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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934.
For the fiscal year ended DECEMBER 31, 1999 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934.
For the transition period from __________ to __________.
Commission file number: 0-18006
THE IMMUNE RESPONSE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0255679
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5935 DARWIN COURT, CARLSBAD, CA 92008
Address of principal executive offices
(760) 431-7080
Registrant's telephone number including area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g)
of the Act: Common Stock, Par Value $.0025
Preferred Stock Purchase Rights
(Title of Class)
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 Common Stock held by non-affiliates of the
registrant, based upon the last sale price of the Common Stock reported on the
National Association of Securities Dealers Automated Quotation National Market
System on March 10, 2000 was $341,346,000.
The number of shares of Common Stock outstanding as of March 10, 2000 was
27,209,345.
DOCUMENTS INCORPORATED BY REFERENCE
(To the Extent Indicated Herein)
Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the Registrant's
2000 Annual Meeting of Stockholders to be held on May 25, 2000 is incorporated
by reference in Part III, Items 10 (as to directors), 11, 12 and 13 of this Form
10-K.
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ITEM 1. BUSINESS
GENERAL
The Immune Response Corporation ("Immune Response" or the "Company") is a
biopharmaceutical company developing immune-based therapies to induce specific
immune responses for the treatment of HIV, autoimmune diseases and cancer. In
addition, the Company is developing a targeted non-viral delivery technology for
gene therapy, which is designed to enable the delivery of genes directly to the
liver via intravenous injection. The Company's gene therapy program is focused
on diseases of the liver.
PRODUCTS UNDER DEVELOPMENT(1)
PRECLINICAL PHASE 1 PHASE 2 PHASE 3
----------- ------- ------- -------
IMMUNE-BASED THERAPIES
HIV [GRAPH] -----------------------------------------------------------
Rheumatoid Arthritis [GRAPH] ---------------------------------------------
Psoriasis [GRAPH] -------------------------------------
Multiple Sclerosis [GRAPH] ----------------------------
Colon Cancer [GRAPH] ----------------------------
Brain Cancer [GRAPH] ---------------
Melanoma Cancer [GRAPH]
Prostate Cancer [GRAPH]
GENE THERAPY
Hemophilia A [GRAPH]
Hepatitis [GRAPH]
(1) The table describes the status of the current product candidates and is
not intended to depict the relative lengths of time of any of the
stages of drug discovery and preclinical and clinical development. The
amount of time spent in any phase of development will vary
substantially from product to product and there can be no assurance
that any of the products will proceed beyond the phase depicted or will
receive regulatory approval. See "Government Regulation."
THE IMMUNE SYSTEM
The immune system is the body's natural defense mechanism to prevent and combat
disease. When a competent immune system recognizes a foreign material or
biological invader it normally induces a response. There are two major arms of
the immune system: T cell-based and B cell or antibody-based.
T cells are specialized white blood cells that are normally produced by the body
to kill infected cells. A T cell-based immune response begins when these
specialized T cells, immune cells, recognize foreign "invaders" such as viruses
or bacteria within the body. However, significant evidence suggests that
infections trigger a T cell-based immune response during the initial course of
their progression but this response is not always sufficient to eradicate the
disease. In fact, some diseases are able to produce substances that suppress the
immune response, thus making it important to provide assistance to the immune
system.
The Company believes that its technology will regulate the body's immune system
to recognize and combat diseases such as HIV, autoimmune disease and cancer.
Ways that this can be accomplished are by boosting the killer T cell responses
against HIV and cancer and boosting the regulatory T cell response against the
disease inducing T cells in autoimmune diseases such as rheumatoid arthritis,
psoriasis and multiple sclerosis.
OUR IMMUNE BASED THERAPIES
IMMUNE BASED THERAPIES FOR HIV
BACKGROUND. AIDS, which is caused by a virus known as HIV, is a condition that
slowly destroys the body's immune system making the body vulnerable to
opportunistic infections. The spread of HIV is a result of the virus invading
the host cell where it uses the host cell's protein synthesis capability to
replicate. The immune system responds by
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producing antibody and cellular immune responses capable of attacking HIV. While
these and other responses are usually sufficient to temporarily arrest progress
of the infection and reduce levels of virus in the blood, the virus continues to
replicate and slowly destroys the immune system by infecting and killing
critical T cells, known as CD4 cells. The CD4 cells are needed to maintain the
immune system. As the infection progresses, the immune system's control of HIV
levels weakens, the level of virus in the blood rises and the level of critical
T cells declines to a fraction of normal level. Currently available antiviral
products have been shown to be effective at reducing the levels of virus in the
blood, however, certain limitations in the therapy have prevented the antiviral
products from being as effective as originally predicted. This is due primarily
to viral resistance and the inability to stimulate the infected individual's own
immune system to kill the virus.
The World Health Organization ("WHO") estimates there are approximately 33
million individuals around the world infected with HIV. WHO also stated that
during 1998, 5.8 million individuals (including 590,000 children) became
infected with HIV. This represents approximately 16,000 new infections per day.
In the United States, the number of HIV-infected individuals is estimated at 1
million. The HIV epidemic represents a significant societal threat to both
developed and developing nations since most of the HIV-infected individuals are
expected to ultimately develop AIDS, creating a significant burden on healthcare
systems and economies around the world.
REMUNE. REMUNE is designed to stimulate an HIV-infected individual's immune
system to attack HIV. The Company believes results from its previous clinical
trials demonstrated that REMUNE significantly boosts HIV-specific immune
responses in HIV-infected individuals. Furthermore, the Company believes REMUNE
stimulates the production of specific antiviral substances, such as chemokines,
which naturally protect T cells from HIV infection. By utilizing an immune-based
therapy such as REMUNE, the Company believes it may be possible to boost the HIV
infected individual's immune system against the virus and further optimize the
effects of antiviral drug therapy.
HIV opinion leaders have begun to recognize that in order to effectively stop or
slow the progression of HIV to AIDS, therapies must stimulate HIV cell mediated
immune response in infected individuals (HIV-specific T cell proliferation) in
addition to reducing viral load through the use of antiviral drugs. Furthermore,
and most importantly, antiviral drugs do not enhance HIV specific immune
function which is now thought by numerous researchers to be important in
controlling HIV replication. The use of REMUNE to reconstitute HIV specific
immunity may provide a unique niche for REMUNE to be utilized in combination
with drug therapy to provide long-term management of HIV.
CLINICAL TRIALS. In 1999, the Company discontinued a 2,526 patient Phase 3
clinical endpoint trial. The trial was discontinued because differences in
clinical endpoints were not observed between treatment groups and extending
the trial would have been unlikely to provide sufficient additional clinical
endpoints to permit statistically significant differences between the
treatment groups to be observed in the near term. The primary efficacy
endpoint for the trial was disease progression to an AIDS defining condition,
or death. At the time the study began this was the only accepted endpoint for
approval by the FDA for vaccines. However, since the discontinuation of the
2,526 patient Phase 3 trial, the FDA has agreed to accept virologic endpoint
trials for the basis of approval for REMUNE. This allows the Company to use
virologic failure as the primary endpoint, which was accepted, for most of
the antiretroviral products that have been approved under the drug division
of the FDA. Under the revised requirements, Agouron Pharmaceuticals, Inc.
("Agouron"), a wholly owned subsidiary of Warner-Lambert Company, and Immune
Response have initiated a Phase 3 pivotal trial in 550 patients to evaluate
whether REMUNE plus highly active antiviral therapy (HAART) delays the time
to virologic failure. This trial will assess whether REMUNE plus HAART is
capable of delaying the time that the HIV virus increases in a patient's
blood. If the trial is successfully enrolled and completed, results can be
expected by the second half of 2001.
The Thailand clinical trial in 297 infected Thai patients, conducted by Trinity
Medical, was completed in 1999. The primary endpoint was increase in CD4 cells.
The primary endpoint was met in this 40-week clinical trial. Although patients
received no antiviral drug therapy, REMUNE augmented CD4 cells and enhanced HIV
specific immunity. Further follow-up has shown stable or decreased viral load in
a majority of the patients that have been examined.
A REMUNE study is also being conducted in Spain. The ongoing 243 patient trial
combines REMUNE with antiviral drug therapy and is assessing the effect of
REMUNE on virologic failure. The data safety monitoring board for this trial,
which was designed to evaluate immunologic and virologic endpoints, met in the
fourth quarter of 1999 and concluded that the trial could continue to completion
which is scheduled for April 2001.
The results of a Phase 1, 10 patient pediatric trial conducted by the National
Institutes of Health were published in the Journal of Infectious Disease showing
that REMUNE was well tolerated in children on antiviral drug therapy
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and induced HIV specific immune responses. Furthermore, the results showed that
children receiving the adult dose of REMUNE had a significant sustained decrease
in viral load compared to children who received a lower dose.
Previous Phase 1 and 2 studies in approximately 350 subjects indicated that
REMUNE was well tolerated with the most common side effect being injection site
reactions. These trials indicated that REMUNE is safe, that it may induce HIV-
specific immune responses and showed positive trends on the virologic and
immunologic markers.
TECHNOLOGY. Remune is composed of inactivated HIV, depleted of its envelope, and
emulsified in Incomplete Freund's Adjuvant ("IFA"), an agent which elicits a
more potent immune response by more effectively presenting the inactivated virus
to the immune system. Remune is manufactured by first culturing HIV-infected
human T cells. The virus is then purified from this cell culture and inactivated
with betapropiolactone, a chemical agent commonly used for viral inactivation,
and then physically inactivated with irradiation. Each of these procedures alone
is capable of inactivating HIV. During processing and purification, the outer
envelope protein of the virus, known as gp120, is depleted from the inactivated
HIV. The final envelope-depleted HIV is emulsified in IFA and is filled in
syringes. When introduced into HIV-infected individuals, Remune appears to
stimulate an HIV-specific immune system response, which the Company believes may
provide a safe, effective and long-lasting benefit to these individuals.
REMUNE is based on the core proteins of the virus, which are consistent across
multiple strains of HIV. Earlier approaches to HIV immune-based therapies were
based on the viral envelope, proteins located on the outside of the virus, and
may not have been effective due to mutations in the viral envelope. The Company
believes REMUNE has shown to be well tolerated after repeated use in over 2,000
individuals. The Company believes REMUNE may be an appropriate treatment for
HIV-infected individuals to take alone or in combination with other treatments.
REMUNE is administered by intramuscular injection, by a healthcare professional,
once every three months.
Currently, the HIV-1 virus continues to evolve and mutate and as a result
different strains or clades of HIV-1 have emerged worldwide. This creates a
moving target for single protein immunogens that are being developed that are
clade specific. The Company believes that, because REMUNE is a whole virus and
contains the core proteins that are more genetically conserved, individuals
treated with REMUNE may be able to elicit broad immune responses to multiple
subtypes of HIV-1 found throughout the world. This type of broad cross
reactivity may have future implications for both therapeutic and preventive
vaccines.
EXISTING THERAPIES FOR HIV. Currently available antiviral products have been
shown to be effective at reducing the levels of virus in the blood, however,
certain limitations in the therapy have prevented the antiviral products from
being as effective as originally predicted. The antiviral products may be
associated with significant toxicity and eventual induction of viral resistance.
In addition, non-compliance with the strict dosage regimen may also reduce the
effectiveness and can accelerate emergence of resistance.
REMUNE BENEFITS. It is currently estimated that only 30% to 40% of HIV-infected
individuals in the United States use cocktail therapies (various combinations of
reverse transcriptase and protease inhibitors). Of these individuals, up to 50%
discontinue treatment due to resistance, toxicity, lack of compliance or because
the cocktail therapy was not effective in reducing the viral load. REMUNE,
unlike drugs, can induce an HIV specific response, is well tolerated and is easy
to administer. REMUNE has been administered to over 2,000 patients and has an
excellent safety profile.
Most importantly, antiviral drugs do not enhance HIV-specific immune
function, which is now thought by numerous researchers to be important in
controlling HIV replication. The fact that REMUNE reconstitutes HIV-specific
immunity provides a unique niche for REMUNE to be utilized in combination
with drug therapy to provide long-term management of disease.
One goal of the combination REMUNE-drug approach is to prolong the impact of
antiviral drug therapies on viral load by increasing the immune response to
HIV-infected cells. If successful, a delay in drug resistance and a prolonged
duration of low levels of virus in the blood coupled with an increase in the
immune response to HIV could translate into clinical benefit.
MANUFACTURING. The Company subleases a 52,500 square foot facility in King of
Prussia, Pennsylvania dedicated to the manufacture of REMUNE for clinical trials
and, if the FDA approves the product, initial commercial production. In February
1996, the Company received clearance from the FDA to release the product for use
in clinical trials. The Company believes the facility, which is a full-scale,
GMP commercial process facility, is capable of supplying
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clinical trial quantities and initial commercial quantities. The Company relies
on a third party for the final inactivation step of the manufacturing process.
If the existing manufacturing operations prove inadequate, there can be no
assurance that any arrangement with a third party can be established on a timely
basis, or that the Company can establish other manufacturing capacity on a
timely basis. The Company believes that the raw materials necessary to produce
REMUNE are readily available from various sources.
COMMERCIALIZATION STRATEGY. During June 1998, the Company and Agouron entered
into an agreement under which the Company exclusively licensed to Agouron the
marketing rights to REMUNE in North America, Europe, Japan and certain other
countries, if regulatory approvals are received. The Company and Agouron have
conducted physician and patient focus group sessions to begin preparations for a
commercial marketing launch of REMUNE, subject to the successful conclusion of
the clinical trials and final approval of the product by the FDA. If REMUNE is
successfully developed and approved for marketing, third party reimbursement
will need to be sought for the costs of related treatments from government
health administration authorities, private health coverage insurers, managed
care organizations and other organizations. The two companies will share all
profits from the commercialization of REMUNE on a 50/50 basis, if REMUNE is
successfully developed and receives the necessary regulatory approvals. The
Company also has partners for Thailand and South and Central America.
IMMUNE-BASED THERAPIES FOR AUTOIMMUNE DISEASES
BACKGROUND. Autoimmune disease results from the body's immune system
manufacturing T cells and or antibodies that are directed against the body's own
cells or organs as if they were foreign. Several autoimmune disorders, including
rheumatoid arthritis, psoriasis and multiple sclerosis, result from the
proliferation of misdirected T cells that incorrectly identify and destroy the
individual's own tissue.
TECHNOLOGY. The Company's proprietary autoimmune immune-based therapies under
development are designed to inhibit or downregulate the T cells that the Company
believes cause the tissue damage in certain autoimmune diseases. These therapies
are designed to induce specific immune responses by inhibiting the
disease-causing T cells. The Company's immune-based approach for the treatment
of these autoimmune diseases is based on the immune system's ability to down
regulate disease causing T cells. The Company is pursuing this approach for the
treatment of rheumatoid arthritis, psoriasis and multiple sclerosis. The
Company's products under development are T cell receptor peptide vaccines based
on a combination of synthetic peptides from T cell receptors emulsified in IFA.
BENEFITS OF OUR APPROACH. The Company believes that its approach to the
treatment of autoimmune diseases may provide several advantages over existing
therapies and competing approaches based on immune system regulation. In
clinical studies, the Company's immune-based therapies using T cell receptor
peptides have demonstrated a lack of toxicity and a specific impact on the
disease-causing cells. These results, combined with the ease of administration
through infrequent intramuscular injections (one to three month intervals) and
the potential for a long-lasting immunity, may provide an important addition or
alternative to existing therapies, which treat only the symptoms of the disease.
While autoimmune diseases may involve any organ system, common targets include
the lining of the joints in rheumatoid arthritis, the skin in psoriasis and the
white matter of the brain and spinal cord in multiple sclerosis. Current
treatments for these diseases address only the symptoms and are ineffective in
halting the progressive tissue destruction caused by the autoreactive T cells.
This progression often results in severe debilitation or death.
RHEUMATOID ARTHRITIS
BACKGROUND. Rheumatoid arthritis is a chronic inflammatory disease characterized
by persistent inflammation of the lining of the joints accompanied by stiffness
and pain or tenderness on motion. It is estimated that approximately 2.1 million
individuals in the United States, and 1-2% of the worldwide population, suffer
from rheumatoid arthritis, and up to $5.6 billion is spent annually worldwide on
medications designed to treat only the symptoms of this debilitating disease.
EXISTING THERAPIES. There is currently no cure for rheumatoid arthritis.
Currently, management of rheumatoid arthritis requires early diagnosis and
aggressive treatment before functional impairment and irreversible joint damage
has occurred. Available therapies generally have adverse side effects and
address only the symptoms of the disease. By contrast, the Company's rheumatoid
arthritis therapy is intended to target and inhibit the specific T cells thought
to be involved in initiating the disease process. The Company believes this
inhibition may reduce the inflammatory events that occur as the disease
progresses.
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PRODUCT UNDER DEVELOPMENT. The treatment being developed is designed to
stimulate the immune system of a rheumatoid arthritis patient to control the T
cells that are initiating the disease. The Company believes that eliminating or
inhibiting these T cells may prevent further damage to the tissue of joints.
HUMAN CLINICAL TRIALS. Based on results observed in an earlier Phase 2
clinical trial, a Phase 2b clinical trial was conducted. The Phase 2b
clinical trial, intended to confirm and expand upon the clinical results from
an earlier completed Phase 2 clinical trial, included 340 individuals with
rheumatoid arthritis who received treatment over 24-weeks at 26 clinical
sites. The Company believes that the results from this Phase 2b trial suggest
a favorable treatment effect according to the American College of
Rheumatology (ACR) 20 improvement criteria with significance at one time
point after the third injection. These findings were consistent with and
expanded upon the results shown in the previous Phase 2 trial. The ACR 20
criteria require an improvement in tender and swollen joint counts of at
least 20% from baseline, along with improvement in three of five other
disease-related criteria. The results from this study also confirmed that the
treatments were safe and well tolerated. The results of the Phase 2b clinical
trial were presented at the American College of Rheumatology 1999 Annual
Meeting.
PSORIASIS
BACKGROUND. Psoriasis is a chronic and recurrent proliferative disease of the
skin characterized by irritating and sometimes painful, defined red patches
covered with silvery-white scales. According to the National Psoriasis
Foundation, psoriasis affects over 6 million Americans. Annual outpatient costs
for treatment are currently estimated at up to $3 billion per year. A
distinguishing feature of the disease is the rapid sloughing of skin layers.
While normal skin cells mature in 28 to 30 days, skin cells of psoriasis
patients move to the surface of the skin in approximately three to seven days.
EXISTING THERAPIES. Current treatments, which range from topical ointments to
phototherapy, address the symptoms of psoriasis rather than the cause of the
disease. Not all treatments work for every individual. These treatments often
require individuals to experiment and/or combine therapies in order to discover
the regimen that is most effective. Treatment success requires faithful
compliance to the regimen and provides varying degrees of relief from the
disease. Patients usually have to cycle in and out of these therapies to achieve
any therapeutic benefit. By contrast, the Company's psoriasis therapy is
intended to target and inhibit the immune system cells that may be involved in
the initiation of the disease process.
PRODUCT UNDER DEVELOPMENT. The treatment being developed by the Company is
designed to stimulate the immune system of a psoriasis patient to regulate the
disease causing T cells. The Company believes that eliminating or inhibiting
these T cells may alleviate the effects of this disease.
HUMAN CLINICAL TRIALS. Based on results observed in an earlier Phase 2 clinical
trial, a second Phase 2 clinical trial was conducted. This Phase 2 clinical
trial involved 84 individuals with moderate to severe psoriasis and was designed
to evaluate the safety and optimal dose of the therapy. The Company believes the
results from this trial suggest that the groups that received intramuscular
injections of T cell receptor peptides along with IFA showed clinical
improvement according to the psoriasis and severity index (PASI) scores when
compared to all other treatment groups.
MULTIPLE SCLEROSIS
BACKGROUND. Multiple sclerosis is a chronic disease of the central nervous
system that effects the white matter of the brain and spinal cord. It is one of
the most common causes of chronic neurologic disability in young adults.
Multiple sclerosis afflicts approximately 350,000 individuals in the United
States and more than 1 million individuals worldwide.
EXISTING THERAPIES. The mechanism of action for currently approved therapies is
not clearly understood. These therapies provide modest benefit for the disease
and have many side effects.
PRODUCT UNDER DEVELOPMENT. The Company's proprietary immune-based therapy under
development for multiple sclerosis contains T cell receptor peptides specific
for multiple sclerosis which were found in the cerebrospinal fluid of
individuals afflicted with multiple sclerosis or because of the reactivity to
myelin basic protein.
HUMAN CLINICAL TRIALS. Based on results from an earlier Phase 1 clinical trial,
a second Phase 1 open label trial was conducted in patients whose T cells were
found to be present at significant levels in spinal fluid cultures of T cells.
Ten patients received injections of the Company's therapeutic peptide vaccine
over 48 weeks. The results suggest that the TCR therapeutic peptide vaccine was
again safe and well tolerated, and it generated strong immune
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responses in 8 out of 10 (80%) patients immunized. The patients remained
clinically stable as measured by expanded disability status scores (EDSS) during
the 48-week study.
IMMUNE-BASED THERAPIES FOR CANCER
BACKGROUND. Cancer is characterized by the uncontrolled growth of abnormal cells
that can spread from the anatomic site of origin. This growth is due to
alterations or mutations in a cell's DNA that leads to production of tumor
associated antigens that are not adequately recognized by the immune system.
Cancer vaccines are intended to optimize the patient's immune system's ability
to recognize the antigens so that the immune system intensifies the attack on
the cancer. Many cancers can be cured if they are detected early and treated
promptly; others can be controlled for many years with a variety of treatment
approaches.
EXISTING THERAPIES. There are currently several ways to treat cancer, all of
which have significant and often severe side effects. Surgery, radiation,
chemotherapy, hormones and more recently, immunotherapy are most often used to
treat cancer. Unfortunately, certain tumors are drug resistant from the
beginning while others develop resistance with repeated treatments. The problem
of drug resistance is particularly serious in chemotherapy where tumors develop
resistance to multiple drugs after only one drug has been administered.
TECHNOLOGY. Immune Response is focused on developing vaccines that will
present tumor cells more effectively to the immune system. The Company's
technology combines two different kinds of cell lines to make up the vaccine.
One is a source of tumor antigens (tumor cell lines) and the other is a
source of cytokine (genetically engineered skin or fibroblast cell line). The
tumor cell lines are grown in the lab and not derived from individual
patients - avoiding the need for patient-specific vaccines. The
cytokine-producing fibroblast cell line allows production of a precise and
consistent amount of cytokine - a molecule that can intensify the immune
response. The combination of these two cell types in the vaccine appears to
be essential for inducing the immunity needed to enable the immune system to
attack and eradicate the cancer. The Company's technology allows for a
controlled reproducible vaccine that is not patient specific.
To further enhance the immune system to destroy the cancer, the Company is also
developing complementary technology to provide cytokines, specifically GM-CSF,
by constructing tumor cell lines that express the cytokine on the surface. The
Company's goal is to combine these two platform technologies to develop cancer
vaccines to treat colon, brain, melanoma, and prostate cancers.
COLON CANCER
BACKGROUND. Colon cancer is the second most frequently diagnosed cancer in the
U.S. with nearly 100,000 new cases and 47,000 deaths expected yearly. Well over
half of the patients are identified early enough for surgical intervention with
the intent to cure. However, recurrence of the cancer following surgery is a
major problem for about 40% of these patients. In addition, more effective
treatments are needed for patients with advanced disease at time of
presentation.
HUMAN CLINICAL TRIALS. Based on promising initial clinical findings from an
earlier Phase 1 study, a second Phase I trial was designed to test a tumor cell
line vaccine in patients with late-stage metastatic colon cancer. Three
established colon tumor cell lines were combined with a fibroblast cell line
genetically engineered to express the IL-2 cytokine. Patients received three
administrations intradermally (under the skin) over a twelve-week period. The
study is designed to measure levels of Cytotoxic T Lymphocytes (CTL's) which
specifically recognize and kill both the vaccinating tumor cells and/or the
patient's own tumor cells. This twelve patient trial will be completed during
2000.
BRAIN CANCER
BACKGROUND. Each year, about 18,000 cases of high-grade gliomas are diagnosed in
the United States, with the numbers increasing yearly in both adults and
children. Prognosis for these patients is very poor. Surgical resections
followed by either radiation or chemotherapy have done little to alter the
fatality of this cancer. The mean life expectancy of patients with glioblastoma
multiforme is only one year after its initial diagnosis and only several months
following recurrence. The Company believes that novel immune-based treatments
could fill a need in treating these cancers.
HUMAN CLINICAL TRIALS. The Company is conducting a Phase 1 trial of a potential
new tumor vaccine designed to induce the patient's immune system to recognize
and destroy tumor cells, thereby preventing or delaying the recurrence of
malignant brain tumors (glioblastoma multiforme and anaplastic astrocytoma). The
study will enroll
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12 patients who have just completed surgical resection and radiation treatment,
currently the standard of care for newly diagnosed glioma patients. The trial
will investigate the Company's platform vaccine technology that utilizes a
fibroblast cell line genetically modified to secrete the GM-CSF cytokine mixed
with irradiated brain tumor (glioma) cell lines. The three goals of the study
are to evaluate the safety of multiple injections of this cell-line based
vaccine, monitor the level of cellular and humoral (antibody) immune responses
induced by the vaccine against the tumor and examine the effects of
immunizations on clinical progression of the disease.
MELANOMA (SKIN) CANCER
BACKGROUND. According to the American Cancer Society, approximately 44,000
individuals in the United States were diagnosed with melanoma in 1999 and an
estimated 7,300 deaths resulted from this disease. The major cause of melanoma
is excessive exposure to the sun's ultraviolet rays. Despite good therapeutic
effects by surgical intervention when detected early, there is no effective
treatment for metastatic melanoma, and its 5 year survival rate is only 5%.
Characterization of many established melanoma cell lines has been completed, and
those lines intended for clinical testing have been selected.
PROSTATE CANCER
Prostate cancer will be newly diagnosed in 334,500 Americans this year, making
it the most common cancer among men. Prostate cancer is the second leading cause
of cancer deaths and the sixth leading cause of death overall among American
men. This program is in the preclinical stages of development within the
company.
GENE THERAPY
TECHNOLOGY. The Company is developing a targeted non-viral delivery technology
for gene therapy. The Company maintains a strong proprietary position in
non-viral technology for IN VIVO delivery of therapeutic genes to appropriate
cells. Once inside the cell, the delivered plasmid DNA, or gene, is capable of
performing its normal function, which is to encode for the production of a
specific protein needed to alleviate a disease condition. Virtually any
recombinant protein therapy currently being used could be transformed into a
gene therapy. The Company believes non-viral delivery may have several
advantages over current therapies including safety over viral delivery systems,
versatility to treat different diseases with the same technology, dosing
schedule, manufacturability, and cost. Most other competitive gene therapy
delivery systems use disabled viruses to carry the gene to the cell nucleus, and
are inherently immunogenic.
HEMOPHILIA
BACKGROUND. Hemophilia A, a hereditary blood clotting disorder, results from the
dysfunction or absence of the Factor VIII protein. Approximately one of every
5,000 live male births worldwide results in a child afflicted with hemophilia A.
Current treatments for hemophilia A are expensive.
In preclinical mouse models, the Company's GeneDrug technology system has
produced therapeutic concentrations of Factor VIII by delivering the gene
that produces this protein. After delivery to cells that normally produce
this protein, the liver cells, the Factor VIII protein was expressed and
secreted into the bloodstream at therapeutic levels on a continuous basis for
several weeks. If successfully developed, this product could potentially
eliminate the need for daily injections of Factor VIII protein to control the
regular bleeding episodes associated with hemophilia by allowing the patient
to receive periodic injections of the Company's GeneDrug in order to maintain
therapeutic levels of Factor VIII. In addition to gene delivery, the Company
is focused on gene potency. Gene potency is the ability of the gene to
generate high levels of its corresponding protein once inside the cell.
Recently, Company scientists completed the synthesis of a new human Factor
VIII gene that has increased potency and which contains organ-specific
elements that only allow its expression in liver cells.
HEPATITIS
BACKGROUND. Hepatitis B is a viral infection of the liver. As many as 1.25
million Americans are chronically infected with hepatitis B virus ("HBV") and
there are up to 320,000 new cases of HBV infection each year. Hepatitis C virus
("HCV") was recently identified as the major cause of non-A/non-B hepatitis. As
many as 3.9 million Americans are chronically infected with this virus and there
are up to 180,000 new cases of HCV infection each year. Recombinant
interferon-alpha (IFN-(alpha)) is currently approved for treatment of both HBV
and HCV. Many patients treated with recombinant IFN-(alpha) do not respond and
whether there is a long-term benefit among those who have responses is
uncertain.
The Company's GeneDrug system is designed to be an improvement over current
interferon therapy by achieving continuous, low-level expression and secretion
of the protein specifically in liver cells. In preclinical mouse models,
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the GeneDrug system has successfully achieved expression of interferon
protein at therapeutic levels that persist for several months. If
successfully developed, this could eliminate the need for numerous frequent
injections of recombinant interferon protein by allowing patients to receive
periodic injections of GeneDrug. The Company entered into a research
collaboration in July 1998 with Schering Corporation to deliver their genes
for IFN-(alpha) using the Company's gene delivery technology for the
treatment of hepatitis. Schering Corporation's obligation to fund under the
collaboration had expired as of December 31, 1999.
NEW GENE DISCOVERY
BACKGROUND. The Company recently completed a series of biochip studies as part
of a gene discovery effort in the gene therapy program. Gene expression
monitoring using microarrays (biochips) was conducted in several biological
models of central and peripheral nervous system growth, differentiation and
trauma including spinal cord injury. Over 3,000 significant gene changes were
categorized to a gene expression database being assembled for new drug targets
and functional gene discovery. Gene expression, especially knowing what genes
are upregulated or downregulated, is crucial to the understanding of gene
function. Since genes are involved in biological processes, knowing gene
function could lead to new drug discovery. New gene discovery compliments the
existing efforts in non-viral gene delivery by potentially supplying genes or
gene products that may be proprietary to the Company for gene therapy.
MANUFACTURING
The Company has established a pilot manufacturing facility at its headquarters
in Carlsbad, California for the production of the immune-based therapies. This
facility is expected to be adequate to supply limited clinical trial quantities
for these therapies. Additional manufacturing capacity for autoimmune disease
and cancer will be needed for commercial scale production, if these therapies
are approved for commercial sale. For the manufacture of the autoimmune disease
therapies under development, the Company obtains synthetic peptides from third
party manufacturers. The Company believes that the synthetic peptides and other
materials necessary to produce the autoimmune disease therapies are readily
available from various sources, and several suppliers are capable of supplying
the autoimmune disease peptides in both clinical and commercial quantities.
PATENTS
REMUNE - HIV THERAPY. In 1993, the Company received a United States patent
relating to REMUNE. In 1998 and 1999, additional patents were issued relating to
certain products and methods. The Company has also received similar patents in
Australia, certain European countries, Japan and Russia. The Company has
additional patent applications relating to REMUNE on file in the United States,
as well as in other countries. The patent applications cover, in part, certain
products and methods of their use for the immunotherapeutic treatment of
HIV-infected patients and/or preventive treatment of uninfected individuals.
There can be no assurance that any additional HIV-related patents will be issued
to the Company. Further, there can be no assurance that the issued patents, or
any patent that may be issued in the future, will survive opposition or provide
meaningful proprietary protection.
AUTOIMMUNE DISEASES. During January 1994, the European Patent Office granted
the Company a patent covering processes for vaccinating against diseases
resulting from pathogenic responses by specific T cell populations. In March
1997, the Company was issued a patent covering this technology in the United
States. In May 1994, the Australian Industrial Property Organisation accepted
a similar application of the Company. In November 1998 and January 1999, the
Company was issued two additional United States patents directed to this
technology. These patents include composition and method claims for the
prevention or treatment of certain autoimmune diseases, such as rheumatoid
arthritis and proliferative T cell diseases. In December 1999, the Company
obtained exclusive rights to the T cell receptor intelllectual property of
Connetics Corporation and XOMA, (US) LLC, creating a broader platform for the
potential development of products to treat chronic connective tissue and
autoimmune diseases such as rheumatoid arthritis, psoriasis and multiple
sclerosis. The Company also has patents and patent applications relating to
its autoimmune technology on file in the United States and other countries,
including members of the European Patent Convention and Japan. These patent
applications cover certain compositions and methods relating to the use of T
cell receptor peptide sequences to vaccinate against autoreactive T cells
involved in autoimmune disease. There can be no assurance that any further
autoimmune disease patents will be issued to the Company or that any issued
patents, or any patent that may be issued in the future, will survive
opposition or provide meaningful proprietary protection. We are aware that
AstraZeneca PLC has acquired the rights to a patent, which has been issued in
Europe and other countries, that may interfere with our ability to develop
some of our technologies related to autoimmune disease if the patent is
upheld after current opposition proceedings. The Company is in discussions
with AstraZeneca PLC to resolve any conflict between the Company's and
AstraZeneca's patent. However, there can be no assurance that a cross license
or other resolutions satisfactory to the Company will result.
10
A failure to resolve this dispute in a manner favorable to the Company could
have a material adverse effect on the Company. In March 1998, the Company
successfully defended its European patent with respect to its immune-based
therapies for autoimmune disease technology that was under opposition; although
this decision can be appealed, the patent is presently enforceable.
CANCER PROGRAM. Technologies for genetically modifying fibroblasts with cytokine
genes or for modifying tumor cells with genes to inhibit TGF-(beta) production
has been exclusively licensed to the Company from Sidney Kimmel Cancer Center
(SKCC). SKCC has issued patents and has applied for patent protection in the
United States and Europe related to the technologies licensed exclusively to the
Company. There can be no assurance that the issued patents, or any patent that
may be issued in the future, will survive opposition or provide meaningful
proprietary protection. In April 1999 the Company received a patent for
Membrane-Bound Cytokine Compositions Comprising GM-CSF (granulocyte-macrophage
colony stimulating factor) and Methods of Modulating an Immune Response Using
Same. The Company has licensed exclusive rights to the technologies for
inhibiting TGF-(beta) via expressed antisense for lung cancer and licensed
exclusive rights to the IL3 radiosensitization in several cancers, including
prostate cancer but excluding colon cancer. There can be no assurance that the
issued patents, or any patent that may be issued in the future, will survive
opposition or provide meaningful proprietary protection.
GENE THERAPY. In November 1992, the Company obtained an exclusive license to a
United States patent, received by the University of Connecticut, covering the
Company's core gene delivery system technology, including methods and
compositions for delivering DNA to the liver via receptors on the surface of
liver cells. In addition, during 1997 and 1999, two related United States
patents issued, extending the Company's gene delivery protection to include the
delivery of any polynucleotide to any mammalian cell via any internalizing cell
surface receptor. Thus, the Company's patent protection in the United States is
no longer limited to the delivery of genes to the liver. In 1999 a similar
patent issued in Europe. In 1998, a corresponding Japanese patent application
also issued, covering the delivery of any polynucleotide to mammalian cells via
non-protein (e.g., synthetic) liver-specific ligands.
The Company also licenses and owns a number of issued United States and foreign
patents covering the delivery of specific genes and polynucleotides to cells
using their proprietary technology, as well as formulations tailored for such
delivery. For example, the Company owns a United States patent covering the
targeted delivery of antisense polynucleotides to cells to treat Hepatitis B
infection. The Company also licensed an allowed European patent application
covering the targeted delivery to cells of genes encoding secretory proteins,
including blood coagulation factors, to treat hemophilia. The Company continues
to file patent applications covering novel genes and other aspects of its
proprietary gene delivery technology, which the Company develops.
The Company is presently seeking to obtain licenses for certain genes from
several different third parties. There can be no assurance that the Company will
be able to obtain such licenses on commercially favorable terms, if at all, and
if these licenses are not obtained, the Company might be prevented from using
certain of its technologies. The Company's failure to obtain a license required
to continue practicing its own technologies would have a material adverse effect
on the Company.
There can be no assurance that any additional gene therapy patents will be
issued to the Company. Further, there can no assurance that the issued patents,
or any patent that may be issued in the future, will survive opposition or
provide meaningful proprietary protection.
COMPETITION
HIV. The Company is engaged in segments of the biopharmaceutical industry,
including the treatment of HIV, that are intensely competitive and rapidly
changing. If successfully developed and approved the product candidates and
compounds that the Company is currently developing will compete with numerous
existing therapies. For example, there are at least 11 drugs currently approved
for the treatment of HIV. In addition, a number of companies are pursuing the
development of novel pharmaceutical products that target the same diseases that
the Company is targeting, and some companies, including several multinational
pharmaceutical companies, are simultaneously marketing several different drugs
and may therefore be able to market their own combination drug therapies. The
Company believes that a significant number of drugs are currently under
development and will become available in the future for the treatment of HIV.
Although the Company believes that there is a significant future market for
therapeutics to treat HIV and other viral diseases, the Company anticipates that
even if it successfully develops REMUNE and REMUNE is approved for marketing, it
will face intense and increasing competition in the future as new products enter
the market and advanced technologies become available. There can be no assurance
that existing products or new products for the
11
treatment of HIV developed by the Company's competitors, including Glaxo
Wellcome, plc, Merck & Co. and Abbott Laboratories, will not be more effective,
or more effectively marketed and sold, than REMUNE, should it be successfully
developed and receive regulatory approval, or any other therapeutic for HIV that
may be developed by the Company. Competitive products or the development by
others of a cure or new treatment methods may render the Company's technologies
and products and compounds obsolete, noncompetitive or uneconomical prior to the
Company's recovery of development or commercialization expenses incurred with
respect to any such technologies or products or compounds. Many of the Company's
competitors have significantly greater financial, technical and human resources
than the Company and may be better equipped to develop, manufacture, sell,
market and distribute products. In addition, many of these companies have
extensive experience in preclinical testing and clinical trials, obtaining FDA
and other regulatory approvals and manufacturing and marketing pharmaceutical
products. For use individually or in combination therapy, many of these
competitors also have products that have been approved or are in late-stage
development and operate large, well-funded research and development programs.
Smaller companies may also prove to be significant competitors, particularly
through collaborative arrangements with large pharmaceutical and biotechnology
companies. Furthermore, academic institutions, governmental agencies and other
public and private research organizations are becoming increasingly aware of the
commercial value of their inventions and are more actively seeking to
commercialize the technology they have developed.
New developments in areas in which the Company is conducting its research and
development are expected to continue at a rapid pace in both industry and
academia. If the Company's product candidates and compounds are successfully
developed and approved, the Company will face competition based on the safety
and effectiveness of its products and compounds, the timing and scope of
regulatory approvals, availability of manufacturing, sales, marketing and
distribution capabilities, reimbursement coverage, price and patent position.
There can be no assurance that the Company's competitors will not develop more
effective or more affordable technology or products, or achieve earlier patent
protection, product development or product commercialization than the Company.
Accordingly, the Company's competitors may succeed in commercializing products
more rapidly or effectively than the Company, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
TREATMENTS FOR AUTOIMMUNE DISEASE. Several emerging technologies related to
immune system regulation, if successfully developed, could compete with the
Company's autoimmune disease treatments under development. The Company believes
that its principal competition in the autoimmune disease area will come from
companies conducting research in the areas of T cell receptors, interaction
between T cells and the target antigen and tissue, specific targeting of
activated T cell populations, and mechanisms of tolerance including oral
tolerance approaches. Scientific reports on T cell receptor research have also
discussed approaches similar to that of the Company.
TREATMENTS FOR CANCER. New cancer therapies are being developed by a number of
individual investigators and companies. Some of these approaches involve
modification of tumor cells with a variety of cytokines, which approaches may
prove competitive with the technologies being developed by the Company. Many of
the Company's competitors have substantially greater experience, financial and
technical resources and production, marketing and development capabilities than
the Company. There can be no assurance that competitors have not or will not
succeed in developing technologies and products more quickly or that are more
effective than any which have been or are being developed by the Company or
which would render the Company's technology and products obsolete and
noncompetitive.
GENE THERAPY. The Company believes that competition in the treatment of the
diseases targeted by its gene therapy program will be of two types: chronic
treatment with pharmaceutical products; and other gene therapy systems under
development for insertion of the correct gene. There currently exist a number of
approved therapies for treatment of hemophilia, and hepatitis B and C. Both
purified and recombinant forms of Factor VIII have been approved by the FDA for
treatment of hemophilia and are effective in stopping bleeding episodes.
Interferon alpha-2b is currently approved for treatment of chronic hepatitis B
and C. Other interferons are being tested for the treatment of viral hepatitis.
In addition to interferons, a variety of nucleoside analogs have been tested for
treatment of chronic hepatitis B, including 3TC.
Several major pharmaceutical companies are investigating gene therapy treatments
for the delivery of proteins to treat these diseases. If these prove effective,
they may compete with the Company's gene delivery therapies. Many of the
Company's competitors have substantially greater experience, financial and
technical resources and production, marketing and development capabilities than
the Company. There can be no assurance that competitors have not or will not
succeed in developing technologies and products more quickly or that are more
effective than
12
any which have been or are being developed by the Company or which would render
the Company's technology and products obsolete and noncompetitive.
GOVERNMENT REGULATION
Clinical testing, manufacture, promotion and sale of the Company's drug products
are subject to extensive regulation by numerous governmental authorities in the
United States, principally the FDA, and corresponding state and foreign
regulatory agencies. The Company believes that REMUNE and most of its other
potential immune-based therapies will be regulated by the FDA as biological drug
products under current regulations of the FDA. Biological products must be shown
to be safe, pure and potent (i.e., effective) and are subject to the same
regulatory requirements as nonbiological products under the Food and Drug
Administration Act ("FDA Act"), as amended by the Food and Drug Administration
Modernization Act of 1997 ("FDA Modernization Act"), except that a biological
product licensed under the PHS Act ("PHS Act") is not required to have an
approved New Drug Application ("NDA") under the Federal Food, Drug and Cosmetic
Act ("FDC Act"). The FDA Modernization Act directed the FDA to take measures to
minimize the differences in the review and approval of marketing applications
for biological and nonbiological products. The FDA Modernization Act also made
significant revisions to the statutory requirements with regard to the approval
of new biologics and nonbiological products. Among other things, the FDA
Modernization Act established a new statutory program for the approval of fast
track drugs, streamlined clinical research, and revised the content of product
approval applications and the FDA review process. The FDA is required to issue
regulations and guidelines in order to implement certain of these new
requirements. Until the FDA implements these regulations and guidelines, it is
impossible to predict the impact of the FDA Modernization Act on the review and
approval of any marketing applications that the Company may submit to the FDA in
the future. The FDC Act, the PHS Act and other federal and state statutes and
regulations govern or influence the testing, manufacture, safety, effectiveness,
labeling, storage, recordkeeping, approval, advertising, distribution and
promotion of biological prescription drug products. Noncompliance with
applicable requirements can result in, among other things, fines, injunctions,
seizure of products, total or partial suspension of product marketing, failure
of the government to grant premarket approval, withdrawal of marketing approvals
and criminal prosecution.
The steps required before a biological drug product may be marketed in the
United States generally include preclinical studies and the filing of an IND
application with the FDA, which must become effective pursuant to FDA
regulations before human clinical trials may commence. Reports of results of
preclinical studies and clinical trials for biological drug products are
submitted to the FDA in the form of a Biologics License Application (the "BLA")
for approval for marketing and commercial shipment. Submission of a BLA does not
assure FDA approval for marketing. The BLA review process may take a number of
years to complete, although reviews of applications for treatments of AIDS,
cancer and other life-threatening diseases may be accelerated or expedited.
Failure of the Company to receive FDA marketing approval for REMUNE or any of
its other products under development on a timely basis could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In the past, in addition to obtaining approval for each biological drug product,
an Establishment License Application (the "ELA") usually was required to be
filed and approved by the FDA. However, the FDA Modernization Act repealed the
statutory requirement for an ELA for a biological product. Now only a single BLA
covering both the biological product and the facility in which the product is
manufactured is required. The FDA also has been directed by the FDA
Modernization Act to take measures to minimize the differences in the review and
approval of biological drugs required to have approved BLAs under the PHS Act
and nonbiological drugs required to have approved NDAs under the FDC Act.
Among the other requirements for BLA approval is the requirement that
prospective manufacturers conform to the Good Manufacturing Practices (the
"GMP") regulations specifically for biological drugs, as well as for other
drugs. In complying with the GMP regulations, manufacturers must continue to
expend time, money and effort in production, recordkeeping and quality control
to assure that the product meets applicable specifications and other
requirements. The FDA periodically inspects biological drug product
manufacturing facilities in order to assure compliance with applicable GMP
requirements. Failure to comply with the GMP regulations subjects the
manufacturer to possible FDA regulatory action, such as the suspension of
manufacturing, product recall or seizure, injunction and criminal prosecution.
There can be no assurance that the Company or its contract manufacturers, if
any, will be able to maintain compliance with the GMP regulations on a
continuing basis. Failure to maintain such compliance could have a material
adverse effect on the Company's business, financial condition and results of
operations.
13
The Company believes its proprietary GeneDrug and cancer treatment therapies
also will likely be regulated as biological products. This is because the
Company's gene products are subject to the FDA's industry guidance for Human
Somatic Cell Therapy and Gene Therapy, which was issued by the FDA in March 1998
(the "1998 Guidance"), as well as earlier FDA notices on this subject. The 1998
Guidance confirms that gene therapy products will be regulated by the FDA as
biological products subject to biological product licensure requirements. In
addition, the 1998 Guidance describes FDA concerns regarding production, quality
control testing, and the administration of recombinant vectors for gene therapy.
No assurance exists that the Company or its suppliers can successfully address
all of the concerns of the 1998 Guidance with respect to gene therapy products.
In addition, since issuance of the 1998 Guidance there have been developments
relating to adverse patient reactions in gene therapy trials that have led to
increased FDA scrutiny of all gene therapy research. No assurance exists that
the Company can successfully respond to the more rigorous requirements prompted
by that scrutiny. As with the Company's other potential products, the gene
therapy products will be subject to extensive FDA regulation throughout the
product development process, and there can be no assurance that any of these
products will be successful at securing the requisite FDA marketing approval on
a timely basis, if at all.
The preclinical and clinical testing process to obtain FDA approval of a
biological drug is expensive and time consuming. Preclinical studies are
conducted in animals usually to evaluate the potential safety of a product. The
results of preclinical studies are submitted to the FDA as part of the IND
application, which must become effective pursuant to FDA regulations before
human clinical trials may begin. Human clinical trials typically are conducted
in three phases and are subject to detailed protocols. Each protocol indicating
how the clinical trial will be conducted must usually be submitted for review to
the FDA as part of the IND application. The FDA's review of a trial protocol
does not necessarily mean that, if the trial is completed, it will constitute
proof of safety or efficacy (including potency). Further, each clinical trial
must be conducted under the auspices of an independent Institutional Review
Board ("IRB") established pursuant to FDA regulations. The IRB considers, among
other things, ethical concerns, informed consent requirements and the possible
liability of the institution conducting the trials. The FDA or IRB may require
changes in a protocol both prior to and after the commencement of a clinical
trial. There is no assurance that the IRB or FDA will permit a trial to go
forward or, once started, to be completed.
The three phases of clinical trials are generally conducted sequentially, but
they may overlap. In Phase 1, the initial introduction of the drug into humans,
the drug is tested for safety, side effects, dosage tolerance, metabolism and
clinical pharmacology. Phase 1 testing for an indication typically takes at
least one year to complete. Phase 2 involves controlled tests in a large but
still limited patient population to determine the preliminary effectiveness of
the drug for specific indications, to determine optimal dosage and to identify
possible side effects and safety risks. Phase 2 trials typically take at least
from one and one-half to two and one-half years to complete. If preliminary
evidence suggesting effectiveness has been obtained during Phase 2 evaluations,
expanded Phase 3 trials are undertaken to gather the additional information
about safety and effectiveness that is needed to evaluate the overall
benefit-risk relationship of the product and to provide an adequate basis for
physician labeling. Phase 3 trials for an indication generally take from two and
one-half to five years to complete. There can be no assurance that Phase 1,
Phase 2 or Phase 3 testing will be completed successfully within any specified
time period, if at all, with respect to any of the Company's products that have
not completed any such testing. Nor can there be any assurance that completion
of clinical testing will result in FDA approval. Furthermore, the FDA may
suspend clinical trials at any time if the patients are believed to be exposed
to a significant health risk.
The FDA Modernization Act amended the FDC Act to streamline clinical research on
biological and nonbiological drugs. Under the new law, a clinical investigation
may begin 30 days after the FDA receives an IND application containing
information about the drug and clinical investigation that includes:
1. Information about the design of the investigation and adequate reports of
basic information, certified by the applicant, necessary to assess the
drug's safety in a clinical trial
2. Adequate information on the chemistry and manufacturing of the drug,
controls available for the drug and primary data tabulations from animal
or human studies.
The FDA is authorized to halt a clinical study at any time by issuing a clinical
hold, confirmed in writing, prohibiting the sponsor from conducting the
investigation. The clinical hold may be issued based on the FDA's determination
that the drug presents an unreasonable risk to the safety of the research
subjects, taking into account the qualifications of the investigators,
information about the drug, the design of the clinical investigation, the
conditions for which the drug is to be investigated, and the health status of
the subjects. Clinical holds also may be imposed by the FDA for other reasons,
as established by regulations. The new law, however, largely codifies current
regulations
14
albeit with several significant changes. First, it potentially reduces the
amount of data required to be submitted as part of an IND (most importantly by
sanctioning the use of "primary data tabulations from animal and human studies"
rather than full reports from such studies). Second, it codifies the procedural
safeguards for issuance of clinical holds and strengthens certain rights of the
manufacturer, including the right to obtain a written decision from the FDA
regarding the removal of a clinical hold within 30 days of a written request
from the IND sponsor.
Under the FDA's current IND regulations, a number of procedures are available to
expedite approval or to allow expanded access to investigational drugs. Certain
investigational drugs, including products for the treatment of AIDS, can be
distributed outside of traditional IND requirements on a "treatment" basis.
Generally, the FDA may permit an investigational drug, including an
investigational biological drug, to be used for "treatment" of patients outside
of controlled clinical trials, if: (1) the drug is intended to treat a serious
or immediately life-threatening disease; (2) there is no comparable or
satisfactory alternative drug or other therapy available to treat that stage of
the disease in the intended patient population; (3) the drug is under
investigation in a controlled clinical trial, or all clinical trials have been
completed; and (4) the sponsor of the controlled clinical trial is actively
pursuing marketing approval of the investigational drug with due diligence.
Although the FDA has granted expanded access to REMUNE for those patients who
are ineligible to enroll in the Phase 3 clinical endpoint trial, the FDA has to
date not designated expanded access protocols for REMUNE as "treatment"
protocols. Either expanded access or a treatment protocol designation might
permit third party reimbursement of some of the costs associated with making
REMUNE available to patients in such an expanded access context. There can be no
assurance that the FDA will determine that REMUNE meets all of the FDA's
criteria for use of an investigational drug for treatment use or that, even if
the product is allowed for treatment use, that third party payers will provide
reimbursement for any of the costs of REMUNE treatment. The FDA Modernization
Act also amended the FDC Act to permit expanded access to individuals and larger
groups to unapproved new therapeutic and diagnostic products. Although it
largely codified existing FDA regulations in this area, it expands access to all
investigational therapies. First, it allows the FDA to authorize the emergency
shipment of investigational new drugs for the diagnosis, monitoring, or
treatment of a serious disease or condition. Second, it permits any person,
through a licensed physician, to request and obtain from a manufacturer or
distributor an investigational drug for the diagnosis, monitoring, or treatment
of a serious disease or condition if the following conditions are met:
1. A comparable or satisfactory alternative therapy is not available.
2. There is sufficient evidence of the drug's safety and effectiveness to permit
such use.
3. The use will not interfere with the conduct of clinical investigations to
support marketing approval.
4. A clinical protocol is submitted to the FDA describing the use of the
investigational drug in a single patient or small group of
patients.
The law also authorizes expanded patient access to investigational drugs under a
treatment IND application.
The FDA also has issued regulations to accelerate the approval of or to expedite
the review of new biological drug products for serious or life-threatening
illnesses that provide meaningful therapeutic benefit to patients over existing
treatments (e.g., the ability to treat patients unresponsive to, or intolerant
of, available therapy, or improved patient response over available therapy).
Under the accelerated approval program, the FDA may grant marketing approval for
a biological or nonbiological drug product earlier than would normally be the
case, based on an effect on a surrogate endpoint or a clinical endpoint other
than survival. Under the program, the sponsor must agree to conduct
postmarketing studies to verify and describe the clinical benefits of the
product. In addition to the accelerated approval process, the FDA has
established procedures designed to expedite the development, evaluation and
marketing of new therapies intended to treat persons with life-threatening and
severely debilitating illnesses, especially when no satisfactory alternative
therapy exists. The term "life-threatening" is defined by the FDA to mean: (1)
disease or conditions where the likelihood of death is high unless the course of
the disease is interrupted and (2) diseases or conditions with potentially fatal
outcomes, where the endpoint of clinical trial analysis is survival. "Severely
debilitating" is defined by the FDA to mean diseases or conditions that cause
major irreversible morbidity. As a condition of approval, the FDA may require
the sponsor to conduct certain postmarketing studies to delineate additional
information about the drug's risks, benefits and optimal use. The FDA
Modernization Act established a new statutory program for the approval of fast
track drugs, including biological products. Fast track drugs are defined as new
drugs or biological products intended for the treatment of serious or
life-threatening conditions and that demonstrate the potential to address unmet
medical needs for such conditions. Under the fast track program, a request for
designation may be submitted concurrently with, or any time after, submission of
an IND application. If a product meets the statutory criteria, the FDA is
required to designate the product as a fast track drug within 60 days of the
request for designation. A BLA or NDA for a fast track drug may be approved by
the FDA upon a determination that the drug has an effect on a clinical endpoint
or a surrogate endpoint that is reasonably likely to
15
predict clinical benefits. The FDA can condition approval of a fast track drug
upon a requirement to conduct post-approval studies and submit copies of
promotional materials to the FDA prior to dissemination. The law also provides
procedures for the expedited withdrawal of marketing approval of a fast track.
There can be no assurance that the FDA will consider REMUNE, or any other of the
Company's products under development, to be an appropriate candidate for
accelerated approval, expedited review or fast track designation.
Since 1992, non-biological and biological drugs have been subject to the
Prescription Drug User Fee Act of 1992 ("PDUFA"). PDUFA requires that companies
submitting marketing applications for such products pay fees in connection with
review of the applications. In return, the FDA has committed to reviewing a
certain percentage of the applications within certain timeframes. For example,
in its Fiscal Year 1999 Report to Congress on PDUFA, the FDA reported that 98%
of all original premarketing applications for biological and nonbiological drugs
received in Fiscal Year 1999 were reviewed within 12 months of the application
submission date. The FDA's PDUFA performance goal in Fiscal Year 1999 was to
complete 90% of such applications within 12 months of the submission date.
Although PDUFA was scheduled to expire on September 30, 1997, the Food and Drug
Administration Modernization Act of 1997 reauthorized PDUFA for five years
(i.e., until September 30, 2002). The FDA has committed for Fiscal Year 2000 to
reaching approval, disapproval or additional-data-required decisions on 90% of
standard original NDAs and to act on 50% of those submissions within 10 months.
The FDA has also agreed to act on 90% of BLAs filed during fiscal year 2000
within 12 months of receipt of the marketing application and to review and act
on 90% of priority original NDAs and BLAs (i.e., applications offering
significant advances over existing treatments) within six months of receipt.
There can be no assurance, however, that any BLA the Company submits to the FDA
for any of its biological products will be reviewed and acted upon within the
timeframes set out above. The Company also is subject to regulation under the
Occupational Safety and Health Act, the Environmental Protection Act, the Toxic
Substances Control Act, the Resource Conservation and Recovery Act and other
present and potential future federal, state or local regulations. Regulations
concerning biotechnology may affect the Company's research and development
programs. Furthermore, existing or additional government regulations may be
applied that could prevent or delay regulatory approval of the Company's
products, or affect the pricing or distribution of such products.
The Company also is subject to foreign regulatory requirements governing human
clinical trials and pharmaceutical sales that vary widely from country to
country. Whether or not FDA approval has been obtained, approval of a product by
comparable regulatory authorities of foreign countries must be obtained prior to
marketing the product in those countries. The approval process may be more or
less rigorous from country to country and the time required may be longer or
shorter than that required in the United States. The Company may seek to use
foreign marketing partners to assist in obtaining foreign regulatory approval
for REMUNE and other products.
EMPLOYEES
As of December 31, 1999, the Company and its subsidiary had a combined 103
full-time employees, of whom 17 hold Ph.D. or other advanced degrees. Of these
employees, 78 are engaged in, or directly support, research and development. A
significant number of the Company's management and professional employees have
had prior experience with pharmaceutical and biotechnology companies. None of
the Company's employees are covered by a collective bargaining agreement.
RISK FACTORS
THE FAILURE TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE PRODUCTS MAY CAUSE US TO
CEASE OPERATIONS.
We have not completed the development of any products. A failure to successfully
develop and commercialize products may cause us to cease operations. Our
potential therapies under development will require significant additional
research and development efforts and regulatory approvals prior to potential
commercialization.
The discontinuation of the Phase 3 trial of REMUNE due to lack of efficacy has
had a material adverse effect on us. If Agouron Pharmaceuticals, Inc. fails to
initiate or successfully complete additional pivotal trials with REMUNE we may
have to abandon REMUNE or seek additional funding.
Our other therapies and technologies are at earlier stages of development than
REMUNE. Some of our technologies have not yet been tested in humans. Human
testing of potential products based on these technologies may not be permitted
by regulatory authorities. Even if human testing is permitted, the products
based on these technologies may not be successfully developed or be shown to be
safe and efficacious. Potential immune-based therapies based on some of our
technologies are at an early stage of clinical testing and may not be shown to
be safe or efficacious or ever receive regulatory approval.
16
The results of our preclinical studies and clinical trials may not be indicative
of future clinical trial results. A commitment of substantial resources to
conduct time-consuming research, preclinical studies and clinical trials will be
required if we are to develop any products. Delays in planned patient enrollment
in our clinical trials may result in increased costs, program delays or both.
None of our potential products may prove to be safe and effective in clinical
trials. FDA or other regulatory approvals may not be obtained and even if
successfully developed and approved, our products may not achieve market
acceptance. Any products resulting from our programs are not expected to be
successfully developed or commercially available for a number of years, if at
all.
Unacceptable toxicities or side effects may occur at any time in the course of
human clinical trials or, if any products are successfully developed and
approved for marketing, during commercial use of our products. The appearance of
any unacceptable toxicities or side effects could interrupt, limit, delay or
abort the development of any of our products or, if previously approved,
necessitate their withdrawal from the market.
OUR ADDITIONAL FINANCING REQUIREMENTS AND LIMITED ACCESS TO FINANCING MAY
ADVERSELY AFFECT OUR ABILITY TO DEVELOP PRODUCTS
We will need to raise additional funds to conduct research and development,
preclinical studies and clinical trials necessary to bring our potential
products to market and establish manufacturing and marketing capabilities. A
failure to raise additional funds would require us to scale back or eliminate
some or all of our research and development programs or license to third parties
products or technologies that we would otherwise seek to develop ourselves. We
believe that our existing resources will enable us to maintain our current and
planned operations only into the first half of 2001.
Although we anticipate that the REMUNE development will continue to represent a
significant portion of our overall expenditures, we also anticipate that costs
related to the development of REMUNE will decrease in 2000. Other anticipated
costs with respect to REMUNE will depend on many factors, in particular the
continuation of our collaboration with Agouron.
Our future capital requirements will depend on many factors, including:
- continued scientific progress in our research and development
programs,
- the scope and results of preclinical studies and clinical
trials, the time and costs involved in obtaining regulatory
approvals,
- the costs involved in filing, prosecuting and enforcing patent
claims,
- competing technological and market developments,
- the cost of manufacturing scale-up,
- effective commercialization activities and arrangements, and
- other factors not within our control.
We intend to seek additional funding through public or private financings,
arrangements with corporate collaborators or other sources. If funds are
acquired through additional collaborations, we will likely be required to
relinquish some or all of the rights to products that we may have otherwise
developed ourselves. If adequate funds are not available when needed or on terms
acceptable to us, we may be required to scale back some or all of our research
and development programs or license to third parties products or technologies
that we would otherwise seek to develop ourselves.
IF AGOURON PHARMACEUTICALS, INC. TERMINATES ITS COLLABORATION WITH US WE MAY
HAVE TO ABANDON REMUNE
Our binding Letter of Intent with Agouron is the primary collaborative
agreement that provides us with contract revenue. The termination of our
agreement with Agouron might require us to abandon REMUNE. Agouron has been
acquired by Warner-Lambert Company. We do not know which Agouron research
products Warner-Lambert Company will continue to fund in the future.
WE MAY NOT BE ABLE TO ENTER INTO ADDITIONAL COLLABORATIONS OR MAINTAIN EXISTING
ONES
We intend to seek additional collaborative arrangements to develop and
commercialize our products. We may not be able to negotiate collaborative
arrangements on favorable terms, or at all, in the future and our current or
future collaborative arrangements may not be successful or continue. Under the
Schering Corporation collaboration, Schering
17
Corporation's obligation to fund had expired on December 31, 1999. Without
funding arrangements, it may cause us to abandon some of our products under
development.
OUR PATENTS AND PROPRIETARY TECHNOLOGY MAY NOT PROVIDE US WITH ANY BENEFIT AND
THE PATENTS AND PROPRIETARY TECHNOLOGY OF OTHERS MAY PREVENT US FROM
COMMERCIALIZING PRODUCTS
A failure to obtain meaningful patent protection for our potential products and
processes would greatly diminish the value of our potential products and
processes.
In addition, whether or not our patents are issued, or issued with limited
coverage, others may receive patents which contain claims applicable to our
products. We are aware that AstraZeneca PLC has acquired the rights to a patent,
which has been issued in Europe and other countries, that may interfere with our
ability to develop some of our technologies related to autoimmune disease if the
patent is upheld after current opposition proceedings. This patent, and others
that we are not aware of, may adversely affect our ability to develop and
commercialize products.
The patent positions of biotechnology and pharmaceutical companies can be highly
uncertain, and involve complex legal and factual questions. Therefore, the
breadth of claims allowed in biotechnology and pharmaceutical patents cannot be
predicted. We also rely upon unpatented trade secrets and know how, and others
may independently develop substantially equivalent trade secrets or know how.
We also rely on protecting our proprietary technology in part through
confidentiality agreements with our corporate collaborators, employees,
consultants and certain contractors. These agreements may be breached and we may
not have adequate remedies for any breach. In addition, our trade secrets may
otherwise become known or independently discovered by our competitors.
Our products and processes may infringe, or be found to infringe, patents not
owned or controlled by us, such as the patent owned by AstraZeneca PLC. If
relevant claims of third-party patents are upheld as valid and enforceable, we
could be prevented from practicing the subject matter claimed in the patents, or
would be required to obtain licenses to redesign our products or processes to
avoid infringement. Licenses may not be available at all or on terms
commercially reasonable to us and we may not be able to redesign our products or
processes to avoid infringement.
Litigation may be necessary to defend against claims of infringement, to enforce
patents issued to us or to protect trade secrets. Litigation could result in
substantial costs and diversion of management efforts regardless of the results
of the litigation. An adverse result in litigation could subject us to
significant liabilities to third parties, require disputed rights to be licensed
or require us to cease using some technology.
OUR HISTORY OF OPERATING LOSSES AND OUR EXPECTATIONS OF CONTINUING LOSSES MAY
HURT OUR ABILITY TO CONTINUE OPERATIONS
As of December 31, 1999 we had a consolidated accumulated deficit of $186.5
million. We have not generated revenues from the commercialization of any
product. We expect to incur substantial net operating losses over the next
several years which may imperil our ability to continue operations. We may not
be able to generate sufficient product revenue to become profitable at all or on
a sustained basis.
THE LENGTHY APPROVAL PROCESS AND UNCERTAINTY OF GOVERNMENT REGULATORY
REQUIREMENTS MAY DELAY OR PREVENT US FROM COMMERCIALIZING PRODUCTS
Clinical testing, manufacture, promotion and sale of our products are subject to
extensive regulation by numerous governmental authorities in the United States,
principally the FDA, and corresponding state and foreign regulatory agencies.
This regulation may delay or prevent us from commercializing products.
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, seizure of products, total or partial suspension of product
marketing, failure of the government to grant premarket approval, withdrawal of
marketing approvals and criminal prosecution.
The regulatory process for new therapeutic drug products, including the required
preclinical studies and clinical testing, is lengthy and expensive. We may not
receive necessary FDA clearances for any of our potential products in a timely
manner, or at all. The length of the clinical trial process and the number of
patients the FDA will require to be enrolled in the clinical trials in order to
establish the safety and efficacy of our products is uncertain.
Even if additional pivotal surrogate marker trials of REMUNE are successfully
completed, the FDA may not approve REMUNE for commercial sale. We may encounter
significant delays or excessive costs in our efforts to secure necessary
approvals. Regulatory requirements are evolving and uncertain. Future United
States or foreign legislative or
18
administrative acts could also prevent or delay regulatory approval of our
products. We may not be able to obtain the necessary approvals for clinical
trials, manufacturing or marketing of any of our products under development.
Even if commercial regulatory approvals are obtained, they may include
significant limitations on the indicated uses for which a product may be
marketed.
In addition, a marketed product is subject to continual FDA review. Later
discovery of previously unknown problems or failure to comply with the
applicable regulatory requirements may result in restrictions on the marketing
of a product or withdrawal of the product from the market, as well as possible
civil or criminal sanctions.
Among the other requirements for regulatory approval is the requirement that
prospective manufacturers conform to the FDA's Good Manufacturing Practices,
GMP, requirements specifically for biological drugs, as well as for other drugs.
In complying with the FDA's GMP requirements, manufacturers must continue to
expend time, money and effort in production, recordkeeping and quality control
to assure that the product meets applicable specifications and other
requirements. Failure to comply with the FDA's GMP requirements subjects the
manufacturer to possible FDA regulatory action. We or our contract
manufacturers, if any, may not be able to maintain compliance with the FDA's GMP
requirements on a continuing basis. Failure to maintain compliance could have a
material adverse effect on us.
The FDA has not designated expanded access protocols for REMUNE as "treatment"
protocols. The FDA may not determine that REMUNE meets all of the FDA's criteria
for use of an investigational drug for treatment use. Even if REMUNE is allowed
for treatment use, third party payers may not provide reimbursement for the
costs of treatment with REMUNE.
The FDA may not consider REMUNE or any other of the Company's products under
development to be an appropriate candidate for accelerated approval, expedited
review or fast track designation.
To market any drug products outside of the United States, we are also subject to
numerous and varying foreign regulatory requirements, implemented by foreign
health authorities, governing the design and conduct of human clinical trials
and marketing approval. The approval procedure varies among countries and can
involve additional testing, and the time required to obtain approval may differ
from that required to obtain FDA approval. The foreign regulatory approval
process includes all of the risks associated with obtaining FDA approval set
forth above, and approval by the FDA does not ensure approval by the health
authorities of any other country.
TECHNOLOGICAL CHANGE AND COMPETITION MAY RENDER OUR POTENTIAL PRODUCTS OBSOLETE
The biotechnology industry continues to undergo rapid change and competition is
intense and is expected to increase. Competitors may succeed in developing
technologies and products that are more effective or affordable than any which
are being developed by us or which would render our technology and products
obsolete and noncompetitive. Many of our competitors have substantially greater
experience, financial and technical resources and production, marketing and
development capabilities than us. Accordingly, some of our competitors may
succeed in obtaining regulatory approval for products more rapidly or
effectively than us.
OUR LACK OF COMMERCIAL MANUFACTURING AND MARKETING EXPERIENCE MAY PREVENT US
FROM SUCCESSFULLY COMMERCIALIZING PRODUCTS
We have not manufactured our product candidates in commercial quantities. We may
not successfully make the transition from manufacturing clinical trial
quantities to commercial production quantities or be able to arrange for
contract manufacturing and this could prevent us from commercializing products.
Even if REMUNE is successfully developed and receives FDA approval, we have not
demonstrated the capability to manufacture REMUNE in commercial quantities.
Except for REMUNE, we have not demonstrated the ability to manufacture our
treatments in large-scale clinical or commercial quantities.
We have no experience in the sales, marketing and distribution of pharmaceutical
products. Thus, our products may not be successfully commercialized even if they
are developed and approved for commercialization.
The manufacture process of our products involves a number of steps and requires
compliance with stringent quality control specifications imposed by us and by
the FDA. Moreover, our products can only be manufactured in a facility that has
undergone a satisfactory inspection by the FDA. For these reasons, we would not
be able quickly to replace our manufacturing capacity if we were unable to use
our manufacturing facilities as a result of a fire, natural disaster (including
an earthquake), equipment failure or other difficulty, or if such facilities are
deemed not in compliance with the FDA's GMP requirements and the non-compliance
could not be rapidly rectified. Our inability or reduced capacity to manufacture
our products would prevent us from successfully commercializing products.
19
We may enter into arrangements with contract manufacturing companies to expand
our own production capacity in order to meet requirements for our products, or
to attempt to improve manufacturing efficiency. If we choose to contract for
manufacturing services and encounter delays or difficulties in establishing
relationships with manufacturers to produce, package and distribute our finished
products, clinical trials, market introduction and subsequent sales of the
products would be delayed. Further, contract manufacturers must also operate in
compliance with the FDA's GMP requirements; failure to do so could result in,
among other things, the disruption of product supplies. Our potential dependence
upon third parties for the manufacture of our products may adversely affect our
profit margins and our ability to develop and deliver products on a timely and
competitive basis.
ADVERSE DETERMINATIONS CONCERNING PRODUCT PRICING, REIMBURSEMENT AND RELATED
MATTERS COULD PREVENT US FROM SUCCESSFULLY COMMERCIALIZING PRODUCTS
Our ability to earn sufficient returns on our products will depend in part on
the extent to which reimbursement for the costs of the products and related
treatments will be available from government health administration authorities,
private health coverage insurers, managed care organizations and other
organizations. Failure to obtain appropriate reimbursement could prevent us from
successfully commercializing products. Third party payors are increasingly
challenging the price of medical products and services. If purchasers or users
of our products are not able to obtain adequate reimbursement for the cost of
using the products, they may forego or reduce their use. Significant uncertainty
exists as to the reimbursement status of newly approved health care products,
and whether adequate third party coverage will be available.
PRODUCT LIABILITY EXPOSURE MAY EXPOSE US TO SIGNIFICANT LIABILITY
We face an inherent business risk of exposure to product liability and other
claims in the event that the development or use of our technology or prospective
products is alleged to have resulted in adverse effects. We may not avoid
significant liability exposure. We may not have sufficient insurance coverage
and we may not be able to obtain sufficient coverage, at a reasonable cost. An
inability to obtain product liability insurance at acceptable cost or to
otherwise protect against potential product liability claims could prevent or
inhibit the commercialization of products developed by us. A product liability
claim could hurt our financial performance.
HAZARDOUS MATERIALS/ENVIRONMENTAL MATTERS COULD EXPOSE US TO SIGNIFICANT COSTS
Although we do not currently manufacture commercial quantities of our product
candidates, we produce limited quantities of these products for our clinical
trials. We may be required to incur significant costs to comply with current or
future environmental laws and regulations. Our research and development
processes involve the controlled storage, use and disposal of hazardous
materials, biological hazardous materials and radioactive compounds. We are
subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of these materials and some waste
products. Although we believe that our safety procedures for handling and
disposing of these materials comply with the standards prescribed by these laws
and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of an accident, we could
be held liable for any damages that result, and any liability could exceed our
resources. Our operations, business or assets may be materially and adversely
affected by current or future environmental laws or regulations.
SUBORDINATION OF COMMON STOCK TO PREFERRED STOCK COULD HURT COMMON STOCKHOLDERS
Our common stock is expressly subordinate to our Series F Convertible Preferred
Stock in the event of our liquidation, dissolution or winding up. If we were to
cease operations and liquidate our assets, there may not be any remaining value
available for distribution to the holders of common stock after providing for
the Series F Convertible Preferred Stock liquidation preference.
VOLATILITY OF STOCK PRICE AND ABSENCE OF DIVIDENDS MAY HURT COMMON STOCKHOLDERS
The market price of our common stock, like that of the common stock of many
other biopharmaceutical companies, has been and is likely to be highly volatile.
Factors such as:
- the results of preclinical studies and clinical trials by us,
our collaborators or our competitors,
- other evidence of the safety or efficacy of our products or
our competitors,
- announcements of technological innovations or new products by
us or our competitors,
- governmental regulatory actions,
20
- changes or announcements in reimbursement policies,
- developments with our collaborators,
- developments concerning patent or other proprietary rights of
ours or our competitors (including litigation),
- concern as to the safety of our products,
- period-to-period fluctuations in our operating results,
- changes in estimates of our performance by securities
analysts,
- market conditions for biopharmaceutical stocks in general, and
- other factors not within our control
could have a significant adverse impact on the market price of our common stock.
We have never paid cash dividends on our common stock and do not anticipate
paying any cash dividends in the foreseeable future.
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS. The Company's Certificate of
Incorporation and Bylaws include provisions that could discourage potential
takeover attempts and make attempts by stockholders to change management more
difficult. The approval of 66 2/3 percent of the Company's voting stock is
required to approve certain transactions and to take certain stockholder
actions, including the calling of special meetings of stockholders and the
amendment of any of the anti-takeover provisions contained in the Company's
Certificate of Incorporation. Further, pursuant to the terms of its stockholder
rights plan, the Company has distributed a dividend of one right for each
outstanding share of common stock. These rights will cause substantial dilution
to the ownership of a person or group that attempts to acquire the Company on
terms not approved by the Board of Directors and may have the effect of
deterring hostile takeover attempts.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
DENNIS J. CARLO, PH.D., age 56, a co-founder of the Company, has been President
and Chief Executive Officer since September 1994, and Chief Scientific Officer
since September 1998. Dr. Carlo was Chief Operating Officer from April 1987 to
September 1994 and Executive Vice President from October 1987 to September 1994.
Dr. Carlo has been Assistant Corporate Secretary and a Director since 1987. From
January 1982 to May 1987, Dr. Carlo was Vice President of Research and
Development and Vice President of Therapeutic Manufacturing at Hybritech
Incorporated, a biotechnology company that was acquired by Eli Lilly & Company
("Eli Lilly"), a pharmaceutical company, in 1986. From 1971 to 1981, Dr. Carlo
held various positions at Merck & Co., Inc., including Director of Development
and Basic Cellular Immunology and Director of Bacterial Vaccines and Immunology.
Dr. Carlo is also a director of AVANIR Pharmaceuticals and Vyrex Corporation.
Dr. Carlo has authored or co-authored over 100 articles and abstracts in the
field of immunology. Dr. Carlo received his Ph.D., M.S. and B.S. from Ohio State
University.
Howard Sampson, age 49, has been Vice President, Finance, Chief Financial
Officer and Treasurer of the Company since May 1999, Mr. Sampson was
Controller from April 1999 to May 1999. From 1996 to 1999 Mr. Sampson
provided executive level financial consulting services for various biomedical
companies. From 1991 to 1996 Mr. Sampson was Chief Financial Officer of Genta
Inc. Mr. Sampson received his B.S. from San Diego State University and is a
C.P.A. in the state of California.
ITEM 2. PROPERTIES
The Company leases a 50,400 square foot laboratory and headquarters facility
located in Carlsbad, California. Under the terms of the lease, which expires on
December 31, 2000, and has two five-year options to extend, current monthly
rental on the facility is approximately $69,600.
21
The Company also leases a 31,200 square foot facility located adjacent to its
headquarters facility in Carlsbad, California. The Company expects this
facility to be used for additional laboratory and office space. Under the
terms of the lease, which expires in March 2008, monthly rental on the
facility is approximately $19,000. The Company has also delivered to the
lessor a Letter of Credit for $600,000 as an additional security deposit.
The Company leases a 52,500 square foot manufacturing facility located in King
of Prussia, Pennsylvania. Under the terms of the lease, which expires on October
31, 2011, and has two five-year options to extend, current monthly rental on the
facility is approximately $38,300.
ITEM 3. LEGAL PROCEEDINGS
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market ("NNM") under
the symbol "IMNR." The following table sets forth the range of high and low
sales prices for the Common stock on the NNM for the periods indicated since
January 1, 1998.
1998 HIGH LOW
------ ---- ---
January 1 - March 31, 1998 $ 11.44 $ 8.81
April 1 - June 30, 1998 19.69 9.50
July 1 - September 30, 1998 15.00 7.38
October 1 - December 31, 1998 14.69 10.13
1999 HIGH LOW
---- ---- ---
January 1 - March 31, 1999 $ 11.38 $ 7.56
April 1 - June 30, 1999 13.25 4.63
July 1 - September 30, 1999 7.13 4.81
October 1 - December 31, 1999 5.75 2.56
As of March 10, 2000, the Company's Common Stock was held by 908 stockholders of
record. The Company has never paid cash dividends and does not anticipate paying
any cash dividends in the foreseeable future.
In October 1999, the Company sold 334,589 shares of newly issued Immune Response
common stock to Agouron, priced at a premium to market, for $2 million. In
October and November 1999, the Company sold 787,087 shares of newly issued
Immune Response common stock to Strong River Investments, Inc., priced at a
discount to the market for $3.2 million. In December 1999, the Company issued
250,000 shares of newly issued Immune Response common stock to Connetics
Corporation and XOMA, (US) LLC, priced at market for $836,000 in exchange for an
exclusive license to intellectual property.
The sales and issuances of securities in the transactions described above were
deemed to be exempt from registration under the Securities Act of 1933, as
amended, by virtue of Section 4(2).
The recipients represented their intention to acquire the securities for
investment purposes only and not with a view to the distribution thereof.
Appropriate legends are affixed to the stock certificates issued in such
transactions. All recipients either received adequate information about the
Company or had access, through employment or other relationships.
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Contract research revenue $14,226 $ 5,488 $ 2,000 $ 1,000 $ 1,561
Licensed research revenue 6,529 12,185 --- 6,000 ---
Research and development expenses 31,246 33,240 34,090 27,211 19,489
Net loss (14,968) (18,062) (33,557) (21,026) (19,936)
Net loss per share - Basic and diluted (.64) *(.81) (1.53) (1.19) (1.19)
Shares used in computing net loss
per share 24,851 23,148 21,883 17,658 16,750
*See Note 14 to the Consolidated Financial Statements.
23
DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------------
(in thousands)
BALANCE SHEET DATA:
Cash, cash equivalents, marketable
securities and short-term investments $23,087 $25,232 $30,439 $47,787 $44,610
Working capital 14,686 22,892 28,939 45,684 43,586
Total assets 39,997 35,626 37,375 54,086 50,429
Stockholders' equity 20,546 22,060 35,102 51,304 48,441
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Immune Response Corporation is a biopharmaceutical company developing
immune-based therapies to induce specific immune responses for the treatment of
HIV, autoimmune diseases and cancer. In addition, the Company is developing a
targeted non-viral delivery technology for gene therapy, which is designed to
enable the delivery of genes directly to the liver via intravenous injection.
The Company's gene therapy program is focused on diseases of the liver.
This discussion contains forward-looking statements concerning the Company's
operating results and timing of anticipated expenditures. Such statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected. Factors that could cause or contribute to such
differences include those discussed under "Risk Factors," as well as those
discussed elsewhere in this Form 10-K. The following should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere in this Form 10-K. These forward-looking statements speak
only as of the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements that may
be made to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
In May 1999, the Company announced the discontinuation of the Phase 3 clinical
endpoint trial for the immune-based therapy, REMUNE, based on the recommendation
of an independent Data Safety Monitoring Board. As a result of this, in June
1999, the Company implemented a restructuring plan primarily aimed at reducing
expenses while focusing the majority of the Company's resources on its
late-stage programs of immune-based therapeutics for HIV (REMUNE) and rheumatoid
arthritis. The restructuring plan included a reduction in the workforce, in June
and again in October, of approximately 30%. The Company took a one-time
restructuring charge against earnings of $650,000.
During 1999, the Company received from Agouron, under the agreement entered into
in 1998, four quarterly payments of $5 million each and a $5 million milestone
payment received in February. The quarterly payments represent $12 million to
support research and development and $8 million for the purchase of 965,928
shares of the Company's common stock priced at a premium to the market. Under
the agreement, the Company agreed to exclusively license REMUNE, its
immune-based therapy under development for the treatment of HIV infection, to
Agouron. Under the terms of the agreement, the Company will manufacture
commercial supplies of REMUNE and Agouron will have exclusive rights to market
REMUNE in North America, Europe and certain other countries. The two companies
will share profits from the commercialization on a 50/50 basis, if regulatory
approvals are received. Agouron will make additional payments upon achievement
of certain milestones.
In September 1999 and October 1999, the Company received payments of $494,000
each from Schering Corporation under an amendment to extend the research
collaboration and option agreement entered into in July 1998 through the
remainder of 1999. In March 1999, the Company received a payment of $988,000 to
fund research under this agreement. Under this research collaboration and option
agreement, the Company agreed to develop gene therapy products for the treatment
of hepatitis B and C; and as part of this agreement, Schering Corporation has
the option to license the Company's gene delivery system for additional
proprietary genes for other diseases for a royalty on future product sales, if
any. Through December 1999, the Company had received approximately $4.0 million
in payments
24
from Schering Corporation. Schering Corporation's obligation to fund under the
research collaboration had expired on December 31, 1999.
In September 1999, the Company entered into a $3.0 million equipment line of
credit, of which $1.6 million was utilized to fund capital
improvements related to increasing the capacity of its manufacturing facility.
In November 1999, the Company completed the sale of $3.2 million of its common
stock to an institutional investor at a price of $4.00 per share.
In December 1999, the Company acquired exclusive technology rights from
Connetics Corporation and XOMA, (US) LLC for $4.9 million payable in a
combination of cash, notes due through October 31, 2000 and common stock.
In January 2000, the Company received a $5.0 million payment from Agouron
consisting of a $3.0 million payment for research and development and a $2.0
million payment for the purchase of 266,667 shares of unregistered common stock
priced at a premium to the market. This was the final payment in a series of six
quarterly payments that the Company expected Agouron to make to fund research
and development and to purchase unregistered common stock under the June 1998
agreement.
In March 2000, the Company sold 4.65 acres of undeveloped property adjacent to
its headquarters facility in Carlsbad, California for approximately $2.0
million.
Also in March 2000, the Company sold for cash approximately $2.3 million of
equity securities held for sale and will recognize a gain on this transaction in
the first quarter 2000.
The Company has not been profitable since inception and had an accumulated
deficit of $186.5 million as of December 31, 1999. To date, the Company has not
recorded any revenues from the sale of products. Revenues recorded through
December 31, 1999 were earned in connection with contract research, licensing of
technology, milestone achievement payments and investment income. The Company
expects its operating losses to continue, as well as to have quarter-to-quarter
fluctuations, some of which could be significant, due to research, development
and clinical trial activities. There can be no assurance that the Company will
be able to generate sufficient product revenue to become profitable at all or on
a sustained basis.
In December 1999, the Securities and Exchange Commission issued a Staff
Accounting Bulletin regarding revenue recognition in financial statements for
non-refundable technology access fees in the biotechnology industry, which could
impact the Company's financial statement. See Footnote 1 to the Consolidated
Financial Statements.
RESULTS OF OPERATIONS
The Company recorded revenues of $20.8 million in 1999 as compared to $17.7
million in 1998 and $2.0 million in 1997. Revenues for 1999 consist primarily of
$15.8 million derived from research and development under collaborative
agreements along with a $5.0 million milestone payment under one of the
collaborative agreements. Of the $20.8 million of revenues received in 1999,
$18.5 million were from Agouron. Revenues for 1998 include $7.7 million derived
from research and development under collaborative agreements along with $10.0
million from a license fee under one of the collaborative agreements. Of the
$17.7 million of revenues received in 1998, $14.2 million were from Agouron.
Revenues for 1997 include $2.0 million derived from research and development
under collaborative agreements. None of the revenue received was from the
commercial sale of products and the Company does not expect to derive revenue
from the sale of products for the foreseeable future.
The Company's research and development cost totaled $31.2 million for 1999 as
compared to $33.2 million for 1998 and $34.1 million for 1997. The decrease in
costs from 1998 to 1999 was due primarily to reduced clinical and regulatory
costs associated with the discontinuation of a 2,500 patient Phase 3 clinical
trial of REMUNE and costs associated with the autoimmune, gene therapy and
cancer programs that was the result of the Company's workforce reduction in June
1999. The decrease in these costs was offset by an increase in cost associated
with scale-up of the manufacturing process for REMUNE. The decrease in costs
from 1997 to 1998 was due primarily to the initial costs of the 2,500 patient
Phase 3 clinical trial of REMUNE being front loaded in 1997, which was due to
the aggressive startup of the trial that was started in 1996. Future spending
associated with the HIV clinical trials is expected to decrease substantially as
future pivotal studies will be conducted by Agouron under the 1998 collaboration
agreement. However, spending associated with the Company's scale-up of the
manufacturing process for REMUNE
25
and the cost of producing clinical supplies for ongoing and future REMUNE
studies could continue to increase in the foreseeable future. Overall future
research and development expenditures are expected to decline in the coming year
unless additional collaborations are completed. There can be no assurance that
any collaborations will be completed, that existing collaborations will not end,
or that the Company will be able to obtain other financing needed to continue
its research and development efforts.
General and administrative expenses totaled $5.2 million for 1999 as compared to
$4.2 million for 1998 and $3.9 million for 1997. The increase in spending in
1999 over 1998 was attributable to higher support costs associated with its
research and development, increase in public company activities and changes
associated with the restructuring. The increase in spending for 1998 over 1997
was attributable to higher support costs associated with its research and
development. General and administrative expenses for 2000 are expected to remain
somewhat constant to 1999 levels.
Restructuring costs of $650,000 for the year ended December 1999 were associated
with the Company's restructuring plan implemented in June 1999 and completed in
October 1999, which reduced the work force by approximately 30%. Employee
severance, health benefits, placement services and other implementation costs
were included in the restructuring costs.
Other revenue and expense decreased to $1.3 million for 1999 from $1.7 million
for 1998 and $2.4 million for 1997. This decrease for 1998 and 1999 was the
result of lower investment income on lower average cash and short-term
investment balances. For 1999, interest expense associated with equipment
financing was netted against income.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception through December 31, 1999, the Company has financed its
activities primarily from public and private sales of equity, funding from
collaborations with corporate partners and investment income. At December 31,
1999, the Company had working capital of $14.7 million, including $23.1 million
of cash, cash equivalents and marketable securities. This compares with working
capital as of December 31, 1998 of $22.9 million, including $25.2 million of
cash, cash equivalents and marketable securities. Working capital decreased as a
result of the cost of operations, in particular, the cost of the REMUNE HIV
clinical trials, clinical trial materials and manufacturing supplies, and the
capital improvements incurred to increase the capacity of the manufacturing
facility producing REMUNE. This decrease was despite the sale of $3.2 million of
common stock to an institutional investor and the financing of $1.6 million of
capital equipment. As of December 31, 1999, the Company had $1.4 million
remaining under a $3.0 million equipment line of credit that was put in place
during 1999.
The Company will need to raise additional funds to conduct research and
development, preclinical studies and clinical trials necessary to bring its
potential products to market and establish manufacturing and marketing
capabilities. The Company anticipates that in 2000, the REMUNE clinical trials
and manufacturing costs will continue to represent a significant portion of the
Company's overall expenditures. The Company also anticipates that costs related
to the clinical trials of REMUNE will decrease, as future pivotal studies will
be conducted by Agouron. However, spending associated with the Company's
scale-up of the manufacturing process for REMUNE and the cost of producing
clinical supplies for ongoing and future REMUNE studies could continue to
increase in the foreseeable future. Research and development expenses for gene
therapy are expected to level off while spending for the rheumatoid arthritis
and cancer programs will remain somewhat constant. Overall future research and
development expenditures are expected to decline from 1999 levels. Future
spending for research and development may increase if additional collaborations
are completed, but there can be no assurance that any will be completed. The
Company anticipates additional capital improvements of approximately $4.0
million for 2000 related to increasing the capacity of its manufacturing
facility, some of which the Company anticipates will be funded with debt
financing. Other anticipated costs with respect to REMUNE, including investment
in inventory, will depend on many factors, including the results of clinical
trials, the continuation of the Company's collaboration with Agouron and other
factors which will influence the Company's determination of the appropriate
continued investment of the Company's financial resources in this program.
The Company's future capital requirements will depend on many factors, including
continued scientific progress in its research and development programs, the
scope and results of preclinical studies and clinical trials, the time and costs
involved in obtaining regulatory approvals, the costs involved in filing,
prosecuting and enforcing patent claims, competing technological and market
developments, the cost of manufacturing scale-up and inventories, effective
commercialization activities and arrangements and other factors not within the
Company's control. The Company intends to seek additional funding through
additional research and development agreements with suitable corporate
collaborators, extensions of existing corporate collaborations, and through
public or private financings if
26
available. However, there can be no assurances that such collaboration
arrangements or any public or private financings will be available on acceptable
terms, if at all. If funds are raised through equity arrangements, further
dilution to stockholders may result. If adequate funds are not available, the
Company may be required to delay, reduce the scope of, or eliminate one or more
of its research or development programs or take other measures to cut costs,
which could have a material adverse effect on the Company. The Company estimates
that its existing capital resources, along with funding under existing research
and development collaborations, available equipment financing and the commitment
for equity funding from an existing collaborative partner will be sufficient to
fund its current and planned operations into the first half of 2001. There can
be no assurances, however, that changes in the Company's research and
development plans or other changes affecting the Company's operating expenses
may result in the expenditure of such resources before such time. In any event,
the Company will need to raise substantial additional capital to fund its
operations in future periods.
YEAR 2000
The Company has performed a review of its computer applications and equipment
related to their continuing functionality for the year 2000 and beyond. The
Company does not believe that it has material exposure with respect to the year
2000 issue concerning its computer applications and equipment. The Company
communicated with third parties with whom it has a material relationship to
assess its risk with respect to year 2000 issues. The Company is not aware, at
this time, of any material year 2000 issues with respect to its dealings with
such third parties. Year 2000 issues have not disrupted the Company or its
operations. Since no significant issues have arisen, the Company does not have a
contingency plan to address any material year 2000 issues.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company
required by this item are set forth at the pages indicated in Item 14(a)(1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item (with respect to Directors) is
incorporated by reference from the information under the captions "Election
of Directors" and "Other Matters" contained in the Company's Proxy Statement
to be filed with the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information under the caption "Compensation of Executive Officers and Directors"
contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information under the caption "Stock Ownership of Management and Certain
Beneficial Owners" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information under the caption "Certain Transactions" contained in the Proxy
Statement.
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The consolidated financial statements required by this item are submitted in a
separate section beginning on page F-1 of this report.
CONSOLIDATED FINANCIAL STATEMENTS OF THE IMMUNE RESPONSE CORPORATION
Report of Independent Public Accountants F-1
Consolidated Balance Sheets at
December 31, 1999 and 1998 F-2
Consolidated Statements of Operations for the
three years ended December 31, 1999 F-3
Consolidated Statements of Stockholders' Equity
for the three years ended December 31, 1999 F-4
Consolidated Statements of Cash Flows for the
three years ended December 31, 1999 F-5
Notes to Consolidated Financial Statements F-6
(2) Financial Statement Schedules
Schedules have been omitted because of the absence of conditions under which
they are required or because the required information is included in the
financial statements or the notes thereto.
(3) Exhibits with each management contract or compensatory plan or
arrangement required to be filed identified. See paragraph (c)
below.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during the fourth quarter
of the fiscal year ended December 31, 1999.
(c) Exhibits
3(i)(12) Restated Certificate of Incorporation of The Immune Response
Corporation, as amended. 3(ii)(6) Restated Bylaws of The
Immune Response Corporation.
10.1(7) Amended and Restated 1989 Stock Plan of The Immune Response
Corporation.
10.13(1) Assignment, dated May 27, 1988, by Jonas Salk and Dennis J.
Carlo, assignors, to the Company.
10.14(1) Assignment, dated May 27, 1988 by Jonas Salk to the Company.
10.17(1) Lease, dated as of May 22, 1989, between the Company and BDN
Carlsbad #1 Limited Partnership.
10.28(5)* Form of Indemnification Agreement entered into between the
Company and its officers and directors.
10.36(2) First Amendment, dated February 19, 1990, to Lease between BDN
Carlsbad #1 Limited Partnership and the Company.
10.37* Amended and Restated 1990 Directors' Stock Option Plan of The
Immune Response Corporation.
10.42(3) Second and Third Amendments to the Lease, dated as of May 22,
1989, between the Company and BDN Carlsbad #1 Limited
Partnership.
29
10.47(4) Rights Agreement, dated February 26, 1992, between the Company
and First Interstate Bank, Ltd., as Rights Agent.
10.53* Form of The Immune Response Corporation Special Nonstatutory
Stock Option Agreement.
10.59(10) Unit Purchase Agreement, dated April 15, 1997, between The
Immune Response Corporation and Kevin B. Kimberlin, including
Common Stock Purchase Warrant, Promissory Note and Stock
Pledge Agreement.
10.60(10) Unit Purchase Agreement, dated April 15, 1997, between The
Immune Response Corporation and Dennis J. Carlo, Ph.D.,
including Common Stock Purchase Warrant, Promissory Note and
Stock Pledge Agreement.
10.61(10) Amendment No. 1 to Rights Agreement (Exhibit 10.47), dated
April 17, 1997, between The Immune Response Corporation and
Harris Trust Company of California
10.62(11) Common Stock Purchase Warrant, dated June 26, 1997, between
The Immune Response Corporation and Kevin B. Kimberlin.
10.63(11) Common Stock Purchase Warrant, dated June 26, 1997, between
The Immune Response Corporation and Dennis J. Carlo, Ph.D.
10.65(15) Letter of Intent dated June 11, 1998 between The Immune
Response Corporation and Agouron Pharmaceuticals, Inc.
10.66(15) Common Stock Purchase Agreement dated June 11, 1998 between
The Immune Response Corporation and Agouron Pharmaceuticals,
Inc.
10.67(13) Securities Purchase Agreement dated as of April 24, 1998 by
and among the Company and the Investors.
10.68(14) Registration Rights Agreement dated as of April 24, 1998 by
and among the Company and the Investors.
10.69(16) Master Loan and Security Agreement dated as of September 30,
1999 between The Immune Response Corporation, I.R.C. Inc. and
Transamerica Business Credit Corporation.
10.70(17) Assignment Agreement dated as of December 8, 1999 by and among
the Company and Connetics Corporation (10.1). +
10.71(17) Agreement dated as of December 8, 1999 by and among the
Company and XOMA, (US) LLC (10.2). +
10.72 Agreement dated as of October 20, 1999 by and among the
Company and Strong River Investments, Inc.
10.73 Lease dated November 1, 1999 by and among the Company and
Brandywine Operating Partnership, L.P.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Public Accountants.
24.1 Power of Attorney (see page 32).
27 Financial Data Schedule
(1) Incorporated by reference to the exhibits of the same number to the
Company's Registration Statement on Form S-1, No. 33-31057.
(2) Incorporated by reference to the exhibits of the same number to the
Company's Registration Statement on Form S-1, No. 33-34096.
(3) Incorporated by reference to the exhibits of the same number to the
Company's Report on Form 10-K for the Fiscal Year ended December 31,
1990 (Commission File No. 0-18006).
(4) Incorporated by reference to Exhibit 5.1 to the Company's Report on
Form 8-K filed March 4, 1992 (Commission File No 0-18006).
(5) Incorporated by reference to the exhibits of the same number to the
Company's Registration Statement on Form S-1, No. 33-31057.
(6) Incorporated by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-8, No. 33-62940.
(7) Incorporated by reference to the exhibit of the same number to the
Company's Registration Statement on Form S-8, No. 333-81945.
30
(10) Incorporated by reference to the Exhibits of the same number filed
with the Company's March 31, 1997 Form 10-Q.
(11) Incorporated by reference to the Exhibit of the same number filed with
the Company's June 30, 1997 Form 10-Q.
(12) Incorporated by reference to the Exhibit of the same number filed with
the Company's June 30, 1999 Form 10-Q.
(13) Incorporated by reference to Exhibit 10.1 filed with the Company's
Form 8-K dated April 24, 1998.
(14) Incorporated by reference to Exhibit 10.2 filed with the Company's
Form 8-K dated April 24, 1998.
(15) Incorporated by reference to the Exhibits of the same number filed
with the Company's June 30, 1998 Form 10-Q.
(16) Incorporated by reference to the Exhibit of the same number filed with
the Company's September 30, 1999 Form 10-Q.
(17) Incorporated by reference to Exhibits 10.1 and 10.2 to the Company's
Form 8-K dated December 8, 1999.
* Indicates management contract or compensatory plan or arrangement.
+ Confidential treatment for some portions of this exhibit has been
requested.
31
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.
THE IMMUNE RESPONSE CORPORATION
By: /s/ Dennis J. Carlo
-------------------------------------
Dennis J. Carlo,
President and Chief Executive 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.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Dennis J. Carlo and Howard Sampson his
attorneys-in-fact, each with full power of substitution, for him in any and all
capacities, to sign any amendments to this Report and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact, or their substitute or substitutes, may do or cause to
be done by virtue hereof.
/s/ James B. Glavin Chairman of the 3/30/00
- ------------------------- Board of Directors ------------
James B. Glavin
/s/ Dennis J. Carlo President, 3/30/00
- ------------------------- Chief Executive Officer, ------------
Dennis J. Carlo and Director
3/30/00
/s/ Howard Sampson Vice President, Finance, ------------
- ------------------------- Chief Financial Officer
Howard Sampson Secretary and Treasurer
/s/ Kevin B. Kimberlin Director 3/30/00
- ------------------------- ------------
Kevin B. Kimberlin
/s/ Melvin Perelman Director 3/30/00
- ------------------------- ------------
Melvin Perelman
/s/ William M. Sullivan Director 3/30/00
- ------------------------- ------------
William M. Sullivan
/s/ Philip M. Young Director 3/30/00
- ------------------------- ------------
Philip M. Young
32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Immune Response Corporation:
We have audited the accompanying consolidated balance sheets of The Immune
Response Corporation (a Delaware corporation) and subsidiaries as of December
31, 1999, and 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. 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. 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 The Immune Response Corporation
and subsidiaries at December 31, 1999, and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
San Diego, California
March 3, 2000
F1
THE IMMUNE RESPONSE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
----------------------------------------------
1999 1998
------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,183 $ 1,889
Marketable securities - available-for-sale 18,904 23,343
Other current assets 202 1,613
------------------- -------------------
Total current assets 23,289 26,845
Property and equipment, net 10,760 7,825
Licensed technology 4,945 ---
Deposits and other assets 1,003 956
------------------- -------------------
$ 39,997 $ 35,626
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,536 $ 2,755
Accrued expenses 3,024 1,198
License contract payable 3,609 ---
Current portion of equipment notes payable 287 ---
Deferred rent obligation 147 ---
------------------- -------------------
Total current liabilities 8,603 3,953
------------------- -------------------
Equipment notes payable 1,221 ---
------------------- -------------------
Deferred rent obligation --- 266
------------------- -------------------
Commitments (Note 3)
Redeemable convertible preferred stock 9,627 9,347
------------------- -------------------
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized; none issued --- ---
Common stock, $.0025 par value, 65,000,000 shares authorized,
26,370,135 and 23,795,292 shares issued and outstanding
at December 31, 1999 and 1998, respectively 66 59
Warrants 2,144 2,144
Additional paid-in capital 203,131 191,317
Accumulated other comprehensive income 1,735 102
Accumulated deficit (186,530) (171,562)
------------------- -------------------
Total stockholders' equity 20,546 22,060
------------------- -------------------
$ 39,997 $ 35,626
=================== ===================
See accompanying notes.
F2
THE IMMUNE RESPONSE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year ended December 31,
--------------------------------------------------------------------
1999 1998 1997
Revenues:
Contract research revenue $ 14,226 $ 5,488 $ 2,000
Licensed research revenue 6,529 12,185 ---
------------------ ------------------ ------------------
20,755 17,673 2,000
------------------ ------------------ ------------------
Expenses:
Research and development 31,246 33,240 34,090
General and administrative 5,154 4,163 3,904
Restructuring costs 650 --- ---
------------------ ------------------ ------------------
37,050 37,403 37,994
------------------ ------------------ ------------------
Other revenue and expense:
Investment income 1,327 1,668 2,437
------------------ ------------------ ------------------
Net loss (14,968) (18,062) (33,557)
Accretion of preferred stock (280) (187) ---
Preferred dividends (750) (518) ---
------------------ ------------------ ------------------
Net loss applicable to common stockholders $ (15,998) $ (18,767) $ (33,557)
================== ================== ==================
Net loss per share - basic and diluted $ (0.64) $ (0.81) $ (1.53)
================== ================== ==================
Weighted average number of shares
outstanding 24,851 23,148 21,883
================== ================== ==================
See accompanying notes.
F3
THE IMMUNE RESPONSE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Common Stock Additional
------------------------------ Paid-in
Shares Amount Warrants Capital
------------- ------------- -------------- ---------------
Balance at December 31, 1996 20,230 $ 51 $ --- $ 171,056
Issuance of common stock and warrants in private
transaction, net of issuance costs of $360,000 2,051 5 2,144 13,491
Issuance of common stock from exercise of options 534 1 --- 1,827
Change in unrealized gain (loss) on marketable
securities --- --- --- ---
Net loss --- --- --- ---
------------- ------------- ------------ ----------------
Balance at December 31, 1997 22,815 57 2,144 186,374
Issuance of common stock in private transaction 245 1 --- 2,814
Issuance of common stock as dividend on convertible
preferred stock 22 --- --- ---
Accrual for preferred stock dividend --- --- --- (263)
Accretion of convertible preferred stock costs --- --- --- (187)
Issuance of common stock from exercise of options 713 1 --- 2,579
Change in unrealized gain (loss) on marketable
securities --- --- --- ---
Net loss --- --- --- ---
------------- ------------- ------------ ----------------
Balance at December 31, 1998 23,795 59 2,144 191,317
Issuance of common stock in private transactions, net 1,753 5 --- 9,572
of issuance costs of $20,000
Issuance of common stock for licensed technology 250 1 --- 836
Issuance of common stock as dividend on convertible
preferred stock 85 --- --- ---
Accrual for preferred stock dividend --- --- --- (163)
Accretion of convertible preferred stock costs --- --- --- (280)
Issuance of common stock from exercise of options 487 1 --- 1,849
Change in unrealized gain (loss) on marketable
securities --- --- --- ---
Net loss --- --- --- ---
------------- ------------- ------------ ----------------
Balance at December 31, 1999 26,370 $ 66 $ 2,144 $ 203,131
============= ============= ============ ================
Accumulated
Other Total
Comprehensive Accumulated Stockholders' Comprehensive
Income (Loss) Deficit Equity Income (Loss)
---------------- --------------- ------------- ---------------
Balance at December 31, 1996 $ 140 $ (119,943) $ 51,304
Issuance of common stock and warrants in private
transaction, net of issuance costs of $360,000 --- --- 15,640
Issuance of common stock from exercise of options --- --- 1,828
Change in unrealized gain (loss) on marketable
securities (113) --- (113) $ (113)
Net loss --- (33,557) (33,557) (33,557)
------------- -------------- --------------- ----------------
Balance at December 31, 1997 27 (153,500) 35,102 $ (33,670)
================
Issuance of common stock in private transaction --- --- 2,815
Issuance of common stock as dividend on convertible
preferred stock --- --- ---
Accrual for preferred stock dividend --- --- (263)
Accretion of convertible preferred stock costs --- --- (187)
Issuance of common stock from exercise of options --- --- 2,580
Change in unrealized gain (loss) on marketable
securities 75 --- 75 $ 75
Net loss --- (18,062) (18,062) (18,062)
------------- -------------- --------------- ----------------
Balance at December 31, 1998 102 (171,562) 22,060 $ (17,987)
================
Issuance of common stock in private transactions, net --- --- 9,577
of issuance costs of $20,000
Issuance of common stock for licensed technology --- --- 837
Issuance of common stock as dividend on convertible
preferred stock --- --- ---
Accrual for preferred stock dividend --- --- (163)
Accretion of convertible preferred stock costs --- --- (280)
Issuance of common stock from exercise of options --- --- 1,850
Change in unrealized gain (loss) on marketable
securities 1,633 --- 1,633 $ 1,633
Net loss --- (14,968) (14,968) (14,968)
------------- -------------- --------------- ----------------
Balance at December 31, 1999 $ 1,735 $ (186,530) $ 20,546 $ (13,335)
============= ============== =============== ================
See accompanying notes
F4
THE IMMUNE RESPONSE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
-----------------------------------------------
1999 1998 1997
------------ ------------ -------------
Operating activities:
Net loss $ (14,968) $ (18,062) $ (33,557)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 1,508 1,486 1,266
Deferred rent expense (119) (89) (59)
Changes in operating assets and liabilities:
Other current assets 1,411 (840) (93)
Accounts payable (1,219) 1,399 (515)
Accrued expenses 1,663 374 64
------------- ------------ -------------
Net cash used in operating activities (11,724) (15,732) (32,894)
------------- ------------ -------------
Investing activities:
Sale of marketable securities, net 6,072 2,299 18,322
Purchase of property and equipment (4,443) (3,501) (2,526)
Sale of land --- --- 1,020
Purchase of licensed technology (500) --- ---
Other assets (47) (603) (304)
------------- ------------ -------------
Net cash provided by (used in) investing activities 1,082 (1,805) 16,512
------------- ------------ -------------
Financing activities:
Proceeds from equipment notes payable 1,621 --- ---
Principal payments under equipment notes payable (112) --- ---
Proceeds from other sales of common stock 9,577 2,815 ---
Net proceeds from sale of common stock and warrants through
private offering --- --- 15,640
Net proceeds from the sale of convertible preferred stock --- 9,160 ---
Net proceeds from exercise of stock options 1,850 2,579 1,829
------------- ------------ -------------
Net cash provided by financing activities 12,936 14,554 17,469
------------- ------------ -------------
Net increase (decrease) in cash and cash equivalents 2,294 (2,983) 1,087
Cash and cash equivalents at beginning of year 1,889 4,872 3,785
------------- ------------ -------------
Cash and cash equivalents at end of year $ 4,183 $ 1,889 $ 4,872
============= ============ =============
Supplemental disclosure of cash flow information:
Interest paid $ 45 $ --- $ ---
============= ============ =============
Supplemental disclosure of noncash investing and financing activities:
Issuance of common stock and notes for licensed technology $ 4,445 $ --- $ ---
============= ============ =============
Accretion of convertible preferred stock $ 280 $ 187 $ ---
============= ============ =============
Payment of dividend on convertible preferred stock with common stock $ 776 $ 329 $ ---
============= ============ =============
Declared dividend on convertible preferred stock $ 163 $ 189 $ ---
============= ============ =============
See accompanying notes
F5
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Immune Response Corporation (the "Company"), a Delaware corporation, is a
biopharmaceutical company developing immune-based therapies to induce immune
responses for the treatment of HIV, autoimmune diseases and cancer. In
addition, the Company is developing a targeted non-viral delivery technology
for gene therapy, which is designed to enable the delivery of genes directly
to the liver via intravenous injection. The Company's gene therapy program is
focused on diseases of the liver.
The Company's products are in various stages of development. Prior to generating
product revenues, the Company must complete the development of its products,
including several years of human clinical testing, and receive regulatory
approvals prior to selling these products in the human health care market. The
Company's products may not be successfully developed, regulatory approvals may
not be granted, or patient and physician acceptance of any of these products may
not be achieved.
The Company faces additional risks associated with biopharmaceutical companies
whose products are in various stages of development. These risks include, among
others, the Company's need for additional financing to complete its research and
development programs and commercialize its technologies. Financing may not be
available to the Company when required or under favorable terms.
The Company believes that patents and other proprietary rights are important to
its business. The Company's policy is to file patent applications to protect
technology, inventions and improvements to its inventions that are considered
important to the development of its business. The patent positions of
pharmaceutical and biotechnology firms, including the Company, are uncertain and
involve complex legal and factual questions for which important legal principles
are largely unresolved.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
SEGMENT REPORTING
The Company has determined that it operates in one business segment dedicated to
pharmaceutical research.
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, liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Certain prior year amounts have been
reclassified to conform with the current year presentation.
CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in U.S. government securities and money
market accounts. The Company has established guidelines relative to
diversification and maturities that maintain safety and liquidity. These
guidelines are periodically reviewed and modified to take advantage of trends in
yields and interest rates.
CONCENTRATION OF RISK
Substantially all of the Company's revenues are derived from collaborative
arrangements with Agouron Pharmaceuticals, Inc., a Warner-Lambert Company
("Agouron") and Schering Corporation ("Schering"). As of December 31, 1999,
Schering's obligation to fund the research program under the collaboration had
expired. See Notes 9 and 10.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash, money market funds, time deposits and
treasury securities with original maturities at the date of acquisition of less
than three months.
F6
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
MARKETABLE SECURITIES - AVAILABLE-FOR-SALE
The Company classifies all of its marketable securities as available-for-sale
and reports them at fair market value. The unrealized gains or losses are
reported as a component of stockholders' equity - Accumulated other
comprehensive income. The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. Realized gains and losses are also
included in interest income. The cost of securities sold is based on the
specific identification method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated or amortized
over their estimated useful lives using the straight-line method. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
the remaining term of the related lease. Other property and equipment have
useful lives ranging from three to seven years.
LICENSED TECHNOLOGY
Intangible assets are recorded at cost and amortized over their estimated useful
lives. In December 1999, the Company acquired licenses to certain patent
technology. These licenses will be amortized over seven years beginning in the
year 2000.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be fully recoverable. Impairment is measured at fair value. Fair value is
determined by an evaluation of available price information at which assets could
be bought or sold including quoted market prices, if available, or the present
value of the estimated future discounted cash flows based on reasonable
assumptions.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with Accounting
Principles Board ("APB") 25, "Accounting for Stock Issued to Employees". In
1996, the Company adopted the disclosure requirements of Statement of Financial
Accounting Standards ("FAS") FAS No. 123, "Accounting for Stock-Based
Compensation". Under APB 25, compensation expense relating to employee stock
options is determined based on the excess of the market price of the Company's
stock over the exercise price on the date of grant and does not require the
recognition of compensation expense for stock issued under plans defined as
noncompensatory. Adoption of FAS No. 123 requires recognition of compensation
expense for virtually all options based on their computed "fair value" on the
date of the grant.
COMPREHENSIVE INCOME
The Company accounts for comprehensive income in accordance with FAS No. 130,
"Reporting Comprehensive Income." The Company reports the accumulated balance of
other comprehensive income or loss separately in the equity section of the
consolidated balance sheets. Prior year financial statements have been
reclassified to conform to the revised presentation. The only component of
comprehensive income is unrealized gain or loss on marketable securities.
REVENUES UNDER COLLABORATIVE AGREEMENTS
The Company earns revenue from licensing its proprietary technology and
performing services under research and development contracts. Initial fees under
license and option agreements are recognized upon contract signing if the fees
are nonrefundable and there are no significant performance obligations
remaining. Revenues from milestones are recognized as the milestones are
achieved. Revenue under research and development contracts is recognized as the
services are performed. Advance payments received in excess of amounts earned
are classified as deferred revenue.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to expense as incurred.
F7
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
INCOME TAXES
All income tax amounts have been computed in accordance with FAS No. 109,
"Accounting for Income Taxes." Under this statement, the liability method is
used to account for deferred income taxes. Under this method, deferred tax
assets and liabilities are determined based on temporary differences between the
financial reporting and tax base of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
reverse.
NET LOSS PER SHARE
Basic and diluted net loss per share is computed using the weighted average
number of common shares outstanding during the period. Potentially dilutive
securities are excluded from the diluted net loss per share calculation, as the
effect would be antidilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101 - "Revenue Recognition in Financial Statements". The
bulletin draws on existing accounting rules and provides specific guidance on
how those accounting rules should be applied and specifically addresses revenue
recognition for non-refundable technology access fees in the biotechnology
industry. SAB No. 101 is effective for fiscal years beginning after December 15,
1999. The Company has not completed its evaluation of the impact of SAB No. 101
on its financial statements, however, the impact is expected to be in a pre-tax
range of approximately $10 million to $15 million charged to the Company's
results of operations in the first quarter of fiscal year 2000.
2. MARKETABLE SECURITIES
Marketable securities consist of treasury securities with maturities of more
than three months and common stock acquired through former research
collaborations. The following table summarizes available-for-sale securities:
AVAILABLE-FOR-SALE SECURITIES
-------------------------------------------------------------
GROSS GROSS
(IN THOUSANDS) UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------- --------------- --------------- ---------------
DECEMBER 31, 1999
U.S. Government Securities $ 17,169 $ --- $ 118 $ 17,051
Equity Securities --- 1,853 --- 1,853
------------ -------------- -------------- -----------
$ 17,169 $ 1,853 $ 118 $ 18,904
============ ============== =========== ===========
DECEMBER 31, 1998
U.S. Government Securities $ 23,241 $ 110 $ 8 $ 23,343
============ ============== =========== ===========
The net realized gains on sales of available-for-sale securities, which are
included in investment income in the accompanying Statement of Operations,
totaled $31,000, $38,000 and $16,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
The amortized cost and estimated fair value of available-for-sale securities at
December 31, 1999, by contractual maturity, are shown below:
ESTIMATED
COST FAIR VALUE
------------ ------------
Due in one year or less $ 14,171 $ 14,087
Due after one year through two years 2,998 2,964
------------ ------------
Totals $ 17,169 $ 17,051
============ ============
F8
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
3. BALANCE SHEET INFORMATION
Property and equipment consists of the following:
DECEMBER 31,
------------------ ---------------
1999 1998
------------------ ---------------
(IN THOUSANDS)
Furniture and fixtures $ 1,547 $ 1,351
Equipment 2,816 1,486
Leasehold improvements 13,254 10,337
Land - held for sale 1,339 1,339
----------- -----------
18,956 14,513
Less accumulated depreciation and
amortization (8,196) (6,688)
----------- -----------
$ 10,760 $ 7,825
=========== ===========
4. EQUIPMENT NOTES PAYABLE
In September 1999, the Company obtained an equipment financing line of $3.0
million, of which it drew down approximately $1.6 million by December 31, 1999.
The loan, which is secured by the equipment, bears interest at 11.1% and is to
be repaid monthly over a four-year term.
Principal payments due on equipment notes payable at December 31 are as follows:
YEARS ENDED DECEMBER 31
-----------------------
(IN THOUSANDS)
2000 $ 287
2001 348
2002 389
2003 484
---------
1,508
Less current portion (287)
---------
$ 1,221
=========
The carrying value of the Company's obligations under equipment notes payable
approximates its fair value, and the implicit interest rate approximates the
Company's borrowing rate.
5. LICENSED TECHNOLOGY
In December 1999, the Company entered into a technology licensing agreement with
Connetics Corporation ("Connetics") and XOMA, (US) LLC ("XOMA"). The agreement
assigns exclusive rights to T cell receptor ("TCR") intellectual property to the
Company in exchange for approximately $4.9 million in cash, common stock and
short-term license contract payable. The agreement also requires the Company to
make royalty payments on future sales of products, if any, related to the TCR
intellectual property to Connetics, XOMA and Dr. Arthur Vandenbark, one of the
inventors of the assigned technology. The Company owns additional TCR-related
intellectual property and intends to carry forward development of pharmaceutical
products for the treatment of rheumatoid arthritis and other autoimmune diseases
using the technology.
The Company capitalized the purchase cost to licensed technology. The license
contract payable requires four quarterly payments of $250,000 beginning in
January 2000.
F9
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
6. COMMITMENTS
The Company leases its offices, research facilities, manufacturing facility, and
certain office and laboratory equipment under operating lease agreements. The
equipment lease agreements require monthly payments through June 2002. The
office and research facility lease agreement, which commenced in January 1991,
is for a term of ten years, with two five-year options to extend. In connection
with this lease, the Company received certain deferred payment terms and the
minimum annual rent is subject to certain annual increases. Rent is being
expensed on a straight-line basis over the term of the lease. Deferred rent
reflected in the accompanying balance sheet represents the difference between
rent expense accrued and amounts actually paid under the terms of the lease.
The Company leases a manufacturing facility in King of Prussia, Pennsylvania.
The lease, which was renegotiated in November 1999, is for a term of twelve
years, with two five-year options to extend. At December 31, 1999, future
minimum rental payments due under the Company's noncancelable operating leases
are as follows:
YEAR ENDING DECEMBER 31,
-------------------------------------
(IN THOUSANDS)
2000 $ 3,305
2001 1,909
2002 939
2003 762
2004 520
Thereafter 4,000
-------------
$ 11,435
=============
Total rent expense for the years ended December 31, 1999, 1998, and 1997 was
$3.0 million, $2.4 million, and $2.4 million, respectively.
7. RESTRUCTURING COSTS
In May 1999, the Company announced the discontinuation of the Phase III
clinical endpoint trial for the immune-based therapy, Remune, based on the
recommendation of an independent Data Safety Monitoring Board. As a result of
this, in June 1999, the Company implemented a restructuring plan primarily
aimed at reducing expenses while focusing the majority of the Company's
resources on its late-stage programs of immune-based therapies. The primary
cost savings were achieved by a reduction in force affecting approximately 47
employees of a total 158-person workforce begun in June 1999 and completed in
October 1999. All employees were notified of such termination and their
estimated severance benefits in advance of the Company recording the charge.
The cost of the restructuring resulted in an all-cash, one-time charge against
earnings of $650,000 primarily for severance costs for salaries, benefits
continuation, consultants and outplacement services. As of December 31, 1999
approximately $100,000 was still accrued.
8. STOCKHOLDERS' EQUITY
STOCK TRANSACTIONS
During April 1998, the Company sold 200 shares of its Series F Convertible
Preferred Stock ("Series F Stock") in return for gross proceeds of $10 million.
In February 1999, the initial conversion price of the Series F stock of $14.07
per share of common stock was adjusted downward to $9.77 per share of common
stock. In August 1999, the conversion price was adjusted downward to $5.87 per
share of common stock. In November 1999, the conversion price was adjusted
downward to $4.17 per share of common stock. The conversion price may be further
adjusted downward at the end of each subsequent three-month period if the
Company's common stock does not trade at prices higher than the conversion price
over a period of time during the applicable three-month period. The Series
F10
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
F Stock bears a dividend of 7.5% per annum. In general, the dividend is payable
in shares of common stock or cash at the Company's option. For the years ended
December 31, 1999 and 1998, 84,668 and 22,234 shares of the Company's common
stock were issued as dividends to the Series F shareholders, respectively. The
Company has filed a registration statement with the Securities and Exchange
Commission covering the resale of the common stock issuable upon conversion of
the Series F Stock.
During 1997, the Company completed a $16.0 million private placement of units
consisting of common stock and warrants to purchase common stock of the Company.
These units were purchased at a price of $7.80 per unit by a director of the
Company and the Company's President and Chief Executive Officer. The units sold
in the private placement consisted of 2,051,281 shares of common stock plus
warrants exercisable for 2,051,281 shares of common stock. The warrants, with an
exercise price of $14.00 per share, are callable by the Company if the Company's
common stock trades at $28.00 per share or greater for 45 consecutive days. The
warrants expire on April 17, 2001. The shares and warrants are unregistered.
STOCK OPTIONS
The Company has established various stock option plans to grant options to
purchase common stock to employees and non-employee directors of the Company and
certain other individuals. The plans authorize the Company to issue or grant
qualified and non-qualified options to purchase up to 8,650,000 shares of its
common stock.
Under the terms of the 1989 Stock Plan, options may be granted at not less
than 100% and 85% of fair market value as of the date of grant for qualified
and non-qualified options, respectively. To date, all options have been
issued at 100% of fair market value. These options primarily become
exercisable over a four-year period from the date of grant.
The 1990 Directors' Stock Option Plan provides for the Company to issue or grant
non-qualified options to purchase up to 650,000 common shares to its
non-employee directors. Under the terms of the plan, options will be granted at
the fair market value as of the date of grant. These options become exercisable
in four equal annual installments on each of the first four anniversaries of the
date of grant. Additionally, the 1990 Directors' Stock Option Plan provides that
upon each date of the Company's Annual Meeting of the Stockholders, non-employee
directors are eligible to receive a grant of 6,250 shares at the fair market
value on date of grant with a one-year vesting schedule.
Activity with respect to the various stock plans is summarized as follows:
STOCK WEIGHTED
OPTIONS AVERAGE
(IN THOUSANDS) OUTSTANDING PRICE
--------------- ------------
Balance at December 31, 1996 4,050 $ 4.71
Granted 578 8.34
Exercised (534) 3.42
Cancelled (91) 6.75
-----------
Balance at December 31, 1997 4,003 5.36
Granted 705 10.38
Exercised (713) 3.62
Cancelled (122) 8.94
-----------
Balance at December 31, 1998 3,873 6.48
Granted 1,749 6.88
Exercised (487) 3.80
Cancelled (620) 8.82
===========
Balance at December 31, 1999 4,515 $ 6.60
===========
F11
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Following is a summary of the options outstanding as of December 31, 1999:
WEIGHTED
(IN THOUSANDS) WEIGHTED WEIGHTED AVERAGE
AVERAGE AVERAGE EXERCISE PRICE
RANGE OF OPTIONS REMAINING EXERCISE OPTIONS OF OPTIONS
EXERCISE PRICES OUTSTANDING LIFE IN YEARS PRICE EXERCISABLE EXERCISABLE
------------------------- ------------- --------------- ---------- -------------- -----------------
$ 2.88 - $ 3.25 1,249 3.37 $ 3.23 1,234 $ 3.23
$ 3.50 - $ 6.38 1,138 8.91 4.90 277 5.06
$ 6.56 - $ 8.88 1,184 7.20 7.82 870 7.59
$ 9.13 - $ 18.25 944 7.45 11.60 545 12.51
----------- -----------
4,515 6.63 $ 6.60 2,926 $ 6.43
=========== ===========
At December 31, 1999, 10,905,000 shares of common stock were reserved for the
exercise of stock options and warrants, future dividends on the Series F Stock,
and future purchase of stock by Agouron. See Note 9.
The Company has adopted the disclosure-only provisions of FAS No. 123.
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in 1999, 1998
and 1997, consistent with the provisions of FAS No. 123, the Company's net loss
and loss per share would have been increased to the pro forma amounts indicated
below:
1999 1998 1997
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss - as reported $ 14,968 $ 18,062 $ 33,557
Net loss - pro forma $ 19,645 $ 22,397 $ 36,886
Net loss per share - as reported $ .64 $ .81 $ 1.53
Net loss per share - pro forma $ .83 $ 1.00 $ 1.69
The fair value of each option grant was estimated on the date of grant using the
Black Scholes option-pricing model with the following weighted average
assumptions used for grants in 1999, 1998 and 1997: risk-free interest rates of
6.621%, 4.733% and 5.72%, respectively; expected option lives of 5 years, 6
years and 5 years, respectively; a dividend rate of zero. The volatility factor
assumptions of the expected market price of the Company's common stock were 91%,
84% and 83% for 1999, 1998 and 1997, respectively.
Because FAS No. 123 has not been applied to options granted prior to January 1,
1995, the resulting pro forma compensation cost may not be representative of
that to be expected in future years. The weighted average fair value of options
granted during 1999, 1998 and 1997 was $6.88, $10.38 and $8.34, respectively.
STOCKHOLDER RIGHTS PLAN
The Company has a Stockholder Rights Plan that provides for the distribution of
a preferred stock purchase right (a "Right") as a dividend for each share of the
Company's common stock of record held at the close of business on March 12,
1992, as well as all future stock issuances. Under certain conditions involving
an acquisition by any person or group of 15% or more of the common stock, the
Rights permit the holders (other than the 15% holder) to purchase the Company's
common stock at a 50% discount upon payment of an exercise price of $150 per
Right. In addition, in the event of certain business combinations, the Rights
permit the purchase of the common stock of an acquiror at a 50% discount. Under
certain conditions, the Rights may be redeemed by the Board of Directors in
F12
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
whole, but not in part, at a price of $.01 per Right. The Rights have no voting
privileges and are attached to and automatically trade with the Company's common
stock. The Rights expire February 26, 2002.
9. REMUNE-TM- COLLABORATION WITH AGOURON PHARMACEUTICALS, INC.
During June 1998, the Company and Agouron entered into a binding agreement under
which the Company agreed to exclusively license to Agouron, REMUNE-TM-, its
immune-based therapy under development for the treatment of HIV infection. Under
the terms of the agreement, the Company will manufacture commercial supplies of
REMUNE; and Agouron will have exclusive rights to market REMUNE in North
America, Europe, Japan and certain other countries, if regulatory approvals are
received. As a result of this agreement, the Company may receive as much as $77
million, including license and milestone payments of $45 million, payments to
support research and development of $18 million and $14 million for the purchase
of the Company's common stock, priced at a premium to the market, subject to
certain rights of termination by Agouron. In addition, the two companies will
share all profits from the commercialization of REMUNE on a 50/50 basis, if
REMUNE is successfully developed and receives the necessary regulatory
approvals.
As of December 31, 1999, the Company had received a total of $42 million from
Agouron under the agreement. Agouron will make additional payments upon
achievement of certain milestones. Amounts received in 1999 were comprised of
the four quarterly payments of $5 million each and a $5 million milestone
payment received in February. The quarterly payments represent $12 million to
support research and development and $8 million for the purchase of 965,928
shares of the Company's common stock priced at a premium to the market. Amounts
received in 1998 were comprised of the initial $10 million license fee, a $2
million stock purchase and the first quarterly payment for $5 million to support
research and development and to purchase stock. Agouron purchased 245,014 shares
of the Company's common stock priced at a premium to the market in 1998.
Subsequent to year-end, the Company received a $5 million payment from Agouron
consisting of a $3 million payment for research and development and a $2 million
payment for the purchase of 266,667 shares of unregistered common stock priced
at a premium to the market. This was the final payment in a series of six
quarterly payments that the Company expected Agouron to make to fund research
and development and to purchase unregistered common stock under the June 1998
agreement.
10. GENE THERAPY LICENSE AGREEMENT
In July 1998, the Company entered into a research collaboration and option
agreement with Schering to develop gene therapy products for the treatment of
hepatitis B and C and other diseases. In September 1999 and October 1999, the
Company received payments for $494,000 each under an amendment to extend the
agreement through the remainder of 1999. In March 1999, the Company received a
payment of $988,000 to fund research under this agreement. During 1998, the
Company received approximately $2 million under the agreement. As part of the
agreement, Schering has the option to license the Company's gene delivery system
for additional proprietary Schering genes for other diseases for a royalty on
future product sales, if any. As of December 31, 1999, Schering's obligation to
fund the research program under the collaboration had expired.
11. SECTION 401(k) PROFIT SHARING PLAN
The Company has a defined contribution plan, The Immune Response Corporation
401(k) Savings and Profit Sharing Plan, which covers substantially all employees
of the Company. This plan allows each eligible employee to voluntarily make
pre-tax deferred salary contributions. The Company may make matching
contributions in amounts as determined by the board of directors. The Company
made matching contributions of approximately $113,000, $103,000, and $101,000,
for the years ended December 31,1999, 1998, and 1997, respectively.
F13
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
12. INCOME TAXES
At December 31, 1999, the Company had federal and California tax net operating
loss carryforwards of approximately $161.4 million and $3.5 million,
respectively. The difference between the federal and California tax loss
carryforwards is primarily attributable to capitalized research and development
expenses for California and the 50% limitation of California loss carryforwards.
The federal tax loss carryforwards will begin expiring in 2002, unless
previously utilized, while the California tax loss carryforwards began to expire
in 1995. The Company also has federal and California research and development
tax credit carryforwards of $8.6 million and $3.8 million, respectively. The
federal research and development credits begin expiring in 2002.
Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the
Company's net operating loss and credit carryforwards will be limited because of
a cumulative change in ownership of more than 50% which occurred during 1992.
However, the Company does not believe such change will have a material impact
upon the utilization of these carryforwards. Included in the federal loss
carryforwards are approximately $4.4 million of acquired net operating loss
carryforwards that can only be used to the extent of the separate taxable income
of the acquired company.
The components of the Company's deferred tax assets as of December 31, 1999, and
1998 are as follows:
DECEMBER 31,
--------------------------------
(IN THOUSANDS) 1999 1998
-------------- -------------
Net operating loss carryforwards $ 55,078 $ 50,388
Unused research and development credits 12,387 11,900
Capitalized research and development 7,298 6,321
Other 1,837 1,591
-------------- -------------
76,600 70,200
Valuation allowance (76,600) (70,200)
-------------- -------------
$ --- $ ---
============== =============
Approximately $7.2 million of the valuation allowance at December 31, 1999
relates to benefits of stock options which, when recognized, will be allocated
directly to stockholders' equity.
13. SUBSEQUENT EVENTS
In January 2000, the Company received a $5 million payment from Agouron
consisting of a $3 million payment for research and development and a $2 million
payment for the purchase of 266,667 shares of unregistered common stock priced
at a premium to the market. This was the final payment in a series of six
quarterly payments that the Company expected Agouron to make to fund research
and development and to purchase unregistered common stock under the June 1998
agreement.
On March 3, 2000, the Company completed a sale of 4.65 acres of undeveloped
property adjacent to its facility in Carlsbad, California for approximately $2
million net proceeds.
F14
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
14. QUARTERLY RESULTS (UNAUDITED)
The following unaudited quarterly financial information includes, in
management's opinion, all normal and recurring adjustments necessary to fairly
state the Company's consolidated results of operations and related information
for the periods presented. Net loss per share has been computed using the
weighted average shares outstanding during each quarter. Certain net loss per
share amounts have been revised from amounts previously reported to reflect the
exclusion of dividends and accretion on preferred stock.
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------------- --------------- --------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999
Contract research revenue $ 3,744 $ $3,494 $ 3,494 $ 3,494
Licensed research revenue 5,462 400 333 333
Operating expenses 10,913 10,289 8,980 6,248
--------------- --------------- --------------- ----------------
Loss from operations before restructuring
costs (1,707) (6,395) (5,153) (2,421)
Restructuring costs - 650 - -
Other income 380 353 304 321
--------------- --------------- --------------- ----------------
Net loss (1,327) (6,692) (4,849) (2,100)
Preferred stock items (258) (257) (258) (257)
--------------- --------------- --------------- ----------------
Net loss applicable to common $ (1,585) $ (6,949) $ (5,107) $ (2,357)
=============== =============== =============== ================
Net loss per share $ (0.06) $ (0.28) $ (0.21) $ (0.09)
=============== =============== =============== ================
1998
Contract research revenue $ 1,000 $ - $ 1,488 $ 3,000
Licensed research revenue - 10,667 1,000 518
Operating expenses (9,260) (9,534) (8,493) (10,116)
--------------- --------------- --------------- ----------------
Loss from operations (8,260) 1,133 (6,005) (6,598)
Other income 311 402 524 431
--------------- --------------- --------------- ----------------
Net income (loss) (7,949) 1,535 (5,481) (6,167)
Preferred stock items - (190) (258) (257)
--------------- --------------- --------------- ----------------
Net income (loss) applicable to common $ (7,949) $ 1,345 $ (5,739) $ (6,424)
=============== =============== =============== ================
Net income (loss) per share $ (0.35) $ 0.06 $ (0.25) $ (0.27)
=============== =============== =============== ================
F15