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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001
or

o 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: 0-24469

GENVEC, INC.
(Exact name of Registrant as specified in its charter)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 240-632-0740

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

TITLE OF EACH CLASS
COMMON STOCK, PAR VALUE $0.001 PER SHARE

        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 ý    No o

        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. o

        As of February 28, 2002, the aggregate market value of the voting stock held by non-affiliates of the Registrant based on the closing sale price of such stock as reported by the Nasdaq National Market on such date was $60,451,354. For purposes of this calculation, shares of common stock held by directors, officers and stockholders whose ownership exceeds ten percent of the common stock outstanding at February 28, 2002 were excluded. Exclusion of such shares held by any person should not be construed to indicate that the person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that the person is controlled by or under common control with the registrant.

        As of February 28, 2002, there were 21,731,310 shares of the registrant's common stock, par value $0.001 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        See Part III hereof with respect to incorporation by reference from the registrant's definitive Proxy Statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 and the Exhibit Index hereto.

TABLE OF CONTENTS

THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED ("EXCHANGE ACT"). FORWARD-LOOKING STATEMENTS ALSO MAY BE INCLUDED IN OTHER STATEMENTS THAT WE MAKE. ALL STATEMENTS THAT ARE NOT DESCRIPTIONS OF HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS, BASED ON MANAGEMENT'S ESTIMATES, ASSUMPTIONS AND PROJECTIONS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES. THESE STATEMENTS CAN GENERALLY BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "INTENDS," "MAY," "WILL," "SHOULD," OR "ANTICIPATES" OR SIMILAR TERMINOLOGY. ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE AS OF THE DATE THEREOF, ACTUAL RESULTS, COULD DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DUE TO A NUMBER OF FACTORS, INCLUDING RISKS RELATING TO THE EARLY STAGE OF PRODUCTS UNDER DEVELOPMENT; UNCERTAINTIES RELATING TO CLINICAL TRIALS; DEPENDENCE ON THIRD PARTIES; FUTURE CAPITAL NEEDS; AND RISKS RELATING TO THE COMMERCIALIZATION, IF ANY, OF OUR PRODUCT CANDIDATES (SUCH AS MARKETING, SAFETY, REGULATORY, PATENT, PRODUCT LIABILITY, SUPPLY, COMPETITION AND OTHER RISKS). ADDITIONAL IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM OUR CURRENT EXPECTATIONS ARE INCLUDED IN THE SECTION BELOW ENTITLED "BUSINESS-RISKS AND UNCERTAINTIES." WE WILL NOT UPDATE ANY FORWARD-LOOKING STATEMENT TO REFLECT EVENTS OR CIRCUMSTANCES THAT OCCUR AFTER THE DATE ON WHICH THE STATEMENT IS MADE, EXCEPT AS MAY BE REQUIRED BY LAW.

PART 1

ITEM 1. BUSINESS

OVERVIEW

        We develop gene-based products that cause medically beneficial proteins to be produced at the site of disease. In essence, this is a form of drug delivery that can improve the therapeutic potential of many proteins. We believe that localized production of proteins over a sustained period can enable the proteins to produce a potential benefit while minimizing the overall toxicity that can occur when proteins are introduced directly into the body by systemic administration. We believe that this approach allows us to take advantage of the established biology of known, important proteins. We have used our proprietary drug discovery and development technologies to create a portfolio of product candidates that treat a number of major diseases. Our current areas of focus are diseases of the heart and blood vessels, cancer and diseases of the eye.

        Our product candidates consist of genes and a vehicle, commonly called a vector, that delivers those genes into cells at the site of disease. We have specialized in the use and improvement of a particular type of vector called adenovectors. By incorporating appropriate genes, adenovectors can also be used to develop vaccines. Our cardiovascular programs are in advanced Phase II trials for the treatment of peripheral vascular disease and coronary artery disease. We anticipate starting Phase II trials for our oncology product candidate, TNFerade, in the second half of 2002. Our product candidate for macular degeneration, AdPEDF, is expected to enter the clinic in the second half of 2002. We recently entered into a $10.2 million collaboration with the Vaccine Research Center at the National Institute of Allergy and Infectious Diseases of the National Institutes of Health to develop a preventative AIDS vaccine.

        Since our incorporation in 1992, we have devoted substantially all of our resources to developing various gene-based products and are now focused on our current product candidates.

OUR PRODUCT PROGRAMS

        BioBypass® angiogen for peripheral vascular disease.    This product candidate produces our proprietary form of vascular endothelial growth factor, VEGF(121), in areas of the leg with inadequate blood flow. VEGF(121) is a protein that stimulates the formation of new blood vessels in diseased tissues to improve blood flow. We are now concluding a randomized, double blind, multi-center Phase II clinical trial targeting 105 patients with peripheral vascular disease. Over 2.5 million patients in the U.S. are currently being treated for this disease.

        BioBypass® angiogen for coronary artery disease.    This product candidate produces VEGF(121) in areas of poor blood flow in the heart. We are finishing a 70 patient randomized, controlled Phase II clinical trial in patients with severe heart disease who do not have adequate therapeutic options. We are also concluding a clinical trial to demonstrate the feasibility of using an endocardial injection catheter to deliver BioBypass® angiogen directly to the area of heart muscle with inadequate blood flow. There are approximately 6 million patients in the U.S. with symptomatic chest pain.

        TNFerade for cancer.    This product candidate produces tumor necrosis factor alpha, TNF(alpha), in tumors. The production of TNF(alpha) in tumors is triggered by standard radiation therapy that is normally part of cancer treatment. This proprietary approach enables the sustained production of TNF(alpha) in the tumor, but avoids unwanted spill over of TNF(alpha) into the patients' blood stream. Interim results from our Phase I clinical trial in solid tumors demonstrated objective tumor shrinkage in over half of the patients treated. Phase II trials are expected to begin in the second half of 2002. Currently, approximately 600,000 patients receive radiotherapy as part of their treatment for cancer.

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        AdPEDF for macular degeneration.    This product candidate uses our proprietary PEDF gene to produce pigment epithelial derived factor protein in the eye. PEDF is a potent inhibitor of angiogenesis and blocks unwanted blood vessel formation in the eye. Macular degeneration is a leading cause of blindness and visual disability in the U.S. There are approximately 300,000 new cases of wet age-related macular degeneration diagnosed each year in the U.S. We anticipate starting clinical trials with AdPEDF in the second half of 2002.

        Preventative AIDS vaccine.    We recently were selected by the Vaccine Research Center at the National Institute of Allergy and Infectious Diseases of the National Institutes of Health from a nationwide solicitation to collaborate in the development of a worldwide preventative AIDS vaccine. This $10.2 million program expands the utility of our advanced adenovector technology platform.

BACKGROUND

        Proteins that regulate biological processes may be candidates to become medically beneficial products. Proteins are widely used in the practice of medicine. Despite the commercial success of many protein therapies, the medical use of many proteins is limited by the inability to maintain sufficient concentrations of the protein at the site of disease for a period of time long enough to provide a benefit, while minimizing side effects caused by the protein's presence in other, non-target tissues. In addition, production of proteins requires large-scale cell culture techniques and highly specialized purification and formulation methods. These requirements can be expensive and time consuming. We believe our technology addresses these key therapeutic and development hurdles.

        Our approach for creating effective drug therapies is to use genes to produce proteins at the site of disease. This approach provides us with an opportunity to convert genes that encode well-known potentially therapeutically beneficial effects directly into product candidates that harness the powerful potential of these proteins in a wide variety of applications. We believe that administering a gene-based product, rather than the protein whose production it stimulates, may also overcome many of the production, speed and cost issues associated with other discovery approaches. Our approach also may result in greater control over the location, timing and amount of therapy. Since high concentrations of the protein are produced only at the site of disease, we anticipate that our new treatments will be effective and well tolerated.

        Our product candidates are made up of vectors and genes intended to produce proteins with the potential for medical benefit. To deliver genes for therapeutic applications, we believe the adenovector has the combined advantages of being well tolerated, efficient and flexible, allowing us to create multiple products for a wide variety of diseases. We believe that we can engineer our vectors to achieve useful performance characteristics and that we can produce them in commercial quantities. In addition, we are able to use the same vector technology for functional genomics purposes to help determine the function of a specific gene and to create new drug candidates—reducing the number of steps that are typically involved in developing a new drug.

STRATEGY

        Our goal is to lead in the discovery, development and commercialization of innovative gene-based products that address major medical needs. To achieve this goal, we intend to:

        Develop and commercialize a broad portfolio of products.    We believe that to achieve maximum economic return with acceptable risk, we need to develop and commercialize a broad portfolio of products. Our technology has allowed us to create product candidates for the treatment of a variety of diseases. We intend to use our technology to add to our portfolio of products so that we can increase the potential for significant revenues in the future. In order for us to develop and commercialize multiple product candidates at the same time, we intend to establish relationships with other companies. These relationships would provide funding and clinical and marketing resources for the

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development and commercialization of some of our product candidates. They would also enhance our ability to build our internal capabilities so that we may independently develop and commercialize selected product candidates.

        Sustain and extend our technology position in safe, efficient and targeted gene delivery.    Our core technology enables us to create products that deliver genes that cause local production of therapeutic proteins. We refer to the delivery of our product directly to the site of the disease as "targeted gene delivery." We will continue to enhance our gene delivery capabilities through internal research, collaborations and acquisitions. We expect improvements in our core technology to enhance our drug discovery efforts and lead to additional product candidates. We intend to further strengthen our technologies relating to process development, formulation and manufacturing.

        As part of our strategy, we have recently entered into a contract with the Vaccine Research Center at the National Institutes of Allergy and Infectious Diseases of the National Institutes of Health. Under this agreement, we will develop and manufacture adenovector preventative AIDS vaccine candidates using our proprietary cell lines and adenovector technology. We will also work on developing an advanced, scaleable vaccine production process to support potential commercialization of such product candidates.

PRODUCT DEVELOPMENT PIPELINE

        We have used our proprietary drug discovery and development technologies to create a portfolio of product candidates that treat a number of major diseases. Our current areas of therapeutic focus include cardiovascular disease, particularly insufficient blood flow in the vessels of the heart and legs, cancer and diseases of the eye. Our existing product candidates use proprietary genes that we have licensed from others.

PORTFOLIO OF PRODUCT CANDIDATES

BIOBYPASS® ANGIOGEN

        BioBypass® angiogen is intended to improve blood flow by stimulating new blood vessel formation in patients with insufficient blood flow in the heart and legs.

        Cardiovascular disease is the leading cause of death in the United States and in most other developed countries. In 2002, the American Heart Association ("AHA") states in its Heart and Stroke Statistical Update that over 60 million Americans suffer from cardiovascular disease and that over

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$280 billion is spent annually on the care and treatment of individuals with this disease. Cardiovascular disease is characterized by insufficient blood flow, or ischemia, which deprives tissues of oxygen and other vital nutrients. Ischemia in the heart can lead to severe pain, impaired heart function and heart attack. Ischemia in the legs can lead to intermittent or chronic pain while at rest, and ultimately, to severe infection, for which amputation of a leg is the only current treatment.

        Coronary Artery Disease.    Approximately 55% of deaths attributable to cardiovascular disease are due to coronary artery disease, or blocked arteries in the heart, which affects more than 12 million patients in the United States. In patients with severe coronary artery disease, angioplasty is often used to open blocked vessels. Angioplasty involves the insertion of an inflatable balloon catheter to physically open a narrowed blood vessel. The AHA estimates that in 1999, the latest date for which data is available, 600,000 angioplasty procedures were performed on patients in the United States at an average cost of $20,000 per procedure. Studies have shown that within seven months following angioplasty, the blood vessel narrows again in 20% to 40% of patients, a process called restenosis. Another option for treating more severe coronary artery disease is coronary artery bypass graft surgery, or CABG, which involves bypassing the diseased artery with a blood vessel taken from another part of the body. The AHA estimates that in 1999 more than 570,000 CABG procedures were performed in the United States at an average cost of $30,000 per procedure. These procedures are highly invasive and frequently need to be repeated. We believe that there is a substantial need for products that are less invasive and provide longer lasting, improved results and reduced deaths in patients undergoing angioplasty or coronary artery bypass surgery. In addition, some coronary artery disease patients are ineligible for angioplasty or coronary bypass procedures. For these patients, new treatments are essential.

        Peripheral Vascular Disease.    Peripheral vascular disease is characterized by the progressive deterioration of blood flow to the legs. Approximately 5% of individuals over the age of 50, or 8 million people in the United States, have peripheral vascular disease, resulting in significant medical costs. The cost of surgical procedures used to treat peripheral vascular disease is in excess of $3 billion annually. Current therapies for the treatment of peripheral vascular disease, ranging from changes in lifestyle and exercise programs to angioplasty or blood vessel grafts, generally do not stop the progress of the disease. In addition, peripheral vascular disease patients who have widespread disease or vessels that are too small to access tend to be poor candidates for angioplasty or blood vessel grafts, which is the bypassing of the diseased artery with a blood vessel taken from another part of the body. Vascular surgeons perform over 100,000 amputations per year, predominantly for end-stage peripheral vascular disease, in the United States alone.

        BioBypass® Angiogen.    We believe that restoring blood flow to areas of insufficient blood flow through the formation of new blood vessels, a process known as angiogenesis, offers one of the most promising treatments for patients with coronary artery disease and peripheral vascular disease. Angiogenesis, the body's natural response to insufficient blood flow, is triggered by proteins such as vascular endothelial growth factor (VEGF). Providing VEGF to ischemic tissue is intended to enhance the body's normal response and stimulate additional blood vessel formation. Therapeutic use of the protein has been limited however, because the VEGF protein is rapidly cleared by the body and can be toxic when administered generally throughout the body.

        Our lead product candidate, BioBypass® angiogen, uses one of our proprietary vectors to deliver a proprietary gene, VEGF(121), to cells of the heart or legs. The VEGF protein has a high degree of specificity for the cells involved in new blood vessel formation, thereby reducing the potential for unwanted side effects. We believe that local administration of BioBypass® angiogen to the diseased tissue using injection catheters or syringes results in production of the VEGF protein where it is needed and avoids the toxicity associated with delivering the protein throughout the body. We have an exclusive worldwide license for all gene therapy products of the VEGF(121) gene from Scios, Inc.

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        Collaboration with Warner-Lambert.    In July 1997, we entered into a collaboration with The Warner-Lambert Company, which was acquired by Pfizer Inc. in June 2000, to research, develop and commercialize gene-based products incorporating the VEGF gene for the treatment of coronary artery disease and peripheral vascular disease. We granted Warner-Lambert an exclusive, royalty-bearing license to manufacture and sell products resulting from our relationship for the treatment of coronary artery disease and peripheral vascular disease worldwide, excluding Asia. Under the terms of our collaboration, Warner-Lambert had the primary responsibility for clinical development, regulatory approval, manufacturing and commercialization of collaboration products.

        On January 22, 2002, Pfizer elected to discontinue co-development of BioBypass® angiogen with us, thus returning to us its development and commercialization rights. Under the terms of our collaboration agreement, Pfizer will be responsible for all development costs associated with the ongoing Phase II clinical trials of BioBypass® angiogen, including the costs relating to the orderly transfer to us of the Investigative New Drug applications through July 22, 2002 for both coronary artery disease and peripheral vascular disease.

        Clinical Status.    BioBypass® angiogen is currently in two separate Phase II clinical trials to evaluate its potential use in the treatment of coronary artery disease and peripheral vascular disease. Warner-Lambert is conducting the Phase II program. As of February 28, 2002, over 90% of the patients have been enrolled in the ongoing Phase II trials. It is anticipated that all patients will be treated by the end of April 2002. GenVec is working with Pfizer to effect a smooth transition of the BioBypass® angiogen program. The Phase II clinical studies are designed to be supportive of registration if an application is filed with the U.S. Food and Drug Administration, or FDA, for product approval. In our earlier Phase Ib clinical trials, we treated a total of 66 patients by direct injection into the heart and legs and observed that BioBypass® angiogen was well tolerated. The initial clinical studies of 31 patients with coronary artery disease, although not placebo-controlled, did include measures of exercise capacity, clinical symptoms, new blood vessel formation and blood flow. The initial clinical study in 35 peripheral vascular disease patients included similar measures and, as in the coronary artery disease studies, supported the initiation of Phase II trials.

        The clinical program plans to assess the effectiveness, toleration and dosage of BioBypass® angiogen administered through a number of different delivery methods, including:

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endocardial injection, from inside the heart, by interventional cardiologists using a catheter;



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epicardial injection, from outside the heart, by cardiac surgeons using a syringe; and



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intramuscular injection by vascular physicians, including surgeons and vascular medicine physicians, using a syringe.

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        The table below summarizes the status of the clinical program for BioBypass® angiogen.

BIOBYPASS® ANGIOGEN CLINICAL PROGRAM

(1)

Targeted patient enrollment numbers.

(2)

Open label, dose-escalation indicates that the patient receives increasing doses of the study medication in an open label fashion, that is, the physician and the patient both know that the patient received the study medication. In a randomized, double-blind, placebo controlled study, neither the patient nor the physician administering the treatment knows whether the patient is receiving the study medication or a placebo.

        The phase II clinical studies are randomized and controlled and will include measures of exercise capability, clinical symptoms, new blood vessel formation and blood flow at time points of three, six and twelve months post treatment. Initial clinical results are expected to be available in late 2002 or early 2003. We may seek a corporate partner to help us develop and commercialize one or both of the disease indications being tested.

TNFERADE

        Cancer is the second leading cause of death in the United States. Approximately 60% of all cancer patients in the U.S. receive radiation therapy as part of their treatment.

        We are developing a new product candidate, TNFerade, to provide benefit in conjunction with radiation therapy for cancer. TNF(alpha) is a protein with a well-documented anti-cancer effect. The TNF(alpha) protein was approved for marketing in Europe for the treatment of two types of cancer, sarcoma and melanoma, in the arms and legs. In accordance with this approval, TNF(alpha) must be delivered in a manner that requires complex surgery under a general anesthetic to isolate delivery to the limb and avoid the toxicity of TNF(alpha) when administered generally throughout the body. This method of administration is applicable to very few cancers and is cumbersome, expensive, and not without risk. TNFerade, which incorporates a proprietary adenovector carrying the gene coding for TNF(alpha), is delivered locally to the tumor site and combined with radiation therapy. We have designed TNFerade so that the maximum gene expression is caused by radiation therapy in order to enhance the local therapeutic effect of TNF(alpha) while minimizing toxicity. We licensed rights to the TNF(alpha) gene in the United States from Asahi Chemical Industry Co., Ltd.

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        Our preclinical studies indicate that TNFerade enhances the effect of radiation in several animal models of human cancer. The combined effect of radiation and TNFerade is believed to be related to selective disruption of the blood vessels in the tumor. We observed damage to the blood vessels and rapid tumor death in the tumors but not in the surrounding normal tissues, indicating a selective effect on diseased tissue. We initiated Phase I clinical studies for TNFerade in the first quarter of 2001. In November 2001, we announced clinical results in the first seven patients treated with TNFerade in the Phase I clinical trial. In a variety of different tumors, all patients experienced tumor shrinkage with over one-half of the patients experiencing tumor shrinkage greater than 50% and two of the seven patients experiencing a complete (100%) response in the treated tumor. Complete Phase I clinical results will be presented at the American Society of Clinical Oncology (ASCO) Annual Conference in May 2002. We plan to initiate Phase II trials in several different solid tumors in the second half of 2002. We may seek a corporate partner to help us develop and commercialize TNFerade.

ADPEDF PRODUCT PROGRAM

        The leading causes of blindness in the developed world are macular degeneration and diabetic retinopathy, a secondary effect of diabetes. Both macular degeneration and diabetic retinopathy involve an excess growth of abnormal blood vessels in the eye that can lead to blindness. Macular degeneration is a progressive eye disease in which new capillaries grow behind the retina. These capillaries can bleed and scar, damaging light-sensing nerve cells and effectively destroying a large portion of a person's sight. There are approximately 300,000 new cases of "wet" age-related macular degeneration diagnosed in the U.S. annually. In "wet" macular degeneration, the new capillaries leak blood or a fluid into a portion of the eye, which damages vision cells. Current treatments for macular degeneration are only partially effective.

        Diabetic retinopathy, the abnormal growth of new blood vessels within the retina, is the leading cause of blindness and visual disability in the United States and Europe. Diabetes is estimated to affect over 120 million people worldwide. Findings suggest that after 15 years of diabetes, 2% of diabetic patients become blind while an additional 10% develop severe visual impairments. Ultimately, many diabetic patients will progress to have diabetic retinopathy. The standard treatment, involving a laser procedure, is often initially effective, but it can damage the retina and surrounding cells and often loses its effectiveness after repeated treatment. We are developing the AdPEDF product candidates to treat macular degeneration and diabetic retinopathy. The AdPEDF product candidates use an adenovector to produce PEDF, the most potent known natural inhibitor of blood vessel growth in the eye. PEDF is a secreted protein that is normally produced in the eye and regulates new blood vessel formation.

        In the first quarter of 2000, we obtained an exclusive license to use the PEDF gene for all gene therapy applications in the eye from the Public Health Service (made up of The National Institutes of Health, the FDA, and the Centers for Disease Control and Prevention). In the fourth quarter of 2000, we obtained an exclusive license to certain method patents invented by investigators at Northwestern University for inhibiting new blood vessel formation using the PEDF gene.

        During 2001, we generated preclinical data indicating that administration in the eye of a vector containing the PEDF gene results in substantial inhibition of new vessel formation in the eye in an animal model of human disease. We have also shown that our vectors can be dosed multiple times in the eye and cause the repeat production of protein from the delivered gene. Our product candidates appear to be well tolerated and we plan to initiate a Phase I trial in the second half of 2002 using AdPEDF for the treatment of macular degeneration. We are seeking a corporate partner to help us develop and commercialize our AdPEDF product candidates.

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DRUG DISCOVERY AND DEVELOPMENT PLATFORM

        We have focused on developing technology to effectively and selectively deliver genes to cause the production of proteins at the location needed to treat disease. Using our technology, we believe we can:

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rapidly put genes into vectors to evaluate gene function and usefulness in therapy;



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deliver our product candidates locally to specific organs or cell types to avoid systemic exposure;



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achieve highly efficient gene delivery to target cells with lower dosages;



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control the rate and duration of gene expression directed by our product candidates to allow flexibility in treating different diseases; and



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produce commercial quantities of our product candidates in a stable, easy-to-use form.

        In constructing our product candidates, we combine a gene with a vector. We derive our vectors from a naturally occurring virus, called an adenovirus. In humans, adenoviruses reproduce in certain tissues, spread and can cause a form of the common cold. We design our vectors so that they cannot reproduce themselves. We do this to limit toxicity, including unwanted effects on target cells and the surrounding tissue, and to reduce any immune response to our vectors. We have multiple versions of vectors with one or more deleted genes that cannot reproduce themselves. Our intellectual property extends to cover the production of stocks of vectors that do not contain any virus that can reproduce itself.

        When administered to tissues, our test vectors enter certain cells and produce the protein encoded by the inserted gene. These test vectors can be used for functional genomics purposes to help determine the function of a specific gene and its potential use as a therapy, as well as to create product candidates. The benefits of vectors can be increased measurably for both functional genomics and product development purposes if the vector's ability to enter desired cells and tissues is broadened or specified. Unlike other vector systems, adenovectors have the potential to be readily re-engineered to alter their performance characteristics, including their ability to efficiently deliver genes to a wide range of tissues or to only select cells in the targeted tissue.

        We believe that adenoviruses are an excellent starting point for generating vectors because they are highly efficient methods for delivering genes, can be readily modified and have the following safety characteristics:

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adenoviruses do not integrate into the DNA of the target cell, thereby minimizing the potential for mutations that can occur with other vector systems;



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adenoviruses are naturally eliminated from cells and tissues; and



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vectors derived from adenoviruses have been well tolerated in clinical testing when administered locally. Thousands of patients have been treated, with very few serious adverse events related to the vector.

TECHNOLOGY FOR LOCAL DELIVERY AND EXPRESSION OF GENES

        Use of delivery devices.    To achieve local production of proteins, we administer our products locally to the site of disease using medical devices, such as injection catheters or syringes. Direct administration of our products into diseased tissue allows us to increase effectiveness by achieving high concentrations of the protein at disease sites while improving safety by significantly avoiding exposure throughout the body. For example, we are using needle-injection catheters so that the interventional cardiologist can administer BioBypass® angiogen directly into the diseased areas of the heart.

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        Delivering genes to cells.    We believe that we are a leader in understanding and modifying the molecular interactions that specify how vectors derived from adenoviruses bind to cells. Adenoviruses enter cells by binding to receptors on the surface of the cell.

        In our BioBypass® angiogen program, we have taken advantage of our adenovector's natural binding to the muscle cells found in the heart. However, because not all disease targets contain this adenovirus receptor, we have developed technology to direct the binding of our vectors to different target receptors to enable a broad range of therapies. We can alter our vectors so that we can add new binding specificities.

        We believe that we have a broad and advanced intellectual property position in creating adenovectors with new binding sites to deliver therapeutic genes to specified cells.

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UTV Technology. Our proprietary Universal Transduction Vector, or UTV, technology allows us to create product candidates that deliver genes to essentially all cell types, including those types that do not contain the adenovirus receptor on their surface. We have engineered our vectors to contain a new binding site that allows binding to all cells that we have tested to date.



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DART Vectors. We have developed Directed And Restricted Tropism, or DART, vectors that enable us to create product candidates that deliver genes only to specific cells. In order to achieve selective delivery to target cells, we remove the ability of the vector to bind to the cell surface receptors. We then insert new binding sites into the vector that bind to specific receptors found on the surfaces of target cells. We have a broad proprietary position covering DART vectors, including special cell lines required for their production.

        We currently use both UTV technology and DART vectors in our drug discovery process and we may incorporate these technologies into TNFerade and our AdPEDF product candidates.

        Control of gene expression.    Our technology allows us to control the location, duration and rate of therapeutic gene expression. We control gene expression by inserting a sequence of DNA, called a promoter, into our vectors adjacent to the therapeutic gene. For some diseases, long-term expression of the therapeutic gene is required to achieve a clinical benefit. Using our technology, we have been able to achieve therapeutic gene expression for several months. In TNFerade, we intend to achieve local production of the TNF(alpha) gene in cancerous tissue undergoing radiation treatment by inserting a specific promoter that will increase protein production after radiation, enhancing protein concentration in the cancer tissue receiving radiation, thereby increasing effectiveness and decreasing the potential for toxicity. We have broad proprietary technology for the use of radiation induced gene expression in TNFerade.

TECHNOLOGY FOR DRUG DISCOVERY AND TESTING

        Rapid and accurate construction of test vectors is an important early step in our drug discovery programs. Our test vectors contain one or more therapeutic genes, appropriate promoters to control gene production and may contain our DART vectors or UTV technology. We believe that it is desirable to evaluate multiple test vectors in preclinical testing in order to identify a product candidate with the preferred efficacy and safety profile. To do this, we have developed proprietary technologies for the rapid construction of test vectors.

        Standard techniques for constructing test vectors rely on assembly in mammal cells and typically require several months. Using our proprietary technology known as the AdFAST system and the AdACE system, we can assemble test vectors in a few weeks. We can also modify any region of the test vector and have the flexibility to place one or more therapeutic genes at different locations in these test vectors. This simplifies and speeds vector construction where multiple modifications are required at a specific site.

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TECHNOLOGY FOR PRODUCTION, PURIFICATION, QUALITY ASSESSMENT AND FORMULATION

        Our proprietary production technology and know-how facilitates the production, purification, quality assessment and formulation of gene-based products. The structure of our core vectors and the procedures for their production and purification enables us to minimize the presence of contaminants. We have an issued U.S. patent broadly covering stocks of adenovectors that cannot reproduce themselves. We believe our proprietary positions in these areas provide a competitive advantage. We expect to use substantially similar methods to produce, purify, assay and formulate many of our adenovector products. This allows us to accelerate product development in a cost effective manner. We have developed production and quality assessment technology suitable for late stage clinical testing of BioBypass® angiogen.

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Production and Scale Up. We produce our adenovectors using cell lines grown under standardized and controlled conditions. We have developed specialized cell lines for production of our vectors. We have designed our production processes for commercial scale production and to reduce the potential for contamination.



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Purification. We have proprietary methods for the purification of our vectors that we believe are suitable for commercial scale as well as for small scale use in discovery and testing of new product candidates.



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Quality Assessment. We have established proprietary methods to assess and confirm the quality and purity of vectors for research purposes and clinical testing. We use advanced techniques to determine the molecular weight of our product candidates as a means to establish product consistency and purity. We have an issued U.S. patent covering this technology. We believe these methods are also suitable for quality assessment of commercial production.



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Formulation. We have developed novel product formulations that improve the stability of our vectors and are covered by an allowed U.S. patent application. Our formulation allows products to be conveniently stored, shipped and used. For research purposes, our formulation enhances the ease and reproducibility of testing.

COLLABORATIVE RELATIONSHIPS

        We establish collaborations with pharmaceutical companies and other organizations to enhance our ability to discover, evaluate, develop and commercialize multiple product opportunities.

        Collaboration with The Warner-Lambert Company.    In July 1997, we entered into a collaboration with The Warner-Lambert Company to research, develop and commercialize gene-based products incorporating the VEGF gene for the treatment of coronary artery disease and peripheral vascular disease. In June 2000, Pfizer Inc. acquired Warner-Lambert and Warner-Lambert became a wholly-owned subsidiary of Pfizer. Warner-Lambert had the primary responsibility for clinical development, regulatory approval, manufacturing and commercialization of products that we develop under this collaboration, including BioBypass® angiogen.

        As previously announced in January 2001, Warner-Lambert terminated the final (fifth) year of the preclinical program under our collaboration agreement in July 2001. The clinical development of BioBypass® angiogen, currently in Phase II trials for the treatment of coronary artery disease and peripheral vascular disease, continued to progress. On January 22, 2002, Pfizer elected to discontinue co-development of BioBypass® angiogen with us, thus returning to us its development and commercialization rights. Under the terms of our collaboration agreement, Pfizer will be responsible for all development costs associated with the ongoing Phase II clinical trials of BioBypass® angiogen through July 22, 2002, including the costs relating to the orderly transfer to us of the Investigative New Drug applications for both coronary artery disease and peripheral vascular disease.

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        Under the terms of the collaboration, we have received more than $60 million, in non-refundable research and development funding, milestone payments, equity purchases and license fees. As part of the collaboration, Warner-Lambert agreed to purchase up to an aggregate of $20.0 million of our capital stock upon the achievement of specified milestones. As of December 31, 2001, Warner-Lambert has purchased $15.0 million of our capital stock. Warner-Lambert is required to purchase, at our election, up to $5.0 million of our capital stock upon showing that a manufacturing process has been established for production of bulk product at a scale and site suitable for pivotal clinical studies as shown by the first collaboration product. The purchase price for all of these equity purchases is 125% of the fair market value of the securities. Warner-Lambert has also committed to guaranteeing a loan to us in a principal amount of $5.0 million. In 1999, we used $2.5 million of the loan guarantee to assist in the financing of our research and development/corporate headquarters facility. In December 2001, Pfizer provided the Company with a cash payment of $343,000 in the form of an interest rate differential payment in satisfaction of its remaining $2.5 million loan guarantee obligation.

        Collaboration with Fuso Pharmaceuticals Industries, Ltd.    In September 1997, we established a collaboration with Fuso to conduct research and to identify, evaluate and develop gene therapy products for the treatment of cancer. Under the terms of the collaboration, we will receive $750,000 annually for five years, subject to Fuso's right to terminate the collaboration upon 90 days prior written notice. As part of the collaboration, we granted Fuso an exclusive, royalty-bearing license to develop and commercialize products developed under the collaboration for the treatment of cancer in Japan and at Fuso's option, Korea and Taiwan. Fuso will be responsible for the development and commercialization of any products in its territory. We will receive additional payments for the achievement by Fuso of specified product development and regulatory milestones, with the earliest of such payments not expected in the near term. We will also receive royalties on the sale of any such products commercialized by Fuso. We have retained all rights to develop and commercialize these products for the treatment of cancer in the rest of the world, and generally for all other uses worldwide, independently and with third parties.

        Collaborations with academic institutions.    We sponsor research at leading academic institutions to enhance our ability to discover, evaluate and develop new product candidates. Our academic collaborations currently include agreements with Weill Medical College of Cornell University, Indiana University and the Foundation for Fighting Blindness.

LICENSES FOR THERAPEUTIC GENES

        To create our product candidates, we combine our vectors with genes intended to produce proteins with therapeutic potential. We have secured licenses to many genes for this purpose. We often seek to obtain exclusivity, consistent with our business needs, when securing such licenses. In return for the rights we receive under our gene licenses, we typically are required to pay royalties based on any commercial sales of the applicable product during a specified time period, as well as provide additional

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compensation, including up-front license fees and product development-related milestone payments. Our gene licenses include:

        Any of our licenses may be terminated by the licensor if we are in breach of a term or condition of the license agreement, or if we become insolvent. In addition, some of our licenses require us to achieve specific milestones.

PATENTS, LICENSES AND PROPRIETARY RIGHTS

        We generally seek patent protection for our technology and product candidates in the United States and abroad. We have submitted patent applications that are pending in the United States and other countries. The patent position of biotechnology firms generally is highly uncertain and involves complex legal and factual questions. Our success will depend, in part, on whether we can:

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obtain patents to protect our own products;



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obtain licenses to use the technologies of third parties, which may be protected by patents;



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protect our trade secrets and know-how; and



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operate without infringing the intellectual property and proprietary rights of others.

        Patent rights; licenses.    Our licensors and we have patents and continue to seek patent protection for technologies that relate to our product candidates, as well as technologies that may prove useful for future product candidates. As of February 28, 2002, we held or had licenses to 357 issued, allowed or pending patents worldwide, of which 51 are issued or allowed in the U.S. These patents and patent applications pertain to genes, vectors, cell lines used to grow vectors, gene expression control elements, vector targeting entities, methods of constructing vectors that include beneficial genes, methods of producing such vectors with beneficial genes (including purification, quality control and assay techniques), methods of storing and shipping vector stocks, administration of vectors with beneficial genes, vector containment and regulation techniques and devices for carrying out the administration of such vectors with beneficial genes.

BioBypass® Angiogen.    We have an exclusive license, under a patent expiring in 2010, for all gene therapy products relating to the VEGF(121) gene. In addition, we have pending patent applications pertaining to the special cell lines required for the production of particular adenovectors, including a cell line we use in the production of BioBypass® angiogen, as well as an issued patent, expiring in 2014, pertaining to stocks of adenovectors that cannot reproduce themselves. We also have pending patent applications pertaining to the delivery of angiogenic substances, such as our BioBypass® angiogen. However, third parties have patents and pending patent applications for other forms of the VEGF gene, and these third parties or their licensees may develop products using these forms of the gene. Third parties also may have

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pending patent applications for adenovectors, including possibly the adenovector used in the BioBypass® angiogen. We are aware of the issued patents and pending patent applications of third parties relating to special cell lines required for the production of particular adenovectors, including a cell line we use in the production of our BioBypass® angiogen, as well as issued patents and pending patent applications relating to the delivery, including through the use of adenovectors, of therapeutic substances to the heart and other tissues, similar to our BioBypass® angiogen. It could be alleged that our BioBypass® angiogen conflicts with such existing or future patents.

TNFerade.    We have a nonexclusive license under the U.S. patent, expiring in 2006, relating to the TNF(alpha) gene and its use. In addition, we have issued patents and pending patent applications pertaining to the adenovector contemplated for use with TNFerade, regulatory elements particularly suited for use with TNFerade, and methods of using TNFerade. In particular, we have an issued U.S. patent, expiring in 2014, covering the use of a spacer sequence positioned in a particular location in certain adenovectors for improving the production of the adenovectors, including TNFerade. Also, we have issued U.S. patents expiring between 2010 and 2016 pertaining to radiation-induced gene expression and a radiation-inducible promoter enabling controlled production of therapeutic proteins from gene therapy products, including TNFerade. We are aware, however, of pending patent applications of third parties pertaining to adenovectors contemplated for use with TNFerade. It could be alleged that TNFerade conflicts with patents that may issue on these patent applications.

AdPEDF product candidates.    We have exclusive rights, under a patent expiring in 2015, to use the PEDF gene for all gene therapy applications in the eye. We have issued patents and pending patent applications pertaining to particular adenovectors and methods of their use, including adenovectors and related methods that may be utilized in conjunction with our AdPEDF product program. However, we are aware of issued patents and pending patent applications of third parties relating to various facets of gene therapy to the eye. It could be alleged that our AdPEDF product candidates conflict with such existing or future patents.

UTV technology and DART vectors.    We have issued patents, expiring in 2014 and 2015, and pending patent applications covering our UTV technology that allows for the delivery of genes in adenovectors to essentially all cell types, as well as our DART vectors, for the purpose of creating products that deliver genes in adenovectors only to selected cells, including special cell lines required for the production of the UTV and DART vectors. We are aware, however, of the issued patents and pending patent applications of third parties relating to such vectors. It could be alleged that our UTV and DART vectors conflict with such existing or future patents.

AdFAST, AdACE AND AdLIBRARY systems.    We have pending patent applications relating to our AdFAST and AdACE systems for constructing adenovectors, including adenovectors useful in therapeutic applications such as our product candidates. Moreover, we have pending patent applications relating to specialized uses of libraries of adenovectors containing many thousands of candidate therapeutic genes, which we refer to as our AdLIBRARY system. These libraries may be particularly well suited for screening genes for a desired biological function. Third parties, however, have issued patents and are pursuing pending patent applications relating to similar systems. It is possible that these or other third parties could use such similar systems in competition with our AdFAST and AdACE systems to construct adenovectors and/or to screen gene libraries. In addition, it could be alleged that our AdFAST, AdACE and AdLIBRARY systems conflict with such existing or future patents.

Production, purification, quality assessment and formulation technology.    We have issued patents, expiring in 2017 and 2018, and pending patent applications pertaining to vector production,

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purification, quality assessment and formulation, including with respect to adenovectors such as contemplated for use with our product candidates. In particular, we have pending patent applications covering specialized cell lines for production of both small and large volumes of our vectors, the process for propagating our vectors, the purification of our vectors applicable to both research and commercial scales, methods of assessing and confirming the quality and purity of our vectors for late-stage clinical testing and commercialization, including an issued patent on the use of techniques to determine molecular weight as a means to establish product consistency and purity, and product formulations that improve the stability of adenovectors and allow our vectors to be conveniently stored, shipped and used. There exist, however, issued patents and pending patent applications of third parties relating to these and other aspects of production, purification, quality assessment and formulation technology. It could be alleged that our production, purification, quality assessment and formulation technology conflicts with such existing or future patents.

We anticipate that our current and future licensors and we will continue to seek to improve existing technologies and to develop new technologies and, when possible, secure patent protection for such improvements and new technologies.

        Trade secrets.    To a more limited extent, we rely on trade secret protection and confidentiality agreements to protect our interests. It is our policy to require our employees, consultants, contractors, manufacturers, collaborators and other advisors to execute confidentiality agreements upon the commencement of employment, consulting or collaborative relationships with us. We also require signed confidentiality agreements from any entity that is to receive confidential data. With respect to employees, consultants and contractors, the agreements generally provide that all inventions made by the individual while rendering services to us shall be assigned to us as our property.

        Nevertheless, these precautions might not prevent proprietary information from being disclosed to others, or others may independently develop substantially equivalent proprietary information or otherwise gain access to our trade secrets. We may not be able to meaningfully protect our trade secrets. Finally, it is possible that not all inventions made by individuals while rendering individual services to us will be assigned to us. In the case of a collaborative arrangement, which requires the sharing of information, our policy is to make available to our collaborator only such information as is relevant to the arrangement, under controlled circumstances, and only during the contractual term of the collaborative arrangement, and subject to a duty of confidentiality on the part of our collaborator. However, these measures may not adequately protect our information. Any material leak of confidential information into the public domain or to third parties may have a material adverse effect on our business, financial condition and results of operations.

COMPETITION

        Competition in the discovery and development of new methods for treating disease is intense. We face, and will continue to face, intense competition from pharmaceutical and biotechnology companies, as well as academic and research institutions and government agencies, both in the United States and abroad. We face significant competition from organizations that are pursuing the same or similar technologies used by us in our drug discovery efforts and from organizations that are developing pharmaceuticals that are competitive with our potential products. Many of our competitors, either alone or together with their collaborative partners, have substantially greater financial resources and larger research and development staffs than we do. In addition, many of these organizations, either alone or together with their collaborators, have significantly greater experience than we do in developing products, undertaking preclinical testing and clinical trials, obtaining FDA and other regulatory approvals of products and manufacturing and marketing products. Additional mergers and acquisitions in the pharmaceutical industry may result in even more resources being concentrated with our competitors. These companies, as well as academic institutions, governmental agencies and private

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research organizations, also compete with us in recruiting and retaining highly qualified scientific personnel and consultants. Our ability to compete successfully with other companies in the pharmaceutical field will also depend to a considerable degree on the continuing availability of capital to us.

        Future competition will likely come from existing competitors, including competitors with rights to proprietary forms of the genes or proteins expressed by the genes that we currently use in our product development programs and competitors with rights to gene delivery technologies, as well as other companies seeking to develop new treatments. We are aware of new product development efforts, which may compete with BioBypass® angiogen, being pursued by, among others, Chiron Corporation and Genentech, Inc. using therapeutic proteins and by Collateral Therapeutics, Inc. and Genzyme General using gene transfer. Competitors or their collaborators may identify important new drug discovery, genes or gene delivery technologies before us, or develop gene-based therapies that are more effective than those developed by our corporate collaborators or us or obtain regulatory approvals of their drugs more rapidly than us. We expect that competition in this field will intensify.

        We are aware of products under development or manufactured by competitors that are used for the prevention or treatment of diseases we have targeted for product development. For example, some companies are evaluating laser-based devices as an approach to improve blood flow in patients with coronary artery disease. Various companies are developing biopharmaceutical products that potentially compete with our product candidates. These include Introgen Therapeutics, Inc., Onyx Pharmaceuticals and Schering-Plough Corporation, which are developing adenoviral vectors to treat cancer. In addition, Alcon Laboratories, Inc., Allergan and EyeTech Pharmaceuticals, Inc. are developing inhibitors of blood vessel growth to treat macular degeneration and diabetic retinopathy. Some of these product candidates are in clinical development.

        We believe that our competitive success will be based on the efficacy and safety of our products, our ability to create and maintain scientifically advanced technology, attract and retain skilled scientific and management personnel, obtain patents or other protection for our products and technology, obtain regulatory approvals and manufacture and successfully market our products either independently or through outside parties. We will rely on corporate collaborators for support of some product candidates and enabling technologies and intend to rely on corporate collaborators for the development, manufacturing and marketing of some future product candidates. Generally, our strategic alliance agreements do not preclude the corporate collaborator from pursuing development efforts utilizing approaches distinct from that, which is the subject of the alliance. Our product candidates, therefore, may be subject to competition with a potential product under development by a corporate collaborator.

MANUFACTURING AND SUPPLY

        We currently rely on third-party manufacturers for current Good Manufacturing Practice, or cGMP, production of our product candidates for clinical purposes. We have a research and development facility and have established laboratories and staff to support the non-cGMP production and process development of more advanced manufacturing processes and product characterization methods for our product candidates. We believe that much of the production and assay technology that has been developed for BioBypass® angiogen is suitable for our other product development programs.

        We intend to continue developing our own product development and manufacturing capability while utilizing third-party contractors where we lack sufficient internal capability. This effort will require significant resources and will be subject to ongoing government approval and oversight.

        We currently have only one supplier for certain of our manufacturing components, including components necessary for BioBypass® angiogen. Currently, we procure raw materials, known as resins, for our product purification and testing methods from Applied Biosystems. We also procure nutrients used to support the growth of microorganisms or other cells from JRH Biosciences, Inc. We have plans

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in place to develop multiple suppliers for all critical supplies before the time we would put any of our product candidates into commercial production.

MARKETING AND SALES

        We continue to explore opportunities for corporate alliances and partners to help develop, commercialize and market our products, although we are prepared to develop and commercialize each product candidate independently, if necessary. Our strategy is to enter into collaborative arrangements with pharmaceutical and other companies for development, manufacturing, marketing and sales of our products that will require broad marketing capabilities and overseas marketing. These collaborators are generally expected to be responsible for funding or reimbursing all or a portion of the development costs, including the costs of clinical testing necessary to obtain regulatory clearances and for commercial scale manufacturing, in exchange for rights to market specific products in particular geographic territories.

        We presently have all rights to TNFerade and AdPEDF product candidates. With Pfizer's decision in January 2002 to terminate our collaboration, all development and commercialization rights for BioBypass® angiogen will be returned to us. We are currently conducting Phase II clinical trials with BioBypass® angiogen in two indications, coronary artery disease and peripheral vascular disease; Phase I clinical trials with TNFerade for the treatment of cancer in combination with radiation therapy and are currently conducting preclinical development studies for the AdPEDF product candidates. These activities should provide useful data for these programs while preserving our opportunities for commercialization, either alone or with a corporate partner. We may, in the future, consider manufacturing or marketing certain products directly and co-promoting certain products if we believe it is appropriate under the circumstances.

GOVERNMENT REGULATION

        Regulation of pharmaceutical products.    The development, production and marketing of any pharmaceutical products developed by us or our collaborators will be subject to regulations by the United States and non-U.S. governmental authorities. In the United States, new drugs are subject to extensive regulation under the Federal Food, Drug and Cosmetic Act, and biological products are subject to regulation both under provisions of that Act and under the Public Health Service Act. The FDA regulates, among other things, the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, advertising and promotion of biologics and new drugs. The process of obtaining FDA approval for a new product is costly and time-consuming.

        The steps required by the FDA before our proposed products may be marketed in the United States include:

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preclinical tests;



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submission to the FDA of an Investigational New Drug Application, or IND, which must become effective before human clinical trials may commence;



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adequate and controlled human clinical trials to establish the safety and efficacy of the drug or biologic in our intended application;



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submission to the FDA of a New Drug Application, or NDA, for drugs, or a Biologic License Application, or BLA, for biologics; and



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FDA approval of the NDA or BLA before any commercial sale or shipment of the drug.

        In addition to obtaining FDA approval for each product, each domestic manufacturing establishment must be registered with the FDA, is subject to FDA inspection and must comply with cGMP regulations. To supply products for use in the United States, including clinical trials, non-U.S.

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manufacturing establishments, including third-party facilities, must comply with cGMP regulations and are subject to periodic inspection by the FDA or by corresponding regulatory agencies in their home country under reciprocal agreements with the FDA.

        Preclinical studies may take several years to complete and there is no guarantee that the FDA will permit an IND based on those studies to advance to clinical testing. Clinical trials generally take two to five years to complete and are typically conducted in three sequential phases, which often overlap. After the completion of all three phases, if the data indicates that the drug or biologic product is safe and effective, a NDA or BLA is filed with the FDA to approve the marketing and commercial shipment of the drug. This process takes substantial time and effort and the FDA may not accept the NDA or BLA for filing, and, even if filed, the FDA might not grant approval. FDA approval of a NDA or BLA may take up to two years and may take longer if substantial questions about the filing arise.

        In addition to regulatory approvals that must be obtained in the United States, a drug product is also subject to regulatory approval in other countries in which it is marketed. No drug product can be marketed in a country until the regulatory authorities of that country have approved an appropriate application. FDA approval does not assure approval by other regulatory authorities. In addition, regulatory approval of prices is required in most countries other than the United States. The pricing review period often begins after market approval is granted.

        Other regulations.    Our business is also subject to regulation under various state and federal environmental laws, including the Occupational Safety and Health Act, the Resource Conservation and Recovery Act and the Toxic Substances Control Act. These and other laws govern our use, handling and disposal of various biological, chemical and radioactive substances used in and wastes generated by our operations. We are not aware of any costs or liabilities in connection with any environmental laws that will have a material adverse effect on our business or financial condition.

EMPLOYEES

        As of February 28, 2002, we had 83 full-time employees, 22 of whom hold M.D. or Ph.D. degrees and 16 of whom hold other advanced degrees. Of our total workforce, 56 are engaged in research and development activities and 27 are engaged in business development, finance and administration functions. None of our employees is represented by a labor union or covered by a collective bargaining agreement, and we consider our employee relations to be good.

RISKS AND UNCERTAINTIES

RISKS RELATED TO OUR BUSINESS

WE HAVE A HISTORY OF NET LOSSES, AND WE EXPECT TO CONTINUE TO INCUR NET LOSSES AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY

        We have incurred net losses in each year since our inception in December 1992, including a net loss of $19.1 million for the year ended December 31, 2001. As of December 31, 2001, we had an accumulated deficit of approximately $69.8 million. We are unsure if or when we will become profitable. The size of our net losses will depend, in part, on the growth rate of our revenues and the level of our expenses.

        We derive substantially all of our revenues from payments from corporate collaborations, and will continue to do so for the foreseeable future. We expect that it will be several years, if ever, before we will recognize revenue from product candidate sales or royalties. A large portion of our expenses is fixed, including expenses related to facilities, equipment and personnel. In addition, we expect to spend significant amounts to fund research and development and to enhance our core technologies. As a result, we expect that our operating expenses will increase significantly over the next several years and,

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consequently, we will need to generate significant additional revenue to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a consistent basis.

WE WILL LIKELY NEED TO RAISE ADDITIONAL FUNDS IN THE FUTURE. IF WE ARE UNABLE TO OBTAIN THE FUNDS NECESSARY TO CONTINUE OUR OPERATIONS, WE MAY BE REQUIRED TO DELAY, SCALE BACK OR ELIMINATE ONE OR MORE OF OUR PRODUCT DEVELOPMENT OR RESEARCH PROGRAMS

        Our future capital requirements will be substantial. We expect that significant additional financing will be required in the future, which we may seek to raise through public or private equity offerings, debt financing, additional strategic alliances and licensing arrangements or some combination of these financing alternatives. Additional financing may not be available to us when needed, or it may be available only on terms unfavorable to us. To the extent that we raise additional capital by issuing equity or convertible securities, the ownership of existing stockholders would be diluted. If we cannot find adequate financing when needed, we may be required to significantly curtail one or more of our research and development programs or to obtain funds through agreements with corporate collaborators or others that may require us to surrender rights to some of our technologies or potential product opportunities, or to grant licenses on terms that are not favorable to us, any of which could negatively impact our operations and prevent us from achieving our business objectives.

OUR ABILITY TO DEVELOP, OBTAIN REGULATORY APPROVAL OF AND COMMERCIALIZE OUR POTENTIAL PRODUCTS DEPENDS, IN PART, ON COLLABORATIONS WITH OTHER COMPANIES. IF WE ARE UNABLE TO FIND COLLABORATORS, WE MAY NOT BE ABLE TO DEVELOP, TEST AND COMMERCIALIZE OUR PRODUCTS

        To date, we only have entered into collaborative agreements with a limited number of companies, including Warner-Lambert, a wholly-owned subsidiary of Pfizer, Inc. Under the terms of our collaboration with Warner-Lambert, Warner-Lambert has been responsible for all costs related to clinical testing, manufacturing, regulatory approval, marketing and sales of our BioBypass® angiogen products.

        Pfizer has notified us that it is discontinuing its collaboration with us for the development and commercialization of BioBypass® angiogen products. Pfizer is responsible for all costs until our collaboration is terminated in July 2002, at which time we will be responsible for any costs connected with the additional development, testing and the commercialization of BioBypass® angiogen products.

        The success of our business strategy depends, in part, on our ability to enter into collaborations with other companies for the development and commercialization of our product candidates, including BioBypass® angiogen. Unless we are able to enter into collaboration agreements, we will need to raise additional funds for the development, testing, and commercialization of our product candidates. If collaborations or funding are not available, we may have to delay or curtail the development and commercialization of certain of our product candidates.

        Except for our collaboration with Warner-Lambert to develop BioBypass® angiogen, our only other collaboration is with Fuso Industries, Ltd. to conduct research and to identify, evaluate and develop gene therapy products for the treatment of cancer. This collaboration agreement expires in September 2002. Although we are in the process of renewing our collaboration agreement with Fuso Industries and are attempting to secure additional collaborations, there can be no assurance that we will be successful in establishing and/or renewing these collaborations. In addition, any collaborations we enter into generally will expire after a fixed period of time, and there can be no assurance that we will be able to renew any collaboration agreements we enter into.

WE CANNOT BE SURE THAT OUR COLLABORATORS WILL PERFORM AS EXPECTED, AND COLLABORATIONS MIGHT PRODUCE CONFLICTS THAT COULD DELAY OR

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PREVENT THE DEVELOPMENT OR COMMERCIALIZATION OF OUR POTENTIAL PRODUCT CANDIDATES AND NEGATIVELY IMPACT OUR BUSINESS AND FINANCIAL CONDITION

        We cannot control the resources that any collaborator may devote to our products. Our present or future collaborators may not perform their obligations as expected. These collaborators may breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. In addition, our collaborators may elect not to develop products arising out of our collaborative arrangements or to devote sufficient resources to the development, regulatory approval, manufacture, marketing or sale of these products. If any of these events occur, we may not be able to develop our technologies or commercialize our products.

        An important part of our strategy involves conducting multiple product development programs. We may pursue opportunities in fields that conflict with those of our collaborators. In addition, disagreements with our collaborators could develop over rights to our intellectual property. Any conflict with our collaborators could reduce our ability to obtain future collaboration agreements and negatively impact our relationship with existing collaborators. A conflict could also lead to delays in collaborative research, development, regulatory approval or commercialization of various products or could require or result in litigation or arbitration, which would be time consuming and expensive and could have a significant negative impact on our business, financial condition and results of operations.

OUR COLLABORATION AGREEMENTS MAY PROHIBIT US FROM CONDUCTING RESEARCH IN AREAS THAT MAY COMPETE WITH OUR COLLABORATION PRODUCTS. THIS COULD NEGATIVELY AFFECT OUR ABILITY TO DEVELOP PRODUCTS AND, ULTIMATELY, FROM ACHIEVING A CONTINUING SOURCE OF REVENUES

        We anticipate that some of our corporate or academic collaborators will be conducting multiple product development efforts within each disease area that is the subject of the collaboration with us. In the past, we generally have agreed not to conduct independently or with any third party any research that is competitive with the research conducted under our collaborations. Therefore, our collaborations may have the effect of limiting the areas of research that we may pursue, either alone or with others. Our collaborators, however, may develop, either alone or with others, products in related fields that are competitive with the products or potential products that are the subject of their collaborations with us. In addition, competing products, either developed by the collaborators or to which the collaborators have rights, may result in their withdrawal of support for our product candidates.

        Generally under our academic collaborations, we retain the right to exclusively license any technologies developed using funding we provided. If we elect to not license a particular technology, the academic collaborator is typically free to use the technology for any purpose, including the development and commercialization of products that might compete with our products.

WE ARE AN EARLY STAGE COMPANY DEPLOYING UNPROVEN TECHNOLOGIES, AND WE MAY NEVER BE ABLE TO DEVELOP, GET REGULATORY APPROVAL OF OR MARKET ANY OF OUR PRODUCT CANDIDATES

        Gene-based therapy is a new and rapidly evolving medical approach, which has not been shown to be effective on a widespread basis. Biotechnology and pharmaceutical companies have successfully developed and commercialized only a limited number of gene-based products to date. In addition, no gene therapy product has received regulatory approval in the United States or internationally. We also have only limited data relating to the safety and effectiveness of our product candidates or delivery systems. To date, none of our product candidates has been approved for sale in the United States or elsewhere. We may be unable to develop products or delivery systems that:

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prove to be safe and effective;

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meet applicable regulatory standards;



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are capable of being manufactured at reasonable costs;



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do not infringe the intellectual property rights of third parties;



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are superior to products offered by third parties; or



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can be marketed successfully.

        Gene-based products may be susceptible to various risks, including undesirable and unintended side effects from genes or the delivery systems, unintended immune responses, inadequate therapeutic efficacy or other characteristics that may prevent or limit their approval or commercial use. Successful products require significant development and investment, including a lengthy and uncertain period of testing to show their safety and effectiveness before their regulatory approval or commercialization. We have not proven our ability to develop, obtain regulatory approval of or commercialize gene-based products. We may be unable to successfully select those genes with the most potential for commercial development.

IF WE FAIL TO ADEQUATELY SHOW THE SAFETY AND EFFICACY OF OUR PRODUCT CANDIDATES, WE WILL NOT BE ABLE TO OBTAIN FDA APPROVAL OF OUR PRODUCT CANDIDATES

        We face the risks of failure involved in developing therapies based on new technologies. While certain of our product candidates are in clinical trials, there are others for which we have not yet initiated clinical trials. For those product candidates not yet in clinical trials, we will need to conduct significant additional research and animal testing, referred to as preclinical testing, before any of these product candidates can advance to clinical trials. In addition, we will need to conduct further clinical testing of those product candidates currently in clinical trials. It may take us many years to complete preclinical testing and clinical trials, and failure could occur at any stage of testing. Acceptable results in early testing or trials may not be repeated later. Not all products in preclinical testing or early stage clinical trials will become approved products. Before we can file applications with the FDA for product approval, we must show that a particular product candidate is safe and effective. Even with respect to those product candidates currently in clinical trials, we must demonstrate the safety and efficacy of those product candidates before we can secure FDA approval. Our failure to adequately show the safety and efficacy of our product candidates would prevent FDA approval of our product candidates. Our product development costs will increase if we experience delays in testing or regulatory approvals or if we need to perform more or larger clinical trials than planned. If the delays are significant, they could negatively affect our financial results and the commercial prospects for our product candidates.

BECAUSE OUR COLLABORATORS OR WE MUST OBTAIN REGULATORY APPROVAL TO MARKET OUR PRODUCTS IN THE UNITED STATES AND NON-U.S. JURISDICTIONS, WE CANNOT PREDICT WHETHER OR WHEN WE WILL BE PERMITTED TO COMMERCIALIZE OUR PRODUCTS

        The pharmaceutical industry is subject to stringent regulation by a wide range of authorities. We cannot predict whether our collaborators or we will obtain regulatory approval for any product we develop. No one can market a pharmaceutical product in the United States until it has completed rigorous preclinical testing and clinical trials of the product and an extensive regulatory approval process implemented by the FDA. To date, neither the FDA nor any other regulatory agency has approved a gene therapy product for sale in the United States or internationally. Satisfaction of regulatory requirements typically takes many years, is dependent upon the type, complexity and novelty of the product and requires the expenditure of substantial resources. Of particular significance are the requirements covering research and development, testing, manufacturing, quality control, labeling and promotion of drugs for human use. Before commencing clinical trials, we must submit to and receive

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approval from the FDA of an Investigational New Drug application. Clinical trials are subject to oversight by Institutional Review Boards and the FDA. Clinical trials are also subject to:

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informed consent;



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good clinical practices;



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continuing FDA oversight;



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potentially large numbers of test subjects; and



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potential suspension by us, our collaborators or the FDA at any time if it is believed that the subjects participating in these trials are being exposed to unacceptable health risks or if the FDA finds deficiencies in the Investigational New Drug application or the conduct of these trials.

        We may encounter delays or rejections in the regulatory approval process because of additional government regulation from future legislation or administrative action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review. Failure to comply with applicable FDA or other applicable regulatory requirements may result in criminal prosecution, civil penalties, recall or seizure of products, total or partial suspension of production or injunction, as well as other regulatory action against our product candidates or us. If regulatory approval of a product is granted, this approval will be limited to those disease indications for which the product has shown through clinical trials to be safe and effective. The FDA also strictly regulates promotion and labeling after approval. Outside the United States, our ability to market a product is contingent upon receiving clearances from the appropriate regulatory authorities. This non-U.S. regulatory approval process includes all of the risks associated with FDA clearance described above.

IF WE OR OUR COLLABORATORS ARE UNABLE TO MANUFACTURE OUR PRODUCTS IN SUFFICIENT QUANTITIES OR ARE UNABLE TO OBTAIN REGULATORY APPROVALS FOR OUR MANUFACTURING FACILITY, WE MAY BE UNABLE TO MEET DEMAND AND MAY LOSE POTENTIAL REVENUES

        Completion of our clinical trials and commercialization of our product candidates require access to, or development of, facilities to manufacture a sufficient supply of our product candidates. We have limited experience manufacturing any of our proposed products in the volumes that will be necessary to support large-scale clinical trials or commercial sales. If we or our collaborators are unable to manufacture our product candidates in clinical or, when necessary, commercial quantities, then we will need to rely on third-party manufacturers to manufacture compounds for clinical and commercial purposes.

        These third-party manufacturers must receive FDA approval before they can produce clinical material or commercial product. Our products may be in competition with other products for access to these facilities and may be subject to delays in manufacture if third parties give other products greater priority than ours. In addition, we may not be able to enter into any necessary third-party manufacturing arrangements on acceptable terms, or on a timely basis. There are very few contract manufacturers who currently have the capability to produce our proposed products, and the inability of any of these contract manufacturers to deliver our required quantities of product candidates timely and at commercially reasonable prices would negatively affect our operations.

        Before our collaborators or we can begin commercially manufacturing any of our product candidates, our collaborators or we must obtain regulatory approval of our manufacturing facility and process. Manufacturing of our proposed products must comply with the FDA's current Good Manufacturing Practices requirements, commonly known as cGMP, and non-U.S. regulatory requirements. The cGMP requirements govern quality control and documentation policies and procedures. In complying with cGMP and non-U.S. regulatory requirements, we will be obligated to expend time, money and effort in production, record keeping and quality control to assure that the

21

product meets applicable specifications and other requirements. Our collaborators or we must also pass a pre-approval inspection before FDA approval. If our collaborators or we fail to comply with these requirements, our product candidates would not be approved. If our collaborators or we failed to comply with these requirements after approval, we would be subject to possible regulatory action and may be limited in the jurisdictions in which we are permitted to sell our products. The FDA and non-U.S. regulatory authorities also have the authority to perform unannounced periodic inspections of our manufacturing facility to ensure compliance with cGMP and non-U.S. regulatory requirements.

        We intend to develop our own manufacturing capability, which will require significant resources and will be subject to ongoing government approval and oversight. Our efforts may not be successful.

IF SUCCESSFUL LARGE-SCALE MANUFACTURING OF GENE-BASED THERAPIES IS NOT POSSIBLE, WE MAY BE UNABLE TO MANUFACTURE ENOUGH OF OUR PRODUCT CANDIDATES TO ACHIEVE REGULATORY APPROVAL OR MARKET OUR PRODUCTS

        Very few companies have showed successful large-scale manufacturing of gene-based therapy products, and it is anticipated that significant process development changes will be necessary for the commercial process. We may be unable to manufacture commercial-scale quantities of gene-based therapy products, or receive appropriate governmental approvals on a timely basis or at all. Failure to successfully manufacture or obtain appropriate government approvals on a timely basis would prevent us from achieving our business objectives.

WE MAY EXPERIENCE DIFFICULTIES OR DELAYS IN PRODUCT MANUFACTURING, WHICH ARE BEYOND OUR CONTROL AND COULD HARM OUR BUSINESS, BECAUSE WE RELY ON THIRD-PARTY MANUFACTURERS

        We currently expect to produce our product candidates through third-party manufacturers. Problems with any manufacturing processes could result in product defects, which could require us to delay shipment of products or recall products previously shipped. In addition, any prolonged interruption in the operations of our or a third party's manufacturing facilities could result in the cancellation of shipments. A number of factors could cause interruptions, including equipment malfunctions or failures, or damage to a facility due to natural disasters or otherwise. Because our manufacturing processes are or are expected to be highly complex and subject to a lengthy FDA approval process, alternative qualified production capacity may not be available on a timely basis or at all.

        Difficulties or delays in our manufacturing could increase our costs and damage our reputation.

        The manufacture of pharmaceutical products can be an expensive, time-consuming, and complex process. Manufacturers often encounter difficulties in scaling-up production of new products, including problems involving the transfer of manufacturing technology, production yields, quality control and assurance, and shortages of personnel. Delays in formulation and scale-up to commercial quantities could result in additional expense and delays in our clinical trials, regulatory submissions and commercialization.

WE RELY ON ONLY ONE SUPPLIER FOR SOME OF OUR MANUFACTURING MATERIALS. ANY PROBLEMS EXPERIENCED BY ANY OF THESE SUPPLIERS COULD NEGATIVELY AFFECT OUR OPERATIONS

        We rely on third-party suppliers and vendors for some of the materials used in the manufacture of our product candidates. Some of these materials are available from only one supplier or vendor. Currently, we procure raw materials, known as resins, for our product purification and testing methods from Applied Biosystems. We also obtain nutrients we use to support the growth of microorganisms or other cells from JRH Biosciences, Inc. Any significant problem experienced by one of our sole-source suppliers could result in a delay or interruption in the supply of materials to us until such supplier resolves the problem or an alternative source of supply is located. Any delay or interruption would likely lead to a delay or interruption of manufacturing operations, which could negatively affect our operations.

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WE FACE SUBSTANTIAL COMPETITION FROM OTHER COMPANIES AND RESEARCH INSTITUTIONS THAT ARE DEVELOPING PRODUCTS TO TREAT THE SAME DISEASES THAT OUR PRODUCT CANDIDATE'S TARGET, AND WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY

        We compete with pharmaceutical and biotechnology companies that are pursuing other forms of treatment for the diseases BioBypass® angiogen and our other product candidates target. We may also face competition from companies that may develop competing technology internally or acquire it from universities and other research institutions. As these companies develop their technologies, they may develop proprietary positions, which may prevent or limit our product commercialization efforts.

        Some of our competitors are established companies with greater financial and other resources than we have. We expect that competition in our business will intensify. Our competitors may succeed in:

•

identifying important genes or delivery mechanisms before us;



•

developing products or product candidates earlier than we do;



•

forming collaborations before we do, or precluding us from forming collaborations with others;



•

obtaining approvals from the FDA or other regulatory agencies for such products more rapidly than we do;



•

developing and validating manufacturing processes more rapidly than we do;



•

obtaining patent protection or other intellectual property rights that would limit our ability to use our technologies or develop products; or



•

developing products that are safer or more effective than those we develop or propose to develop.

        While we seek to expand our technological capabilities to remain competitive, research and development by others may render our technology or product candidates obsolete or noncompetitive or result in treatments or cures superior to any therapy developed by us.

RISKS RELATED TO OUR INDUSTRY

IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITORS MAY BE ABLE TO TAKE ADVANTAGE OF OUR RESEARCH AND DEVELOPMENT EFFORTS TO COMPETE WITH US

        Our commercial success will depend in part on obtaining patent protection for our products and other technologies and successfully defending these patents against third party challenges. Our patent position, like that of other biotechnology firms, is highly uncertain and involves complex legal and factual questions. The biotechnology patent situation in the United States and other countries is uncertain and is currently undergoing review and revision. Changes in, or different interpretations of, patent laws in the United States and other countries might allow others to use our discoveries or to develop and commercialize our products without any compensation to us.

        Our ability to develop and protect a proprietary position based on biotechnological innovations and technologies involving genes and gene-based therapy, delivery systems, production, formulations and the like, is particularly uncertain. The U.S. Patent and Trademark Office, as well as patent offices in other countries, have often required that patent applications concerning biotechnology-related inventions be limited or narrowed substantially. Our disclosures in our patent applications may not be sufficient to meet the statutory requirements for patentability in all cases. In addition, other companies or institutions possess issued patents and have filed and will file patent applications that cover or attempt to cover genes, vectors, cell lines, and methods of making and using gene-based therapy

23

products that are the same as or similar to the subject matter of our patent applications. For example, while we have pending patent applications pertaining to various types of adenovectors that cannot reproduce themselves, adenovectors modified to alter cell binding characteristics and special cell lines used to grow adenovectors, we are aware of issued patents and pending patent applications of other companies and institutions relating to the same subject matter. Patents and patent applications of third parties may have priority over our issued patents and our pending or yet to be filed patent applications. Proceedings before the U.S. Patent and Trademark Office and other patent offices to determine who properly lays claim to inventions are costly and time consuming, and we may not win in any such proceedings.

        The issued patents we already have or may obtain in the future may not provide commercially meaningful protection against competitors. Other companies or institutions may challenge our or our collaborators' patents in the United States and other countries. In the event a company, institution or researcher infringes upon our or our collaborators' patent rights, enforcing these rights may be difficult and can be expensive and time consuming, with no guarantee that our or our collaborators' patent rights will be upheld. Others may be able to design around these patents or develop unique products providing effects similar to our products. Thus, for example, although we have an issued U.S. patent broadly covering stocks of adenovectors that cannot reproduce themselves, our competitors may find ways to get around this patent. In addition, our competitors may legally challenge our patent and it may be held to be invalid. In addition, various components used in developing gene-based therapy products, such as particular genes, vectors, promoters, cell lines and construction methods, used by others and us are available to the public. As a result, we are unable to obtain patent protection with respect to such components, and third parties can freely use such components. Third parties may develop products using such components that compete with our potential products. Also, with respect to some of our patentable inventions, our collaborators or we have decided not to pursue patent protection outside the United States. Accordingly, our competitors could develop, and receive non-U.S. patent protection for gene-based therapies or technologies for which our collaborators or we have or are seeking U.S. patent protection. Our competitors may be free to use these gene-based therapies or technologies outside the United States in the absence of patent protection.

        Where we believe patent protection is not appropriate we rely to a limited extent on trade secrets to protect our technology. However, trade secrets are difficult to protect. While we have entered into confidentiality agreements with employees and collaborators, we may not be able to prevent the disclosure of our trade secrets. In addition, other companies or institutions may independently develop substantially equivalent information and techniques.

IF OUR POTENTIAL PRODUCTS CONFLICT WITH INTELLECTUAL PROPERTY RIGHTS OF COMPETITORS, UNIVERSITIES OR OTHERS, THEN WE MAY BE PREVENTED FROM DEVELOPING THOSE PRODUCT CANDIDATES

        Other companies and institutions have issued patents and have filed and will file patent applications that may issue into patents that cover or attempt to cover genes, vectors, cell lines and methods of making and using gene-based therapy products used in or similar to our product candidates and technologies. For example, we are aware of issued patents and pending patent applications relating to the delivery, including through the use of adenovectors, of medically beneficial substances to the heart and other tissues, similar to our BioBypass® angiogen, and special cell lines required for the production of certain adenovectors, including a cell line we use in the production of our BioBypass® angiogen. It could be alleged that our BioBypass® angiogen conflicts with these patents. We also are aware of other issued patents and pending patent applications that relate to various aspects of our product candidates and systems, and it could be alleged that our product candidates conflict with these patents. We have not conducted freedom to use patent searches on all aspects of our product candidates or potential product candidates, and may be unaware of relevant patents and patent applications of third parties. In addition, those freedom to use patent searches that have been

24

conducted may not have identified all relevant issued patents or all relevant pending patent applications that could issue into patents, particularly in view of the characterizations of the subject matter of issued patents and pending patent applications, as well as the fact that pending patent applications can be maintained in secrecy for a period of time and, in some instances, until issuance as patents.

        An issued patent gives rise to a rebuttable presumption of validity under U.S. law and the laws of some other countries. The holders of these or other patents could bring legal actions against our collaborators or us for damages or to stop us or our collaborators from using the affected technology, which could limit our ability to develop and commercialize our product candidates. If any of our potential products are found to infringe a patent of a competitor or third party, we or our collaborators may be required to pay damages and to either obtain a license in order to continue to develop and commercialize the potential products or, at the discretion of the competitor or third party, to stop development and commercialization of the potential products. Since we have concentrated our resources on developing only a limited number of products, the inability to market one of our products would disproportionately affect us as opposed to a competing company with many products in development.

        We believe that there will be significant litigation in our industry regarding intellectual property rights. Many of our competitors have and are continuing to expend significant amounts of time, money and management resources on intellectual property litigation. If we become involved in litigation, it could consume a substantial portion of our resources and could adversely affect our business, financial condition and results of operations, even if we ultimately are successful in such litigation, in view of our limited resources.

IF OUR RIGHT TO USE INTELLECTUAL PROPERTY WE LICENSE FROM OTHERS IS AFFECTED, OUR ABILITY TO DEVELOP AND COMMERCIALIZE OUR PRODUCT CANDIDATES MAY BE HARMED

        We rely, in part, on licenses to use some technologies that are material to our business. For example, to create our product candidates, we combine our vectors with genes intended to produce proteins. For our current product candidates, we have secured licenses to use the VEGF(121), iNOS, TNF(alpha), and PEDF genes. We do not own the patents that underlie these licenses. For these genes, we do not control the enforcement of the patents. We rely upon our licensors to properly prosecute and file those patent applications and to prevent infringement of those patents.

        While many of the licenses under which we have rights provide us with exclusive rights in specified fields, the scope of our rights under these and other licenses may be subject to dispute by our licensors or third parties. In addition, our rights to use these technologies and practice the inventions claimed in the licensed patents and patent applications are subject to our licensors abiding by the terms of those licenses and not terminating them. Any of our licenses may be terminated by the licensor if we are in breach of a term or condition of the license agreement, or if we become insolvent. In addition, some of our licenses require us to achieve specific milestones.

        Our product candidates and potential product candidates will require several components that may each be the subject of a license agreement. The cumulative license fees and royalties for these components may make the commercialization of these product candidates uneconomical.

ADVERSE EVENTS IN THE FIELD OF GENE THERAPY MAY NEGATIVELY AFFECT REGULATORY APPROVAL OR PUBLIC PERCEPTION OF OUR PRODUCTS OR PRODUCT CANDIDATES

        In September 1999, a patient undergoing gene therapy using an adenoviral vector to deliver a therapeutic gene died as a result of an adverse reaction to the treatment. This death was widely publicized. His family has since filed lawsuits against his doctors and the University of Pennsylvania. Other patient deaths have occurred in other gene-based clinical trials. These deaths and the resulting

25

publicity surrounding them, as well as any other serious adverse events in the field of gene therapy that may occur in the future, may result in greater governmental regulation of our product candidates and potential regulatory delays relating to the testing or approval of our product candidates. As a result of the incident in September 1999, the United States Senate has commenced hearings to determine whether additional legislation is required to protect volunteers and patients who participate in gene therapy clinical trials. Additionally, the National Institutes of Health and its advisory bodies routinely review the field of gene therapy and issue reports on the adverse events reported by investigators. In addition, the NIH has recently approved a proposal to establish a Gene Transfer Safety Assessment Board to review serious adverse event reports, annual reports and other safety information in order to assess toxicity and safety and report these findings at NIH Recombinant DNA Advisory Committee (RAC) meetings. Likewise, the FDA is considering a proposed rule to require submission of redacted INDs and required IND safety and annual reports for the purpose of making this information public. Any increased scrutiny could delay or increase the costs of our product development efforts or clinical trials.

        The commercial success of our product candidates will depend in part on public acceptance of the use of gene therapies for the prevention or treatment of human disease. Public attitudes may be influenced by claims that gene therapy is unsafe, and gene therapy may not gain the acceptance of the public or the medical community. Negative public reaction to gene therapy could result in greater government regulation and stricter clinical trial oversight and commercial product labeling requirements of gene therapies and could cause a decrease in the demand for any products we may develop.

WE MAY BE SUED FOR PRODUCT LIABILITY, WHICH COULD DAMAGE OUR REPUTATION AND EXPOSE US TO UNANTICIPATED COSTS

        We, alone or with our collaborators, may be held liable if any product our collaborators or we develop, or any product which is made with the use or incorporation of any of our technologies, causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing or sale. Regardless of the merit or eventual outcome, product liability claims may result in:

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withdrawal of product candidates from our clinical trials;



•

damage to our reputation;



•

costs of litigation;



•

substantial monetary awards to plaintiffs; and



•

decreased demand for our products or product candidates.

        Although we currently have and intend to maintain product liability insurance, this insurance may become prohibitively expensive, or may not fully cover our potential liabilities. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of products developed by us or in collaboration with others. If we are sued for any injury caused by our products or our products made in collaboration with others, our liability could exceed our total resources.

WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR BUSINESS; ANY DISPUTES RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF THESE MATERIALS COULD BE TIME CONSUMING AND COSTLY

        Our research and development processes involve the use of hazardous materials, including chemicals and radioactive and biological materials, and also produce hazardous waste products. Hazardous chemicals used in our processes include, but are not limited to, flammable solvents such as methanol and ethanol, toxic chemicals such as ethidium bromide and formaldehyde, and corrosive chemicals such as acetic acid and sodium hydroxide. We also use several radioactive compounds,

26

including phosphorous-32, carbon-14, sulfur-35, phosphorous-33, iodine-125, hydrogen-3, and chromium-51.

        The hazardous biological material used in our research and development activities include human and animal cell lines and viruses, such as adenoviruses, and animals infected with human viruses. Some of the biological material may be novel, including viruses with novel properties. We cannot eliminate the risk of accidental contamination or discharge or injury from these materials. Federal, state, and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, these hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our total assets. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development or production efforts.

        Although we have general liability insurance, these policies contain exclusions from insurance against claims arising from pollution from chemical or radioactive materials. Our collaborators are working with these types of hazardous materials in connection with our collaborations. In the event of a lawsuit or investigation, we could be held responsible for any injury we or our collaborators cause to persons or property by exposure to, or release of, any hazardous materials. However, we believe that we are currently in compliance with all applicable environmental and occupational health and safety regulations.

ITEM 2. PROPERTIES

        We currently lease 42,900 square feet for our corporate offices and research and development laboratories located at 65 West Watkins Mill Road in Gaithersburg, Maryland. The lease expires on November 1, 2009. We have options to extend the term of this lease for an additional fourteen years, through October 2023. We believe that this facility is sufficient for our current needs. We have additional space in our current facility to accommodate our anticipated growth over the next several years.

ITEM 3. LEGAL PROCEEDINGS

        We are not currently a party to any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.

        There were no matters submitted by the Company during the fourth quarter of 2001 to a vote of security holders, through the solicitation of proxies or otherwise.

EXECUTIVE OFFICERS OF THE REGISTRANT

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        Paul H. Fischer, Ph.D. has been our President and Chief Executive Officer and a director since November 1996, and has served in various positions with us since March 1995, including Executive Vice President and Chief Operating Officer and Vice President of Research and Development. Before joining us, he was Executive Vice President of Research and Development at Aronex Pharmaceuticals, Inc., formerly Oncologix, Inc., a biotechnology company. Dr. Fischer's previous experience included Manager, Cancer Research at Pfizer Inc., a pharmaceutical company. Dr. Fischer received his B.S. in biology from the University of Denver, his Ph.D. in pharmacology from the University of California at San Francisco and performed post-doctoral research in pharmacology at the Yale University School of Medicine and was an Associate Professor of Human Oncology at the University of Wisconsin.

        Jeffrey W. Church has served as our Chief Financial Officer since August 1998. From September 1997 to August 1998, Mr. Church served as Executive Vice President and Chief Financial Officer of Biospherics, Inc., a telecommunications and biotechnology company. From 1986 to August 1997, Mr. Church served in various positions at Meridian Medical Technologies, Inc., formerly Survival Technology, Inc., a medical device and drug delivery company, including Controller and Senior Vice President of Finance and Chief Financial Officer. From 1979 to 1986, Mr. Church was an Audit Manager at PriceWaterhouseCoopers LLP. Mr. Church received his B.S. in accounting from the University of Maryland and is a Certified Public Accountant.

        C. Richter King, Ph.D. has served as our Vice President, Research since May 1999. From May 1998 to May 1999, Dr. King served as our Vice President, New Products Research. From April 1995 to April 1998, Dr. King was an Associate Professor of Biochemistry at Georgetown University Medical School's Lombardi Cancer Research Center in Washington, D.C. From April 1992 to April 1995, Dr. King was the Director of Drug Discovery at Aronex Pharmaceuticals, Inc., formerly Oncologix, Inc., a biotechnology company. Dr. King holds a Ph.D. in biochemistry from Johns Hopkins University.

        Imre Kovesdi, Ph.D. has served as our Vice President and Chief Scientific Officer since April 1999. From September 1995 to April 1999, he served as our Vice President of Discovery Research and from July 1993 to September 1995, he served as our Director of Vector Biology. From 1987 to 1993, he led projects in eukaryotic gene expression and neurotrophic factors at the Medical Research Division of the American Cyanamid Company. Dr. Kovesdi received a B.S. in electrical engineering from the University of British Columbia, a Ph.D. in molecular biology from Simon Fraser University and did his post-doctoral training at The Rockefeller University.

        Henrik S. Rasmussen, M.D., Ph.D. joined us in April 1999 and currently serves as our Senior Vice President of Clinical Operations and Regulatory Affairs. From 1994 to April 1999, Dr. Rasmussen served as Vice President for Clinical Research/Senior Vice President for Clinical Research and Regulatory Affairs at British Biotech in Annapolis, Maryland. From 1989 to 1994, Dr. Rasmussen served in various positions at Pfizer Central Research, including Global Study Director and Global Candidate Leader. Dr. Rasmussen has been involved in drug development in a number of different therapeutic areas, including cardiology, oncology, inflammation, acute care, neurology and dermatology and has authored or co-authored over 120 scientific papers and abstracts. Dr. Rasmussen received his M.D. and Ph.D. degrees from the University of Copenhagen and spent four years practicing medicine in the fields of cardiology, gastroenterology, infectious disease, immunology and rheumatology at a major university hospital in Copenhagen.

        Thomas E. Smart joined us in March 1995 to lead our corporate development function and currently serves as our Senior Vice President of Corporate Development. Mr. Smart's previous experience included Director of Business Development at Cell Genesys, Inc., a biotechnology company; various positions within the Corporate Strategic Planning and Allied Business Group at G.D. Searle, a pharmaceutical company; and Business Development Analyst at Genetics Institute, a biotechnology

28

company. Mr. Smart received his B.S. in the biological sciences from Cornell University and his M.B.A. from the University of Chicago.

        Grant A. Yonehiro was named Drug Development Vice President effective March 1, 2002. From 2000 to 2001 he served as Vice President, Commercial Operations and from 1997 to 2000, he served as our Vice President, Product Management. From March 1996 to April 1997, Mr. Yonehiro served as our Associate Director of Corporate Development and from April 1997 to September 1997, he served as our Director of Corporate Development. From January 1994 to March 1996, Mr. Yonehiro served as a Manager, Corporate Development for Cell Genesys, Inc., a biotechnology company. Mr. Yonehiro received a Bachelor of Individualized Studies from the University of Minnesota and his M.B.A. from the University of California at Berkeley.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

        Our common stock is traded in the over-the-counter market and is included for quotation on the Nasdaq National Market under the symbol GNVC. Our common stock began trading on December 12, 2000.

        Set forth below is the range of high and low closing sale prices for our common stock as reported on the Nasdaq National Market following the December 12, 2000 completion of our initial public offering. Prior to the initial public offering on December 12, 2000, there was no established public trading market for our common stock.

        As of February 28, 2002, there were approximately 164 holders of record of our common stock. We have not paid any cash dividends since our inception and we do not anticipate paying any cash dividends in the foreseeable future.

        Since completion of the public offering in December 2000, pursuant to Form S-1, Commission File No. 333-47408), the net offering proceeds have been invested in cash equivalents and short and long-term investments. The cash equivalents consist of commercial paper having maturities of three months or less. Our investment portfolio consists of investment grade government agency notes and corporate bonds having maturities of less than five years. During the current year we have expended approximately $3.1 million of the proceeds of our initial public offering for research and development activities, approximately $1.5 million for general and administrative expenses, approximately $130,000 for capital expenditures and approximately $230,000 for repayment of loans and capital leases.

        Recent sales of unregistered securities.    On December 21, 2001, we sold 1,791,000 shares of our common stock to each of two accredited investors, HealthCare Ventures V LP and HealthCare Ventures VI LP, for a total of 3,582,000 shares at a price of $3.60 per share, or an aggregate price of $12,895,200. The shares of common stock were sold pursuant to Section 4(2) of the Securities Act of 1933 and Regulation D thereunder as a transaction not involving a public offering.

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ITEM 6. SELECTED FINANCIAL DATA

        The following table sets forth our selected financial data for each of the years in the five-year period ended December 31, 2001. The information below should be read in conjunction with our financial statements and notes thereto included elsewhere in this report and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K. The historical results are not necessarily indicative of results to be expected for future periods.

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

        The following discussion should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this report. See "Business—Risks and Uncertainties" regarding certain factors known to GenVec that could cause reported financial information not to be necessarily indicative of future results, including discussions of the risks related to the development, regulatory approval, proprietary protection of our gene therapy products, and their market success relative to alternative products.

CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

        The discussion and analysis of our financial condition and results of operations are based upon our financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an on-going basis, we evaluate our estimates using authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates. While our significant accounting policies are more fully described in Note 2 to our financial statements included in this report, we believe the following accounting policies to be critical:

        Revenue.    Research and development (R&D) revenue, from cost-reimbursement and cost-plus agreements, are recognized as earned based on the performance requirements of the contract. Non-refundable R&D fees for which no further performance obligations exist are recognized when collection is assured. Contract and upfront license payments where we have continued involvement through a research or development collaboration are recognized ratably over the contract period. Revenue associated with performance milestones are recognized based on achievement of the milestones as defined in the respective agreements.

        Clinical Trial Expenses.    Clinical trial expenses are payable to clinical sites and core laboratories. Expenses for clinical sites are accrued on a straight-line basis over the treatment period based on the number of patients treated for each trial. Expenses for core laboratories are recognized as incurred.

OVERVIEW

        We develop gene-based products that cause the production of therapeutic proteins at the site of disease. We believe that local production of proteins over a sustained period will allow the proteins to deliver their potential therapeutic benefit while minimizing side effects. Our current areas of focus are cardiovascular disease, particularly coronary artery disease and peripheral vascular disease, oncology and ophthalmology. We are developing BioBypass® angiogen as part of our collaboration with Warner-Lambert, under which we have received approximately $60.0 million in license fees, research and

31

development funding, milestone payments and equity purchases. The following table summarizes actual payments received under our collaboration with Warner-Lambert as of December 31, 2001.

(1)

For financial reporting purposes, the $5.0 million license fee received in July 1997 was amortized over four years and the $3.75 million license fee received in January 1999 was amortized over two years based on the terms of the sponsored research and development agreements.

(2)

Excludes $1.6 million, $0.9 million and $75 thousand in expense reimbursements recognized in 1999, 2000 and 2001, respectively.

        On January 22, 2002, Pfizer, Inc. the parent company of Warner-Lambert, notified us of their plans to discontinue the co-development of BioBypass® angiogen, thus returning all development and commercialization rights to us. Under the terms of the 1997 collaboration agreement, Pfizer will be responsible for all development costs associated with the ongoing Phase II clinical trials of BioBypass® angiogen through July 22, 2002, including the costs related to the orderly transfer to us of the Investigative New Drug (IND) applications for both coronary artery and peripheral vascular disease indications.

        BioBypass® angiogen is currently in two separate Phase II clinical trials to evaluate its potential use in the treatment of coronary artery disease and peripheral vascular disease. As of February 28, 2002, over 90% of the patients have been enrolled in the current Phase II studies. It is anticipated that all patients will be treated by the end of April 2002. We are working with Pfizer to transfer the IND applications and to assume responsibility for clinical development, regulatory approval, manufacturing and commercialization of BioBypass® angiogen. Initial clinical results are expected to be available in late 2002 or early 2003. We may seek a corporate partner to help us develop and commercialize one or both of the disease indications being tested.

        We have generated no product revenues and have funded our operations primarily through the private and public placement of equity securities and the proceeds of our corporate collaboration agreements. For more information about our collaboration with Warner-Lambert, see "Business—Our Collaborative Relationships."

        In accordance with Staff Accounting Bulletin 101, we have deferred recognition of up-front contract or license payments received under our collaboration and license agreements and have amortized the related unearned revenues over the terms of the collaboration agreements, generally ranging from two to four years. During 1997 and 1999, we received $5.0 million and $4.1 million, respectively, in upfront contract and license fees. Our results of operations included $2.9 million, $3.0 million and $1.8 million during the years ended 1999, 2000 and 2001 of amortization of these upfront contract and license fees. As of December 31, 2001, we have amortized all of these amounts into income.

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        Our results of operations for the year ended December 31, 2000 included $2.0 million in milestone revenues recognized. Our results of operations in the future may fluctuate based upon the timing and progress of developmental efforts resulting in performance-based milestone payments.

        As discussed in the Business section of this report, we have recently entered into a contract with the Vaccine Research Center at the National Institutes of Allergy and Infectious Diseases of the National Institutes of Health to develop and manufacture preventative AIDS vaccine candidates. Under the terms of this agreement, we may receive up to $10.2 million in research and development funding.

        We expect our sources of revenue for the next several years to consist primarily of payments under corporate collaborations and interest income. We will not receive revenue from product sales until one or more of our product candidates are commercialized. In order to accelerate product commercialization and finance our research and development activities, we are currently engaged in and are actively seeking collaborations with leading pharmaceutical and biotechnology companies.

        We have incurred operating losses each year since inception and, as of December 31, 2001, had an accumulated deficit of approximately $69.8 million. Our losses have resulted principally from costs incurred in research and development and from general and administrative activities. Research and development expenses consist primarily of salaries and related personnel costs, sponsored research costs, patent costs, technology access fees and other expenses related to our product development and research programs. We expense our research and development costs as they are incurred. General and administrative expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, professional fees and other corporate expenses including business development and general legal activities. We expect to incur substantial additional operating losses for at least the next few years as a result of increases in our expenses for research and development activities.

        Our quarterly operating results will depend upon many factors. These factors include variations in payments received or made by us under strategic alliances, which include milestone payments, royalties, license fees and other revenues, our ability to maintain and establish corporate collaborations and the amount and timing of operating expenses relating to research and development, preclinical testing and clinical trials. As a consequence, our quarterly operating results have fluctuated in the past and are likely to do so in the future.

        Through December 31, 2001, we had recorded an aggregate of $9.1 million of deferred compensation expense resulting from the granting of stock options to employees, directors or consultants covering shares of our common stock, which stock options had exercise prices below the fair value of the underlying common stock at the date of their grant. Net of prior amortization and cancellations, net deferred compensation of $3.1 million at December 31, 2001 will be amortized over the vesting periods of the respective options, typically four years. We anticipate recording total compensation charges resulting from the amortization of the deferred compensation expense recorded as of December 31, 2001 approximately as follows: $1.2 million in 2002, $1.1 million in 2003 and $0.8 million in 2004. During 2001 the Company amortized $1.6 million of deferred compensation expense.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2001 AND 2000

REVENUES:

        Ongoing research and development support.    Ongoing research and development support decreased 70% to $2.6 million in 2001 from $8.8 million in 2000 primarily as a result of scheduled reductions in research and development support under our collaboration agreement with Warner-Lambert. In addition, revenue recognized in 2000 included $3.0 million in process development support

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received for successfully establishing a manufacturing process suitable for clinical manufacturing. Over 77% and 94% of our ongoing research and development support in 2001 and 2000 were earned under our collaboration agreement with Warner-Lambert, which they have elected to discontinue. Future ongoing research and development support will come from existing contracts, including those with Fuso Pharmaceuticals and the Vaccine Research Center of NIH, and from future collaborative agreements.

        Contract, license and milestone payments.    Recognition of contract, license and milestone payments decreased to $1.8 million in 2001 from $5.1 million in 2000. Revenues in 2001 consisted of amortization of upfront contract and license fees. Revenues in 2000 consisted of amortization of upfront contract and license fees and a $2.0 million technology success fee related to the development of a production process and testing methods suitable for clinical supplies for pivotal trials.

OPERATING EXPENSES:

        Research and development.    Research and development expenses increased 6% to $16.3 million in 2001 from $15.4 million in 2000. The increase in our research and development activities related primarily to internal product development programs including the initiation of clinical development of TNFerade and preclinical development efforts for our AdPEDF product program.

        General and administrative.    General and administrative expenses increased 26% to $8.7 million in 2001 from $6.9 million in 2000. The increase was primarily attributable to higher levels of expenditures related to legal and consulting fees associated with our new product development initiatives, including acquiring and maintaining our intellectual property portfolio, higher compensation charges resulting from several new hires, related recruiting and relocation costs and the increased cost of Director and Officer Liability insurance as a public company.

        Other income.    Other income, consisting primarily of interest income, net of interest expense, increased 185% to $1.5 million in 2001 from $534,000 in 2000. The $1.0 million increase was due to higher levels of cash available for investing as a result of our IPO in December 2000.

YEARS ENDED DECEMBER 31, 2000 and 1999

REVENUES:

        Ongoing research and development support.    Ongoing research and development support decreased 37% to $8.8 million in 2000 from $14.1 million in 1999 as a result of scheduled reductions in research and development support under our collaboration agreement with Warner-Lambert. Revenue from ongoing research and development support in 1999 included additional revenues resulting from an amendment to the collaboration agreement with Warner-Lambert effective January 1, 1999. Pursuant to the amendment, Warner-Lambert received the right, at its expense, to manufacture collaboration products for clinical and commercial sales worldwide, excluding Asia. Before the amendment, we were expending funds to develop manufacturing capability for which we were not entitled to reimbursement. In connection with the amendment, we were entitled to receive additional payments from Warner-Lambert for process development support activities. These payments aggregated $6.3 million in 1999, which included $1.3 million for reimbursement of expenditures incurred by us before 1999. Payments for process development support in 2000 totaled $3.0 million for successfully establishing a manufacturing process suitable for clinical manufacturing. Over 94% of our ongoing research and development support in 2000 and 1999 were earned under our collaboration agreement with Warner-Lambert.

        Contract, license and milestone payments.    Recognition of contract, license and milestone payments increased to $5.1 million in 2000 from $2.9 million in 1999. Revenues in 2000 consisted primarily of $3.1 million from the amortization of upfront contract and license fees and a $2.0 million technology success fee related to the development of a production process and testing methods suitable

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for Phase III clinical trial manufacturing. Revenues in 1999 consisted of amortization of upfront contract and license fees.

OPERATING EXPENSES:

        Research and development.    Research and development expenses increased 8% to $15.4 million in 2000 from $14.2 million in 1999. The increase in our research and development activities related primarily to internal product development programs including the initiation of clinical development of TNFerade and preclinical development efforts for our AdPEDF product and GENSTENT programs.

        General and administrative.    General and administrative expenses increased 31% to $6.9 million in 2000 from $5.3 million in 1999. The increase was primarily attributable to higher levels of expenditures related to legal and consulting fees associated with our new product development initiatives, including acquiring and maintaining our intellectual property portfolio, higher operating expenses related to our new facility and higher compensation charges resulting from the amortization of the deferred compensation expense from stock options granted.

        Other income.    Other income, consisting primarily of interest income, net of interest expense, decreased 12% to $534,000 in 2000 from $607,000 in 1999. The $73,000 decrease was due to increased interest expense related to the financing of our new facility, and lower levels of cash available for investing as compared to 1999.

LIQUIDITY AND CAPITAL RESOURCES

        In December 2000, we raised $34.0 million, net of underwriters discounts and commissions of $2.7 million and offering costs of $1.3 million, from our initial public offering. Concurrent with the closing of this offering, we sold $5.0 million of our common stock to Warner-Lambert in a private transaction as part of the 1997 research, development and collaboration agreement. In December 2001 we raised an additional $12.8 million, net of offering costs of $118,000, in a private equity offering.

        As of December 31, 2001, we held $19.9 million in cash and cash equivalents and short-term investments, as compared to $39.8 million as of December 31, 2000 and $22.0 million in long-term investments as of December 31, 2001 compared to $6.7 million as of December 31, 2000. Net cash used in operating activities was approximately $16.2 million in 2001. Net cash used in investing activities was approximately $15.1 million, which consisted principally of the purchases of investment securities of a longer-term duration and the purchase of property and equipment. In the past, we have contracted with various academic institutions and research organizations to perform research and development activities and with clinical sites for the treatment of patients under clinical protocols. Such contracts expire at various dates and have differing renewal and expiration clauses. Several of these contracts are currently in the renewal process. Our commitments are summarized in the following table:

        As discussed above, Pfizer notified us of their plans to discontinue the co-development of BioBypass® angiogen; Pfizer has no obligations to us after July 2002. As a result, we will no longer be receiving milestone and other payments that we had been receiving under the terms of the agreement.

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These milestones and other payments, together with securities offerings, have been our primary source of funding during the last several years. We will require substantial funds in addition to our present working capital to develop our product candidates and meet our business objectives. We may seek additional future funding through collaborative arrangements and strategic alliances, additional public or private equity or debt financing, additional licensing arrangements, or some combination of these alternatives. Some of these arrangements may require us to relinquish rights to certain of our existing or future technologies, product candidates or products that we would otherwise seek to develop or commercialize on our own, or to license the rights to our technologies, product candidates or products on terms that are not favorable to us. In addition, if we lack adequate funding, we may be required to delay, reduce the scope of, or eliminate one or more of our research and development or clinical programs.

        We anticipate that annual expenditures for research and development, including clinical trials, product development and preclinical studies, and general and administrative activities will increase significantly in future years. In the future, our liquidity and capital resources will depend upon, among other things, the level of our research, development, clinical, regulatory and marketing expenses and funding from collaborations.

        In connection with the return of BioBypass® angiogen, we expect to incur additional costs related to the transfer of required technology and manufacturing capability to a contract manufacturing organization for production of BioBypass® angiogen for Phase III clinical trials. Costs may be incurred in connection with the transfer itself as well as potential delays in our clinical trials if product is not available for scheduled trials due to manufacturing delays. We may also incur patient follow-up costs in connection with our assumption of the ongoing clinical trials for BioBypass® angiogen.

        As of December 31, 2001, we held $41.9 million in cash and investments. We believe that our cash reserves and anticipated cash flow from our current corporate collaborations will be sufficient to support our operations for approximately 18 months. Without new corporate collaborations or additional equity financing, we would use approximately $25.0 million in cash over the next twelve months, including approximately $2.5 million for capital expenditures related to expansion of facilities and internal research and development capabilities. We expect that significant additional financing will be required in the future, which we may seek to raise through public or private equity offerings, debt financing, additional strategic alliance and licensing arrangements or some combination of these financing alternatives.

        As of December 31, 2001, our net operating loss carry forwards were approximately $62.9 million. If not utilized, our loss carry forwards will expire at various dates through 2021. Utilization of our net operating losses to offset future taxable income, if any, may be substantially limited due to "change of ownership" provisions in the Internal Revenue Code of 1986. We have not yet determined the extent to which limitations may have been triggered as a result of past or future financings. This annual limitation may result in the expiration of certain net operating losses before their use.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

        The primary objective of our investment activities is to preserve our capital until it is required to fund operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. As of December 31, 2001, we had cash and cash equivalent and short-term and long-term investments of $41.9 million as follows:

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        Our exposure to market risk is confined to our cash and cash equivalents, which consist of commercial paper having maturities of less than one year, and our investment portfolio. We maintain an investment portfolio of investment grade government agency notes, corporate bonds and asset-backed securities. The securities in our investment portfolio are not leveraged, are classified as available-for-sale and are, due to their predominantly short-term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure on our investment portfolio. As of December 31, 2001, securities totaling $5.4 million mature in 2002, $6.7 million mature in 2003, $6.1 million mature in 2004, $4.4 million mature in 2005 and $4.8 million mature in 2006. While we do not believe that an increase in market rates would have any significant negative impact on the realizable value of our investment portfolio, changes in interest rates affect the investment income we earn on our investments and, therefore, impact our cash flow and results of operations. We have operated in the United States and all revenues to date have been received in U.S. dollars. Accordingly, we have not had any material exposure to foreign currency rate fluctuations.

        At December 31, 2001, we had an outstanding bond payable of $4.6 million. This bond bears interest at a variable rate based on LIBOR. During 2000, we entered into an interest rate swap agreement that effectively fixed the interest rate over the life of the bond at 6.68% plus a remarketing fee. We also have outstanding loans and capital lease obligations totaling $1.4 million at fixed interest rates ranging from 5.0% to 10.8%. Principal and interest on these loans is due and payable monthly.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The response to this item is submitted in a separate section of this report. See Index to Financial Statements on Page F below for a list of the financial statements being filed herein.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

        Information required by this item, with the exception of information on our executive officers, is incorporated by reference from our Proxy Statement relating to the 2002 Annual Meeting of Stockholders to be filed pursuant to General Instruction G(3) to Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

        The information required by this item is incorporated by reference from our Proxy Statement relating to the 2002 Annual Meeting of Stockholders to be filed pursuant to General Instruction G(3) to Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by this item is incorporated by reference from our Proxy Statement relating to the 2002 Annual Meeting of Stockholders to be filed pursuant to General Instruction G(3) to Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by this item is incorporated by reference from our Proxy Statement relating to the 2002 Annual Meeting of Stockholders to be filed pursuant to General Instruction G(3) to Form 10-K.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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39

*

Compensatory plan, contract or arrangement.

+

Certain portions of this exhibit have been omitted based upon a request for confidential treatment. The omitted portions have been filed with the Commission pursuant to our application for confidential treatment.

(1)

Incorporated by reference to our Registration Statement on Form S-1 (File No. 333-47408) declared effective by the Securities and Exchange Commission on December 12, 2000.

(2)

Incorporated by reference from our Registration Statement on Form S-8 (File No. 333-55590) filed with the Securities and Exchange Commission on February 14, 2001.

(3)

Incorporated by reference from our Annual Report on Form 10-K (File No: 0-24469) filed with the Securities and Exchange Commission on March 30, 2001.

(4)

Incorporated by reference from our Registration Statement on Form 8-A (File No: 0-24469) filed with the Securities and Exchange Commission on September 26, 2001.

(5)

Incorporated by reference from our Form 8-K (File No: 0-24469) filed with the Securities and Exchange Commission on January 3, 2002.

(b)

Reports on Form 8-K.

No reports on Form 8-K were filed during the fourth quarter of 2001.

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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.

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.

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GENVEC, INC.
INDEX TO FINANCIAL STATEMENTS

42

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
GenVec, Inc.

We have audited the accompanying balance sheets of GenVec, Inc. as of December 31, 2000 and 2001, and the related statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GenVec, Inc. as of December 31, 2000 and 2001, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

McLean, Virginia
February 26, 2002

F-1

GENVEC, INC.

Balance Sheets

See accompanying notes to financial statements.

F-2

GENVEC, INC.

Balance Sheets (continued)

See accompanying notes to financial statements.

F-3

GENVEC, INC.
Statements of Operations

See accompanying notes to financial statements.

F-4

GENVEC, INC.
Statements of Stockholders' Equity