
49
VAXGEN, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
Revenue Recognition
Research contracts require the Company to perform research activities as
specified in each respective contract on a best efforts basis, and the Company
is reimbursed based on the fees stipulated in the respective contracts which
approximates cost. The Company recognizes revenue based on completion of
performance under the respective contracts.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Income Taxes
Deferred income taxes are provided based on the estimated future tax
effects of temporary differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates that are expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is established to reduce deferred tax assets to the amount expected to
be realized.
Fair Value of Financial Instruments
The Company has financial instruments other than cash, cash equivalents and
investment securities, consisting of interest receivable, accounts payable, and
a payable to Genentech. The fair value of these financial instruments
approximates their carrying amount due to their short-term nature.
Stock-Based Compensation
The Company accounts for its stock option plans for employees and
non-employee members of the Board of Directors in accordance with the provisions
of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations. Accordingly, compensation expense
related to employee stock options is recorded if, on the date of grant, the fair
value of the underlying stock exceeds the exercise price. The Company applies
the disclosure only requirements of Statement of Financial Accounting Standards
(SFAS) No. 123, which allows entities to continue to apply the provisions of APB
25 for transactions with employees, and to provide pro
50
VAXGEN, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
forma results of operations disclosures for employee stock option grants as if
the fair-value-based method of accounting in SFAS 123 had been applied to these
transactions.
Comprehensive Income
Comprehensive income (loss) consists of net income (loss) and other gains
and losses affecting stockholders' equity that, under generally accepted
accounting principles, are excluded from net income (loss). These include
unrealized gains or losses on available-for-sale securities.
Loss Per Share
Basic loss per share is computed on the basis of the weighted average
number of shares outstanding for the reporting period. Diluted loss per share is
computed on the basis of the weighted average number of common shares plus
dilutive potential common shares outstanding using the treasury stock method.
Potential dilutive common shares consist of shares issuable to holders of
unexercised employee stock options and warrants outstanding. Options and
warrants to purchase, in the aggregate, approximately 1,977,000, 1,699,000, and
751,000 shares of common stock outstanding at December 31, 2000, 1999 and 1998,
respectively, were not included in the calculation of diluted loss per share
because the representative share increments would be antidilutive.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the discounted future cash flows expected to be
generated by such assets. Assets to be disposed of are reported at the lower of
their carrying amount or fair market value less costs to sell.
51
VAXGEN, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
Reclassifications
Certain prior year amounts have been reclassified to conform with the 2000
presentation.
Business Segments
The Company's operations are confined to one business segment, the
discovery and development of vaccines that immunize against HIV.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. SFAS 133, as amended by SFAS 138, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The adoption of SFAS 133
on January 1, 2001, did not have any impact on the Company's financial
statements.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation -- an interpretation of APB
Opinion 25," (Interpretation No. 44) which generally becomes effective July 1,
2000. Interpretation No. 44 clarifies the application of APB 25 for certain
matters, specifically (a) the definition of an employee for purposes of applying
APB 25, (b) the criteria for determining whether a plan qualifies as a
non-compensatory plan, (c) the accounting consequence of various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. The
adoption of Interpretation No. 44 did not have any impact on the Company's
financial position or results of operations.
In December 1999, The United States Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition in
Financial Statements." This Staff Accounting Bulletin, as amended, was adopted
in the fourth quarter of 2000. The adoption of SAB No. 101 did not have any
impact on the Company's financial position or results of operations.
52
VAXGEN, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
2. Investment Securities
The following summarizes the Company's investment securities at December 31:
Gross Gross
Amortized Unrealized Realized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
1999:
Commercial paper ......................... $ 20,797,000 $ 4,000 $ (2,000) $ 20,799,000
Government obligations ................... 19,306,000 2,000 (87,000) 19,221,000
Corporate obligations .................... 14,493,000 2,000 (44,000) 14,451,000
------------ ------------ ------------ ------------
$ 54,596,000 $ 8,000 $ (133,000) $ 54,471,000
============ ============ ============ ============
2000:
Government obligations ................... $ 14,977,000 $ 116,000 $ (1,000) $ 15,092,000
Corporate obligations .................... 27,767,000 242,000 (3,000) 28,006,000
------------ ------------ ------------ ------------
$ 42,744,000 $ 358,000 $ (4,000) $ 43,098,000
============ ============ ============ ============
Amortized cost and market value of investment securities at December 31,
2000 by contractual maturity are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Market
Maturities Cost Value
- ---------------------------------------------------------- ---------------------- ---------------------
Due in 1 year or less ................................... $16,460,000 $16,525,000
Due between 1 year to 3 years ........................... 26,284,000 26,573,000
----------- -----------
$42,744,000 $43,098,000
=========== ===========
Investment income, net, includes interest of $3,909,000, $2,178,000 and
$1,005,000 earned on investments and realized gains (losses) of $13,000,
($30,000) and $8,000 realized upon the sale of investments for 2000, 1999 and
1998, respectively.
53
VAXGEN, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
3. Property and Equipment
The following is a summary of property and equipment as of December 31,
2000 and 1999:
2000 1999
---- ----
Furniture and equipment .............. $2,615,000 $1,779,000
Leasehold improvements ............... 1,941,000 1,657,000
---------- ----------
4,556,000 3,436,000
Less accumulated depreciation and amortization 1,354,000 580,000
---------- ----------
$3,202,000 $2,856,000
========== ==========
4. Relationship with Genentech
The Company was founded in 1995 to develop and commercialize an HIV vaccine
in partnership with Genentech. In 1996, in return for an equity interest
(1,150,000 shares or 54% of the then outstanding and subscribed shares) in the
Company, rights to maintain 25% ownership of the Company's common stock (through
common stock warrants), a seat on the Board of Directors and certain
manufacturing and marketing rights to the vaccine, Genentech granted the Company
an exclusive license to certain technology.
Genentech financed the formation of the Company by means of a $1,000,000
line of credit. Additionally, Genentech and the Company entered into an
agreement whereby Genentech could convert the line of credit plus additional
capital totaling $2,000,000 into shares of the Company's common stock. The
conversion was made concurrent with an initial private placement in March 1997.
The conversion resulted in the issuance of 285,714 shares of common stock. Upon
the final closing of the private placement, Genentech exercised its option to
retain a 25% common stock ownership interest and thereby acquired an additional
86,640 shares of common stock for cash. At December 31, 1998, Genentech retained
warrants for the exercise of additional common stock in the event of a second
private placement in excess of $10 million or an Initial Public Offering (IPO).
Such warrants were exercisable at the issue price per share of the additional
capital raised and would allow Genentech to maintain its 25% ownership interest.
The warrants expired unexercised at the completion of the Company's 1998 private
placement in January 1999. Genentech no longer has any rights to maintain its
proportionate ownership position.
The license and supply agreement between the Company and Genentech, in
part, defines the working relationship between the companies. Genentech has
granted the Company an exclusive license to all patents and proprietary know-how
that Genentech is free to license or sublicense related to the development of a
vaccine to prevent HIV infection. Certain of the licensed technology is
sublicensed or assigned to the Company under licenses from third parties to
Genentech. The Company, as the exclusive licensee of
54
VAXGEN, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
Genentech, has assumed all of Genentech's obligations under these
third-party license agreements. Such obligations consist primarily of royalties
on product sales. However, the vaccine in its current form does not incorporate
any technology sublicensed or assigned to the Company for which there is an
obligation under licenses from third parties. The initial term of the license
agreement is 15 years from the commercial introduction date of a licensed
product and will be determined on a country-by-country, product-by-product
basis. In addition, upon entering the agreement, Genentech transferred to the
Company 300,000 doses of the vaccine. Under the license and supply agreement,
the Company is required to use due diligence in developing, seeking regulatory
approval for, and marketing and commercializing the vaccine. Due diligence is
defined in the agreement as meaning that the Company shall use the maximum
effort consistent with prudent business and scientific judgement in developing,
seeking regulatory approval for, marketing of and commercializing licensed
products in the field of use.
In connection with reaching this goal, the Company is required to achieve
the filing of the first market approval for a product with the FDA not later
than the fifth anniversary of the closing of the private placement, which
occurred in 1997. The Company and Genentech can agree to extend this
requirement, subject to a two-year limit. If the Company fails to exercise due
diligence, Genentech has the right to convert the exclusive license to a
non-exclusive license, and may be entitled to terminate the license. Genentech
may terminate the license and supply agreement if the Company fails to: (1)
maintain a tangible net worth of at least $1,000,000; or (2) meet certain due
diligence milestones within two years of the date originally set for such
milestones.
As part of the license and supply agreement, Genentech has an option to
manufacture the vaccine and a one-time option to be responsible for marketing
the vaccine worldwide. Should Genentech exercise its marketing option, Genentech
will pay a license fee to the Company equal to 33% of the Company's
developmental costs of the initial AIDSVAX product (including the Phase III
clinical trials and regulatory submissions), as well as a percentage of ongoing
profits on the sales of the vaccine. If Genentech does not elect its marketing
option, it will receive a royalty on product sales; the royalty rate depends on
whether Genentech elects to manufacture the vaccine being sold commercially.
The Company had a service agreement with Genentech whereby Genentech
supplied research, process science and regulatory support to the Company. The
contract expired on December 31, 2000. The Company is currently in negotiations
with Genentech to extend the agreement. Expenses incurred by the Company for
2000, 1999 and 1998 were $3,210,000, $1,679,000 and $681,000, respectively,
under the contract. In excess of 95% of costs represent research and development
expenses in each period and the remainder is general and administrative
expenses.
Prior to September 1998, the Company leased office space from Genentech.
Rent expense under this lease was $80,000 in 1998.
55
VAXGEN, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
Management believes that the terms of the agreement provided Genentech full
reimbursement for specifically identified actual direct costs as well as
indirect and overhead costs incurred related to the Company. Charges for
indirect and overhead costs were based upon a percentage of direct costs.
Management believes this method resulted in a reasonable allocation of costs to
the Company.
5. Initial Public and Private Placement Stock Offerings
In 1997, the Company completed a private placement sale of 3,607,047 shares
of its common stock at a price of $7.00 per share resulting in proceeds of
$23,001,000, net of issuance costs of $2,248,000. A total of 149,270 shares in
this private placement were sold to related parties. In conjunction with the
1997 private placement and under agreements with the Company, Genentech
converted a $1,000,000 line of credit with the Company and invested an
additional $1,000,000 in the Company in return for 285,714 shares of the
Company's common stock. Additionally, in October 1997, Genentech exercised its
option to maintain a 25% ownership interest in the Company (note 4), which
resulted in the issuance of 86,640 shares of the Company's common stock.
In 1998, the Company initiated a private placement sale of its common stock
at a price of $9.50 per share. The first closing and issuance of common shares
in the private placement was completed in December 1998 and resulted in the sale
of 986,097 shares of the Company's common stock and proceeds of $8,604,000, net
of issuance costs of $764,000. A total of 33,629 shares in the first closing
were sold to related parties. The final closing and issuance of 583,913 shares
of common stock for proceeds of $5,273,000, net of issuance costs of $274,000,
occurred in January 1999. A total of 2,000 shares were sold to related parties
in the final closing.
The Company completed its initial public offering (the "IPO") in July 1999,
in which it issued and sold 3,565,000 shares of common stock for aggregate
proceeds to the Company of $46,400,000. Of the aggregate proceeds received in
the IPO, $4,400,000 was used to pay underwriting discounts and commissions and
expenses related to the IPO, resulting in net proceeds of approximately
$42,000,000.
In 1999, the Company completed a private placement of common stock with
Vulcan Ventures, Inc. The issuance of the common shares in the private placement
was completed in December 1999 and resulted in the sale of 2,173,913 shares of
the Company's common stock and proceeds of approximately $24,000,000, net of
issuance costs.
56
VAXGEN, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
6. Stock Options and Warrants
(a) Stock Option Plans
1996 Stock Option Plan
In May 2000, the shareholders of the Company approved an increase in the
number of shares of common stock authorized for issuance under the Company's
1996 Stock Option Plan (the Plan) to a total of 3,250,000 shares. Options
granted under the Plan may be designated as qualified or nonqualified at the
discretion of the compensation committee of the Board of Directors. At December
31, 2000, 1,459,688 shares were available for grant under the Plan.
Generally, shares under option vest ratably over four years, beginning one
year from the date of grant; however, options can vest upon grant. All options
expire no later than 10 years from the date of grant. Qualified stock options
are exercisable at not less than the fair market value of the stock at the date
of grant and nonqualified stock options are exercisable at prices determined at
the discretion of the Board of Directors, but not less than 85% of the fair
market value of the stock at the date of grant.
1998 Director Stock Option Plan
In 1998, the Board of Directors approved the 1998 Director Stock Option
Plan (the Director Plan) for non-employee directors. Under the Director Plan,
37,500 shares of common stock are reserved for grant. As of December 31, 2000,
non-employee directors have been granted options to purchase 15,122 shares of
the Company's common stock at exercise prices ranging from $7.00 per share to
$13.50 per share. Such options vested immediately. Under the Director Plan,
options will automatically be granted to non-employee directors on the date of
the annual shareholders' meeting. The exercise price of each annual option grant
is to be the fair market value of the Company's common stock on the grant date.
Each annual option grant fully vests on the first anniversary of its grant date,
subject to certain meeting attendance requirements. At December 31, 2000, 22,378
shares were available for grant under the Director Plan.
57
VAXGEN, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
The following is a summary of the Company's stock option activity, and
related information for the periods ended December 31, 2000, 1999 and 1998:
2000 1999 1998
--------------------------- ----------------------------- -----------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------------ ----------- ----------- ----------- ------------ -----------
Balance at
beginning of
year ........................ 1,201,926 $ 9.27 441,071 $7.00 200,000 $7.00
Granted ..................... 550,562 18.44 1,041,184 9.65 271,071 7.00
Exercised ................... (151,528) 8.50 (87,491) 7.00 (5,750) 7.00
Canceled .................... (40,304) 12.00 (192,928) 7.15 (24,250) 7.00
--------- ---------- ----------
Balance at end
of year ..................... 1,560,656 12.51 1,201,926 9.27 441,071 7.00
========= ========== ==========
Options
exercisable at
year end .................... 591,407 9.80 238,062 7.80 116,696 7.00
Weighted-average
fair value of
options granted
during the year ............. $13.36 $6.70 $1.46
The weighted average remaining contractual life of stock options
outstanding at December 31, 2000 is 8.4 years.
The fair value of each option grant is estimated on the date of grant using
the following assumptions for grants in 2000, 1999 and 1998: expected dividend
yield of 0%; expected volatility of 95% in 2000, 116% for the period during 1999
subsequent to the initial public offering (June 30, 1999) and 0% for the periods
prior to the initial public offering; risk-free interest rate of 6.00%, 6.75%
and 6.00%; and expected lives of four years.
58
VAXGEN, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
Had compensation cost pursuant to the plans been determined consistent with
SFAS 123, the Company's net loss and loss per share would have been adjusted to
the pro forma amounts indicated below:
Years ended December 31,
----------------------------------------------------
2000 1999 1998
--------------- --------------- -------------
Net loss -- as reported $(31,803,000) $(23,334,000) $(9,163,000)
Net loss -- pro forma $(34,215,000) $(24,237,000) $(9,333,000)
Loss per share -- basic and diluted, as reported $ (2.33) $ (2.44) $ (1.48)
Loss per share -- basic and diluted, pro forma $ (2.51) $ (2.53) $ (1.51)
During 1998, the Board of Directors approved for grant options to purchase
174,925 shares of the Company's common stock at an exercise price of $7.00 per
share and 302,900 shares at an exercise price of $9.50 per share. However, since
the grant of such options would have caused the number of shares outstanding to
exceed the number of shares reserved for grant under the Plan, the Company's
shareholders had to approve an increase in the number of shares reserved for
grant under the Plan. On April 1, 1999, the shareholders of the Company approved
an increase in the number of shares reserved for grant under the Plan to
1,750,000 shares. This represents the measurement date for previously granted
but unapproved options. As a result, the Company recorded deferred compensation
in the amount of $3,223,000, representing the excess of fair market value of the
common shares on April 1, 1999, $13.00 per share, over the exercise price of the
options on the date stockholder approval was obtained. The Company has recorded
charges to compensation expense of $998,000 and $972,000 for the portion of the
vesting lapsed during the years ended December 31, 2000 and 1999, respectively.
The balance of deferred compensation is being amortized to expense over the
remaining vesting period of the options.
(b) COMMON STOCK WARRANTS
In connection with the Company's 1997 private placement, certain
consultants were issued warrants to purchase approximately 219,000 shares of the
Company's common stock exercisable at $7.00 per share through June 2007. As of
December 31, 2000, warrants to purchase 51,017 shares have been exercised.
The Company similarly agreed to issue warrants to purchase approximately
91,000 shares of the Company's common stock exercisable at $9.50 per share to
certain consultants in connection with the Company's 1998 private placement.
Such warrants were earned in December 1998 and January 1999. The warrants are
exercisable through 2009. As of December 31, 2000, warrants to purchase 11,021
shares have been exercised.
During the second quarter of 1999, in connection with the resolution of an
employment matter, the Company issued warrants to purchase 150,000 shares of the
Company's
59
VAXGEN, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
common stock exercisable at $7.00 per share. As a result of the warrant
issuance, the Company recorded compensation expense of approximately $2,000,000.
As of December 31, 2000, warrants to purchase 10,000 shares have been exercised.
In 1999, the Company agreed to issue warrants to purchase approximately
35,000 shares of the Company's common stock exercisable at $11.50 per share to
certain consultants in connection with the Company's 1999 private placement with
Vulcan Ventures, Inc. The warrants are exercisable through 2009. As of December
31, 2000, warrants to purchase 6,087 shares have been exercised.
7. Income Taxes
The Company has reported no income tax benefits due to limitations on the
recognition of deferred tax assets for financial reporting purposes.
The tax effects of temporary differences and carryforwards that give rise
to deferred tax assets are as follows:
December 31
----------------------------
2000 1999
---- ----
Deferred tax assets:
Net operating loss carryforwards................ $22,513,000 $11,941,000
Equity compensation............................. 1,522,000 2,406,000
Research and experimentation credit
carryforwards................................. 1,263,000 941,000
Other........................................... 378,000 146,000
----------- -----------
Total gross deferred tax assets......... 25,676,000 15,434,000
Less valuation allowance........................ 25,676,000 15,434,000
----------- -----------
Net deferred tax assets................. $ -- $ --
=========== ===========
Based on the weight of available evidence, including cumulative losses
since inception and expected future losses, the Company has determined that it
is more likely than not the entire deferred tax asset amount will not be
realized and, therefore, a valuation allowance has been provided on all gross
deferred tax assets.
The increases in the valuation allowance for deferred tax assets of
$10,242,000, $10,186,000 and $3,299,000 in 2000, 1999 and 1998, respectively,
are primarily attributable to increases in net operating loss and tax credit
carryforwards.
At December 31, 2000 the Company had net operating loss carryforwards of
approximately $66,216,000 and research and experimentation credit carryforwards
of
60
VAXGEN, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
approximately $1,263,000 which are available to offset future Federal taxable
income and income taxes, respectively, if any, and expire beginning in 2010.
8. Commitments
(a) Leases
The Company leases office facilities under noncancelable operating leases,
which expire from 2002 to 2007, along with a sublease agreement under which the
Company acts as a sublessor. Until September 1998, the Company also leased
office space from Genentech.
In August 1998, the Company commenced a lease for office space at Mahidol
University in Bangkok, Thailand, ending at the conclusion of Phase III clinical
trials in Thailand. The lease requires monthly payments of $2,000. Additionally,
the Company began renovation of project office space at Taksin Hospital, also in
Bangkok. The Company is required to pay up to $100,000 for renovations, for
which the Company will receive use of the facility for a five-year term at no
additional cost. As of December 31, 2000, the Company had fulfilled its
obligation related to the renovations.
The Company entered into an 88-month laboratory lease commencing January 1,
1999, which requires the Company to expend a minimum of $500,000 in leasehold
improvements, in addition to its scheduled lease payments. As of December 31,
2000, the Company had fulfilled its obligation related to the leasehold
improvements.
Minimum annual payments, excluding required leasehold improvements and
renovations, under the foregoing leases, are as follows:
2001................................................. $927,000
2002................................................. 945,000
2003................................................. 959,000
2004................................................. 988,000
2005................................................. 1,017,000
Thereafter........................................... 1,250,000
Rent expense for 2000, 1999 and 1998 was $1,198,000 and $901,000 and
$353,000, respectively.
(b) Employment Agreements
The Company has employment contracts with certain members of management
ending from 2001 to 2004. Such agreements provide for discretionary bonuses and
annual increases in compensation as determined by the Board of Directors.
Minimum compensation under these contracts aggregates $1,298,000 annually.
61
VAXGEN, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
(c) Clinical Trials
In connection with Phase III clinical trials, the Company has contracted
for the services of 61 medical clinics in North America and Europe and 17
medical clinics in Thailand associated with the Bangkok Metropolitan
Administration. The clinics will provide the location, clinicians, oversight,
and volunteers for the three-year testing of the Company's vaccine. Payment will
be made over the period based on the number of volunteers vaccinated, the number
of return visits and the subsequent testing and follow-up of these volunteers.
Total commitments are estimated to aggregate approximately $29,400,000, of which
the Company had paid approximately $5,000,000 for the year ended December 31,
2000. Estimated future payments are as follows:
2001................................. $5,900,000
2002................................. 6,200,000
2003................................. 2,700,000
9. Non-cash Compensation Expense
Employment contracts with three members of management provided for the
issuance of an aggregate of 325,757 shares of the Company's common stock to
these individuals if the public market valuation of a share of the Company's
common stock, as computed on a 30-day trailing average of the closing price of
the Company's common stock over such period as reported by The NASDAQ Stock
Market(R), is equal to or greater than $28.00 per share. In November 2000, the
average price of $28.00 was achieved and accordingly, the 325,757 shares of
common stock were issued to the three members of management. The Company
recorded an immediate non-cash compensation charge to expense equal to the per
share value of the common stock issued. The per share value of the stock upon
issuance was $24.25 with a charge to expense equaling $7,900,000
The Company granted three 6-month loans aggregating $2,619,000 to three
members of management. The loans are related to payroll taxes paid by the
Company on behalf of the officers in connection with compensation incurred as a
result of shares issued to the officers. Interest accrues on a monthly basis at
a rate of 6% per annum beginning January 2001. The loans are to be paid by a
lump-sum payment in June 2001, although there is an extension provision in the
loan agreements. Two of the loans are secured by the common stock of the Company
owned by the officer, the third loan is currently in negotiations in respect to
securing the loan.
In December 2000, the Company recorded a $1,800,000 charge for costs
related to the resignation of the Company's chairman and chief executive
officer. Costs included cash payments totaling $650,000 and a non-cash
compensation charge of $1,150,000 related to acceleration of stock options.
62
VAXGEN, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
Non-cash compensation expense for 2000, 1999 and 1998 was $9,958,000,
$3,319,000 and $0, respectively.
10. Selected Quarterly Financial Data (Unaudited)
Year Ended December 31, 2000
--------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------------ ------------------ ---------------- ----------------
Revenues $ -- $ -- $ 200,000 $ 75,000
Loss from operations $ (5,646,000) $ (6,575,000) $ (7,219,000) $ (16,263,000)
Other income, net $ 1,030,000 $ 1,005,000 $ 962,000 $ 903,000
Net loss $ (4,616,000) $ (5,570,000) $ (6,257,000) $ (15,360,000)
Basic and diluted loss per
share $ (0.34) $ (0.41) $ (0.46) $ (1.11)
Weighted average shares
used in computing basic
and diluted loss per share 13,540,000 13,564,000 13,605,000 13,833,000
Year Ended December 31, 1999
--------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------------ ------------------ ---------------- ----------------
Revenues $ -- $ -- $ -- $ --
Loss from operations $ (4,044,000) $ (7,993,000) $ (6,807,000) $ (6,638,000)
Other income, net $ 284,000 $ 233,000 $ 706,000 $ 925,000
Net loss $ (3,760,000) $ (7,760,000) $ (6,101,000) $ (5,713,000)
Basic and diluted loss per
share $ (0.49) $ (1.01) $ (0.55) $ (0.49)
Weighted average shares
used in computing basic
and diluted loss per share 7,619,000 7,685,000 11,156,000 11,679,000
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
64
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10 is incorporated by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 (the "Exchange Act") no later than 120
days after the end of the 2000 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
under the Exchange Act no later than 120 days after the end of the 2000 fiscal
year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
under the Exchange Act no later than 120 days after the end of the 2000 fiscal
year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
under the Exchange Act no later than 120 days after the end of the 2000 fiscal
year.
65
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Page
----
VaxGen, Inc.
Report of Independent Auditors'.............................. 44
Balance Sheets - December 31, 2000 and 1999.................. 45
Statements of Operations - Years ended December 31, 2000,
1999, 1998 and Period from Inception (November 27, 1995)
through December 31, 2000.................................... 46
Statements of Cash Flows - Years ended December 31, 2000,
1999, 1998 and Period from Inception (November 27, 1995)
through December 31, 2000.................................... 47
Statements of Stockholders' Equity (Deficit) and
Comprehensive Loss - Years ended December 31, 2000,
1999, 1998 and Period from Inception (November 27, 1995)
through December 31, 2000.................................... 48
(a)(2) Financial Statement Schedules
Financial statement schedules have been omitted because they
are not applicable, not required, or the required information
is included in the financial statements and notes thereto.
66
(a)(3) Exhibits
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 Amended and Restated Bylaws (1)
4.1 Specimen stock certificate (1)
10.1 Registration Rights Agreement between VaxGen and Genentech, dated
as of May 5, 1997 (1)
10.2 1996 Registration Rights Agreement between VaxGen and certain
stockholders (1)
10.3 1998 Registration Rights Agreement between VaxGen and certain
stockholders (1)
10.4 VaxGen, Inc. Amended and Restated 1996 Stock Option Plan (2)
10.5 1998 Director Stock Option Plan (1)
10.6 Form of stock option agreement (1)
10.7 Form of common stock warrant (1)
10.8 Right of First Option Agreement between VaxGen and Leon A.
Greenblatt, dated March 14, 1997 (1)
10.9 Amended and Restated Employment Agreement between VaxGen and
Robert C. Nowinski (3)
10.10 Amended and Restated Employment Agreement between VaxGen and
Donald P. Francis (4)
10.11 Amended and Restated Employment Agreement between VaxGen and
Phillip W. Berman (5)
10.12 Employment Agreement between VaxGen and John G. Curd, dated as of
May 3, 1999 (1)
10.13 Employment Agreement between VaxGen and Carter A. Lee, dated as
of April 1, 1999 (1)
10.14 License Agreement with Genentech, dated as of May 1, 1996 (1)
10.15 Services Agreement with Genentech, dated as of January 1, 1999 (1)
10.16 Letter of Intent for Supply Development Agreement between
VaxGen and Pasteur Merieux Serums et Vaccins (Pasteur Merieux
Connaught), dated April 10, 1998(1)
10.16.1 Amendment to Letter of Intent for Supply Development Agreement
between VaxGen and Pasteur Merieux Serums et Vaccins (Pasteur
Merieux Connaught), dated May 3, 1999(1)
10.17 Form of trial clinic agreement (1)
10.18 Lease Agreement between VaxGen and Oyster Point Tech Center LLC,
dated October 26, 1998 (1)
10.19 Lease Agreement between VaxGen and Spieker Properties, L.P.,
dated May 20, 1998 (1)
10.20 Common Stock Purchase Agreement between VaxGen and Vulcan
Ventures, Inc., dated October 15, 1999 (6)
10.21 Severance Agreement and Mutual General Release entered into
between Robert C. Nowinski and VaxGen, Inc. dated as of
December 7, 2000
10.22 Loan and Security Agreement, Promissory Note and Account Control
Agreement entered into between Donald P. Francis and VaxGen, Inc.
dated as of December 20, 2000
67
Exhibit
Number Description
------ -----------
10.23 Promissory Note entered into between
Robert C. Nowinski and VaxGen, Inc. dated as of December 20, 2000
10.24 Loan and Security Agreement, Promissory Note and Account Control
Agreement entered into between
Phillip W. Berman and VaxGen, Inc. dated as of December 20, 2000
10.25 Employment Agreement between VaxGen and William Heyward, dated as
of January 3, 2000
10.26 Employment Agreement between VaxGen and George T. Baxter, dated
as of September 5, 2000
23.1 Consent of KPMG LLP
(1) Incorporated by reference to the same exhibit filed with the Company's
Registration Statement on Form S-1 (File No. 333-78065).
(2) Incorporated by reference to Exhibit 99.1 filed with the Company's
Registration Statement on Form S-8 (File No. 333-85391).
(3) Incorporated by reference to Exhibit 99.4 filed with the Company's
Registration Statement on Form S-8 (File No. 333-85391).
(4) Incorporated by reference to Exhibit 99.3 filed with the Company's
Registration Statement on Form S-8 (File No. 333-85391).
(5) Incorporated by reference to Exhibit 99.5 filed with the Company's
Registration Statement on Form S-8 (File No. 333-85391).
(6) Incorporated by reference to the same exhibit filed with the Company's
Annual Report on Form 10-K (File No. 000-26483).
(a) Reports on Form 8-K:
A current report on Form 8-K dated December 29, 2000 was filed with
the Securities and Exchange Commission, reporting under Item 5 the
resignation of Robert C. Nowinski as Chairman of the Board and Chief
Executive Officer of the Company.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VaxGen, Inc.
(Registrant)
By: /s/ Carter A. Lee
------------------------------------
Carter A. Lee
Senior Vice President
Finance & Administration
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Donald P. Francis March 30, 2001
-------------------------
Donald P. Francis
President and Director
(Principal Executive Officer)
By: /s/ Carter A. Lee March 30, 2001
-------------------------
Carter A. Lee
Senior Vice President
Finance & Administration
(Principal Financial and Accounting Officer)
/s/ Phillip W. Berman March 30, 2001
- ------------------------------
Phillip W. Berman
Senior Vice President,
Research and Development, Director
/s/ Randall L-W. Caudill March 30, 2001
- ------------------------------
Randall L-W. Caudill
Director
/s/ Stephen C. Francis March 30, 2001
- ------------------------------
Stephen C. Francis
Director
/s/ Ruth B. Kunath March 30, 2001
- ------------------------------
Ruth B. Kunath
Director
/s/ William D. Young March 30, 2001
- ------------------------------
William D. Young
Director
69
EXHIBIT INDEX (A)
Exhibit
Number Description
- ------- -----------
10.21 Severance Agreement and Mutual General Release entered into
between Robert C. Nowinski and VaxGen, Inc. dated as of
December 7, 2000
10.22 Loan and Security Agreement, Promissory Note and Account
Control Agreement entered into between Donald P. Francis and
VaxGen, Inc. dated as of December 20, 2000
10.23 Promissory Note entered into between Robert C. Nowinski and
VaxGen, Inc. dated as of December 20, 2000
10.24 Loan and Security Agreement, Promissory Note and Account
Control Agreement entered into between Phillip W. Berman and
VaxGen, Inc. dated as of December 20, 2000
10.25 Employment Agreement between VaxGen and William Heyward, dated
as of January 3, 2000
10.26 Employment Agreement between VaxGen and George T. Baxter, dated
as of September 5, 2000
23.1 Consent of KPMG LLP
(A) Exhibits incorporated by reference are listed in Item 14(a)3 of this Report.
70