(Mark One)

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

For the fiscal year ended December 31, 2004

or

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______________to_______________.

GENVEC, INC.

(Exact name of Registrant as specified in its charter)

DELAWARE		23-2705690
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

65 WEST WATKINS MILL ROAD, GAITHERSBURG, MD		20878
(Address of principal executive offices)		(Zip code)

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:

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 xNo o.

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) 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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). xYes o No

As of June 30, 2004, the aggregate market value of the voting and non-voting common equity 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 $138,356,307. 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 June 30, 2004 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, 2005 there were 55,635,968 shares of the Registrant's common stock, par value $0.001 per share, outstanding.

PART NO.	ITEM NO.	DESCRIPTION	PAGE NO.
I	1	BUSINESS	2
	2	PROPERTIES	25
	3	LEGAL PROCEEDINGS	25
	4	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	25
II	5	MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	28
	6	SELECTED FINANCIAL DATA	28
	7	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	29
	7A	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	35
	8	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	36
	9	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	36
	9A	CONTROLS AND PROCEDURES	36
	9B	OTHER INFORMATION	36
III	10	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	37
	11	EXECUTIVE COMPENSATION	37
	12	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	37
	13	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	37
	14	PRINCIPAL ACCOUNTANT FEES AND SERVICES	37
IV	15	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	38
		FINANCIAL STATEMENTS	F

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 PRODUCT CANDIDATES UNDER DEVELOPMENT; RISKS RELATING TO OUR ABILITY TO SECURE AND MAINTAIN RELATIONSHIPS WITH COLLABORATORS; UNCERTAINTIES WITH, AND UNEXPECTED RESULTS AND RELATED ANALYSES RELATING TO CLINICAL TRIALS OF OUR PRODUCT CANDIDATES; THE TIMING AND CONTENT OF FUTURE U.S. FOOD AND DRUG ADMINSTRATION REGULATORY ACTIONS; DEPENDENCE ON EFFORTS OF THIRD PARTIES; DEPENDENCE ON INTELLECTUAL PROPERTY; RISKS THAT WE MAY LACK THE FINANCIAL RESOURCES AND ACCESS TO CAPITAL TO FUND OUR OPERATIONS; AND RISKS RELATING TO THE COMMERCIALIZATION, IF ANY, OF OUR PRODUCT CANDIDATES (SUCH AS MARKETING, REGULATORY, PATENT, PRODUCT LIABILITY, SUPPLY, COMPETITION AND OTHER RISKS). FURTHER INFORMATION ON THE FACTORS AND RISKS THAT COULD AFFECT OUR BUSINESS, FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS, ARE CONTAINED IN THE SECTION BELOW ENTITLED "BUSINESS RISKS AND UNCERTAINTIES." WE WILL NOT UPDATE ANY FORWARD-LOOKING STATEMENT TO REFLECT NEW, CHANGING OR UNANTICIPATED EVENTS OR CIRCUMSTANCES THAT OCCUR AFTER THE DATE, ON WHICH THE STATEMENT IS MADE, EXCEPT AS MAY BE REQUIRED BY LAW OR REGULATION.

ITEM 1.  BUSINESS

Each of our gene-based product candidates uses a common, patent-protected technology platform that uses a vehicle, commonly called a vector, to deliver genes that produce medically beneficial proteins directly at the site of disease. Proteins are widely used in the practice of medicine, and have already become FDA-approved products. The medical use of many proteins, however, has been limited by the inability to maintain sufficient concentrations of the protein at the site of the 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. We believe that our technology addresses these key hurdles and may have many advantages when compared with other protein therapy approaches including:

· The efficient production of therapeutic proteins at the site of disease;

· Better toleration by localized administration to the diseased tissue thereby avoiding toxicity associated with systemic administration of proteins; and

· More cost-effective development since each of our product candidates shares common production and scale-up, purification, quality assessment and formulation technologies.

We use adenovectors to deliver protein-coded genes to cells. Adenovectors are modified adenoviruses, which are naturally occurring viruses that cause aliments like a common cold. Our adenovectors lack the ability to replicate and cannot reproduce themselves inside the body. Our vectors also do not invade or integrate with the DNA of the patients. Therefore, the insertion of the gene coded for the therapeutic protein is not permanent. The vector carrying the gene is delivered to the site of disease, produces the therapeutic protein for a desired period of time, and is then eliminated from the body.

Our gene-based therapeutic product candidates have been generally well tolerated in multiple human clinical trials using our proprietary protein delivery approach. We believe results to date support the broad applicability and commercial potential of our product candidates. In addition to our internal product development programs, we are working with our collaborators and customers to develop second-generation vectors and new applications for our technology, such as preventative vaccines to treat infectious diseases. Our current projects include:

·

A multi-year, $40 million collaboration with The Vaccine Research Center at the National Institute of Allergy and Infectious Diseases of The National Institutes of Health to develop preventative AIDS and SARS vaccine candidates, announced January 2002;

·

Other funded preventative vaccine development programs include the United States Naval Medical Research Center and the Malaria Vaccine Initiative to develop a malaria vaccine and a collaboration with the Agriculture Research Service of the United States Department of Agriculture to develop anti-viral treatments to prevent foot and mouth disease; and

·

A three-year, $4.5 million contract extension announced January 2003 with Fuso Pharmaceuticals Industries of Japan to develop a targeted cancer therapy product candidate designed to treat not only the primary tumor, but also cancer that has spread, or metastasized, to distant sites in the body. Under the terms of our agreement with FUSO, we have retained worldwide rights, excluding Japan, to develop and commercialize product candidates arising from the collaboration.

BIOBYPASS for severe heart disease. BIOBYPASS is designed for the treatment of coronary artery disease. As a result of blocked arteries in the heart, patients with severe coronary artery disease typically experience severe, often immobilizing, pain from minimum physical activity such as walking. This pain is known as hypoxic pain because it results from a lack of oxygen to the tissues. BIOBYPASS is intended to restore blood flow to areas of the heart with insufficient blood flow through the formation of new blood vessels, a process known as angiogenesis. BIOBYPASS produces the therapeutic protein, vascular endothelial growth factor (VEGF₁₂₁) that stimulates the growth of new blood vessels in heart tissue and restores blood flow to areas of the heart with poor blood flow. Our approach of directly injecting BIOBYPASS into the heart wall through a minimally invasive catheter approach enables the sustained, controlled production of the VEGF₁₂₁in in the area of the heart with poor blood flow.

In May 2002, we completed a randomized, controlled Phase II study of 67 patients with severe coronary artery disease and no treatment options (the “REVASC study”). In November 2002, we presented positive results from the REVASC study at the American Heart Association annual meeting showing that these “no option” patients benefited when they received BIOBYPASS administered by a surgical procedure. Patients treated with BIOBYPASS showed a greater ability to exercise, less chest pain, less need for medication for angina pain and an improved quality of life compared to patients receiving the current standard of care. There were no drug-related serious adverse events or dose limiting toxicities. Also in 2002, we completed a Phase I clinical study designed to demonstrate the feasibility of using an injection catheter to deliver BIOBYPASS directly to the heart muscle. This study is of importance since we anticipate that the commercialized version of BIOBYPASS will be delivered by a non-surgical injection catheter such as that used in our feasibility study. Results of this study were presented at the American College of Cardiology meeting in March 2003 demonstrating the safety and feasibility of using an injection catheter to deliver BIOBYPASS.

In January 2004, the Company entered into a research collaboration with the Cordis Cardiology Division of Cordis Corporation, a Johnson & Johnson company, to study the clinical benefit of BIOBYPASS in a procedure involving guided delivery of this angiogenic agent directly into targeted regions of the heart in patients with severe coronary artery disease using the Cordis NOGASTAR® Mapping Catheter and MYOSTAR™ Injection Catheter.

The purpose of this collaboration is to evaluate the effects of BIOBYPASS on exercise tolerance and heart function in a randomized, placebo-controlled Phase II trial in 129 patients with advance heart disease. This NOVA (NOGA Delivery of VEGF in Angina) study was initiated in March 2005 and will be conducted at multiple sites in Europe and Israel. GenVec and Cordis will collaborate on regulatory matters and share in the clinical trial costs. GenVec will supply BIOBYPASS and Cordis will provide the injection catheters and training to the interventional cardiologists conducting the trial. GenVec retains commercial rights to BIOBYPASS and Cordis retains commercial rights to their NOGASTAR mapping catheters and MYOSTAR injection catheters. This clinical study is intended to confirm previous clinical results seen in the REVASC study and help position this product candidate for a pivotal Phase III trial.

 

 

PEDF for treatment of vision loss. Another product candidate, PEDF, is designed for the treatment of wet age-related macular degeneration (AMD). AMD is a progressive eye disease characterized by the growth of abnormal blood vessels in the center portion of the retina (the macula), the area of the eye that makes central vision and visual acuity possible. GenVec believes that early intervention therapy with PEDF holds the promise to stabilize or improve patient vision. According to the Macular Degeneration Network, and others, there are approximately 200,000 new cases of wet age-related macular degeneration diagnosed each year in the United States and more than 500,000 cases diagnosed worldwide, and it is a leading cause of blindness in individuals over the age of 50. PEDF uses GenVec’s proprietary adenovector, a DNA carrier, to deliver the pigment epithelium - derived factor (PEDF) gene that results in the production of PEDF protein in the treated eye.  PEDF is normally produced in the eye and serves two important functions.  PEDF is the eye’s key natural regulator of normal blood vessel growth.  It also is a neuro-protective agent of the photoreceptors (the vision - sensing cells of the eye responsible for sight).  PEDF’s key differentiation from other therapies is its potential to protect the retina from damage caused by fragile, leaky, abnormal blood vessels.

During 2004, we completed enrollment of the dose-escalating portion of a Phase I multi-center clinical trial of PEDF in 28 patients with wet age-related macular degeneration. Results of the first part of the Phase I study were reported at the Subspecialty Retina Day symposium of the first joint session of the American Academy of Ophthalmology and the European Ophthalmology Society on October 22, 2004. In this study, which was conducted in patients with very advanced wet AMD, PEDF was generally well tolerated at all dose levels and encouraging effects on retinal appearance were seen in some patients. In February 2005, we initiated the second part of the ongoing Phase I clinical trial of PEDF in 20 patients with less advanced AMD at the Wilmer Eye Institute at The Johns Hopkins School of Medicine. This multi-center Phase I study will compare two doses of PEDF (already tested) to evaluate the drug’s safety, tolerability, and effects on vision as well as to establish the dose level(s) for possible Phase II clinical testing. PEDF, in animal studies, has been demonstrated to rapidly elevate the intraocular PEDF protein levels in the eye, inhibit the growth of unwanted blood vessels in the eye and cause selective regression of established abnormal blood vessels, and protect the retina from damage.

Cell Transplantation Therapy for Congestive Heart Failure. Our scientists have isolated and expanded muscle cells from human tissue and are studying the use of these cells for transplantation into damaged heart muscle. We believe that patients suffering from heart attacks would benefit if these muscle cells could repair their damaged hearts. These cells, isolated from a muscle biopsy of a patient who had suffered a heart attack, allow transplantation of the patient’s own muscle cells into his or her heart, thereby avoiding rejection by the body's immune system. Preclinical studies published in the journal Circulation showed that transplantation of muscle cells after myocardial infarction in an animal model was well tolerated and improved cardiac function.

We have completed patient enrollment in three Phase I clinical trials treating patients with damaged heart muscle. One of these trials involved transplanting muscle cells into a patient's heart at the same time that the patient received a left ventricular assist device (LVAD). The LVAD is implanted in these patients as a bridge to heart transplant. Our clinical trial involved the implantation of 300 million myoblasts in six patients. Once a patient receives a new heart in this trial, we are able to histologically examine their old heart. This allowed us to evaluate cell survival and new blood vessel formation after transplantation. In March 2003, we and our collaborators published the results from the review of four explanted hearts in the Journal of American College of Cardiology. Upon examination, we noted skeletal muscle cells survived and differentiated into mature myofibers in three of the four hearts and in one heart we noticed an increase in small vessel formation at the site of surviving myotubes.

The second Phase I clinical trials involved transplanting human muscle cells into the heart at the same time that a patient underwent coronary artery bypass surgery (CABG). This was a 12-patient dose escalation trial with safety being evaluated at doses ranging from 10 million to 300 million cells. Results of this trial were presented in November 2003 at the American Heart Association annual meeting. In the first half of 2004, the Company initiated a follow-on study to the first CABG study, our third Phase I clinical trial, to more clearly discriminate the clinical benefit attributable to the CABG versus the potential contribution from the myoblast transplantation. This multi-center Phase I study enrolled 12 patients with transmyocardial scars. In this study, myoblasts were transplanted into a region of the heart with a significant scar. Since CABG cannot restore function to non-viable, scarred myocardium, any post-treatment improvements detected in the region of the scar could be attributed to the myoblasts alone. Similar to the first CABG study, improvements in multiple measures were demonstrated. Patients showed improvements in cardiac output, ventricular dimensions and in measures of tissue viability.

Develop and commercialize our other product candidates through corporate alliances. We intend to form strategic alliances with other companies to develop and commercialize BIOBYPASS for patients with severe heart disease, Cell Transplantation Therapy for congestive heart failure and PEDF for patients with wet age-related macular degeneration. In January 2004, we entered into an agreement with Cordis Corporation to conduct a randomized, double-blind, placebo-controlled Phase II trial to study the clinical benefit of BIOBYPASS in a procedure involving guided delivery of the angiogenic agent directly into targeted regions of the heart in patients with severe coronary artery disease using the Cordis NOGASTAR Mapping Catheter and MYOSTAR Injection Catheter. Strategic alliances will allow us to further the development of our product portfolio while we focus our internal efforts on the development of our lead product candidate, TNFerade.

Expand our product candidate pipeline and enhance our technology base. We will continue to seek to enhance our gene delivery capabilities through internal research, external collaborations and acquisitions. We have received funding for research collaborations to develop preventative vaccines against HIV, SARS, malaria and dengue virus, and an anti-viral to prevent foot and mouth disease, and to develop a second-generation TNFerade product candidate. 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 through these relationships.

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

·

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

·

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

·

Achieve efficient gene and protein delivery to target cells;

·

Control the amount and duration of production of therapeutic proteins to allow flexibility in treating different diseases; and

·

Produce commercial quantities of our product candidates.

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 or cause a cold. We do this to limit toxicity, including unwanted effects on target cells and the surrounding tissue, and to reduce immune responses to our vectors. We have multiple versions of vectors to suit different application in therapeutic and vaccine products.

When administered to tissues, our vectors enter target cells and produce the protein encoded by the inserted gene. In addition to their use in therapeutic and vaccine product candidates, these vectors can be used for functional genomics purposes to help determine the function of a specific gene and its potential use as a therapy. Adenovectors can be re-engineered to alter their performance characteristics, including their ability to deliver genes to the targeted tissue.

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

·

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

·

Adenoviruses are naturally eliminated from cells and tissues; and

·

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

Use of delivery devices. To achieve local production of proteins, we administer our product candidates directly to the site of disease using standard 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 have used percutaneous injection to administer TNFerade directly to the tumor and catheters to administer BIOBYPASS directly into diseased areas of the heart.

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 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.

·

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. This technology is being used in our collaboration with FUSO Pharmaceuticals Industries, Ltd.

·

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.

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

Control of gene expression. Our technology also 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. In TNFerade, we intend to achieve local production of the TNF-alpha protein in cancerous tissue undergoing radiation treatment and chemotherapy by inserting a specific promoter that will increase protein production after radiation or chemotherapy, enhancing protein concentration in the cancer tissue receiving treatment. We have broad proprietary technology for the use of chemo-radiation-induced gene expression in TNFerade.

We believe our proprietary production technology and know-how facilitates the production, purification, quality assessment and formulation of our product candidates. The structure of our 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. We currently use third-party manufacturers for production of our product candidates for clinical purposes.

·

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.

·

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.

·

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.

·

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 formulations allow products to be conveniently stored, shipped and used. For research purposes, our formulation enhances the ease and reproducibility of testing.

Malaria Vaccine Initiative. In March 2004, we signed a two-year, $2.6 million contract for the development, production and evaluation of vaccines against malaria. Under the contract, the Company will be responsible for constructing adenovector-based vaccine candidates using is proprietary cell line and second-generation adenovector technology. The Company has a separate agreement for work to be performed under a Collaborative Research and Development Agreement (CRADA) with the Navy Medical Research Center (NMRC). Under the CRADA, NMRC will provide the Company with optimized malaria genes to be used in the development of the adenovector -based vaccines as well as provide preclinical evaluation of the vaccine candidates.

Sponsored Research. We also 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 the University of Chicago (TNFerade), the Johns Hopkins University (PEDF), and the University of Maryland and Michigan (Hearing Loss).

 

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

SOURCE	GENE	NATURE OF LICENSE
Asahi Chemical Industry Co., Ltd	TNF - alpha	United States, non-exclusive, for all gene therapy applications
Scios, Inc.	VEGF121	Worldwide, exclusive for all gene therapy applications
Public Health Service	PEDF	Worldwide, exclusive for all ocular gene therapy and protein applications
Northwestern University	PEDF	Worldwide, exclusive for all ocular gene therapy applications

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.

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:

·

obtain patents to protect our own products;

·

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

·

protect our trade secrets and know-how; and

·

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, 2005, we held or had licenses to 394 issued, allowed or pending patents worldwide, of which 105 are issued or allowed in the U.S. These patents and patent applications pertain to genes that encode therapeutic proteins, expression control elements that regulate the production of the therapeutic proteins by such genes, vectors into which we incorporate such genes and expression control elements to create our product candidates, cells for cardiac repair, cell lines used to manufacture our product candidates, targeting technology for adding specificity to our product candidates, methods of constructing, producing (including purification, quality control and assay techniques), storing, and shipping our product candidates, methods of administering our product candidates, and methods of treating disease using our product candidates. 

TNFerade. We have issued patents and pending patent applications pertaining to such adenovectors, the expression control elements used in TNFerade to cause production of the TNF-alpha protein by the TNF-alpha gene, and methods of using TNFerade for treating disease. In particular, we have an issued U.S. patent, expiring in 2020, covering the TNFerade vector product, which adds to the Company's broad intellectual property position around its lead oncology program and core adenovector technology. We have an exclusive license to issued U.S. patents expiring between 2010 and 2015 pertaining to radiation-induced gene expression and a radiation-inducible promoter enabling controlled production of therapeutic proteins from gene therapy products, including TNFerade. We have a nonexclusive license under the U.S. patent, expiring in 2006, relating to the TNF-alpha gene, which we inserted into a second-generation adenovector to create 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.

BIOBYPASS. We have an exclusive license, under a patent expiring in 2010, for all gene therapy products using the VEGF₁₂₁ gene. In addition, we have an exclusive license to an issued patent, expiring in 2017, and pending patent applications pertaining to the delivery of angiogenic substances, such as BIOBYPASS. 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 pending patent applications for adenovectors, including possibly the adenovector used in BIOBYPASS. We are aware of 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 BIOBYPASS, 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 BIOBYPASS. It could be alleged that BIOBYPASS conflicts with such existing or future patents.

PEDF product candidates. We have exclusive rights, under patents expiring in 2015 and thereafter, to use the PEDF gene and PEDF protein for all ocular applications. 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 PEDF 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 PEDF product candidates conflict with such existing or future patents.

Cell Transplantation Candidates. We have an issued U.S. patent expiring in 2019 and additional pending foreign patent applications relating to compositions that include skeletal myoblasts and fibroblast cells that can be transplanted into the cardiac tissue of patients suffering from diseased, damaged or insufficient cardiac function. We also have a pending U.S. application containing additional data and supporting additional patent claims to related methods and compositions. Additionally, we have a pending U.S. application to an improved system for delivering a liquid (e.g., a cell suspension) to solid tissue sites. Both applications have pending related foreign applications. We have an issued U.S. patent expiring in 2013 relating to an injectable culture medium for maintaining viable myoblast cells. The medium can be used to maintain myoblasts for an extended period of time and can be injected into a desired transplantation site of a patient. We have a non-exclusive license under a patent expiring in 2014 relating to a method of forming a stable myocardial graft in a mammal by introducing myoblast or cardiomyocytes into the myocardial tissue of the mammal. We are aware of a U.S. patent of a third party that has been submitted for reexamination pertaining to methods of forming stable myocardial grafts by transplanting skeletal myoblast or fibroblasts into scar tissue in a heart.

UTV technology and DART vectors. We have issued patents, expiring in 2014 and thereafter, 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, which are designed for the purpose of creating product candidates that deliver genes in adenovectors only to selected cells, and special cell lines required for the production of the UTV and DART vectors. We are aware, however, of 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.

Production, purification, quality assessment and formulation technology. We have issued patents, expiring in 2017 and thereafter, and pending patent applications pertaining to the production, purification, quality assessment and formulation of our product candidates. In particular, we have pending patent applications covering specialized cell lines for production of both small and large volumes of our product candidates, the process for manufacturing our product candidates, the purification of our product candidates applicable to both research and commercial scales, methods of assessing and confirming the quality and purity of our product candidates for 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 product candidates and allow our product candidates to be conveniently stored, shipped and used. We are aware, however, of 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.

To date, we only have entered into collaborative agreements with a limited number of companies, and some of those are no longer in effect. The success of our business strategy depends, in part, on our ability to enter into and sustain collaborations with other companies for the development and commercialization of our product candidates. Unless we are able to enter into and sustain collaboration agreements, we will need to raise additional funds for the development, testing, and commercialization of our product candidates. If collaborations or other funding is not available, we may have to delay or curtail the development and commercialization of certain product candidates.

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. The resolution of such conflicts and disagreements may require us to relinquish rights to our intellectual property that we believe we are entitled to. In addition, any disagreement or conflict with our collaborators could reduce our ability to obtain future collaboration agreements and negatively impact our relationship with existing collaborators. Such a conflict or disagreement 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.

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 its collaboration with us. In the past, we generally have agreed not to conduct independently, or with any third party, certain 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. Some of 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 withdrawing 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.

Gene-based medicines and cell transplantation are new and rapidly evolving medical approaches, which have 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 and cell transplantation products to date. In addition, no gene therapy product has received regulatory approval in the United States. We also have only limited data relating to the safety and effectiveness of our product candidates and 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 medicine and cell transplantation products may be susceptible to various risks, including undesirable and unintended side effects from genes, cells 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 medicines or cell transplantation products. We may be unable to successfully select those genes or cells with the most potential for commercial development.

We face the risk 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 or trials, and failure could occur at any stage of testing. Acceptable results in early testing or trials might 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 effectiveness of our product candidates would prevent FDA approval of our products. 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.

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The pharmaceutical industry is subject to stringent regulation by a wide range of authorities. We cannot predict whether we or our collaborators 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, the FDA has not approved a gene therapy product for sale in the United States. 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 the FDA and receive approval from the FDA of an Investigational New Drug application (“IND”). 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 (GCP);

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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 risks similar to those associated with FDA clearance described above.

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 gene-based products in the volumes that will be necessary to support large-scale clinical trials or commercial sales. We do not yet know the extent to which we will be able to adapt our existing Charlestown manufacturing facilities and processes to the manufacture of gene therapy product candidates.

Our Charlestown facility currently is the only manufacturer of our cell transplantation product candidates. For the next several years, we expect to conduct manufacturing for cell transplantation products in the facility in Charlestown, Massachusetts. If this facility or the equipment in this facility is significantly damaged or destroyed, we will not be able to replace quickly or inexpensively our manufacturing capacity. We do not have any experience manufacturing cell transplantation product candidates in the volumes that will be necessary to support large clinical trials or commercial sales. Our present manufacturing process may not meet initial expectations as to scheduling, reproducibility, yield, purity, cost, potency or quality.

If we or our collaborators are unable to manufacture our product candidates in clinical quantities or, when necessary, commercial quantities, then we will need to rely on third parties to manufacture compounds for clinical and commercial purposes. These third-party manufacturers must receive FDA approval before they can produce clinical material or commercial products. 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. 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 on a timely basis and at commercially reasonable prices would negatively affect our operations.

Before we or our collaborators can begin commercial manufacturing of any of our product candidates, we or our collaborators must obtain regulatory approval of the 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 product meets applicable specifications and other requirements. We or our collaborators must also pass a pre-approval inspection before FDA approval. If we or our collaborators fail to comply with these requirements, our product candidates would not be approved. If we or our collaborators fail 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.

Very few companies have shown successful large-scale manufacturing of gene-based medicines or cell transplantation 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-base medicines or cell transplantation products, or receive appropriate government approvals, on a timely basis or at all. Failure to successfully manufacture or obtain appropriate government approvals on a timely basis or at all would prevent us from achieving our business objectives.

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 process 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 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. For supply of early clinical trial materials, we rely on one supplier Invitrogen Corporation, for its cell culture medium. The cell culture medium is used to grow the cells within which our product candidates are produced. For supply of late-stage clinical trial materials, we currently are planning to use purification resins from the Applied Biosystems Group of Applera Corporation and the BioSepra S.A. Process Division of Pall Corporation in addition to the one supplier for cell culture medium. We do not currently have supply agreements with any of these suppliers. Any significant problem experienced by one of our 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. We have limited experience with alternative sources of the aforementioned raw materials. Any delay or interruption would likely lead to a delay or interruption of manufacturing operations, which could negatively affect our operations.

We currently have limited sales, marketing and distribution capabilities. As a result, we will depend on collaborations with third parties that have established distribution systems and direct sales forces. To the extent that we enter into co-promotion or other licensing arrangements, our revenues will depend upon the efforts of third parties, over which we may have little or no control. If we are unable to reach and maintain agreements with one or more pharmaceutical companies or collaborators, we may be required to market our products directly. In any case we may elect to establish our own specialized sales force and marketing organization to market our products to physicians. In order to do this, we would have to develop a marketing and sales force with technical expertise and with supporting distribution capability. Developing a marketing and sales force is expensive and time consuming and could delay a product launch. We cannot be certain that we will be able to attract and retain qualified sales personnel or otherwise develop this capability.

We compete with pharmaceutical and biotechnology companies that are pursuing other forms of treatment for the diseases that our 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:

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identifying important genes or delivery mechanisms before us;

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developing products or product candidates earlier than we do;

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

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

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developing and validating manufacturing processes more rapidly than we do;

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

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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.

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 therapy, delivery systems, production, formulations and the like, is particularly uncertain. The U.S. Patent and Trademark Office, as well as the 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 therapy 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 patents and they may be held to be invalid. In addition, various components used in developing gene 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, we or our collaborators 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 therapies or technologies for which we or our collaborators have or are seeking U.S. patent protection. Our competitors may be free to use these gene 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 or use of our trade secrets. In addition, other companies or institutions may independently develop substantially equivalent information and techniques.

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 and 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. 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 we may be unaware of relevant patents and patent applications of third parties. In addition, those freedom to use patent searches that have been 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 circumstances, 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 holder of a patent to which we or our collaborators do not hold a license 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 or preclude 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 expended 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.

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 VEGF₁₂₁, 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 in certain other circumstances. 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.

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. Other patient deaths have occurred in other gene-based clinical trials. These deaths and the resulting publicity surrounding them, as well as any other serious adverse events in the field of gene therapy or cell transplantation 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 held a series of hearings to determine whether additional legislation was required to protect patients who participate in clinical trials. Possibly as a consequence of these hearings, a specific division within the FDA for gene and cell therapy was established. Furthermore, extended patient follow-up for gene therapy product candidates has been recommended. 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. The NIH has 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. Additional scrutiny cannot be ruled out. 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 and cell transplantations for the prevention or treatment of human disease. Public attitudes may be influenced by claims that gene therapy or cell transplantation is unsafe, and gene therapy and cell transplantation may not gain the acceptance of the public or the medical community. Negative public reaction to gene therapy or cell transplantation could result in greater government regulation and stricter clinical trial oversight and commercial product labeling requirements of gene therapies and cell transplantation products and could cause a decrease in the demand for any products we may develop.

Our product candidates involve new technologies and therapeutic approaches in the field of gene therapy, which is a new and evolving field. As discussed above, no gene therapy product has received regulatory approval in the United States, and adverse events in this field may negatively affect public perception of our product candidates. Even if our product candidates attain regulatory approval, our success will depend upon the medical community, patients and third party payors accepting gene therapy products in general, and our product candidates in particular, as medically useful, cost-effective and safe. In particular, our success will depend upon physicians specializing in the treatment of those diseases that our product candidates target prescribing treatments that involve the use of our product candidates in lieu of, or in addition to, existing treatments that they are already familiar with and for which greater clinical data may be available. Even if the clinical safety and efficacy of our product candidates is established, physicians may elect not to recommend our products for a variety of reasons, including the reimbursement policies of government and third-party payors. Further, third-party payors, such as health insurance plans, may be reluctant to authorize and pay for new forms of treatment that they may deem expensive and less-proven that existing treatments. Even if gene therapy products, and our product candidates in particular, are accepted by the medical community and third-party payors, the public in general, or patients in particular, may be uncomfortable with new therapies, including our product candidates, and it could take substantial time for them to accept gene therapy products as a viable treatment alternative, if ever. If gene therapy and our product candidates do not gain widespread acceptance, we may be unable to generate significant revenues, if any, which would adversely affect our results of operations. In addition, even if our product candidates achieve market acceptance, we may not be able to maintain that market acceptance over time if new products or technologies are introduced that are more favorably received than our product candidates or render them obsolete.

We, alone or with our collaborators, may be held liable if any product we or our collaborators 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;

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withdrawal of our products from the market; if they have been approved;

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damage to our reputation;

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costs of litigation;

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substantial monetary awards to plaintiffs; and

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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. Currently, we have a total of $5 million liability coverage under a clinical trials and professional liability insurance policy. If we are sued for any injury caused by our products, our liability could exceed our total resources.

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, 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 polices 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.

Our success may depend, in part, on the extent to which reimbursement for the costs of therapeutic products and related treatments will be available from third-party payors such as government health administration authorities, private health insurers, managed care programs, and other organizations. Over the past decade, the cost of health care has risen significantly, and there have been numerous proposals by legislators, regulators, and third-party health care payors to curb these costs. Some of these proposals have involved limitations on the amount of reimbursement for certain products. Similar federal or state health care legislation may be adopted in the future and any products that we or our collaborators seek to commercialize may not be considered cost-effective. Adequate third-party insurance coverage may not be available for us to establish and maintain price levels that are sufficient for realization of an appropriate return on our investment in product development. Moreover, the existence or threat of cost control measures could cause our corporate collaborators to be less willing or able to pursue research and development programs related to our product candidates.

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. We also lease 25,000 square feet for research and development laboratories and manufacturing space located in Charlestown, Massachusetts. The lease expires on October 3, 2006; we have an option to extend the term of the lease for an additional five years. We believe that these facilities are sufficient for our current needs. We have additional space in our current facilities 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 quarter ended December 31, 2004 to a vote of security holders, through the solicitation of proxies or otherwise.

NAME	AGE	PRESENT POSITION WITH THE REGISTRANT
Paul H. Fischer, Ph.D.	55	President and Chief Executive Officer
Jeffrey W. Church	48	Chief Financial Officer, Treasurer and Corporate Secretary
E. Michael Egan	51	Sr. Vice President, Commercial Development
C. Richter King, Ph.D.	50	Sr. Vice President, Research
Bryan T. Butman, Ph.D.	52	Vice President, Quality
Nita U. Patel, Ph.D.	45	Vice President, Regulatory Affairs
Abdellah Sentissi, Ph.D.	55	Vice President, Quality Systems

Paul H. Fischer, Ph.D., serves as our President and Chief Executive Officer and as a director of the Company. Dr. Fischer has served as President and Chief Executive Officer and as a director of the Company since 1996. Prior to joining GenVec, he was Executive Vice President of Research and Development with Oncologix, Inc., (now Antigenics, Inc.) a biotechnology company. Dr. Fischer’s previous experience includes Manager, Cancer Research at Pfizer, Inc., a pharmaceutical company. Dr. Fischer performed post-doctoral research in Pharmacology at Yale University School of Medicine. He was an Assistant Professor of Pharmacology at the University of Missouri School of Medicine and an Associate Professor of Human Oncology at the University of Wisconsin, prior to joining Pfizer. Dr. Fischer received his B.S. in Biology from the University of Denver and his Ph.D. in Pharmacology from the University of California at San Francisco.

Jeffrey W. Church joined the Company in August 1998 and serves as Chief Financial Officer, Treasurer and Corporate Secretary. Prior to joining the Company, he served from September 1997 to August 1998 as Executive Vice President and Chief Financial Officer of Biospherics, Inc., a telecommunications and biotechnology company. Before that Mr. Church was employed with Meridian Medical Technologies, Inc., a medical device/drug delivery company. In addition to his CFO duties at Meridian, Mr. Church was also responsible for one of the company’s three operating units. Previously, Mr. Church spent seven years with PricewaterhouseCoopers as Audit Manager. Mr. Church received his B.S. in Accounting from the University of Maryland and is a Certified Public Accountant.

E. Michael Egan serves as Senior Vice President, Commercial Development. Mr. Egan joined GenVec after having served as Chief Operating Officer for Diacrin Inc., which was acquired by GenVec in August 2003. Mr. Egan has over 15 years experience in business development and laboratory management. During his career, he has been involved in the development of several key business collaborations and partnerships. Mr. Egan was a member of the Board of Directors of Repligen Clinical Partners, LP and Secretary/Treasurer of Repligen Sandoz Research Corporation. Mr. Egan received a BS in Biology from Boston College, Boston, MA and a Certificate of Special Studies in Administration and Management from Harvard University, Boston, MA.

C. Richter King, Ph.D., serves as our Senior Vice President of Research. From May 1998 to December 2004, Dr. King served as our Vice President of New Product Research, an area that he still oversees. Prior to joining GenVec in 1998, Dr. King conducted extensive research into the amplification of the erbB-2 gene, which is associated with common human cancers. Pursuing erbB-2 as a potential target for anticancer therapy, Dr. King directed an experienced research group at the Georgetown University Medical School’s Lombardi Cancer Research Center in Washington, DC, where he served as Associate Professor with the University’s Department of Biochemistry. Previously, Dr. King was the Director of Drug Discovery for Oncologix (now Antigenics, Inc.). Dr. King holds a Ph.D. in Biochemistry from the Johns Hopkins University in Baltimore, MD.

Bryan T. Butman, Ph.D., has served as our Vice President of Quality since March 2002. He joined GenVec in 1999 and previously served as Director of Quality and Analytical Sciences from September 1999 to March 2002. Immediately prior to joining GenVec, Dr. Butman was Executive Director, Diagnostic Product Research and Development with INTRACEL Corporation, a biotechnology company. Dr. Butman has over 20 years of experience in the development, clinical testing, registration and manufacture of medical diagnostic products and in the development of quality control assays for parenteral biopharmaceuticals. Throughout his biotechnology career, Dr. Butman has developed successful products in the areas of cardiovascular disease, oncology, infectious disease and hematology. He has held senior positions within Warner Lambert, AKZO-Nobel, Organon Teknika, PerImmune and INTRACEL. Dr. Butman holds a Ph.D. in Cell Biology from Wayne State University.

Nita U. Patel, Ph.D. joined GenVec in 2004 and serves as Vice President of Regulatory Affairs.  Prior to GenVec, Dr. Patel served as Senior Director of Regulatory Affairs at Baxter Healthcare Corporation and as Vice President of Regulatory Affairs and Quality Systems at Novavax, Inc.  Prior to Novavax, Dr. Patel served as Project Director at MedImmune and was responsible for coordinating both domestic and international filings and communications with regulatory authorities regarding the various products developed and produced by MedImmune, most notably Synagis.  Dr. Patel holds a Bachelor’s degree in biochemistry from Queen Elizabeth College, London and a Ph.D. in yeast genetics from University College London.  Dr. Patel also serves as an adjunct professor of Regulatory Affairs and Biotechnology at Montgomery College, Maryland.

Abdellah Sentissi, Ph.D. serves as Vice President of Quality Systems.  He joined GenVec after having served as Senior Director of Quality Systems for Diacrin Inc., which was acquired by GenVec in August 2003.   Dr. Sentissi has over 18 years experience in quality control and quality assurance of parenteral drugs; design and installation of new GMP facilities; quality assurance and regulatory submission.  During the course of his career in biotechnology, Dr. Sentissi has developed QA/QC Departments, implemented GMP in-house training programs; designed validation programs; and managed the manufacturing of a monoclonal antibody.  He has held increasingly senior positions with Massachusetts Biologic Laboratories and Endocon, Inc.  Dr. Sentissi holds a Ph.D. in Clinical Chemistry from Northeastern University, Boston, MA.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Since our initial public offering of common stock on December 12, 2000, our common stock has been traded in the over-the-counter market and is included for quotation on the Nasdaq National Market under the symbol GNVC.

 

Set forth below is the range of high and low closing sale prices for our common stock as reported on the Nasdaq National Market for the two most recent years:

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, 2004. 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.

 

		AS OF DECEMBER 31,
			2004			2003			2002			2001			2000
SUMMARY BALANCE SHEET DATA:
(in thousands)
Cash, cash equivalents and short-term
investments		$	30,763		$	26,523		$	17,652		$	19,930		$	39,790
Working capital			26,021			20,636			12,471			17,017			35,837
Long-term investments			2,302			13,438			2,708			21,988			6,682
Total assets			44,071			52,684			31,085			51,366			57,179
Long-term debt, less current portion			3,264			4,539			5,921			5,088			6,026
Accumulated deficit			(135,594	)		(116,700	)		(95,439	)		(69,841	)		(50,745	)
Total stockholders' equity			30,481			37,026			15,629			40,128			44,316

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 product candidates, and their market success relative to alternative products.

The discussion and analysis of GenVec's financial condition and results of operations are based upon GenVec's 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, GenVec evaluates its estimates using authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates. Significant accounting policies are more fully described in Note 2 to GenVec's financial statements included in this annual report on Form 10-K.

GenVec believes the following accounting policies to be critical because they require significant estimates or judgment on the part of management:

Revenue Recognition. 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. Reimbursable costs under such contracts are subject to audit and retroactive adjustment. Contract revenues and accounts receivable reported in the financial statements are recorded at the amount expected to be received. Contract revenues are adjusted to actual upon final audit and retroactive adjustment. Estimated contractual allowances are provided based on management’s evaluation of current contract terms and past experience with disallowed costs and reimbursement levels. Non-refundable R & D fees for which no further performance obligations exist are recognized when collection is assured. Contract and upfront license payments where GenVec has 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.

In accordance with Staff Accounting Bulletin 104, GenVec has deferred recognition of up-front contract or license payments received under its collaboration and license agreements and has amortized the related unearned revenues over the terms of the collaboration agreements, generally ranging from two to four years. GenVec's results of operations included $435,000, $98,000 and $-0- during the years ended December 31, 2004, 2003 and 2002, of amortization of these upfront contract and license fees which were received in prior years. As of December 31, 2004, GenVec had unearned upfront contract and license fees of $1.1 million related to the Terumo agreement acquired in the business combination consummated in August 2003. As of December 31, 2004 and 2003, GenVec had unearned revenue related to other contracts of $2.1 million and $1.3 million, respectively.

Clinical Trial Expenses and Research and Development Activities: GenVec is currently focused on the development of four therapeutic product candidates, TNFerade, BIOBYPASS, PEDF and Cell Transplantation Therapy for cardiac repair which are in various stages of clinical trials. Clinical trial expenses are payable to clinical sites and core laboratories. Expenses for clinical sites are accrued ratably over the treatment period based on the number of patients treated for each trial. We estimate these costs at the commencement of the trial based on prior experience and expected timing of the treatment. At the completion of each trial, we record an adjustment equal to the difference between the estimated amounts and the actual amounts. Expenses for core laboratories are recognized as incurred.

The expenditures that will be necessary to execute GenVec's business plan are subject to numerous uncertainties, which may adversely affect its liquidity and capital resources. Completion of clinical trials may take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty and intended use of a product candidate. GenVec estimates that clinical trials of the type GenVec generally conducts are typically completed over the following timelines:

 

Clinical Phase		Estimated Completion Date
Phase I.......................................................................................		1 - 2 years
Phase II......................................................................................		1 - 3 years
Phase III.....................................................................................		2 - 4 years

The duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during the clinical trial protocol, including, among others, the following:

·

the number of patients that ultimately participate in the trial;

·

the duration of patient follow-up that seems appropriate in view of the results;

·

the number of clinical sites included in the trials; and

·

the length of time required to enroll suitable patient subjects

GenVec tests potential product candidates in numerous pre-clinical studies to identify indications for which they may be product candidates. GenVec may conduct multiple clinical trials to cover a variety of indications for each product candidate. As GenVec's obtains results from trials, GenVec may elect to discontinue clinical trials for certain product candidates or for certain indications in order to focus its resources on more promising product candidates or indications.

An element of GenVec's business strategy is to pursue the research and development of a range of product candidates for a variety of indications. This is intended to allow GenVec to diversify the risks associated with its research and development expenditures. As a result, GenVec believes its future capital requirements and its future financial success are not substantially dependent on any one product candidate. To the extent GenVec is unable to maintain a broad range of product candidates, GenVec's dependence on the success of one or a few product candidates would increase.

GenVec's product candidates also have not yet received FDA regulatory approval, which is required before GenVec can market them as therapeutic products. In order to proceed to subsequent clinical trial stages and to ultimately achieve regulatory approval, the FDA must conclude that GenVec's clinical data establish safety and efficacy. Historically, the results from pre-clinical testing and early clinical trials have often not been predictive of results obtained in later clinical trials. A number of new drugs and biologies have shown promising results in early clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals.

Furthermore, GenVec's business strategy includes the option of entering into collaborative arrangements with third parties to complete the development and commercialization of GenVec's product candidates. In the event that third parties take over the clinical trial process for one or more of GenVec's product candidates, the estimated completion date would largely be under the control of that third party rather than GenVec. GenVec cannot forecast with any degree of certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements, in whole or in part, and how such arrangements would affect GenVec's development plan or capital requirements. GenVec's programs may also benefit from subsidies, grants or government or agency-sponsored studies that could reduce GenVec's development costs.

As a result of the uncertainties discussed above, among others, GenVec is unable to estimate the duration and completion costs of its research and development projects or when, if ever, and to what extent it will receive cash inflows from the commercialization and sale of a product. GenVec's inability to complete its research and development projects in a timely manner or its failure to enter into collaborative agreements, when appropriate, could significantly increase its capital requirements and could adversely impact its liquidity. These uncertainties could force GenVec to seek additional, external sources of financing from time to time in order to continue with its business strategy. GenVec's inability to raise additional capital, or to do so on terms reasonably acceptable to it, would jeopardize the future success of its business.

TNFerade, GenVec's lead cancer product candidate has received FDA clearance to enter a randomized, placebo controlled Phase II trial for the treatment of locally advanced pancreatic cancer. GenVec has incurred approximately $35 million of expenses on the development of this product candidate since the commencement of this program in 1999. These costs include research, development, clinical trials and clinical supply costs, including an allocation of corporate general and administrative expenses. GenVec expects to continue to expend substantial additional amounts for the clinical development of TNFerade.

BIOBYPASS has completed two Phase II trials in two separate indications - coronary artery disease and peripheral vascular disease. In May 2002, GenVec completed a randomized, controlled study of 67 patients with severe coronary artery disease and no treatment options demonstrating that these "no option" patients benefited when they received BIOBYPASS. In January 2003, GenVec reported that its 107 patient, randomized, placebo-controlled Phase II clinical trial of BIOBYPASS for the treatment of peripheral vascular disease failed to meet its clinical endpoints due primarily to an unexpectedly large placebo response. Since commencement of the research and development program of BIOBYPASS in 1996, through December 31, 2004, GenVec has incurred approximately $46.7 million in research, development and clinical costs, including an allocation of corporate general and administrative expenses. From July 1997 until July 2002, the development of BIOBYPASS was subject to a Research, Development and Collaboration Agreement with The Warner Lambert Company, a subsidiary of Pfizer, Inc., whereby GenVec received approximately $62.6 million in non-refundable research and development funding, milestone payments, equity purchases and license fees. GenVec intends to seek strategic alliances with other organizations to continue the clinical development of BIOBYPASS. In January 2004, the Company entered into a research collaboration with Cordis Corporation, a Johnson & Johnson company, to conduct a randomized, double blind, placebo controlled study using BIOBYPASS in a procedure involving guided delivery of the angiogenic agent directly into targeted regions of the heart in patients with severe coronary artery disease using the Cordis NOGASTAR Mapping Catheter and MYOSTAR Injection Catheter. Clinical benefit will be assessed in multi-center study, which has been recently initiated in Europe and is expected to enroll up to 129 patients with severe heart disease. GenVec and Cordis will collaborate on regulatory matters and share in the clinical trial costs. GenVec will supply all clinical material and Cordis will provide the NOGASTAR and MYOSTAR mapping and injection catheters and training to the interventional cardiologists conducting the trial. GenVec retains commercial rights to BIOBYPASS and Cordis retains all commercial rights to the NOGASTAR mapping catheters and MYOSTAR injection catheters. GenVec anticipates that it will share the risks and costs of development by partnering this program, which it expects may require granting commercialization rights to collaborators.

PEDF has completed an initial Phase I trial for the treatment of advanced, wet age-related macular degeneration, a leading cause of blindness in individuals over the age of 50. GenVec has initiated a Phase I study to evaluate PEDF in patients with less severe macular degeneration. Since commencement of the program in 2000 through December 31, 2004, GenVec has incurred approximately $18 million in research, development and clinical costs, including an allocation of corporate general and administrative expenses. GenVec intends to seek strategic alliances with other organizations to continue the clinical development of PEDF. GenVec anticipates that it will share the risks and costs of development by partnering this program, which it expects may require granting commercialization rights to its collaborators.

Cell Transplantation Therapy for cardiac disease is currently in Phase I clinical testing. GenVec estimates, that from 1990 through December 31, 2004, an estimated $18 million to $23 million has been spent on the development of this product candidate, primarily in research and development expenses, including an allocation of corporate general and administrative expenses. GenVec intends to seek strategic alliances with other organizations to continue the clinical development of Cell Transplantation Therapy. GenVec anticipates that it will share the risks and costs of development by partnering this program, which it expects may require granting commercialization rights to its collaborators.

GenVec is also developing therapeutic vaccines for the treatment of life-threatening viruses. GenVec is currently collaborating with the U.S. Government and PATH’s Malaria Vaccine Initiative (MVI) for the development of preventative vaccines for HIV, SARS, malaria and dengue virus. Each of these vaccine candidates will be evaluated in clinical trials sponsored by the respective organizations. Research and development activities performed by GenVec are subject to statements of work and approved budgets under fixed price or cost-plus, fixed fee contracts. Since commencement of these vaccine development programs in 2002 through December 31, 2004, GenVec has incurred approximately $23.5 million in research and development costs, including an allocation of corporate general and administrative expenses.

In December 2004, the Financial Accounting Standards Board (“FASB”) recently enacted Statement of Financial Accounting Standards No. 123 - revised 2004 (“SFAS 123R”), “Share-Based Payment” which replaces Statement of Financial Accounting Standards No. 123 (“SFAS 123”) “Accounting for Stock-Based Compensation” and supercedes APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” SFAS 123R requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our statements of operations. The accounting provisions of SFAS 123R are effective for reporting periods beginning after June 15, 2005.

We are required to adopt SFAS 123R in the second half of 2005. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. See Note 2 in our Notes to Financial Statements for the pro forma net income and net income per share amounts, for 2002 through 2004, as if we had used a fair-value-based method similar to the methods required under SFAS 123R to measure compensation expense for employee stock incentive awards. Although we have not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, we are evaluating the requirements under SFAS 123R and do not expect the adoption to have a significant adverse impact on our statements of operations and net income per share.

See Note 2 in our Notes to Financial Statements for information regarding other recent accounting pronouncements.

We are clinical-stage biopharmaceutical company focused on the development and commercialization of novel therapies that produce medically beneficial proteins at the site of disease. GenVec combines its patented gene transfer technologies with proprietary therapeutic genes to create product candidates, such as TNFerade for cancer, BIOBYPASS for heart disease and PEDF for eye disease. Using the same patented gene transfer technology, GenVec is also collaborating with the U.S. Government and Malaria Vaccine Initiative (MVI) for the development of vaccine candidates for HIV, SARS, malaria and dengue virus.

GenVec will focus on the clinical development of TNFerade and seek collaborative partners to advance the development of our BIOBYPASS and Cell Transplantation Therapy programs for heart disease and PEDF product candidate for the prevention of blindness. If GenVec enters into collaborative licensing and/or funded research arrangements, operating expenses would increase commensurate with the increased revenues from such arrangements.

To date, none of GenVec's proprietary or collaborative programs has resulted in a commercial product; therefore, GenVec has not received any revenues or royalties from the sale of products by GenVec or by GenVec's collaborators. GenVec has funded its operations primarily through public and private placements of equity securities, payments received under collaborative programs with other companies and debt financings.

We have incurred operating losses each year since inception and, as of December 31, 2004, had an accumulated deficit of approximately $135.6 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, clinical trial costs, and other expenses related to our product development and research programs. General and administrative expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, facility costs, professional fees and other corporate expenses including business development and general legal activities.

Revenue. Revenue increased 13 percent to $11.9 million in 2004 from $10.5 million in 2003 primarily from an increase of $1.2 million in research activities under our funded vaccine programs with the National Institute of Health (NIH) and the Malaria Vaccine Initiative (MVI) and a $641,000 increase in NIH funded research grants, which help support further development of our core technologies. These increases were partially offset by a temporary decline of approximately $800,000 under our funded vaccine development program with the Navy Medical Research Center.

Research and development. Research and development expenses decreased slightly from $23.5 million in 2003 to $23.1 million in 2004. Research and development expenditures were focused on internal product development efforts around the continuing clinical development of TNFerade and PEDF and the Company’s funded vaccine programs with The Vaccine Research Center at the National Institute of Allergy and Infectious Diseases of the National Institute of Health and PATH’s Malaria Vaccine Initiative. Offsetting these costs were lower levels of expenditures related to the BIOBYPASS Phase II trials for coronary artery disease and decreased activities conducted under our funded vaccine development program with the Navy Medical Research Center.

General and administrative. General and administrative expenses decreased 6 percent to $7.9 million in 2004 from $8.4 million in 2003. This reflects a $1.2 million decrease in severance cost incurred in April 2003 as part of our workforce reduction/cost control program, partially offset by increases during 2004 in fees related to intellectual property, recruiting and compliance with new regulations promulgated under the Sarbanes-Oxley Act of 2002.

Other income (expense), consisting primarily of interest income and investment gains or losses offset by interest expense, increased from $81,000 in other income in 2003 to $226,000 in other income in 2004. This increase was primarily due to a $222,000 increase in interest income generated, in part, from the $11.7 million net proceeds of our equity financing completed April 16, 2004 and a $100,000 decrease in interest expense stemming from debt repayments of $1.5 million; these 2004 factors were partially offset by a $178,000 gain on sale of a security reported in 2003.

Revenue. Revenue, excluding related party revenue, increased 83 percent to $10.5 million in 2003 from $5.7 million in 2002 primarily from an increase of $4.6 million in funded research activities under our funded vaccine programs with the National Institute of Health and the U.S. Naval Medical Research Center.

Revenue - related party. Revenue - related party was $2.7 million in 2002 from the BIOBYPASS collaboration with the Warner-Lambert Company/Pfizer, Inc. We did not receive any related party revenues in 2003 due to the termination of our collaboration with Warner-Lambert during 2002.

Research and development. Research and development expenses decreased slightly from $24.4 million in 2002 to $23.5 million in 2003. Research and development expenditures were focused on internal product development efforts around the continuing clinical development on TNFerade and PEDF and the expansion of the Company's funded vaccine program with The Vaccine Research Center at the National Institute of Allergy and Infectious Diseases of the National Institute of Health. Offsetting these increases were lower levels of expenditures related to the BIOBYPASS Phase II trials for coronary artery disease and peripheral vascular disease which were completed in late 2002 and reduced spending resulting from the restructuring efforts described below.

General and administrative. General and administrative expenses decreased 13 percent to $8.4 million in 2003 from $9.6 million in 2002. This decrease reflects our efforts to reduce outside costs and also the workforce reduction as a part of our cost reduction program announced on April 23, 2003. Expenses included a $1.2 million charge for severance and termination costs related to the workforce reduction referred to above.

Other income (expense), consisting primarily of interest income and investment gains or losses offset by interest expense, increased from $17,000 in other expense in 2002 to $81,000 in other income in 2003. This increase was due to a $178,000 gain on sale of a security in 2003 compared to net investment losses of $486,000 in 2002, due to the write down of a security, offset by a decrease in interest income due to lower levels of cash available for investing for the first three quarters of 2003 coupled with lower rates of return on these invested funds.

To date, we have been engaged primarily in research and development activities. As a result we have experienced and expect to continue to incur operating losses for the foreseeable future until one or more of our product candidates are commercialized. As of December 31, 2004, we held $33.1 million in cash and investments as compared to approximately $40.0 million at December 31, 2003. Net cash used in operating activities was $16.1 million in 2004 compared with $19.6 million used in 2003. Net cash provided by financing activities was $10.6 million in 2004, primarily reflecting proceeds of $11.7 million from issuance of stock, $403,000 from purchases under stock incentive programs, offset by debt payments of $1.5 million. Net cash provided by investing activities was approximately $5.6 million in 2004, which consisted principally of the net proceeds of the maturity of investment securities offset by the purchase of property and equipment. As of December 31, 2004, our working capital was approximately $26.0 million compared to $20.6 million at December 31, 2003; this increase primarily reflects a $5.4 million increase in cash and equivalents and short-term investments resulting from a shortening of the average maturity of our invested securities commensurate with projected liquidity needs.

Historically, 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. We also utilize different financing instruments, such as debt and capital and/or operating leases, to finance various equipment and facility needs. Our external research, clinical study and financing commitments are summarized in the following table:

 

 

We expect our revenue for the next several years to consist primarily of payments under corporate collaborations, government grants and contracts and interest income. In order to reduce our operating expenses, we intend to focus our resources on our lead product candidate, TNFerade, for the treatment of cancer. We previously announced a collaboration with Cordis Corporation to conduct further clinical studies of our cardiovascular product candidate, BIOBYPASS. With respect to our other product candidates, including Cell Transplantation Therapy and PEDF, we will seek to form strategic alliances with other companies pursuant to which we will share the risks and costs of development. We also will continue to look for funded research collaborations to help offset our future losses from operations. 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.

We also will continue to seek capital through the public or private sale of securities. If we are successful in raising additional funds through the issuance of equity securities, investors likely will experience dilution, or the equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. If we raise funds through the issuance of debt securities, those securities would have rights, preferences and privileges senior to those of our common stock. 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 believe that our cash reserves and anticipated cash flow from our current collaborations will be sufficient to support our operations for approximately 2 years. Without new collaborations, government grants or contracts, or additional equity financing, we would use approximately $15 - $17 million in cash over the next twelve months, including approximately $1.0 million for capital expenditures and $2.9 million in contractual obligations reflected in the table above. We expect that significant additional financing will be required in the future, which we may seek 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, 2004, our net operating loss carry forwards were approximately $186.3 million. If not utilized, our loss carry forwards will expire at various dates through 2024. 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, 2004, we had cash and cash equivalents and short-term and long-term investments of $33.1 million as follows:

 

Cash and cash equivalents	$ 5.4   million
Short-term investments	$ 25.4 million
Long-term investments	$ 2.3   million

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 and corporate bonds. 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, 2004, securities totaling $25.4 million mature in 2005 and $2.3 million mature in 2006. While we do not believe that an increase in market rates of interest 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, 2004, we had an outstanding industrial revenue bond payable of $3.1 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 percent plus a remarketing fee. As of December 31, 2004, the fair value of the interest rate swap, excluding accrued interest, was $239,000. We also have outstanding loans and capital lease obligations totaling $1.4 million at fixed interest rates ranging from 5.0 percent to 12.1 percent. 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.

ITEM 9A.  CONTROLS AND PROCEDURES

Based on their evaluation as of December 31, 2004, our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were sufficiently effective to ensure that the information required to be disclosed by us in this Annual Report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and instructions for Form 10-K.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Our management has concluded that, as of December 31, 2004, our internal control over financial reporting is effective based on these criteria. Our independent registered public accounting firm, KPMG LLP, have issued an audit report on our assessment of our internal control over financial reporting, which is included herein.

There were no changes in our internal controls over financial reporting during the quarter ended December 31, 2004 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

Our management, including our Chief Executive Office and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitation in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within GenVec have been detected.

None.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item, with the exception of information on our executive officers, which appears under "Executive Officers of the Registrant", is incorporated by reference from our Proxy Statement relating to the 2005 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 2005 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, with the exception of information relating to compensation plans under which equity securities of the Registrant are authorized for issue, which appears below, is incorporated by reference from our Proxy Statement relating to the 2005 Annual Meeting of Stockholders to be filed pursuant to General Instruction G(3) to Form 10-K.

The following table discloses certain information about the options issued and available for issuance under all outstanding Company option plans as of December 31, 2004:

	(a)	(b)	(c)
Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted- average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)
Equity compensation plans approved by security holders	4,785,215	$ 3.20	1,820,938
Equity compensation plans not approved by security holders	--	--	--
Total	4,785,215	$ 3.20	1,820,938

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference from our Proxy Statement relating to the 2005 Annual Meeting of Stockholders to be filed pursuant to General Instruction G(3) to Form 10-K.

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item is incorporated by reference from our Proxy Statement relating to the 2005 Annual Meeting of Stockholders to be filed pursuant to General Instruction G(3) to Form 10-K.

 

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)  (1)  Financial Statements - See index to Financial Statements on page F below for a list of the financial statements being filed herein.

(2)  Financial Statement Schedules - All financial statement schedules are omitted because they are not applicable, not required under the instructions or all the 

       information required is set forth in the financial statements or notes thereto.

 

(3)  Exhibits - The Exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this report.

 

 

* 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.

 

(6) Incorporated by reference from our Quarterly Report on Form 10-Q (File No: 0-24469) filed with the Securities and Exchange Commission on

     August 14, 2002.

 

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

     March 28, 2002.

 

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

     March 31, 2003.

 

(9) Incorporated by reference from our Registration Statement on form S-4 (File No. 333-105320) filed with the Securities and Exchange

     Commission on May 16, 2003.

 

(10) Incorporated by reference from Diacrin, Inc. Form 10-K, as amended. (File No. 0-20139) filed on April 29, 1992.

 

(11) Incorporated by reference from Diacrin, Inc. Form 10-K (File No. 0-20139) filed on March 26, 2003.

 

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

       March 15, 2004.

 

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.

 

	GenVec, Inc
Date: March 15, 2005	By:	/s/ Paul H. Fischer, Ph.D.
		Paul H. Fischer, Ph.D.
		President, Chief Executive Officer and Director

 

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.

 

 

As reported in the Registrant’s Definitive Proxy Statement, dated April 27, 2004, under the caption, “Compensation Committee Report,” all employees, including named executive officers, are eligible for annual bonuses. The bonus for all employees and executive officers, except for the President and Chief Executive Officer, is based on the achievement of pre-determined (i) individual goals and (ii) corporate goals. Each year, a maximum bonus pool is set aside for possible distribution as bonuses in the first quarter of the next fiscal year.

 

2005 annual bonuses will be determined by the achievement of both individual goals and corporate goals, each of which will be given 50% weight in determining the annual bonus. Based upon individual performance and accomplishments, the Compensation Committee will award discretionary bonuses that fall within ranges established by the Compensation Committee at the start of the year. Such ranges are based on a range of percentages of employee’s salary, with those with higher salary grades being eligible for a higher percentage of their salary to be paid as a bonus. Individual goals are established for each employee subsequently evaluated in each individual’s performance review. Corporate goals for 2005 relate to financing activities, progress in product development programs, the establishment of new strategic alliances, and other business development initiatives. Certain of these goals carry a higher weighting than others. The bonus for the President and Chief Executive Officer is determined exclusively by satisfaction of the corporate goals.

The Compensation Committee has approved bonuses for 2004 and awarded the following bonus payments in the first quarter of 2005 to the Company’s named executive officers:

 

 

Name and Principal Position		2004 Bonus Payment
Paul H. Fischer, Ph.D.		$64,014
CEO and President
Jeffrey W. Church		$28,659
CFO, Treasurer and Corporate Secretary
E. Michael Egan		$29,391
Senior Vice President, Commercial Development
C. Richter King, Ph.D.		$37,318
Senior Vice President Research