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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 0-26483
VaxGen, Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-3236309
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1000 Marina Blvd., Suite 200
Brisbane, California 94005
(Address of principal executive offices, including zip code)
(650) 624-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes |X| No |_|
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing sale price of the registrant's Common Stock
on June 28, 2002, as reported on the Nasdaq National Market was approximately
$57.0 million. Shares of Common Stock held by each current executive officer and
director and by each person who is known by the registrant to own 5% or more of
the outstanding Common Stock have been excluded from this computation in that
such persons may be deemed to be affiliates of the registrant. Share ownership
information of certain persons known by the registrant to own greater than 5% of
the outstanding common stock for purposes of the preceding calculation is based
solely on information on Schedule 13G filed with the Commission and is as of
June 28, 2002. This determination of affiliate status is not a conclusive
determination for other purposes.
The number of shares outstanding of the registrant's Common Stock, par
value $0.01 per share, as of March 14, 2003, was 15,853,540.
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business 1
Item 2. Properties 29
Item 3. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of Security Holders 30
PART II 31
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 31
Item 6. Selected Financial Data 32
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 33
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 43
Item 8. Financial Statements and Supplementary Data 44
Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure 71
PART III 72
Item 10. Directors and Executive Officers of the Registrant 72
Item 11. Executive Compensation 76
Item 12. Security Ownership of Certain Beneficial Owners and Management 81
Item 13. Certain Relationships and Related Transactions 82
Item 14. Controls and Procedures 82
PART IV 84
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 84
SIGNATURES 88
CERTIFICATIONS 90
Business Overview
Forward-Looking Statements and Risk Factors
This report includes forward-looking statements. In particular, statements
about our expectations, beliefs, plans, objectives, assumptions or future events
or performance are contained or incorporated by reference in this report. We
have based these forward-looking statements on our current expectations about
future events. While we believe these expectations are reasonable, such
forward-looking statements are inherently subject to risks and uncertainties,
many of which are beyond our control. Our actual results may differ materially
from those suggested by these forward-looking statements for various reasons,
including those discussed in this report under the heading "Risk Factors" at
page 20. Given these risks and uncertainties, you are cautioned not to place
undue reliance on such forward-looking statements. The forward-looking
statements included in this report are made only as of the date hereof. We do
not undertake and specifically decline any obligation to update any such
statements or to publicly announce the results of any revisions to any of such
statements to reflect future events or developments. When used in the report,
unless otherwise indicated, "we, "our" and "us" refers to VaxGen.
VaxGen, Inc. is a biopharmaceutical company engaged in the development,
manufacture and commercialization of biologic products for the prevention and
treatment of human infectious disease. We are developing preventive vaccines
against anthrax, smallpox and HIV/AIDS and we are the single-largest shareholder
in a joint venture formed to build biopharmaceutical manufacturing operations.
VaxGen was formed in November 1995 to complete the development and
commercialization of AIDSVAX(R), a vaccine designed to prevent infection by HIV,
the virus that causes AIDS. We subsequently launched two Phase III trials of
AIDSVAX, one in North America and Europe and a second in Thailand. Preliminary
results from the North American and European trial, which were announced in
February 2003, indicated that the vaccine did not prevent HIV infection in the
study population as a whole, although the vaccine did appear to provide
protection to a subgroup of non-Hispanic minorities composed of Blacks, Asians
and trial volunteers who identified themselves as something other than Hispanic
or Caucasian. We continue to analyze data from this trial to determine if there
is a biologic reason for the apparent prevention of HIV infection among the
subgroup. Preliminary results from the trial in Thailand are expected in the
second half of 2003. These are the world's first and so far only Phase III
trials of a preventive HIV/AIDS vaccine.
We have used our expertise and infrastructure developed through the AIDSVAX
program to broaden our focus to include the development of two additional
vaccine candidates and large-scale manufacturing operations through our joint
venture, Celltrion, Inc. (Celltrion). In September 2002, we were selected by the
National Institute of Allergy and Infectious Disease (NIAID), a division of the
National Institutes of Health (NIH), to develop a new anthrax vaccine for
civilian use. In December 2002, we announced a working partnership with
Chemo-Sero-Therapeutic Research Institute (Kaketsuken) of Japan to conduct
clinical development of a potentially safer smallpox vaccine for use in the
United States and elsewhere.
We are the single-largest shareholder in Celltrion, a joint venture formed
to provide manufacturing of complex proteins made through mammalian-cell
fermentation. This type of manufacturing is used to make many of the
pharmaceutical products developed by the biotechnology industry, including
monoclonal antibodies and therapeutic proteins. Celltrion has funded the
majority of the construction costs associated with building a manufacturing
facility next to our research and development facility in South San Francisco,
California. While the facility is designed to produce complex folded proteins in
mammalian cell culture, the South San Francisco facility is both expandable and
flexible, so as to be able to support our other programs. Celltrion is building
a much larger manufacturing facility in South Korea that could be used to
provide a global supply of AIDSVAX and/or other biopharmaceutical products made
by us or in partnership with us or independently.
We intend to continue expanding our product portfolio, both in vaccines and
other products that leverage our capabilities in large-scale clinical
development, manufacturing process refinement and biopharmaceutical
manufacturing.
Why Vaccines
Most vaccines are preventive, not curative. As a result, vaccines are
particularly suited to address epidemics, especially those of the magnitude of
HIV/AIDS, and the threat of infection by deadly pathogens, such as anthrax,
smallpox, Ebola and others. We are one of approximately 30 companies worldwide
with expertise in the field of preventive vaccine development and currently are
the only company to have completed a Phase III efficacy trial of an HIV/AIDS
vaccine candidate.
1
VaxGen Products Under Development: A Modern Anthrax Vaccine
Overview
The U.S. government has recognized an urgent need to devise appropriate and
effective measures to protect its citizens from the harmful effects of Bacillus
anthracis spores used as instruments of terror. Accordingly, the National
Institutes of Health (NIH) selected VaxGen, one of two companies selected and
the only one based in the U.S., to develop a new anthrax vaccine and to create
a feasibility plan to manufacture an emergency stockpile of 25 million doses.
The only anthrax vaccine currently licensed, BioThrax(R), requires six
injections over 18 months. The goal of the government contract is to develop
a new modern vaccine that proves to be safe in humans, efficacious in animal
challenge studies and requires no more than three injections. Under the initial
phase of the contract, we anticipate receiving approximately $16.2 million to
advance the development of a vaccine candidate initially developed by the U.S.
Army Medical Research Institute of Infectious Diseases (USAMRIID).
Under this agreement, we and our major sub-contractor, Battelle Memorial
Research Institute (Battelle), located in Columbus, Ohio, will continue the
development and testing of the recombinant B. anthracis vaccine candidate
developed by USAMRIID known as rPA102 (Recombinant Protective Antigen). This
investigational vaccine, in development for more than a decade, combines the
safety benefits of a vaccine made through modern recombinant technology with a
record of efficacy documented in animal models.
About Anthrax
Anthrax spores have been documented as naturally occurring in soil samples
throughout the world. Natural human anthrax infections are acquired through
cutaneous contact with infected animals and animal products (which is most
common) or by ingestion or inhalation of spores.
Natural anthrax infections in the U.S. were rare until the bio-terrorism
attacks in the fall of 2001, when anthrax was delivered by U.S. mail to
government and elected officials and members of the media, exposing U.S. Postal
Service employees and many others to the potentially deadly spores. Five people
died as a result of these attacks and many more became sick as a result of
exposure to anthrax.
Cutaneous anthrax is caused by contact with B. anthracis spores through a
person's skin, most often at the site of a prior injury such as a cut or an
abrasion. The incubation period following infection can be anywhere from one to
12 days. Fatalities from this form of infection tend to be relatively low.
Inhalation anthrax is contact with B. anthracis spores by inhalation through the
human respiratory system. In this instance, the incubation period is usually
much shorter, one to seven days, and once symptoms appear, infection results in
a relatively high fatality rate. Gastrointestinal anthrax is acquired through
the ingestion of contaminated foods. The incubation period is one to seven days
and fatality rates are relatively high once symptoms appear.
Anthrax secretes three proteins, protective antigen (PA), lethal factor (LF)
and edema factor (EF), that subsequently combine on the surface of human cells.
Once these proteins assemble in the proper configuration, they then fuse through
the human cell membrane and cause serious illness and potentially death.
The anthrax vaccine candidate we are developing is made from a recombinant,
cloned, version of PA grown in non-infectious spores of B. anthracis. The
vaccine candidate is designed to train the human immune system to produce
antibodies to PA. In the advent of a genuine anthrax infection, these antibodies
are thought to coat the surface of PA and prevent it from docking with LF and
EF. Anthrax cannot cause illness or death if these three proteins are unable to
combine.
2
Anthrax Vaccine Development Timeline
As the prime contractor for the initial 15-month program that began October 1,
2002, we have primary responsibility for the implementation and management of
the contract, including regulatory compliance, designing and implementing a
Phase I human clinical trial and preparing a feasibility plan to manufacture
a national emergency stockpile of at least 25 million doses utilizing qualified
manufacturing operations that may include our South San Francisco biologics
manufacturing facility.
Battelle, a major sub-contractor on the first phase of the contract, has primary
responsibility for initial manufacturing of the vaccine candidate as well as for
conducting animal safety and efficacy experiments and clinical assays.
If results from the first phase are positive, we will be eligible for additional
$15.0 million funding as a continuation of the current contract to support a
Phase II clinical trial. We expect that this award would be issued in late 2003.
Phase I Trial Design: Determination of Safety and Immunogenicity
A Phase I randomized, double-blind, placebo-controlled, dose-ranging clinical
trial will be conducted in healthy adult volunteers to assess the safety and
immunogenicity of the vaccine. The study will evaluate the vaccine's safety and
immunogenicity (the ability of an antigen or vaccine to stimulate an immune
response) of four different doses of rPA102 vaccine or placebo over a 12-month
period.
A total of 80 healthy volunteers 18 to 55 years of age will be recruited into
the trial in the U.S. The four dose groups will receive immunization with rPA102
or placebo at 0, 4 and 8 weeks. Volunteers will be assessed for safety 30-60
minutes and three days from immunization for all three injections.
Immunogenicity will be assessed every other week from weeks 0-12, then during
weeks 24, 36 and 48. Immunogenicity will be evaluated by ELISA (Enzyme-Linked
Immunosorbent Assay) to PA and by toxin neutralizing antibody.
Each dose group will include 20 volunteers, randomized to either rPA102 or
placebo at a 4:1 ratio, which means that 16 volunteers in each treatment group
will receive vaccine and four volunteers in each treatment group will receive
placebo. The four dose groups will be enrolled sequentially after a safety
evaluation of the previous lower dose by us and an independent Data Safety
Monitoring Board (DSMB).
One interim analysis will be performed two weeks after all volunteers in all
four dose groups have received the second immunization at week 4. If no
significant safety concerns arise and at least 75% of volunteers in at least one
dose group have antibody to PA after the second immunization, equivalent to
those found after two doses of AVA, the only currently licensed anthrax vaccine,
a Phase II trial of rPA102 formulation may be recommended. Phase I volunteers
will continue to be immunized and followed to completion in this protocol.
The study consists of a screening period up to 30 days prior to enrollment
during which eligibility for the trial is assessed, including screening blood
sample collected for baseline laboratory assessments (including antibodies to
anthrax), review of inclusion/exclusion criteria and informed consent.
Volunteers who qualify for the trial will be enrolled and randomized to a
treatment or placebo group. The total duration of the trial, which is expected
to begin enrolling volunteers early in the second quarter of 2003, is 48 weeks.
VaxGen anticipates concluding the trial by the second quarter of 2004.
Phase II Trial: Determination of Safety and Efficacy
If results from the Phase I trial are positive, we will be eligible for an
additional $15.0 million starting in late 2003 from the NIH as a continuation of
the current contract to support a Phase II clinical trial. Unlike most vaccines,
we believe that an anthrax vaccine can be evaluated and approved by the U.S.
Food and Drug Administration (FDA) on the basis of an adequate and controlled
Phase II study, supported by animal efficacy studies. The FDA recently codified
the possibility of approval of new drugs or biologics, such as an anthrax
vaccine, on the basis of animal efficacy studies, where adequate and
well-controlled human studies cannot be ethically conducted and field efficacy
studies are not feasible.
3
The vaccine candidate, rPA102, has been under development for more than a decade
by USAMRIID. Its efficacy and safety have already been documented in previous
animal studies. In new animal studies, we will continue to evaluate the vaccine
candidate's safety and efficacy and gather data to help it determine an
optimized dosing regimen, vaccine formulation and immunization schedule. No
human study volunteers will be exposed to anthrax.
It is anticipated that the NIH will make a decision as to the conduct of a Phase
II study by us for the anthrax vaccine candidate following an evaluation of the
Phase I results, which should be the fourth quarter of 2003. Should we receive
approval to conduct the Phase II trial, the first volunteers are scheduled for
enrollment by December 2003. The total duration of the trial is projected to be
24 months.
Should we succeed in winning the contract to develop a 25 million-dose national
emergency stockpile of the vaccine candidate, the NIH is expected to include in
the award funding to conduct a much larger Phase II safety trial and determine
an optimal dose regimen.
The Market for a Modern Anthrax Vaccine
Following the initial, two-part contract to develop a modern anthrax vaccine, a
second, much larger contract will be awarded by the NIH, through a competitive
bid process, to license and manufacture a national vaccine stockpile of 25
million doses. We intend to be a bidder in this competitive process, which we
anticipate will conclude by the end of September 2003. We anticipate the
contract from the NIH will also include provisions for keeping the vaccine
stockpile up-to-date based on the stability of the product. We also anticipate
that the national stockpile will not be licensed for general use or approved by
the FDA and will be used only in the event of a national emergency.
We expect the U.S. government to contract for an additional supply of anthrax
vaccine that would be approved by the FDA and which could be used in the
civilian population before an outbreak of anthrax. We are unaware of the size or
timing of this contract.
We hope to develop the anthrax vaccine, seek regulatory approval of it by the
FDA and market and/or license it to various appropriate authorities within the
U.S. government, approved allied governments and private customers.
4
Vaccine Products Under Development: A Potentially Safer Smallpox Vaccine
Overview
In December 2002, we and Kaketsuken entered into initial agreements that will
allow us to begin development of Kaketsuken's attenuated smallpox vaccine for
use in the U.S. We believe that the vaccine, licensed in Japan in 1980, will
have a better safety profile, yet be equally effective, compared to smallpox
vaccines currently available in the U.S.
The vaccine gives a pock, or "take", at the site of injection at a rate similar
to smallpox vaccines currently stockpiled in the U.S. Public health
authorities have long accepted the "take" as evidence of successful immunization
against smallpox. However, the FDA may require that the vaccine show efficacy in
animal models before it can be licensed for commercial use in the U.S.
The vaccine is based on the LC16m8 clone of the internationally accepted Lister
strain of vaccinia virus, which is a "pox"-type virus related to smallpox.
A Potentially Safer Smallpox Vaccine
Although smallpox was officially eradicated in the 1970s, small quantities of
the virus exist in a few research laboratories worldwide. Increasing concerns
about the use of biological agents, including smallpox, in acts of terrorism or
war have caused the U.S. to re-evaluate the importance of widespread
smallpox vaccination in order to protect U.S. citizens from potential attacks.
As a result, the President of the U.S. has ordered that thousands of
"first responders" people working in hospital emergency rooms and other public
health environments, the Armed Forces, and police and fire departments, among
others, undergo vaccination with the currently available vaccine.
The most available smallpox vaccine in the U.S. is made from a virus called
vaccinia. This smallpox vaccine contains the "live" vaccinia virus, not "dead"
or attenuated virus like many other vaccines. For that reason, the vaccination
site must be cared for carefully to prevent the virus from spreading to others.
Also, the vaccine can cause side effects ranging from mild reactions that
include a sore arm, fever, and body aches to serious and even life-threatening
reactions in some rare instances.
We believe LC16-Kaketsuken, which is an attenuated live virus, will have a
better safety profile and would therefore offer a more acceptable alternative
for use in widespread vaccination programs. A stockpile of the vaccine exists in
Japan for use there. The vaccine, LC16-Kaketsuken, already has been administered
to approximately 50,000 Japanese children, in whom no serious side effects were
observed.
About Smallpox
Smallpox is a serious, contagious, and often fatal infectious disease. There is
no specific treatment for smallpox disease, and the only prevention is
vaccination. There are two clinical forms of smallpox. Variola major is the
severe and most common form of smallpox, with a more extensive rash and higher
fever than variola minor. Historically, variola major has an overall fatality
rate of about 30 percent. Variola minor is a less common presentation of
smallpox, and a much less severe disease, with death rates historically of 1% or
less.
Smallpox outbreaks have occurred from time to time for thousands of years, but
except for virus produced in laboratories, the disease is now eradicated after a
successful worldwide vaccination program. The last case of smallpox in the U.S.
was in 1949. The last naturally occurring case in the world was in Somalia in
1977. After the disease was eliminated from the world, routine vaccination
against smallpox among the general public was stopped because it was no longer
necessary for prevention.
Generally, direct and fairly prolonged face-to-face contact is required to
spread smallpox from one person to another. Smallpox also can be spread through
direct contact with contaminated objects such as bedding
5
or clothing, and, in rare instances, by virus carried in the air in enclosed
settings such as buildings, buses, and trains.
The terrorist events of the fall of 2001, however, heightened concern that the
variola virus might be used as an agent of bioterrorism. For this reason, the
U.S. government is taking precautions for dealing with a potential smallpox
outbreak.
Smallpox Vaccine Development Timeline
Our agreement with Kaketsuken calls for us to initiate clinical trials with
LC16-Kaketsuken in the U.S., subject to consent from the FDA. We will be
responsible for clinical development and related activities necessary to meet
the requirement for licensure through the FDA. If we are able to reach an
agreement with Kaketsuken regarding the licensure of the vaccine and
successfully complete clinical development and obtain FDA review and approval,
we anticipate licensure of the vaccine in mid-2004.
The Market for a Potentially Safer Smallpox Vaccine
LC16-Kaketsuken may offer a valuable alternative to conventional and new
non-attenuated vaccines for protecting people against the threat of smallpox as
a bioterrorist weapon. We believe this vaccine could be an essential tool in the
global bio-defense arsenal.
We and Kaketsuken are currently negotiating the extension of our partnership to
address vaccine supply and commercialization. We have entered into initial
discussions with regard to an agreement with Kaketsuken, under which we would
market any vaccine to various appropriate authorities within the U.S.
government, approved allied governments, and private customers. We are currently
negotiating the commercial terms of this arrangement.
Currently, the U.S., United Kingdom and Israel have ordered broad-based
immunization programs against smallpox. In addition, most industrialized nations
(G8: U.S., Canada, Japan, France, Germany, Italy, Russia and the United
Kingdom), as well as others including Spain, Israel, Mexico, South Africa,
Australia and Hong Kong, Republic of China have begun stockpiling smallpox
vaccine.
In the U.S., opinion polls indicate more than 75% of Americans would like to be
vaccinated against smallpox, but more than 50% also have strong concerns
regarding the safety of the currently available options. Moreover, due to
concerns of vaccine safety, many leading medical and professional associations,
including the American Association of Pediatrics, American College of
Pathologists and National Vaccine Information Campaign, have come out against
the current U.S. vaccination policy. We believe this supports our belief that
there is demand for a safer and effective smallpox vaccine.
Vaccine Products: AIDSVAX(R)
Overview of AIDSVAX
We recently completed a large-scale Phase III clinical trial on the first of two
formulations for AIDSVAX, called AIDSVAX B/B, in humans, while a second Phase
III trial for a second formulation, AIDSVAX B/E, continues. These are the first
and so far only Phase III clinical trials ever conducted for a preventive HIV
vaccine. The original AIDSVAX technology was developed by Genentech, Inc.
(Genentech) and then licensed exclusively to us.
Our HIV vaccine is designed to prevent infection by HIV, rather than treat
established infection. AIDSVAX contains synthetic copies of the proteins from
the surface of HIV. Since the vaccine contains no genetic material, AIDSVAX is
incapable of causing HIV infection. Humans vaccinated with AIDSVAX produce
antibodies against HIV. In laboratory tests these antibodies bind to the virus
and neutralize its infectivity. Vaccination with AIDSVAX was designed to
stimulate immune memory, training the immune system to mobilize rapidly upon
exposure to HIV.
The recently completed Phase III clinical trial of AIDSVAX B/B conducted in
North America and Europe, and the continuing trial of AIDSVAX B/E being
conducted in Thailand, were designed to determine the efficacy of AIDSVAX. In
October 1999, we completed the enrollment of over 5,400 trial volunteers for the
North
6
American/European Phase III clinical trial, which was conducted in 59 clinical
centers. In August 2000, we completed the enrollment of over 2,500 volunteers
for the Thai Phase III clinical trial, which is being conducted in 17 clinical
centers in Bangkok.
We intend to apply to the FDA and foreign regulatory authorities for licenses to
manufacture and sell AIDSVAX if (i) further analysis of the data from the trial
in North America and Europe confirms the initial findings of efficacy in certain
subgroups and (ii) results from the trial in Thailand clearly demonstrate that
the vaccine is effective. Alternatively and/or in addition, we may conduct other
clinical trials of AIDSVAX if government or philanthropic organizations fund
such trials and there is a sound scientific rationale for such trials.
Preliminary Results of the North American/European Phase III Clinical Trial
Preliminary results of the North American/European Phase III clinical trial,
which was announced in February 2003, indicated that the study did not show a
statistically significant reduction of HIV infection within the study population
as a whole, which was the primary endpoint of the trial. However, the study did
show a statistically significant reduction of HIV infection in certain
vaccinated subgroups. Protection appeared to correlate with the higher level of
vaccine-induced neutralizing antibodies observed in these groups. These
preliminary results are subject to additional analysis and, in the case of
subgroups, are based on much smaller sample sizes than the overall study.
The results are based on trial volunteers who received at least the primary
course of three injections of either vaccine or placebo. Recognizing the
limitations of subgroup analyses, the separate analysis of efficacy in subgroups
was pre-specified in the statistical analysis plan. The statistical analysis
plan was reviewed in advance by the FDA and its suggestions were incorporated
prior to unblinding of the data. The preliminary analysis found that:
o The reduction of infection among the entire sample of volunteers,
including all racial groups, was 3.2% (p-value = not statistically
significant; n = 5,009).
o There were 67% fewer HIV infections among ethnic minorities, other than
Hispanic individuals, who received vaccine compared to placebo recipients
(unadjusted p-value <0.01; n = 498).
o There were 78% fewer HIV infections among Black volunteers who received
vaccine compared to placebo recipients (unadjusted p-value <0.02; n =
314).
o There were 86.5% fewer HIV infections among women who received vaccine
compared to placebo recipients (unadjusted p-value <0.08; n = 268).
Trial data indicates that Black and Asian volunteers appeared to produce higher
levels of antibodies against HIV. White and Hispanic volunteers appeared to
develop consistently lower levels of protective antibodies following
vaccination. We intend to conduct additional analyses to confirm if there was a
direct correlation between the level of antibodies and the prevention of
infection in the Black and Asian subgroups.
The data also indicates that AIDSVAX is well tolerated, with no significant
differences in symptoms between volunteers who received vaccine compared to
those who received the placebo. Vaccine recipients had a slightly higher rate of
pain, swelling and tenderness at the injection site compared to placebo
recipients.
HIV/AIDS and Determination of the Market for AIDSVAX
HIV is the virus that causes AIDS, a lethal disease characterized by the gradual
deterioration of the human immune system. HIV is transmitted by three
predominant means: sexual contact; exposure to blood from an infected person,
such as sharing needles in drug use; and transmission from infected mothers to
their newborns. The dominant mode of transmission worldwide is heterosexual
contact. Although the disease is manifested in many ways, the problem common to
all patients is the destruction of essential immune cells known as T
lymphocytes, or T cells. Destruction of these T cells by HIV makes the body
particularly
7
vulnerable to opportunistic infections and cancers that typify AIDS and
ultimately cause death. Blocking HIV infection would prevent AIDS.
The HIV/AIDS epidemic is one of the largest and most deadly epidemics in human
history. Its spread across the world has been documented by the Joint United
Nations Programme on HIV/AIDS (UNAIDS) and the World Health Organization (WHO).
According to the UNAIDS and the WHO:
- -- 1.2% of the world's adult population (15 to 49 years of age) was living
with HIV/AIDS as of 2002;
- -- 5.0 million per year, or approximately 14,000 people per day, were newly
infected with HIV in 2002;
- -- 42.0 million people are living with HIV/AIDS;
- -- 3.1 million AIDS deaths occurred in 2002; and
- -- 27.9 million people have died from AIDS since the beginning of the
epidemic.
(Source: "AIDS Epidemic Update: December 2002" Joint United Nations Programme on
HIV/AIDS (UNAIDS) and the World Health Organization (WHO), 2002.)
HIV has spread widely around the globe including into China, India and some of
the most populated areas of the world. An estimated 1,500,000 people in North
America and Western Europe are currently infected with HIV. Approximately 75,000
new infections occur each year in these two regions. AIDS is currently one of
the top four fatal diseases worldwide and the most deadly infectious disease. As
a result, in his State of the Union address in January 2003, U.S. President
George Bush pledged to spend $15 billion over the next five years for HIV/AIDS
treatment and prevention programs in the U.S. and throughout the world.
Progress has recently been made in treating HIV infection. Current HIV therapies
slow multiplication of the virus and delay the onset of AIDS. They do not cure
HIV infection or AIDS. Costs of these drugs generally exceed $12,000 per year
per patient in the industrialized world. Considering costs, toxicities,
difficulties in compliance with complex drug regimens and the development of
resistance to these drugs, we believe such therapies will be available only to a
small fraction of the HIV-infected population. Accordingly, we believe these
therapies will probably have a minimal impact on the worldwide epidemic. As a
result, we believe that the adult market for an HIV vaccine could reach
approximately three billion people. Should this market include pediatric use,
the number could exceed four billion.
The HIV Infection Process
A virus cannot replicate without entering a host cell. To make new infectious
virus particles, a virus must enter a cell and take over its metabolic
machinery. If a virus cannot gain entry to a cell, it is incapable of surviving
for more than a few hours in the body.
Viruses are varied in their structure and use different ways to enter cells. HIV
is a spherical virus that maintains its genetic information inside its protein
core. This core is surrounded by an outer coat called the envelope. The envelope
has protein projections, called glycoproteins that extend out from its surface.
Glycoproteins enable HIV to bind to, and subsequently enter, human cells. The
principal glycoprotein on the envelope of HIV is called gp120. To present the
proper orientation for infection, the gp120 proteins are organized on the virus
surface in clusters of three.
HIV uses gp120 to bind to the surface of cells through a two-step interaction
between the virus and its target cell. The first step involves the attachment of
gp120 to a part of the target cell's surface called the CD4 receptor. The second
step occurs soon thereafter, as the gp120 protein changes shape and then
interacts
8
with another target cell molecule called the chemokine receptor. When this
two-step process has been completed, the virus can fuse through the target-cell
membrane.
Once inside the cell, the viral envelope opens and the core of the virus is
released, initiating a replication cycle that produces thousands of new virus
particles per infected cell. As it multiplies, HIV kills infected T cells and
releases new infectious virus into fluid or blood to infect and kill more T
cells. Over time, this cycle leads to the destruction of an essential line of
immunological defense and increased susceptibility to the opportunistic
infections and cancers that are characteristic of AIDS.
In addition to T cells, HIV also infects, and may reside in, blood scavenger
cells called macrophages. While infection of macrophages is not a primary cause
of AIDS, it is important in the biology of HIV and part of our strategy to
prevent infection by the virus.
Development of Vaccine Formulations for the Whole World
At the beginning of the epidemic, HIV was most likely limited to Africa. HIV,
like many other viruses, underwent mutation to create distinct subtypes. People
infected with a single subtype of HIV then exported their infection to other
places, with different subtypes becoming predominant in different geographical
areas. Subsequently, HIV underwent further mutation to create individual strains
of each subtype.
Although the potential genetic variation in HIV might appear limitless, we
believe only a small number of mutations confer advantage to the virus. As a
result, there are probably a limited number of deadly viral subtypes and
strains. We believe these fall into particular patterns providing a logical
basis to formulating a vaccine for HIV. We also believe that the major subtypes
of gp120 have been identified, although minor subtypes are identified
periodically.
SUBTYPES (a.k.a. "clades"). There are five major subtypes of HIV, labeled "A"
through "E," according to their order of discovery. The major difference between
each subtype is a genetic variation in regions encoding the envelope protein
(gp120) and the core antigens.
Virtually all HIV in the Americas, Europe, the Caribbean and Australia is
subtype B. The vast majority of HIV in Thailand and in the Pacific Rim countries
is subtype E. Subtype C virus has emerged as the most rapidly expanding HIV in
Africa, China and India. The remaining subtypes A and D occur primarily in
Africa and in limited areas around the world.
Like most vaccines, AIDSVAX consists of two biologically active ingredients: an
antigen and an adjuvant. An antigen is the ingredient in vaccines that activates
the human immune system response. The antigen in AIDSVAX is synthetic gp120
protein. Since the vaccine contains only a synthetic fragment of the virus and
no genetic material, it is incapable of causing HIV infection or AIDS. An
adjuvant is an active ingredient in vaccines that improves the human immune
system response by attracting immune cells to the region where the vaccine is
injected. The adjuvant in AIDSVAX is alum (i.e. aluminum hydroxide).
As a general strategy, we plan to develop AIDSVAX formulations that will
stimulate antibodies against multiple binding sites on gp120. Our goal is to
expand the range of antibodies that are stimulated by a vaccine to neutralize a
broader group of HIV subtypes. A practical application of this strategy has been
the conversion of AIDSVAX from a monovalent to a bivalent formulation.
The formulation of AIDSVAX for the recently completed Phase III trial is
bivalent AIDSVAX B/B for HIV infections in North America, Europe, Australia and
portions of South America; the continuing Phase III trial in Thailand is
bivalent AIDSVAX B/E for HIV infections in Southeast Asia.
9
Phase III Trial Design
Both the recently completed and continuing Phase III trials are double blind,
placebo-controlled. For the recently completed North American/European Phase III
clinical trial, the test group of volunteers received AIDSVAX while the placebo
group received a comparable-appearing placebo containing alum alone. All vials
of vaccine and placebo are coded. During the trial, neither volunteers, nor
clinical researchers, nor we knew which volunteers were given the vaccine or
placebo until the trial data was analyzed to determine efficacy. The protocol
called for each volunteer to be vaccinated a total of seven times during a
30-month period. The purpose of the booster doses, one each six months, was to
stimulate high antibody levels throughout the entire trial period. During each
visit, the volunteers received counseling on how to avoid the risk of HIV
infection. Follow-up with volunteers continues for at least six months after the
last vaccination is administered. The Thai Phase III clinical trial, which is
scheduled for completion at the end of June 2003, followed the same general
protocol.
Volunteers in North America and Europe were initially HIV-negative homosexual
men at high risk for infection and HIV-negative women who have HIV-infected
sexual partners or high-risk sexual behavior. This trial tested the vaccine
against sexual transmission of HIV. Volunteers in Thailand were initially
HIV-negative intravenous drug users with a high risk for blood-borne
transmission of HIV. This trial is testing the vaccine against blood-borne
transmission of HIV. In both the North American/European and Thai clinical
trials, the volunteers were being vaccinated and monitored by clinics with HIV
expertise and experience with these particular population groups.
The size of each Phase III clinical trial was established by a statistical model
that included: (1) the power to detect at least 30% efficacy at statistical
significance in preventing HIV infection; (2) the rate of infection of the
volunteer group; and (3) assumptions concerning the rate of retention of the
volunteers in the trial for a 36 month clinical observation period. Rate of
retention refers to the degree to which volunteers continue to participate in
the study.
Each Phase III clinical trial was conducted in two overlapping steps: (1)
recruitment of volunteers during a 17-18 month period; and (2) a 36-month
clinical observation period. For each individual, the 36-month observation
period began on the day of his or her first vaccination.
Conduct of the Phase III Clinical Trials
We utilized a clinical team who had assisted and monitored the 59 clinical sites
that were engaged in the North American/European AIDSVAX trial, including data
management; the central contract laboratories for HIV testing; sample handling
and shipping; and bio-statistics.
Audit and monitoring functions were conducted by an outside clinical research
organization, which audits the clinical sites for compliance with the Phase III
procedures, data recording, medical records and the use of Good Clinical
Practice (GCP), as defined by the FDA.
For Thailand, we also have a clinical team in place located in the U.S. and in
addition, approximately 200 people in Thailand are also involved in
administration and conduct of the trials and are employed by the Bangkok
Metropolitan Administration and Mahidol University.
Each clinical site agreed to conduct its activities according to the United
States and Thai FDA-reviewed Phase III protocols. The protocol sets standard
procedures for all sites and laboratories. Following each volunteer's visit to
a clinical site, data was recorded in both the volunteer's permanent medical
chart, as well as on a case report form, which were forwarded to us. The
original trial design called for approximately 1,200,000 case report forms to be
gathered and entered into the database for both clinical trials. As of December
31, 2002, we had processed approximately 1,286,000 case report forms.
The Phase III protocol also requires clinical sites to report any serious
adverse event to us. Any serious adverse events were to be immediately examined
in detail by our medical monitors. If deemed a
10
serious event related to the vaccine, the event was to be promptly reported to
the FDA. The protocol required all other adverse events to be recorded on the
case report forms and provided to the DSMB and the FDA for review on a periodic
basis. As of December 31, 2002, no serious adverse events related to the vaccine
had been reported to the FDA.
Determination of Efficacy
Our goal is to develop the most effective AIDS vaccine possible. The primary
goal of our Phase III studies was to measure how well AIDSVAX prevents HIV
infection. This was determined by comparing the number of infections in the
placebo group of volunteers to the number of infections in the vaccine group.
To gain either U.S. or Thai FDA regulatory approval for the sale of AIDSVAX, we
expected that the recently completed North American/European trial, along with
the ongoing Thai trial, would need to demonstrate that in the group of
volunteers who received AIDSVAX, there were at least 30% fewer HIV infections
than in the group who received the placebo. The 30% target, in this case, refers
to the lower bound of the confidence interval surrounding the final observed
efficacy. (A confidence interval establishes the upper and lower bounds of
efficacy surrounding an observed efficacy. It is similar to a margin of error
surrounding the results of a poll. If the study were repeated over and over
again, the true efficacy would fall within the confidence interval 95% of the
time.) In the U.S., the 30% target was based on discussions with the FDA and the
recommendations from its Vaccine and Related Biological Products Advisory
Committee.
To demonstrate that the lower bound of the confidence interval is above 30%, and
based on the original design of the trial, the observed efficacy needed to be
between approximately 45% and 67%. Observed efficacy is the standard by which
vaccines are measured.
In therapeutic studies it has been determined that suppression of viral load
correlates with an extension of life, so these data may support a licensing
application to the FDA and could represent a significant breakthrough by
potentially helping HIV-infected people live longer and reduce their ability to
infect others. It is not known yet whether either of these outcomes, known as
secondary endpoints, would be considered for regulatory approval.
License and Supply Agreement With Genentech
The license and supply agreement, which was amended and restated as of May 1,
2002, between us and Genentech, in part, defines the working relationship
between the companies. Genentech has granted us an exclusive license to all
patents and proprietary know-how that Genentech is free to license or sublicense
related to the development of a vaccine to prevent HIV infection. Certain of the
licensed technology is sublicensed or assigned to us under licenses from third
parties to Genentech. We, as the exclusive licensee of Genentech, have assumed
all of Genentech's obligations under these third-party license agreements. Such
obligations consist primarily of royalties on product sales. However, the
vaccine in its current form does not incorporate any of the technology
sublicensed or assigned us under licenses from third parties where there are
obligations under the license agreements. The initial term of the license
agreement is 15 years from the commercial introduction date of a licensed
product and will be determined on a country-by-country, product-by-product
basis. In addition, upon entering the original agreement, Genentech transferred
to us 300,000 doses of the vaccine. If we decide to conduct further clinical
trials, we will have to manufacture additional doses of the vaccine. Under the
license and supply agreement, we are required to use due diligence in
developing, seeking regulatory approval for, and marketing and commercializing
the vaccine. Due diligence is defined in the agreement as meaning that we will
use the maximum effort consistent with prudent business and scientific judgment
in developing, seeking regulatory approval for, marketing of and commercializing
licensed products in the field of use.
In connection with reaching this goal, we are required to achieve the filing of
the first market approval for a product with the FDA by May 2004, if it is able
to meet all of the primary endpoints established in its current Phase III
clinical trial. However, if we do not meet all of our primary endpoints, the
filing requirement date would be extended to May 2006. In addition, the
Agreement could be terminated if either
11
party fails to comply with any of its material obligations or in the event of
insolvency or bankruptcy of either party.
As part of the amended and restated license and supply agreement, Genentech gave
up its option to manufacture the vaccine and a one-time option to be responsible
for marketing the vaccine worldwide. Under the amended and restated agreement,
we granted Genentech an exclusive option to use, sell, offer for sale and
import, on an exclusive basis, the licensed vaccine in the U.S., Mexico and
Canada (North America). This option would be exercisable by Genentech any time
prior to 90 days from the date we deliver the final report of the Phase III
clinical trial and a detailed calculation of our development costs to Genentech.
Should Genentech exercise its North American marketing option, Genentech will
pay a license fee to us equal to 33% of our developmental costs of the initial
AIDSVAX product (including the Phase III clinical trials and regulatory
submissions). In addition, Genentech and we would share in the net profits in
North America, whereby 70% would go to Genentech and 30% would go to us. If
Genentech does not exercise its marketing option for North America, and in any
event for all sales outside of North America, we will pay a royalty equal to
fifteen percent of net sales to Genentech, except that the royalty owed to
Genentech for sales made by us to the World Health Organization or the United
Nations for use in a third world county at a price lower than the average price
charged in private markets in such a country, then the royalty owed Genentech
will be proportionately adjusted to a minimum rate of 7.5%.
Genentech's formal decision not to manufacture AIDSVAX followed our announcement
earlier in 2002 that we are creating a current Good Manufacturing Practice
(cGMP) manufacturing facility in South San Francisco with the capacity to
produce at least 10 million doses of AIDSVAX per year. Our strategy was to
initiate commercial manufacture in the South San Francisco facility and then
amend our license to include manufacture in a facility being built in Incheon,
South Korea, by our manufacturing joint venture partner, Celltrion. This larger
facility is scaled to initially produce in excess of 200 million doses of
AIDSVAX per year, should it become licensed.
As well as retaining an economic interest in the sales of AIDSVAX, Genentech
owns approximately 10% of our common stock.
Licensed Patents
We have licensed from Genentech exclusive rights to a portfolio of United States
and foreign patents. These include nine issued United States patents and eight
pending United States patent applications as well as 85 issued foreign patents
and 36 pending foreign applications. The technology claimed in these patents and
applications involves a range of HIV vaccine product development activities,
including the cloning and expression of recombinant virus glycoproteins for use
as vaccine products and sustained release formulations of HIV gp120. Also
claimed by patent filings are specific compositions of matter for the components
of our vaccine products, and proprietary production, recovery and purification
process technology.
Under the Genentech license agreement, Genentech has retained title to the
licensed patents and patent applications and other licensed technology
previously owned by Genentech, while we will retain title to any improvements
developed by us. Both parties will jointly own any improvements to the licensed
patents and patent applications or other licensed technology developed or
invented jointly. If Genentech exercises its marketing option under the
Genentech license agreement, it would have a fully paid-up, non-exclusive,
worldwide license under all improvements to the licensed know-how or patent
rights that we own. Furthermore, Genentech will have such a license if Genentech
terminates the Genentech license agreement before the expiration of the 15-year
term or if VaxGen voluntarily terminates the agreement. Genentech will remain
responsible for the filing, prosecution and maintenance of all licensed patent
rights, in consultation with us, at our expense.
In 1997, Chiron Corporation filed oppositions against two of Genentech's
European patents that are licensed to us. With our assistance, Genentech
defended these patents, which were both upheld in amended form in May 2000. By
prevailing in both patent disputes, we confirmed its exclusive rights to various
forms
12
of key proteins, methods for manufacturing the proteins, and their use for the
prevention and treatment of HIV/AIDS. We believe the broad intellectual property
protection afforded by these patents will allow us to participate in, and
benefit financially from, the development of any vaccine that uses these
proteins, in particular the form of gp120 that is the main ingredient in
AIDSVAX. Chiron Corporation has appealed both decisions, and the appeals are
pending.
Sales and Marketing
If AIDSVAX is eventually licensed, we intend to make this product available
through governmental purchasing agencies and private markets. We intend to serve
the bulk purchaser markets directly. We intend to rely on third parties for
sales and marketing of AIDSVAX to private purchasers. Genentech currently has an
option to obtain an exclusive North American license to use, market and sell
AIDSVAX. If AIDSVAX is approved for sale and Genentech does not exercise its
option to market AIDSVAX, we intend to serve North American bulk purchasers
directly and enter into agreements for marketing and distribution with other
partners to serve private purchasers, and will pay a predetermined royalty to
Genentech.
Government Collaborations and Grants
We have established collaborative relationships with two federal government
agencies: the U.S. Centers for Disease Control and Prevention (CDC) and the U.S.
NIAID.
Our collaborations with CDC are conducted in both the United States and
Thailand. In October 1999, we entered into collaboration with the CDC to support
research at six of the 56 clinics in the United States conducting Phase III
clinical trials of our AIDSVAX vaccine. The participating sites implemented the
Phase III protocol, and conducted epidemiological, social and behavioral
research, which is being shared by us and the CDC. The sites were compensated
directly by the CDC for the clinical costs, which would otherwise have been
incurred by us, and for conducting the additional research. The CDC agreed to
contribute approximately $8,000,000 to the participating sites over a four-year
period. In Thailand, the CDC is assisting in the measurement of viral loads in
infected vaccinees and placebo recipients, as well as examining HIV subtypes and
strains in the study populations.
In 2001, we finalized a collaborative agreement with BBI Biotech Research
Laboratories Inc. (BBI Biotech), which is being funded by the NIAID, to obtain
and store clinical specimens from our North American/European Phase III clinical
trial. The samples will be used to determine if the vaccine induced a cellular
immune response in the volunteers who received the active vaccine. The project
is being funded under a seven-year contract, which NIAID awarded BBI Biotech.
Under a subcontract with BBI Biotech, we will receive a gross amount of
approximately $1,730,000 to support the establishment of the sample collection.
We recognized approximately $474,000 of this revenue for the year ended December
31, 2002.
In 2001, we were awarded a grant from the NIH to continue the development of a
vaccine designed to prevent infection by HIV subtype C, the most widespread form
of the virus. The Small Business Innovation Research (SBIR) Fast Track grant
provides up to $1,131,000 for the development program. We recognized
approximately $464,000 of this revenue for the year ended December 31, 2002. The
NIH grant will allow us to create and conduct laboratory tests of a subtype C
vaccine that could be used alone in Southern Africa and India, or could be
combined with a vaccine against the B and E subtypes for regions of the world,
such as China, where all three subtypes are in circulation.
In September 2002, we were awarded a contract from NIAID to develop a new
anthrax vaccine and to create a feasibility plan to manufacture an emergency
stockpile of 25 million doses. The period of performance of the contract is from
September 30, 2002 through December 31, 2003. NIAID is expected to award a
separate contract in 2003 to manufacture the stockpile. The goal of the
government contract is to develop a vaccine that proves to be safe in humans,
efficacious in animal challenge studies and requires no more than three
injections. Under the initial phase of the NIAID contract, we will be able to
earn revenue up
13
to $16.2 million, upon satisfaction of certain milestones, to advance the
development of a vaccine candidate initially developed by the USAMRIID. If
results from the first phase are positive, NIAID may elect, at least 60 days
prior to December 31, 2003, to extend the contract. If the contract is extended,
we will be eligible for an additional $15.0 million beginning in 2003 as a
continuation of the current contract to support a Phase II clinical trial. A
second, much larger contract to manufacture the 25-million dose stockpile will
be awarded by NIAID through a competitive bid process by the end of the third
quarter of 2003. We will recognize revenue based on the completion of
milestones, that have been specified by NIAID. During the fourth quarter of
2002, we invoiced NIAID a total of $493,000, however we were not able to
recognize any revenue associated with this contract in 2002, because milestones
set forth in the agreement had not been achieved. Revenues and costs associated
with milestones which have not been substantiated through objective evidence
from NAID, will be deferred on our balance sheet.
Also in September 2002, we were awarded a $1.0 million task order to provide
AIDSVAX under a supply contract to develop HIV vaccines for a forthcoming Phase
III trial in Thailand funded by the NIH and conducted by the Walter Reed Army
Institute of Research (WRAIR). There are two government options and, if
exercised, would increase the total contract award to $3.3 million. In February
2003, the NIH exercised the first option to take delivery of the first
two-thirds of the vaccine supply. We expect that the NIH will exercise their
second option for the remaining balance of the vaccine supply in September 2003.
The majority of the contract award will be earned in 2003. The start date of the
clinical trial has been delayed due to matters outside of our control, but is
now currently scheduled to begin enrolling volunteers during the fourth quarter
of 2003 and will combine our AIDSVAX B/E vaccine with ALVAC, an AIDS vaccine
candidate being developed by Aventis Pasteur.
In October 2002, the NIH awarded us a SBIR grant to characterize the sequences
of the viruses responsible for recent HIV infections. The viruses are being
sequenced from blood specimens obtained from volunteers who became infected
during their participation in our North American/European Phase III clinical
trial and is intended to help identify Subtype B virus variants that might be
included in future vaccine formulations. Because the clinical trial is a
double-blinded, placebo-controlled study, we do not know if the specimens
gathered are from recipients of the vaccine or the placebo. The award for the
first phase of the grant is $210,000. We recognized approximately $102,000 in
grant revenue for the year ended December 31, 2002. Funding for the first year
of the second phase is proposed at $840,000 and we expect the award during the
second quarter of 2003.
Other Collaborations
We have on-going collaborations in which we provide AIDSVAX to four separate
Phase I/II clinical trials testing combination vaccines. AIDSVAX has been tested
with two different formulations of an Aventis Pasteur vaccine candidate. The
trials were conducted in the U.S. and abroad in both adult and infant
populations.
Relationship with Aventis Pasteur
Aventis Pasteur (formerly Pasteur Merieux Connaught) and VaxGen have been in
discussions to co-develop an alternative vaccine regimen, called the
prime/boost. The prime/boost utilizes two independent vaccines administered
sequentially. An Aventis Pasteur vaccine is administered initially, followed by
a bivalent gp120 vaccine. Two Phase III clinical trials have been considered to
test this approach.
The first of these trials was planned by NIAID to test an Aventis Pasteur
vaccine formulation with VaxGen's AIDSVAX B/B formulation in North and South
America. However, in February 2002, NIAID announced its decision not to proceed
forward with the Phase III trial. NIAID's decision was based on its Phase II
study indicating that ALVAC-HIV did not induce a sufficient cytotoxic T
lymphocyte (CTL) immune response to qualify it for the next trial phase. NIAID
stated that its decision not to proceed with the trial did not mean that the
vaccines were not efficacious.
14
The second trial was originally to be sponsored by the Walter Reed Army
Institute of Research (WRAIR), but now will be sponsored by NIAID. This trial is
being planned to test another Aventis Pasteur vaccine formulation with our
AIDSVAX B/E vaccine in Thailand in a population of both heterosexual male and
female adults. This trial is currently scheduled to begin sometime during the
fourth quarter of 2003.
In November 2002, we and Aventis Pasteur entered into a Cooperation Agreement to
facilitate the conduct by NIAID and other government agencies of certain
clinical trials of both our potential preventative vaccines. The Agreement
generally stipulates that both parties shall in good faith cooperate to conduct
biologics license application enabling clinical trials of our respective vaccine
candidates, use diligence in facilitating and seeking regulatory approval and
show best efforts to commercialize our vaccine candidates if proven successful.
There are no commercial terms contained in the Agreement.
15
VaxGen Manufacturing
Overview
We were formed seven years ago to complete the development of and commercialize
AIDSVAX, a vaccine designed to prevent infection or disease caused by HIV/AIDS.
In the course of carrying out this endeavor, it became clear to us that should
AIDSVAX prove effective in Phase III trials, manufacturing capacity would be
needed to produce a licensure application to the FDA. Further, a projected
shortage of bio-manufacturing capacity worldwide over the next five years would
delay expeditious commercialization of the vaccine should the FDA approve it for
use.
In order to avoid delays in licensure processes and eventually bringing AIDSVAX
to market, and to capitalize on what will likely be a shortage in global
bio-manufacturing capacity, we and a group of South Korean investors formed a
joint venture in 2002. The joint venture plans to invest approximately $122
million to build and operate large-scale bio-manufacturing facilities in
Incheon, South Korea and South San Francisco, California. The facility in
Incheon will be operated by the joint venture, known as Celltrion, and is being
designed to manufacture mammalian cell-cultured biopharmaceutical products
besides AIDSVAX.
Celltrion, through the same $122 million investment, is also contributing to the
funding of construction of the facility in South San Francisco, California, to
be operated directly by us, to support licensure and commercial launch of the
vaccine. Both facilities will be used for commercial manufacture of AIDSVAX, if
the FDA licenses it, or other biopharmaceutical products.
The Celltrion Joint Venture
The South Korean investors participating in the Celltrion joint venture are
Nexol Corp., KT&G Corp., and J. Stephen & Co. Ventures Ltd. We are providing
mammalian cell culture technology and biologics production expertise to
Celltrion, but no cash, in exchange for a 44% interest in the joint venture. We
are Celltrion's single-largest shareholder. The South Korean partners are
providing the funding necessary to design and construct both facilities, and to
validate and operate the Incheon facility. The Incheon facility will be built on
approximately 23 acres of land sold to Celltrion by the city of Incheon at a
discount to prevailing market rates.
Celltrion will finance the capital and operating costs of the manufacturing
facility in Incheon, South Korea. In its first phase of development, which
Celltrion expects to complete by 2005, we believe the Incheon facility will be
capable of producing up to 200 million doses of AIDSVAX; or other
biopharmaceutical products annually. Celltrion is also contributing to financing
the capital costs of constructing a manufacturing facility in South San
Francisco from which we believe AIDSVAX will initially be licensed and launched.
We believe the South San Francisco facility will have the capacity to
manufacture at least 10 million doses of AIDSVAX; or other biopharmaceutical
products annually when it is licensed and operational, which we believe will
occur in the second half of 2004. We will be responsible for certain costs of
validation, operation and licensure of this manufacturing facility. Both
manufacturing facilities will be designed to manufacture a variety of human
therapeutic proteins using mammalian cell fermentation, in addition to AIDSVAX.
The Joint Venture Agreement
Under the terms of the joint venture agreement, dated February 25, 2002, between
us and the three South Korean investors, the total capitalization of Celltrion
during the start-up phase will be between $82.0 million and $122.0 million,
subject to adjustment with the consent of the shareholders of Celltrion. The
laws of the Republic of Korea govern the joint venture agreement. After all
planned rounds of financing are completed; our fully diluted ownership will be
approximately 44%. As of December 31, 2002, the South Korean investors had
contributed approximately $40.75 million in cash to Celltrion of the $47.0
million in cash that is required by the joint venture agreement between us and
Celltrion, and secured a $40.0 million loan with a Korean bank. There is a
remaining balance of $6.25 million to be funded, of which J. Stephen & Co.
16
Ventures Ltd. is obligated to fund $3.75 million before the end of June 2003 and
Nexol Corp. is obligated to fund $2.5 million with no specified time requirement
for such funding. As a result, we currently have a 48.9% interest in the joint
venture.
A board of directors comprised of five individuals will manage Celltrion. So
long as we retain 66-2/3% of its initial shareholdings in Celltrion, we will be
entitled to nominate two of the directors and the CEO(s) of Celltrion.
The joint venture agreement may be terminated as follows:
-- If any party commits a material breach of any of its obligations
that is not cured within 60 days from the date of written notice of
breach;
-- If any party becomes incapable for a period of six months of
performing any of its obligations under the joint venture agreement
because of a force majeure;
-- If any party files for liquidation, bankruptcy or a similar
transaction or event; or
-- If the license agreement is terminated by VaxGen for certain reasons
described in the license agreement.
Land Purchase and Sale Agreement
Celltrion has entered into a land purchase and sale agreement, dated February
25, 2002, with the City of Incheon, South Korea. The land will be the site for
Celltrion's South Korean manufacturing facilities. As part of Celltrion's
initial formation, we and Celltrion entered into an assignment agreement on
March 25, 2002, in which we assigned Celltrion our rights, obligations, and
liabilities under the land purchase and sale agreement.
Contribution Agreement
Under the terms of the contribution agreement dated February 25, 2002 between us
and Celltrion, we made an in-kind contribution to Celltrion, as a part of the
initial capitalization of Celltrion, of the license and sub-license of certain
cell culture technology used for the manufacture of a number of pharmaceutical
products including AIDSVAX. VaxGen received 7.8 million shares of Celltrion
common stock for this contribution. The terms and conditions of the use of the
contributed technology has been set forth in the license agreement and the
sub-license agreement.
17
Government Regulation
The products VaxGen is developing, including AIDSVAX and the vaccine candidates
for anthrax and smallpox, and its manufacturing efforts, including its joint
venture with Celltrion, are subject to federal regulation in the U.S.,
principally by the FDA, and by state and local governments, as well as
appropriate regulatory and ministerial authorities in certain foreign
governments. Such regulations govern or influence, among other things, the
testing, manufacture, safety and efficacy requirements, labeling, storage,
record keeping, licensing, advertising, promotion, distribution and export of
products, and manufacturing and the manufacturing process.
The FDA classifies AIDSVAX and the anthrax and smallpox vaccine candidates we
are developing as biological drug products. The steps ordinarily required before
a biological drug product may be marketed in the United States include:
-- Pre-clinical laboratory and animal testing;
-- The submission to the FDA of an Investigational New Drug Application
(IND), which must become effective before clinical trials may
commence;
-- Adequate and well-controlled clinical trials to establish the
safety, purity and potency of the biological drug product and to
characterize how it behaves in the human body;
-- The submission to the FDA of a Biologics License Application that
includes both clinical trial data and manufacturing information;
-- FDA review of the Biologics License Application (BLA);
-- Completion of comparability studies, if necessary;
-- Satisfactory completion of an FDA pre-approval inspection of the
manufacturing facilities; and
-- FDA approval of the license application, including approval of all
product labeling.
Pre-clinical testing includes laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety, purity and potency of each product. Pre-clinical safety tests must be
conducted by laboratories that comply with FDA regulations regarding Good
Laboratory Practices. The results of the pre-clinical tests together with
manufacturing information and analytical data are submitted to the FDA as part
of the IND and are reviewed by the FDA before the commencement of clinical
trials. Unless the FDA objects to an IND by placing the study on clinical hold,
the IND will become effective 30 days following its receipt by the FDA. The FDA
may suspend clinical trials at any time on various grounds, including a finding
that patients are being exposed to unacceptable health risks. If the FDA does
place the study on clinical hold, the sponsor must usually resolve all of the
FDA's concerns before the study may proceed.
Clinical trials involve the administration of the investigational product to
humans under the supervision of qualified principal investigators. Clinical
trials are conducted in accordance with GCP under protocols submitted to the FDA
as part of the Investigational New Drug Application. In addition, each clinical
trial is approved and conducted under the auspices of an institutional review
board and with the patients' informed consent. The institutional review board
considers, among other things, ethical factors, and the safety of human subjects
and possibility of liability of the institutions conducting the trial.
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Clinical trials for vaccines are typically conducted in three sequential phases;
however, the phases may overlap. The goal of a Phase I clinical trial is to
establish initial data about safety and tolerance of the biological agent in
humans. In Phase II clinical trials, evidence is sought about the desired immune
response of a biological agent in a limited number of patients. Additional
safety data and dosing regimen information are also gathered from these studies.
The Phase III clinical trial program consists of expanded, large-scale,
multi-center studies of persons who are susceptible to the targeted disease. The
goal of these studies is to obtain sufficient evidence of the safety, purity and
potency of the proposed product. We recently announced data from the first of
two Phase III clinical trials for AIDSVAX, in which we failed to meet the
primary endpoint of the trial, but did observe some evidence of efficacy in
certain racial subgroups. We will need to modify the vaccine in order to
continue developing it for use in a broad population. In addition, we believe
that we will have to conduct additional clinical trials of AIDSVAX in order to
obtain approval from the FDA either in a broad patient population or in any
particular subgroups.
All data obtained from the clinical trials, in addition to detailed information
on the manufacture and composition of the product would be submitted in a BLA to
the FDA for review and approval for the manufacture, marketing and commercial
shipments of AIDSVAX or other products. FDA approval of the BLA is required
before marketing may begin in the U.S. The FDA also may, at any time, require
the submission of product samples and testing protocols for lot-by-lot
confirmatory testing by the FDA prior to commercial distribution. This means a
specific lot of vaccine cannot be released for commercial distribution until the
FDA has authorized such release. Similar types of regulatory processes will be
encountered as efforts are made to market any vaccine internationally. We will
be required to assure product performance and manufacturing processes from one
country to another.
For commercialization of AIDSVAX, the manufacturing processes described in our
BLA must receive FDA approval and the manufacturing facility must successfully
pass an inspection prior to approval of AIDSVAX for sale within the U.S. The
pre-approved inspection assesses whether, for example, the facility complies
with the FDA's cGMP. These practices include elaborate testing, control,
documentation, record keeping and other quality assurance procedures. For
marketing outside the United States, VaxGen will be subject to the regulatory
requirements of other countries, which vary from country to country, including
marketing approval requirements. The time needed to secure regulatory approval
in other countries may be longer or shorter than that required for FDA approval.
If results from the Phase I trial of the anthrax vaccine candidate we are
developing are positive, under an agreement with the NIH, we will be eligible
for an additional $15.0 million beginning in late 2003 from the NIH as a
continuation of the current contract to support a Phase II clinical trial of the
vaccine. Unlike most vaccines, it is anticipated that an anthrax vaccine can be
evaluated and approved by the FDA on the basis of an adequate and controlled
Phase II study, supported by animal efficacy studies. The FDA recently codified
the possibility of approval of new drugs or biologics, such as an anthrax
vaccine, on the basis of animal efficacy studies, where adequate and
well-controlled human studies cannot be ethically conducted and field efficacy
studies are not feasible.
Employees
As of December 31, 2002, we had 117 employees: 30 are clinical staff, 37 are
research and development staff, 33 are management/administration staff, 12 are
regulatory and quality services staff and 5 are manufacturing staff. None of our
employees is subject to a collective bargaining agreement, and we believe that
our relations with our employees are good.
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Risk Factors
You should carefully consider the following risk factors, in addition to the
other information set forth in this prospectus, before purchasing our common
stock. Each of these risk factors could adversely affect our business, operating
results and stock price.
Risks Relating to our Business
We may need to raise additional capital, and any inability to raise required
funds could harm our business.
As of December 31, 2002, we had $18.0 million of cash and cash equivalents and
investment securities. We believe that our existing cash and cash equivalents
and investment securities, together with investment income and funds primarily
from government contracts and grants, will enable us to meet our forecasted
expenditures through November 2003, but our existing capital resources will not
be sufficient to commercialize AIDSVAX. In addition, our accountants have
expressed doubt about our ability to continue as a going concern. Even if we are
technically able to successfully develop AIDSVAX in light of our recent clinical
trials, we expect additional development efforts and clinical trials will add
several years to the development timeline and result in substantial additional
expense. We are unable to fund these efforts with our current financial
resources. As a result, we will need to obtain additional financing to support
AIDSVAX as well as to continue operations in 2004. We do not know if additional
financing will be available, at all or on acceptable terms. If we fail to raise
sufficient funds, we would have to curtail or cease operations.
Clinical development is a long, expensive and uncertain process, and delay or
failure can occur at any stage of our clinical trials. We may not succeed in our
efforts to develop AIDSVAX based on our preliminary results and not meeting the
primary endpoint of the Phase III clinical trial.
We must provide the FDA and foreign regulatory authorities with clinical data
that demonstrate the safety and statistically significant efficacy of our
product candidates before they can be approved for commercial sale. Clinical
development is a long, expensive and uncertain process, and delay or failure can
occur at any stage of our clinical trials. AIDSVAX is our most advanced product
candidate. We recently announced data from the first of two Phase III clinical
trials for AIDSVAX, in which we failed to meet the primary endpoint of the
trial, but did observe some evidence of efficacy in certain racial subgroups. We
will need to modify the vaccine in order to continue developing it for use in a
broad population. In addition, we believe that we will have to conduct
additional clinical trials of AIDSVAX in order to obtain approval from the FDA
either in a broad patient population or in any particular subgroups. These
development efforts and subsequent clinical trials are lengthy and expensive,
and the outcome is uncertain. Even with modifications, we may discover that
AIDSVAX fails to protect individuals from contracting HIV. If we are unable to
successfully develop AIDSVAX, we will be unable to generate revenue from this
product opportunity, and our stock price is likely to decline.
We have limited experience in developing other types of vaccines and products,
such as smallpox and anthrax vaccines, and may be unable to develop other
vaccines and products, which could adversely affect our ability to execute our
business strategy, our business and our financial condition.
Part of our business strategy is to develop biologic products for the prevention
and treatment of human infectious diseases. In September 2002, we were awarded a
contract from the NIAID to develop a new anthrax vaccine and to create a
feasibility plan to manufacture an emergency stockpile of 25 million doses. In
December 2002, we entered into agreements with Kaketsuken to initiate
development of Kaketsuken's attenuated smallpox vaccine for use in the United
States. We have only limited experience in developing other types of vaccines
and products, so we may not be able to develop either an effective anthrax
vaccine or a smallpox vaccine for use in the United States or receive the
appropriate regulatory approvals to
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distribute either vaccine candidate in the U.S. If these development efforts
fail, it could adversely affect our ability to execute our business strategy,
our business and our financial condition.
Delay in completing our clinical trials could jeopardize our ability to obtain
regulatory approval to market AIDSVAX on a timely basis.
We expect to complete our Thai clinical trials in the second quarter of 2003 and
announce results sometime in the fourth quarter of 2003. Completion of our
clinical trial, and announcement of the results of the trial could be delayed
for a variety of reasons, including:
o lower-than-anticipated retention rate of volunteers in the trial;
o serious adverse events related to the vaccine;
o our principal third-party investigator may not perform our clinical
trials on our anticipated schedule or consistent with a clinical
trial protocol, and other third-party organizations may not perform
data collection and analysis in a timely or accurate manner; or
o different interpretations of our preclinical and clinical data,
which could lead initially to inconclusive results.
Our development costs will increase if we have material delays in our clinical
trial or if we need to perform more or larger clinical trials than planned. If
the delays are significant, our financial results and the commercial prospects
for our products and product candidates will be harmed, and our prospects for
profitability will be impaired. Furthermore, our inability to complete our
clinical trials in a timely manner could jeopardize our ability to obtain
domestic or foreign regulatory approval.
If we fail to comply with extensive regulations enforced by domestic and foreign
regulatory authorities, the commercialization of our product candidates could be
prevented or delayed.
Vaccine candidates are subject to extensive government regulations related to
development, clinical trials, manufacturing and commercialization. The process
of obtaining and complying with FDA, other governmental and foreign regulatory
approvals and regulations is costly, time consuming, uncertain and subject to
unanticipated delays. It also subjects us to the following risks and
obligations, among others.
o The FDA or foreign regulators may refuse to approve an application
if they believe that applicable regulatory criteria are not
satisfied.
o The FDA or foreign regulators may require additional testing for
safety and efficacy.
o If regulatory approval of a product is granted, the approval may be
limited to specific indications or limited with respect to its
distribution; for example, the FDA may approve the licenses for only
high-risk populations.
o The FDA or foreign regulators may not approve our manufacturing
processes or manufacturing facilities, or may require additional
clinical studies to establish the safety, purity and potency of our
product candidates.
o Even if United States regulatory approval for any product is
obtained, the license will be subject to continual review, and newly
discovered or developed safety or efficacy data may result in
revocation of the marketing license.
o If regulatory approval of the vaccine candidate is granted, the
marketing of that vaccine would be subject to adverse event
reporting requirements and the FDA's general prohibition against
promoting products for unapproved or "off-label" uses.
o We will be subject to continual regulatory review and periodic
inspection and approval of manufacturing modifications, including
compliance with the FDA's cGMPs regulations.
In addition, the FDA stringently applies regulatory standards for manufacturing.
Failure to comply with any of these post-approval requirements can, among other
things, result in warning letters, product seizures, recalls, fines,
injunctions, suspensions or revocations of marketing licenses, operating
restrictions and criminal prosecutions. There can be no assurance that we will
avoid incurring significant costs to comply
21
with such laws and regulations in the future, or that such laws or regulations
will not have a material adverse effect on us.
We receive funding from the U.S. government, and in the future we may receive
significant orders from the U.S. government, if the U.S. government fails to
continue funding or purchasing products we manufacture, our business will be
harmed.
We have received funding from the U.S. government for the development of an
anthrax vaccine. Changes in government budgets and agendas may result in future
funding to be decreased and de-prioritized. Furthermore, we cannot be certain of
the timing of any future funding. The failure of the U.S. government to continue
to fund our research and development programs would harm our business.
Similarly, if we develop any anthrax vaccine candidate that is approved by the
FDA, the U.S. government is likely to be our largest customer for this product.
The failure of the U.S. government to place sufficient orders for this product
or to place orders on a timely basis would be harmful to our future business.
Even if the U.S. government were to become a customer, we would be subject to
additional governmental contract requirements, and future sales would depend, in
part, on our ability to meet those requirements, certain of which may be onerous
or even impossible for us to satisfy
The approval requirements of vaccines used to fight bio-terrorism are still
evolving, and we cannot be certain that any vaccines we develop, if effective,
would meet these requirements.
The approval requirements of vaccines used to fight bio-terrorism are still
evolving, and we cannot be certain that any vaccines we develop, if effective,
would meet the approval requirements of regulatory authorities. We are
developing products based upon current policies regulating these vaccines. Our
business is subject to substantial risk because these policies may change
quickly and unpredictably and in ways that could impair our ability to obtain
regulatory approval of these products.
Our product development efforts may not yield marketable products due to results
of studies or trials, failure to achieve regulatory approvals or market
acceptance, proprietary rights of others or manufacturing issues.
Our success depends on our ability to successfully develop and obtain regulatory
approval to market new biopharmaceutical products. A significant portion of the
research that we will conduct will involve new and unproven technologies.
Development of a product requires substantial technical, financial and human
resources even if the product is not successfully completed.
Our potential products may appear to be promising at various stages of
development yet fail to reach the market for a number of reasons, including:
o lack of sufficient prevention benefit or unacceptable safety during
preclinical studies or clinical trials;
o failure to receive necessary regulatory approvals;
o existence of proprietary rights of third parties; and
o inability to develop manufacturing methods that are efficient,
cost-effective and capable of meeting stringent regulatory
standards.
We face competition from several companies with greater financial, personnel and
research and development resources than ours.
Several of our competitors have announced that they are trying to develop an HIV
vaccine and are planning, conducting or have completed Phase I or Phase II
clinical trials. In addition, several of these companies are developing new drug
therapies and other treatments that may mitigate the impact of the disease. Our
competitors are also developing vaccine candidates for anthrax and smallpox,
which would compete with the vaccine candidates we are developing. Our
commercial opportunities will be reduced or eliminated if our competitors
develop and market products for any of the diseases that we target that are:
22
o more effective;
o have fewer or less severe adverse side effects;
o are easier to administer; or
o are less expensive than the products or product candidates we are
developing.
Even if we are successful in developing effective drugs, obtaining FDA and other
required regulatory approvals and commercializing them, our products may not
compete effectively with these products or other successful products.
Researchers are continually learning more about diseases, which may lead to new
technologies for treatment. Our competitors may succeed in developing and
marketing products either that are more effective than those that we may
develop, alone or with our collaborators, or that are marketed before any
products we develop are marketed.
Our competitors include fully integrated pharmaceutical companies and
biotechnology companies that currently have drug and target discovery efforts,
as well as universities and public and private research institutions. Many of
the organizations competing with us have substantially greater capital
resources, larger research and development staffs and facilities, greater
experience in drug development and in obtaining regulatory approvals and greater
marketing capabilities than we do.
We have only a limited operating history and we expect to continue to generate
losses.
To date, we have engaged primarily in research, development and clinical
testing. At December 31, 2002, we had an accumulated deficit of approximately
$142.0 million. We sustained net losses of approximately $2.1 million in 1996,
$3.1 million in 1997, $9.2 million in 1998, $23.3 million in 1999, $31.8 million
in 2000, $26.9 million in 2001 and $45.7 million in 2002. We expect to incur
substantial losses in the future.
Our South Korean manufacturing joint venture may not be successful.
In February 2002, we entered into a joint venture, Celltrion, with a group of
South Korean investors for the purpose of building and operating a manufacturing
facility in Incheon, South Korea, and a smaller manufacturing facility in South
San Francisco. We have not yet completed the full capitalization of, or the
transfer of all technology to, Celltrion. Celltrion will be unable to complete
its capitalization and unable to build a manufacturing facility in South Korea
or in South San Francisco, if Celltrion is unable to secure or raise the
necessary funding or does not receive the necessary technology for the
manufacture of AIDSVAX or other biopharmaceutical products.
Even if Celltrion successfully builds its manufacturing facilities, we cannot be
certain that the facilities will pass domestic or foreign regulatory approvals
or be able to manufacture the vaccine candidates we are developing or third
parties' products in commercial quantities, on a cost-effective basis or at all.
In addition, the political, social and economic situation of South Korea, and
the stability of the Korean peninsula as a whole, may not continue to provide an
environment in which we would be able to manufacture the vaccine candidates we
are developing cost-efficiently or at all. The South Korean government may
impose regulations or restrictions that would make it difficult, impractical or
impossible, whether economically, legally or otherwise, for us to conduct our
business there. Celltrion's manufacturing operations may expose our business to
numerous risks inherent in international operations including:
o foreign currency controls;
o currency fluctuations;
o trade restrictions or changes in tariffs;
o the difficulties associated with staffing and managing international
operations;
o generally longer receivables collection periods;
o potentially limited protection for intellectual property rights;
o potentially adverse taxes; and
o international conflict and war.
23
If Celltrion is unable to manufacture AIDSVAX or other vaccines or products, or
if it becomes commercially impractical for Celltrion to manufacture those
products, we may not recoup the cost of our investment, and our business and
results of operations will suffer.
Our use of hazardous materials, chemicals and viruses exposes us to potential
liabilities.
Our research and development involves the controlled use of hazardous materials,
chemicals, and viruses. Although we believe that our safety procedures for
handling and disposing of such materials comply with the standards prescribed by
state and federal regulations, we cannot completely eliminate the risk of
accidental contamination or injury from these materials. In the event of such an
accident, we could be held liable for significant damages or fines.
We may become subject to product liability claims, which could reduce demand for
our products or result in damages that exceed our insurance limitation.
We face an inherent risk of exposure to product liability suits in connection
with vaccines being tested in human clinical trials or sold commercially. We may
become subject to a product liability suit if any vaccine we develop causes
injury, or if vaccinated individuals subsequently become infected or otherwise
suffer adverse effects from our vaccines or products. Regardless of merit or
eventual outcome, product liability claims may result in decreased demand for a
vaccine or product, injury to our reputation, withdrawal of clinical trial
volunteers and loss of revenues. If a product liability claim is brought against
us, the cost of defending the claim would be significant and any adverse
determination may result in liabilities in excess of our insurance coverage. We
currently have product liability insurance in the amount of $25 million.
However, we cannot be certain that our current insurance can be maintained, or
additional insurance coverage could be obtained, on acceptable terms, if at all.
Legislation limiting or restricting liability for medical products used to fight
bio-terrorism is evolving, and we cannot be certain that any such protections
will apply to our vaccines or products.
Legislation relating to medical products used to fight bio-terrorism is
evolving, and may enable the United States government to release and use certain
medical products prior to such products obtaining FDA or other regulatory
approval. According to the terms of one proposed bill, upon a declaration of
emergency, the United States government may authorize the introduction and use
of a qualified medical product (possibly the anthrax vaccine, currently under
development with government funding, and the smallpox vaccine) prior to either
such medical product obtaining FDA regulatory approval. Further, such proposed
legislation provides that the United States government may elect to purchase and
stockpile quantities of vaccines or products prior to receipt of regulatory
approval to fight bio-terrorism. Legislation limiting or restricting liability
for the use of such vaccines is evolving, and we cannot be certain that any such
protections will apply to the vaccines or products developed by us. If the
legislation does not provide sufficient protection, and we are not able to
obtain these protections by contract, we may become subject to product liability
suits and other third party claims if vaccines or products developed by us cause
injury, or if vaccinated individuals subsequently become infected or otherwise
suffer adverse effects from such vaccines or products. We currently have product
liability insurance in the amount of $25 million. However, we cannot be certain
that our current insurance will cover such claims, or that adequate insurance
coverage can be obtained.
Political or social factors may delay or reduce revenues by delaying or
impairing our ability to market AIDSVAX or any other vaccine or product.
Products developed for use in addressing the HIV/AIDS epidemic have been, and
will continue to be, subject to competing and changing political and social
pressures. Similarly products developed to treat or combat the threat of
bio-terrorism will be subject to changing political and social environments. The
political and social responses to the HIV/AIDS epidemic and to bio-terrorism
have been highly charged and
24
unpredictable. Political or social pressures may delay or cause resistance to
bringing our products to market or limit pricing of our products, which would
harm our business.
Failure to hire and retain key management employees could adversely affect our
ability to obtain financing, develop AIDSVAX and other products, conduct
clinical trials or execute our business strategy.
We are highly dependent on our senior management and scientific staff,
particularly Lance Gordon, Ph.D., our Chief Executive Officer, Donald Francis,
M.D., D.Sc., our President, and Phillip Berman, Ph.D., our Senior Vice
President, Research & Development. These individuals have played a critical role
in raising financing, negotiating business development opportunities, developing
the vaccine and conducting clinical trials. The loss of the services of any of
these key members of senior management and scientific staff may prevent us from
achieving our business objectives.
Failure to protect our intellectual property or infringing on the intellectual
property rights of others could harm our business and cause our stock price to
fall.
If we are unable to protect our intellectual property, we may be unable to
prevent other companies from using our technology in competitive products. If we
infringe the intellectual property rights of others, we may be prevented from
developing or marketing AIDSVAX or other products. We rely on patent and other
intellectual property protection to prevent our competitors from manufacturing
and marketing AIDSVAX and other products. Our technology, including technology
licensed from Genentech, will be protected from unauthorized use by others only
to the extent that it is covered by valid and enforceable patents or effectively
maintained as trade secrets. As a result, our success depends on our ability and
Genentech's ability, to:
o obtain patents;
o protect trade secrets;
o operate without infringing upon the proprietary rights of others;
and
o prevent others from infringing on our proprietary rights.
We cannot be certain that our patents or patents that we license from Genentech
will be enforceable and afford protection against competitors. We cannot assure
you that our operations or technology will not infringe intellectual property
rights of others. If we infringe the intellectual property of others, there can
be no assurance that we would be able to obtain licenses to use the technology
on commercially reasonable terms or at all.
Risks Relating to Our Relationship with Genentech and Our Relationships with
other Third Parties
We intend to rely on third parties for the production, sales or marketing of our
vaccines if they are successfully developed. Our dependence on third parties may
delay or impair our ability to generate revenues, or adversely affect our
profitability.
Since inception we have been primarily focused on research and development of
AIDSVAX. We lack any sales or marketing history, and as of present do not have
plans on developing internally such capability. We intend to rely on third
parties for the sales and marketing of our products. Our lack of sales and
marketing personnel and distribution relationships may impair our ability to
generate revenues. We are also entirely dependent on third parties to produce
AIDSVAX. To date, we have relied on Genentech for this purpose. Genentech
currently has an exclusive option to manufacture AIDSVAX, although they have
consented to our participation in Celltrion, our South Korean manufacturing
joint venture. Our license agreement with Genentech does not specify the price
we will be required to pay Genentech to manufacture AIDSVAX. Genentech is not
able to assure us that it will have adequate manufacturing capacity to produce
AIDSVAX for us on a commercial scale.
25
Our license agreement with Genentech, as amended effective as of May 1, 2002,
permits Genentech to terminate the agreement, or terminate the exclusivity of
our license, if we:
o fail to use due diligence in developing, seeking regulatory approval
for, marketing or commercializing products covered by the agreement;
o fail to file the first market approval application for AIDSVAX with
the FDA prior to May 1, 2004; provided, that this date may be
extended to May 1, 2006 if our Phase III clinical trials do not meet
all of their primary endpoints; or
o breach the license agreement and fail to cure the breach within the
time period provided in the agreement.
If Genentech were to terminate our license agreement, we would not be able to
develop or market AIDSVAX.
Risks Related to the Issuance of Series A 6% Cumulative Redeemable Convertible
Preferred Stock (Series A Preferred Stock) and Warrants
We may be obligated to redeem the Series A Preferred Stock, the common stock
issued on exercise of the warrants and/or the warrants at a premium to the
purchase or exercise price.
On May 23, 2001 we completed a private placement in which we issued 20,000
shares of our Series A Preferred Stock and warrants to purchase common stock for
aggregate proceeds of $20.0 million. As of December 31, 2002, there were 3,800
shares of Series A Preferred Stock and warrants to purchase 530,672 shares of
common stock outstanding. The terms of our Series A Preferred Stock, and the
warrants, give the holders the right to require us to redeem all of the
outstanding Series A Preferred Stock, common stock issued on exercise of the
warrants, and/or the warrants, under certain circumstances, including:
o on May 23, 2004, with respect to the Series A Preferred Stock;
o at a 15% premium upon a change of control; and
o at a 20% premium if we breach certain of our obligations under the
purchase agreements, if our stock is delisted or not quoted on an
approved stock exchange or the Nasdaq National Market or Small Cap
Market for 5 consecutive days or if we are insolvent or certain
actions are taken as part of a bankruptcy proceeding.
Our redemption of the Series A Preferred Stock, common stock issued on
conversion of the Series A Preferred Stock or on exercise of the warrants,
and/or the warrants, if any of these circumstances were to happen they would
require the expenditure of a significant amount of cash that could substantially
exceed the proceeds that we received in the private placement.
Our stockholders could experience substantial dilution as result of the issuance
of additional preferred stock.
Our board of directors has the authority to establish the designation of
19,979,500 additional shares of preferred stock that are convertible into common
stock without any action by our stockholders, and to fix the rights,
preferences, privileges and restrictions, including voting rights, of such
shares. The issuance and conversion of any such preferred stock would further
dilute the percentage ownership of our stockholders.
If the holders of the Series A Preferred Stock and the warrants elect to have
the Series A Preferred Stock and the warrants assumed by a potential acquirer of
VaxGen, or redeemed by VaxGen, the acquirer could be deterred from completing
the acquisition.
The Series A Preferred Stock and the warrants permit the holders to elect to
have their shares of Series A Preferred Stock and the warrants remain
outstanding after an acquisition of VaxGen and to have the acquirer assume all
of our obligations to the holder. The Series A Preferred Stock also permits the
holders of Series A Preferred Stock to require us to repurchase the Series A
Preferred Stock, at a premium, in
26
connection with an acquisition. The ability to force an acquirer to assume the
Series A Preferred Stock and the warrants, and the ability to force us to
repurchase the Series A Preferred Stock at a premium, in the event of a merger
could deter a potential acquirer from completing an acquisition of VaxGen.
We may be required to obtain the consent of the holders of Series A Preferred
Stock before taking corporate actions, which could harm our business.
Our certificate of incorporation requires us to obtain the consent of the
holders of the Series A Preferred Stock before we may issue securities that have
senior or equal rights as the Series A Preferred Stock or incur unsecured
indebtedness for borrowed money, or take other actions with respect to the
Series A Preferred Stock or securities that have fewer rights than the Series A
Preferred Stock. We are also required to obtain the consent of the holders of
the Series A Preferred Stock before we amend or modify our certificate of
incorporation or bylaws to change any of the rights of the Series A Preferred
Stockholders. While these obligations may deter a potential acquirer from
completing a transaction with us, they may also prevent us from taking corporate
actions that would be beneficial to us and our stockholders.
Other Risks
Our stock price may be volatile, and your investment in our stock could decline
in value.
The trading price of our common stock has been and is likely to continue to be
extremely volatile. Our stock price could be subject to wide fluctuations in
response to a variety of factors, including the following:
o adverse results or delays in clinical trials;
o delays in our product development efforts;
o failure to win future government contracts for anthrax or smallpox;
o real or perceived safety issues with any of our vaccine candidates;
o delays in completion of our manufacturing facilities in South Korea
and the U.S.;
o changes in financial estimates by securities analysts;
o rumors about our business prospects, product development efforts or
clinical trials;
o new products or services offered by us or our competitors or
announcements relating to product developments by our competitors;
o issuances of debt or equity securities;
o sales by our stockholders of substantial amounts of our common
stock, including shares issued upon exercise of outstanding options
and warrants and conversion of the Series A Preferred Stock; and
o other events or factors, many of which are beyond our control.
In addition, the stock market in general, and the Nasdaq National Market and
biotechnology companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of these companies. Broad market and industry factors may negatively
affect the market price of our common stock, regardless of actual operating
performance. In the past, following periods of volatility in the market price of
a company's securities, securities class action litigation has often been
instituted against companies. This type of litigation, if instituted, could
result in substantial costs and a diversion of management's attention and
resources, which would harm our business.
27
Available Information
We maintain a site on the World Wide Web at www.vaxgen.com; however, information
found on our website is not incorporated by reference into this report. We make
available free of charge on or through our website our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange Commission (SEC).
We assume no obligation to update or revise any forward-looking statements in
this Annual Report on Form 10-K whether as a result of new information, future
events or otherwise, unless we are required to do so by law.
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Item 2. Properties
Our executive offices are located in Brisbane, California, in an office building
in which we lease approximately 20,000 square feet. The lease agreement
terminates in May 2007, and we have an option to renew for a successive
five-year period. We also lease approximately 70,000 square feet of laboratory
and manufacturing space in South San Francisco under three lease agreements,
which terminate in March 2004, April 2006 and October 2008, respectively. We
have an option to renew for a successive five-year period. We believe that our
facilities are sufficient to support our operations for at least the next 18
months.
In Thailand, we lease office space which are occupied by our collaborators at
Mahidol University and at Taksin Hospital in Bangkok. We will lease this space
through the duration of the Thai Phase III clinical trials.
Item 3. Legal Proceedings
On March 17, 2003 a civil complaint for violation of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 was filed in the United States District
Court for the Northern District of California, entitled Janice Whitkens v.
VaxGen, Inc., et al., Civil Action No. C03-1129 JSW. Named, as defendants are
VaxGen, Inc., Chief Executive Officer Lance K. Gordon and President Donald P.
Francis, M.D. The plaintiff seeks to represent a class of persons who purchased
the Company's securities between August 6, 2002 and February 26, 2003, and
alleges that the defendants misled investors about the progress of certain
clinical trials and the Company's future manufacturing and marketing plans.
Management believes the Company has strong defenses and intends to defend the
action vigorously.
Following the filing of the Whitkens complaint, several additional class action
complaints were filed in the same court, each making identical or similar
allegations against the same defendants. The company expects that these
complaints will eventually be consolidated into a single action. Management
believes the Company has strong defenses and intends to defend the action
vigorously.
On or about March 21, 2003, two separate but virtually identical shareholder
derivative actions were filed in California Superior Court for San Mateo County
entitled Rhodes v. Allen, et al. civil action no. CIV 430087, and MacDonald v.
Allen, et al., civil action no. CIV 430088. Named as defendants in both actions
are company directors Lance K. Gordon, Donald P. Francis. M.D., Phillip W.
Berman, David W. Beier, Randall L-W. Caudill, Stephen C. Francis and William D.
Young. Also named as defendants are Paul Allen and Vulcan Ventures, Inc. The
allegations of these complaints mirror those contained in the class action, and
plaintiffs allege as well that Mr. Allen and Vulcan Ventures sold shares of the
company's stock while in possession of material non-public information about the
company. Plaintiffs, purportedly suing on behalf of the company, assert claims
against all defendants for breach of fiduciary duty, mismanagement, waste and
unjust enrichment, and against Mr. Allen and Vulcan Ventures for breach of
fiduciary duty and insider trading. Management believes the Company has strong
defenses and intends to defend the action vigorously.
29
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's stockholders during the
quarter ended December 31, 2002.
30
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Stock
Our common stock began trading publicly on The Nasdaq National Market(R) on June
30, 1999 under the symbol "VXGN." The following table lists quarterly
information on the price range of the common stock based on the high and low
sale prices for our common stock as reported on The Nasdaq National Market(R)
for the periods indicated below. These prices do not include retail markups,
markdowns or commissions.
High Low
-------- -------
Fiscal 2002:
Fourth Quarter $23.25 $ 8.35
Third Quarter $10.73 $ 4.51
Second Quarter $11.99 $ 4.96
First Quarter $12.90 $ 8.40
Fiscal 2001:
Fourth Quarter $18.12 $ 8.07
Third Quarter $19.55 $11.50
Second Quarter $25.33 $18.37
First Quarter $28.69 $15.38
As of February 28, 2003, there were 399 holders of record of the common stock.
On March 14, 2003, the last reported sale price on The Nasdaq National Market(R)
for the common stock was $3.83 per share.
Dividend Policy
We have not declared or paid any cash dividends on our common stock since
inception. We currently intend to retain all of our cash and any future earnings
to finance the growth and development of our business and therefore we do not
anticipate paying any cash dividends in the foreseeable future. Any future
determination to pay cash dividends will be at the discretion of our Board of
Directors and will be dependent upon our financial condition, results of
operations, capital requirements and such other factors as the Board of
Directors deems relevant.
Recent Sales of Unregistered Securities
In 2002, we issued warrants to a consultant to purchase up to 6,000 shares of
our common stock at an exercise price of $11.52 per share. The warrants were
issued for work performed by the consultant. The exemption from registration
relied upon for this transaction was Section 4(2).
31
Item 6. Selected Financial Data
This selected financial data should be read in conjunction with our financial
statements, related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this report.
Period
from
Inception
(November 27,
1995)
Year Ended December 31 through
------------------------------------------------------------ December 31,
2002 2001 2000 1999 1998 2002
-------- -------- -------- -------- -------- ---------
(in thousands, except per share data)
Statement of Operations Data:
Revenues:
Research grant and contract revenue $ 1,055 $ 895 $ 275 $ -- $ -- $ 2,225
Related party services revenue 527 -- -- -- -- 527
-------- -------- -------- -------- -------- ---------
Total revenues 1,582 895 275 -- -- 2,752
Operating expenses:
Research and development (20,975) (16,701) (18,513) (18,003) (6,831) (85,855)
General and administrative (14,373) (11,823) (17,465) (7,479) (3,345) (55,682)
-------- -------- -------- -------- -------- ---------
Loss from operations (33,766) (27,629) (35,703) (25,482) (10,176) (138,785)
Other income, net 2,022 3,255 3,900 2,148 1,013 13,196
-------- -------- -------- -------- -------- ---------
Net Loss $(31,744) $(24,374) $(31,803) $(23,334) $ (9,163) $(125,589)
Charges attributable to convertible
preferred stock (13,909) (2,484) -- -- -- (16,393)
-------- -------- -------- -------- -------- ---------
Net loss applicable to common
stockholders $(45,653) $(26,858) $(31,803) $(23,334) $ (9,163) $(141,982)
======== ======== ======== ======== ======== =========
Net loss per share applicable to
common stockholders--basic and
diluted $ (3.13) $ (1.90) $ (2.33) $ (2.44) $ (1.48)
======== ======== ======== ======== ========
Weighted average shares
outstanding--basic and diluted 14,567 14,145 13,636 9,568 6,185
======== ======== ======== ======== ========
At December 31,
---------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
(in thousands)
Balance Sheet Data:
Cash, cash equivalents and investment
securities $18,021 $48,410 $48,524 $70,534 $19,468
Working capital 13,320 45,242 48,013 68,213 17,866
Total assets 28,037 53,372 56,797 75,225 21,472
Long-term obligations 606 22 367 89 --
Redeemable convertible preferred stock 3,349 15,845 -- -- --
Total stockholders' equity 14,495 32,561 51,072 71,150 19,398
32
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
In November 1995, VaxGen was formed to continue development of AIDSVAX, a
preventative vaccine against HIV/AIDS. At that time, Genentech licensed to us
the technology necessary for completing development and commercialization of
AIDSVAX under a license agreement. Currently, Genentech owns approximately 10%
of our outstanding common stock.
Since our formation, we have focused on developing and testing AIDSVAX. We have
developed two formulations of AIDSVAX, which focus on the predominant HIV
subtype in North America, Europe, the Caribbean, and Australia (subtype B) and
the predominant HIV subtype in Southeast Asia and East Asia (subtype E). We have
commenced two Phase III clinical trials, one in North America and Europe to
determine the efficacy AIDSVAX B/B and one in Thailand, to determine the
efficacy of AIDSVAX B/E.
In October 1999, we completed the initial inoculation and enrollment of over
5,400 trial volunteers for the North American/European Phase III clinical trial,
which was conducted in 59 clinical centers and completed the clinical trial as
planned in December 2002. On February 24, 2003, we announced that the study did
not show a statistically significant reduction of HIV within the study
population as a whole, which was the primary endpoint of the trial. However, the
study did show a statistically significant reduction of HIV infection in certain
vaccinated groups. Initial trial data indicated that Black and Asian volunteers
appeared to produce higher levels of antibodies against HIV. White and Hispanic
volunteers appeared to develop consistently lower levels of protective
antibodies after vaccination. We intend to conduct additional analyses of the
data to confirm if there was a direct correlation between the level of
antibodies and the prevention of infection. We are not sure yet why certain
groups have a better immune response, but these preliminary results may indicate
that a surface-protein (gp120) vaccine stimulates neutralizing antibodies
correlates with prevention of HIV infection. The results of the clinical trial
also initially indicated that the vaccine is well tolerated and has a high
safety profile. Based on the preliminary results, we intend to continue
development of AIDSVAX through licensure, including additional studies as needed
in the subgroups in which the vaccine demonstrated significant reduction in
infection and in parallel continue to work on the vaccine to make it more
broadly effective. However, our continued development of AIDSVAX will depend on
whether we obtain funding from sources including governmental agencies and
philanthropic organizations, rather than from the equity markets.
In August 2000, we completed the initial inoculation and enrollment of over
2,500 volunteers for the Thai Phase III clinical trial, which is being conducted
in 17 clinical centers in Bangkok. We are scheduled to complete this trial
during the second quarter of 2003 and expect to announce clinical results during
the last quarter of 2003. The FDA has designated our HIV/AIDS vaccine candidates
Fast Track Products for the prevention of HIV infection. The Fast Track
designation could enable more rapid regulatory review of AIDSVAX if and when we
submit a BLA.
In February 2002, we and a group of South Korean investors announced the
formation of a joint venture, called Celltrion, to build and operate a
manufacturing facility in Incheon, South Korea. As our part of the investment in
the joint venture, we are providing mammalian cell culture technology and
biologics production expertise. Celltrion contributed funds to a subsidiary for
the purpose of funding the first $7.0 million of construction cost for a smaller
manufacturing facility in South San Francisco, California. This smaller facility
is intended to support the licensure and commercial launch of AIDSVAX, but is
also designed to support the manufacture of other biopharmaceutical products. In
the event that AIDSVAX is proven successful and the Incheon facility is
validated and licensed to produce AIDSVAX, Celltrion would produce bulk material
that will be sold to us. However, in the event that AIDSVAX is proven to be
unsuccessful, we believe the Incheon facility would be used to manufacture other
biopharmaceutical products, in which we would share in the profits based on our
percentage ownership. After all rounds of financing are complete, our fully
diluted ownership of the joint venture will be approximately 44%. Although we
have no further funding obligation to Celltrion, we are responsible for any
additional capital equipment costs in excess of $7.0 million for which we
receive equivalent value in common stock and
33
certain future costs related to the validation, operation and licensure of the
manufacturing facility in South San Francisco, California.
To date, we have generated $2,752,000 in revenue from grants from the NIH for
research and development of HIV vaccines along with funds received through a
collaborative agreement with BBI Biotech, which is funded by the NIAID, to
obtain and store clinical specimens from our North American/European Phase III
clinical trial; and from service agreement fees from our manufacturing joint
venture.
In September 2002, we were awarded a contract from NIAID to develop a new
anthrax vaccine and to create a feasibility plan to manufacture an emergency
stockpile of 25 million doses of an anthrax vaccine. The period of performance
of the contract is from September 30, 2002 through December 31, 2003. The goal
of the government contract is to develop a modern vaccine that proves to be safe
in humans, efficacious in animal challenge studies and requires no more than
three injections. Under the initial phase of the NIAID contract, we will be
awarded $16,200,000, upon satisfaction of certain milestones, to advance the
development of a vaccine candidate initially developed by the USAMRIID. If
results from the Phase I clinical trial are positive, NIAID may elect, at least
60 days prior to December 31, 2003, to extend the contract. If the contract were
to be extended, we would be eligible for an additional contract award of
$15,000,000 beginning in late 2003 and running through 2007 as a continuation of
the current contract to support a Phase II clinical trial. A second, much larger
contract to manufacture a 25 million-dose stockpile under an IND will be awarded
by NIAID through a competitive bid process by the end of the third quarter of
2003.
Also in September 2002, we were awarded a $1,000,000 task order to provide
AIDSVAX under a supply contract to develop HIV vaccines for a forthcoming Phase
III trial in Thailand funded by the NIH and conducted by the WRAIR. The majority
of the contract award will be earned in 2003. There are two government options,
if exercised, which would increase the contract award to a total of $3,300,000.
In February 2003, the NIH exercised the first option to take delivery of the
first two-thirds of the vaccine supply. We expect that the NIH will exercise
their second option for the remaining balance of the vaccine supply in September
2003. The start date of the clinical trial has been delayed due to matters
outside of our control, but is now currently scheduled to begin enrolling
volunteers during the fourth quarter of 2003 and will combine our AIDSVAX B/E
vaccine with ALVAC, an AIDS vaccine candidate being developed by Aventis
Pasteur.
In December 2002, we announced that we and Kaketsuken entered into initial
agreements that will allow us to begin development of Kaketsuken's attenuated
small pox vaccine, LC16-Kaketsuken, for use in the U.S., subject to approval by
the FDA. We believe, that the vaccine, which was licensed in Japan in 1980, will
have a better safety profile, yet be equally effective, compared to small pox
vaccines currently available in the U.S. We are currently in negotiations with
Kaketsuken to define the specific commercial terms of our relationship.
We have incurred losses since inception as a result of research and development
and general and administrative expenses in support of our operations. As of
December 31, 2002, we had a deficit accumulated during the development stage of
$141,983,000. We anticipate incurring substantial losses over at least the next
two to three years as we complete our clinical trials, apply for regulatory
approvals continue development of our vaccines and expand our operations.
Since inception, our research and development expenses have been applied to two
product development projects: AIDSVAX, our HIV vaccine candidate, and a program
to develop a new anthrax vaccine for the U.S. Government. For AIDSVAX, we have
incurred total costs of $81,834,000 in research and development since we began
operations in late 1995. During the last three years we have incurred costs of
$18,827,000, $14,828,000 and $18,513,000, during 2002, 2001, and 2000,
respectively. The most significant research and development costs incurred for
the development of AIDSVAX include: the costs to conduct the Phase III clinical
trials, the cost of the clinical materials, the costs associated with the
laboratory
34
activities required to support the trials, the establishment of a regulatory and
quality systems group to support the possible licensure of the products, and the
costs to refine the manufacturing process of the vaccine. In 2003, we expect the
development cost for AIDSVAX will be approximately $4,400,000, and is primarily
associated with the conclusion of the Thai Phase III clinical trial
The North American/European Phase III clinical trial was completed as scheduled
in December 2002. Completion meant that the last volunteer remaining in the
trial had completed the study protocol and that all of the data collected during
the multiple year study was "locked" for analysis. Up until mid-February, the
data continued to be blinded and was not unblinded until when the final analysis
began. On February 24, 2003, we announced that the study did not show a
statistically significant reduction in HIV infection within the study group as a
whole, which was the primary endpoint of the clinical trial. However, the study
did show a statistically significant reduction of HIV infection in certain
subgroup populations. The results of the clinical trial also initially indicated
that the vaccine, AIDSVAX B/B, is well tolerated and has a high safety profile.
We intend to conduct additional analyses to confirm if there was a direct
correlation between the level of antibodies and the prevention of infection.
However, if additional clinical trials are needed, we intend only to continue
the development of AIDSVAX B/B if we are able to obtain funding from
governmental or philanthropic sources.
The Thai Phase III clinical trial, which is testing our AIDSVAX B/E formulation
in a blood-borne transmission study, is scheduled for completion in June 2003
and we anticipate announcing the results of this trial sometime during the
fourth quarter of 2003. In October 2002, the Thai trial underwent its final
safety and conduct review by the Data Safety and Monitoring Board (DSMB). The
DSMB concluded that the study was being conducted appropriately and that the
vaccine was appearing safe. Besides a good safety profile, the retention of
volunteers remaining in the trial continues to remain above expectations. On an
annualized basis the retention rate as of September 15, 2002, 96.7% of the
volunteers in the trial continued to participate. The DSMB also conducted an
interim analysis of efficacy and recommended that the study continue to its
planned conclusion in June 2003.
The anthrax vaccine project began during the fourth quarter of 2002 when the NIH
awarded us a cost reimbursement contract to develop a new vaccine to prevent
anthrax infection. As of December 31, 2002, we have incurred total costs of
$1,379,000 towards this project, which has been deferred along with the related
revenue until the milestones that are required have been met. We expect to incur
approximately additional costs of $7,500,000 during 2003, of which we expect to
receive be reimbursement for all our direct expenses, coverage for a certain
part of our overhead and general and administrative expenses and a fixed profit
amount.
In February 2003, we received official notification from NIAID indicating that
we met the program requirements stipulated under milestone 1 of the anthrax
vaccine development contract. Milestone 1 required us to produce the pilot lot
of the anthrax vaccine clinical material amongst other associated activities.
Along with Milestone 1, we continue to perform, in parallel, against the other
milestones required under the contract with NIAID. Thus far, we are performing
within budget and on schedule.
We cannot reasonably estimate the nature, timing and cost of completing these
product development projects due to the numerous risks and uncertainties
associated with developing vaccines, including:
o intense and changing governmental regulation, both foreign and
domestic, and social and political considerations with respect to
drug development, particularly bio-terrorism and AIDS research;
o the fact that the anthrax vaccine project is in the very early
stages of pre-clinical testing and that we have only limited
experience in developing vaccines and products other than AIDSVAX;
o the uncertainty of future pre-clinical and clinical study results
and the uncertainty of the timing of enrolling volunteers in vaccine
trials, particularly in large scale clinical vaccine trials
enrolling hundreds and thousands of volunteers in multiple cities
and in various countries;
35
o the possibility of delays in the completion of clinical trials
caused by different interpretations of pre-clinical and clinical
data; and
o the uncertainty related to our manufacturing facilities, which are
in an early stage of construction, various risks related to our
reliance on third parties, including Genentech, Celltrion and
government entities.
See the section entitled "Risk Factors" for a more detailed discussion of these
risks and uncertainties.
Critical Accounting Policies and Estimates
Our discussion and analysis of our operating results and financial condition is
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of the financial statements requires us to make estimates,
judgments, and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. While we believe our estimates, judgments,
and assumptions are reasonable, the inherent nature of estimates is that actual
results will likely be different from the estimates made.
We believe the following critical accounting policy affect the most significant
judgments and estimates used in the preparation of our consolidated financial
statements.
Revenue Recognition
We recognize revenue when all of the following conditions have occurred:
o Persuasive evidence of an arrangement exists;
o Delivery has occurred or services have been rendered;
o The price is fixed and determinable; and
o Collectibility is reasonably assured.
Our fees are typically considered to be fixed or determinable at the inception
of an arrangement and are negotiated at the outset of an arrangement and are
generally based on specific services or products to be delivered. In the event
payment terms are provided that differ significantly from our standard business
practices and collectibility is not reasonably assured, the fees are deemed to
not be fixed or determinable and revenue is recognized as the fees are paid.
In addition, we adopted the guidance provided by the SEC, which addresses the
proper recognition of service revenue. We believe that this is the appropriate
treatment of our contract with the NIH to develop a new anthrax vaccine. Under
this arrangement we deferred revenues and expenses on our balance sheet until we
are able to provide objective evidence that we have attained the specified
milestones established by the NIH. At December 31, 2002, we had $1,379,000 of
deferred costs and $493,000 of deferred revenues related to this agreement.
36
Results of Operations
Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001
Revenue
Contract revenue increased 77%, from $895,000 for the year ended December 31,
2001 to $1,582,000 for the year ended December 31, 2002. The revenue in 2002
primarily consisted of funds received as reimbursements under a collaborative
agreement with BBI Biotech and two Small Business Innovation Research (SBIR)
grants that are funded by NIAID; and service agreement revenue of $527,000
earned from the Celltrion joint venture and its wholly-owned subsidiary,
VaxGen-Celltrion, Inc. Revenue earned in one period is not indicative of revenue
to be earned in future periods.
Research and development expenses
Research and development expenses increased 26%, from $16,701,000 for the year
ended December 31, 2001 to $20,975,000 for the year ended December 31, 2002. The
net increase is due primarily to the increase in personnel expenses of
$2,590,000, the final closeout expenses payable to our North American and
European clinical trial sites and service fees associated with the completion of
our two Phase III clinical trials amounting to an increase of $2,332,000 offset
by a reduction of $1,109,000 in fees paid to our licensing partner, Genentech.
The increase in personnel cost and service fees include salary and benefits
expenses and fees for services required to support our regulatory filings, the
advanced development of our manufacturing processes and the monitoring and
auditing expenses normally incurred at the end of a Phase III clinical trial. We
expect research and development expenses to increase for the foreseeable future
if we are able to advance the product candidates we are developing into clinical
development and if we are able to raise necessary funds to support such
programs.
General and administrative expenses
General and administrative expenses increased 22%, from $11,823,000 for the year
ended December 31, 2001 to $14,373,000 for the year ended December 31, 2002. The
increase was primarily due to higher spending for occupancy, personnel and
insurance costs. Prior to the fourth quarter of 2002, we entered into a sublease
agreement to occupy an additional 50,000 square feet of space to establish our
South San Francisco manufacturing facility and the laboratory facilities needed
to support a manufacturing operation. Personnel costs increased due to the
hiring of additional personnel required to support the expanding infrastructure
of our operations. Finally, insurance premium cost, mainly in the product
liability and directors and officers liability programs increased due to current
market conditions in the insurance industry. We expect general and
administrative expenses will be maintained at similar levels but will be
adjusted according to the level of our research and development activity and
planned operations.
Other income, net
Other income, net, consisting primarily of interest income, decreased 38%, from
$3,255,000 for the year ended December 31, 2001 to $2,022,000 for the year ended
December 31, 2002. This was primarily attributable to lower average balances of
cash, cash equivalents and investment securities, along with lower interest
yields.
37
Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000
Revenue
Revenue increased 225% to $895,000 for the year ended December 31, 2001 from
$275,000 in December 31, 2000. Revenue in 2000 primarily consisted of funds
received as reimbursements under a collaborative agreement with BBI Biotech.
Revenue earned in one period is not indicative of research contract revenue to
be earned in future periods.
Research and development expenses
Research and development expenses decreased 10% from $18,513,000 for the year
ended December 31, 2000 to $16,701,000 for the year ended December 31, 2001. The
decrease is due to a reduction of fees paid to Genentech for clinical material
as a result of the clinical trials winding down along with lower clinical trial
site costs, laboratory supply costs and fees paid to third parties associated
with conducting the clinical trials.
General and administrative expenses
General and administrative expenses decreased 32%, from $17,465,000 for the year
ended December 31, 2000 to $11,823,000 for the year ended December 31, 2001. The
decrease was primarily due to a $7,900,000 non-cash compensation charge in 2000
related to the issuance of common stock to three executives in connection with
the achievement of a bonus provision in their employment contracts, offset by
higher infrastructure costs along with an increase of approximately $1,000,000
in legal fees related to business development and the resolution of an employee
matter.
Other income, net
Other income, net, consisting primarily of interest income, decreased 17%, from
$3,900,000 for the year ended December 31, 2000 to $3,255,000 for the year ended
December 31, 2001. This was primarily attributable to lower average balances of
cash, cash equivalents and investment securities, along with lower interest
yields.
Liquidity and Capital Resources
Our primary financing requirements are for (i) capital equipment expenditures
related to the manufacturing facility in South San Francisco, California; (ii)
funding our day-to-day working capital requirements; and (iii) research and
development costs.
Cash, cash equivalents and investment securities were $18,021,000 and our
working capital position was $13,320,000 at December 31, 2002. We have financed
our operations since inception primarily through capital provided by Genentech,
sales of our common stock and through an issuance of convertible preferred
stock. Genentech has no obligation to provide us future funding.
We completed our initial public offering in July 1999, in which we sold
3,565,000 shares of common stock resulting in net proceeds to us of
approximately $41,959,000. In early 1999, we received net proceeds of $5,273,000
from private placement financing activities, which were completed prior to our
initial public offering.
In December 1999, we completed a private placement of common stock with Vulcan
Ventures, Inc. The funds from the private placement helped support our on-going
operations along with our current clinical
38
trials. This private placement has also enabled us to commence development of a
formulation of AIDSVAX, that focuses on the predominant HIV type found in
Africa, China, India and South America (subtype C). Currently, we have developed
formulations of AIDSVAX, that focus on the predominant HIV type in North
America, Europe, the Caribbean and Australia (subtype B) and the predominant HIV
subtype in Southeast Asia and East Asia (subtype E). The private placement
consisted of approximately 2,174,000 shares of common stock, which resulted in
proceeds, net of expenses, to us of approximately $24,100,000.
On May 23, 2001 we completed a preferred stock financing through which four
investors paid us an aggregate of approximately $20,000,000 in consideration for
20,000 shares of our Series A Preferred Stock at a price of $1,000 per share,
convertible into shares of our common stock, at an initial conversion price of
$23.2185 per share. In the event that there is no earlier conversion, we must
redeem the Series A Preferred Stock for cash on May 23, 2004, at a redemption
price equal to $1,000 per share plus all accrued and unpaid dividends. Expenses
relating to the transaction were approximately $1,700,000, resulting in net
proceeds to us of approximately $18,300,000. The proceeds from the Series A
Preferred Stock financing have been used to develop our commercial-scale
manufacturing facilities, the potential development of new adjuvants and general
corporate purposes. During the fourth quarter of 2002, two investor's converted
16,200 shares in the aggregate of Preferred Stock in exchange for 1,172,436
shares of common stock, which included shares issued for accrued but unpaid
dividends. As of December 31, 2002, 3,800 shares of Series A Preferred Stock
remained outstanding.
In connection with the preferred stock financing, we issued warrants for the
purchase of 297,177 shares of our common stock to our preferred stock investors.
The warrants, which expire on May 23, 2006, originally had an initial exercise
price of $25.2375 per share; however effective as of May 23, 2002, the exercise
price was automatically adjusted to $14.133 per share and the number of shares
issuable on exercise of the warrants increased to 530,674, in accordance to the
terms of the warrants.
Since our inception, investing activities, other than purchases and sales of
investment securities, have consisted entirely of equipment acquisitions and
leasehold improvements. From inception through December 31, 2002, our gross
investment in equipment and leasehold improvements was $6,421,000. The increase
in equipment and leasehold improvements has been primarily due to the
development of our research and development laboratories and the establishment
of larger office facilities. Net cash used in operating activities for 2002 was
$29,040,000 representing expenditures for research and development costs and
general and administrative expenses.
In October 1999, we entered into collaboration with the CDC to support research
at six of the 54 clinics in the United States conducting Phase III clinical
trials of our AIDSVAX vaccine. The participating sites implemented our Phase III
protocol, as well as conducted epidemiological, social and behavioral research,
which will be shared by the Company and the CDC. The sites were compensated
directly by the CDC for the clinical costs. The CDC has agreed to contribute
approximately $8,000,000 to the participating sites over a four-year period.
In 2001, we finalized a collaborative agreement with BBI Biotech, which is being
funded by the NIAID, to obtain and store clinical specimens from our North
American/European Phase III clinical trial. The project is being funded under a
contract, which NIAID awarded BBI Biotech for seven years. Under a subcontract
with BBI Biotech, we will receive a gross amount of approximately $1,730,000 to
support the establishment of the sample collection. We recognized approximately
$474,000 for the year ended December 31, 2002.
In 2001, we were awarded a grant from the NIH to continue the development of a
vaccine designed to prevent infection by HIV subtype C, the most widespread form
of the virus. The SBIR Fast Track grant provides up to $1,131,000 for the
development program. We recognized approximately $464,000 for the
39
year ended December 31, 2002. The NIH grant will allow us to create and conduct
laboratory tests of a subtype C vaccine that could be used alone in Southern
Africa and India, or it could be combined with a vaccine against the B and E
subtypes for regions of the world, such as China, where all three subtypes are
in circulation.
In February 2002, we and a group of South Korean investors announced the
formation of a joint venture, named Celltrion, which intends to raise up to
approximately $122.0 million, consisting of up to approximately $92.0 million in
cash and an in-kind investment of mammalian cell culture technology and
production support valued at $30.0 million, to build and operate a facility in
Incheon, South Korea, to manufacture AIDSVAX. The joint venture also intends to
fund a capital contribution of $7.0 million towards construction of a smaller
facility in South San Francisco to support licensure and commercial launch of
AIDSVAX. We believe that both facilities, once constructed, would be designed
for commercial manufacture of AIDSVAX, if it proves safe and effective and is
approved by the FDA or other bio-pharmaceutical products.
As part of our investment in the joint venture, we provided mammalian cell
culture technology and biologics production expertise to the joint venture. We
currently are Celltrion's single-largest stockholder. Although we have no
further funding obligation to Celltrion, we are responsible for any additional
capital equipment costs in excess of $7.0 million; and certain costs related to
the validation, operation and licensure of the manufacturing facility in South
San Francisco, California. The South Korean partners will provide the funding
necessary to design and construct both facilities and to validate and operate
the Incheon facility. After all planned rounds of financing are completed; our
fully diluted ownership will be approximately 44%. As of December 31, 2002, the
South Korean investors had contributed approximately $40.75 million in cash to
Celltrion of the $47.0 million in cash that the joint venture agreement between
us and Celltrion, and secured a $40 million loan with a Korean bank. As a
result, we currently have a 48.9% interest in the joint venture.
In September 2002, we were awarded a contract from NIAID to develop a new
anthrax vaccine and to create a feasibility plan to manufacture an emergency
stockpile of 25 million doses. The period of performance of the contract is from
September 30, 2002 through December 31, 2003. NIAID is expected to award a
separate contract in 2003 to manufacture the stockpile. Under the initial phase
of the NIAID contract, we will be awarded $16.2 million, upon satisfaction of
certain milestones, to advance the development of a vaccine candidate initially
developed by the USAMRIID. If results from the first phase are positive, NIAID
may elect, at least 60 days prior to December 31, 2003, to extend the contract.
If the contract were extended, we would be eligible for an additional $15.0
million in 2003 as a continuation of the current contract to support a Phase II
clinical trial. During the fourth quarter of 2002, we invoiced NIAID a total of
$493,000, however we were not able to recognize any revenue associated with this
contract in 2002, because attainment of contractual milestones set forth in the
agreement had not been met. We will recognize revenue based on the completion of
milestones, which have been specified by NIAID. Revenues and costs (not to
exceed revenues) associated with milestones which have not been substantiated
through objective evidence from NAID, will be deferred on our balance sheet.
Also in September 2002, we were awarded a $1.0 million task order to supply
AIDSVAX B/E under an existing general contract to develop HIV vaccines for a
forthcoming Phase III trial in Thailand funded by the NIH and conducted by
WRAIR. There are two government options, if exercised, would increase the total
contract award to $3.3 million. In February 2003, the NIH exercised the first
option to take delivery of the first two-thirds of the vaccine supply. We expect
that the NIH will exercise their second option for the remaining balance of the
vaccine supply in September 2003. The majority of the contract award will be
earned in 2003.
In October 2002, the NIH awarded us a SBIR grant to characterize the sequences
of the viruses responsible for recent HIV infections. The viruses are being
sequenced from blood specimens obtained from volunteers who became infected
during their participation our North American/European Phase III clinical trial
and is intended to help identify Subtype B virus variants that should be
included in future vaccine formulations.
40
The grant award for the first phase of the grant is $210,000. We recognized
approximately $102,000 in grant revenue for the year ended December 31, 2002.
Funding for the first year of the second phase is proposed at approximately
$840,000 and we expect the grant will be awarded during the second quarter of
2003.
Future payments due under contractual obligations as of December 31 are as
follows:
Non-Cancelable Clinical Trial
Operating Leases Expenses Total
---------------- --------------- -----------
2003 $ 2,269,000 $3,750,000 $ 6,019,000
2004 2,169,000 -- 2,169,000
2005 2,176,000 -- 2,176,000
2006 2,186,000 -- 2,186,000
2007 1,581,000 -- 1,581,000
2008 and thereafter 1,044,000 -- 1,044,000
----------- ---------- -----------
Total $11,425,000 $3,750,000 $15,175,000
=========== ========== ===========
We believe that our existing cash and cash equivalents and investment
securities, together with investment income, the funds from our existing
government contracts and grants, along with funds from other potential
collaborative arrangements, will enable us to meet our forecasted expenditures
through the anticipated completion of our Thai Phase III clinical trial and
through approximately November 2003. However, we will need to raise additional
funds to support the necessary manufacturing and development programs if we
apply for regulatory approval of the AIDSVAX vaccine and to support other
business opportunities.
We will also need to raise additional capital if the Thai Phase III clinical
trials are delayed or more costly than currently anticipated, or if
commercialization is delayed for any other reason. Our future capital
requirements are also dependent on several other factors, including:
o the progress of other internal research and development projects;
o the timing and ability to negotiate government contracts or grants;
o the need for leasehold improvements to facilities and the purchase
of additional capital equipment;
o the ability to attract and negotiate business development
opportunities; and
o the timing of revenue, from our vaccine candidates.
We cannot assure you that we will be able to raise funds when needed, or that
such funds will be available on satisfactory terms. If we are unable to raise
additional capital, we will need to scale back our research and development
efforts. We will restrict additional planned activities and operations, as
necessary, to sustain operations and conserve cash resources.
At December 31, 2002, we had federal and California net operating loss
carryforwards of approximately $122,692,000 and $67,238,000. The federal and
California net operating loss carryforwards expire by 2022 and 2014,
respectively. Additionally, we have federal research credits, expiring through
2022, of approximately $3,288,000 and California research credits, carrying
forward indefinitely of approximately $2,348,000. There is significant
uncertainty about our ability to realize these benefits and we have not
reflected any deferred tax assets on our balance sheet.
41
New Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
146, Accounting for Exit or Disposal Activities. SFAS 146 addresses the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including costs related to terminating a contract that
is not a capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS 146 supersedes Emerging Issues Task Force
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring), and requires liabilities associated with exit and disposal
activities to be expensed as incurred. SFAS 146 is effective for exit or
disposal activities that we initiate after December 31, 2002.
In November 2002, the FASB issued Financial Interpretation No. 45, "Guarantor's
Accounting and Disclosure requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). The initial recognition and
initial measurement provisions apply on a prospective basis to guarantees issued
or modified after December 31, 2002, regardless of the guarantor's fiscal
year-end. The disclosure requirements in the Interpretation are effective for
financial statements of interim or annual periods ending after December 15,
2002. We do not have any guarantees nor do we provide any guarantees for others.
We do not expect the adoption of FIN 45 to have a material effect on our
financial condition or results of operations.
In November 2002, the FASB issued Emerging Issues Task Force (referred to as
EITF) Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF
Issue No. 00-21 addresses certain aspects of the accounting by a company for
arrangements under which it will perform multiple revenue-generating activities.
EITF Issue No. 00-21 addresses when and how an arrangement involving multiple
deliverables should be divided into separate units of accounting. The provisions
of EITF Issue No. 00-21 will apply to revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. We do not expect the adoption of
EITF Issue No. 00-21 to have a material effect on our financial condition or
results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure - an amendment of FASB Statement No. 123.
SFAS 148 amends FASB Statement No. 123, Accounting for Stock Based Compensation
and provides alternative methods for accounting for a change by registrants to
the fair value method of accounting for stock-based compensation. Additionally,
SFAS 148 amends the disclosure requirements of SFAS 123 to require disclosure in
the significant accounting policy footnote of both annual and interim financial
statements of the method of accounting for stock based-compensation and the
related pro forma disclosures when the intrinsic value method continues to be
used. The statement is effective for fiscal years beginning after December 15,
2002, and disclosures are effective for fiscal years ending after December 15,
2002. We have included the disclosure in our financial statements.
In January 2003, the FASB issued Financial Interpretation No. 46, "Consolidation
of Variable Interest Entities" (FIN 46). The consolidation requirements of
Interpretation 46 apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements apply to older entities in the
first fiscal year or interim periods beginning after June 15, 2003. Certain of
the disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity
42
was established. We do not expect the adoption of FIN 46 to have a material
effect on our financial condition or results of operations.
Impact of Inflation
The impact of inflation on our operations for the years ended December 31, 2002,
2001, and 2000 was not material.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
At December 31, 2002 and 2001, our exposure to market rate changes is related
primarily to our debt securities included in our investment portfolio. We do not
have any derivative financial instruments. By policy, we invest in debt
instruments of the U.S. Government, Federal agencies and high-quality corporate
issuers, limit the amount of credit exposure to any one issuer, limit duration
by restricting the term, and hold investments to maturity except under rare
circumstances. Investments in both fixed rate and floating rate instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall.
Due in part to these factors, our future investment income may decrease due to
changes in interest rates or due to losses we may suffer when securities decline
in market value. At December 31, 2002, we held government debt instruments and
corporate obligations in the principal amount of $13,094,000. If market interest
rates were to increase immediately and uniformly by 10% from levels at December
31, 2002, the fair value of our portfolio would decline by an immaterial amount.
Our exposure to losses as a result of interest rate changes is managed through
investing primarily in securities that mature in a period of one year or less.
We have exposure to foreign currency exchange risk primarily related to our
conducting clinical trials in Thailand. Thailand is currently considered an
emerging economy. A material increase in the value of Thailand's currency
against the U.S. Dollar could cause an increase in our expenses. The majority of
our contracts associated with conducting clinical trials in Thailand are priced
in Baht. As of December 31, 2002, we have incurred $1,000 in foreign exchange
losses. We do not expect that our foreign currency balance sheet exposure as of
December 31, 2002 will result in a significant impact on our operations or cash
flows.
43
Item 8. Financial statements and supplementary data
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
VaxGen, Inc.:
We have audited the accompanying balance sheets of VaxGen, Inc. (a development
stage enterprise) as of December 31, 2002 and 2001, and the related statements
of operations, cash flows, and stockholders' equity (deficit) and comprehensive
loss for each of the years in the three-year period ended December 31, 2002 and
the period from November 27, 1995 (inception) through December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of VaxGen, Inc. (a development
stage enterprise) as of December 31, 2002 and 2001, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2002 and the period from November 27, 1995 (inception)
through December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations during its development stage and expects to have a working
capital deficiency for 2003 that raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Mountain View, California
February 7, 2003
44
VaxGen, Inc.
(A Development Stage Enterprise)
BALANCE SHEETS
ASSETS
December 31, December 31,
2002 2001
------------- -------------
Current assets:
Cash and cash equivalents $ 4,449,000 $ 7,499,000
Investment securities 13,572,000 40,911,000
Accounts receivable, net of allowance for doubtful accounts
of $487,000 as of December 31, 2002 and $487,000 as of
December 31, 2001 1,302,000 438,000
Accounts receivable - related party 440,000 --
Deferred costs 1,379,000 --
Prepaid expenses and other current assets 1,765,000 1,338,000
------------- -------------
Total current assets 22,907,000 50,186,000
Property and equipment, net 3,309,000 2,987,000
Restricted cash 1,033,000 --
Investment in affiliate 268,000 --
Employee loans receivable 135,000 55,000
Other assets 385,000 144,000
------------- -------------
Total assets $ 28,037,000 $ 53,372,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to Genentech $ 1,900,000 $ 2,250,000
Accounts payable 595,000 557,000
Accrued clinical trial expenses 2,455,000 894,000
Accrued liabilities 3,705,000 1,212,000
Deferred revenues 917,000 --
Current portion of long-term obligations 15,000 31,000
------------- -------------
Total current liabilities 9,587,000 4,944,000
Deferred rent 606,000
Long-term obligations -- 22,000
Redeemable convertible preferred stock, $0.01 par
value, 20,500 shares authorized:
Series A 6% cumulative, $0.01 par value, 3,800 and
20,000 shares issued and outstanding at December 31,
2002 and December 31, 2001, respectively (liquidation
preference of $3,800,000 and $20,000,000 at December 31,
2002 and December 31, 2001, respectively) 3,349,000 15,845,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 19,979,500 shares
authorized; none issued or outstanding -- --
Common stock, $0.01 par value, 60,000,000 shares authorized;
15,777,064 and 14,300,600 shares issued and outstanding
at December 31, 2002 and December 31, 2001, respectively 157,000 143,000
Additional paid-in capital 156,117,000 128,387,000
Deferred stock compensation (94,000) (516,000)
Accumulated other comprehensive income -
unrealized gain on investment securities 298,000 877,000
Deficit accumulated during the development stage (141,983,000) (96,330,000)
------------- -------------
Total stockholders' equity 14,495,000 32,561,000
------------- -------------
Total liabilities and stockholders' equity $ 28,037,000 $ 53,372,000
============= =============
See accompanying notes to financial statements.
45
VaxGen, Inc.
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
Period
from
Inception
(November 27,
1995)
Year Ended December 31, through
---------------------------------------------- December 31,
2002 2001 2000 2002
------------ ------------ ------------ -------------
Revenue:
Research grant and contract revenue $ 1,055,000 $ 895,000 $ 275,000 $ 2,225,000
Related party services revenue 527,000 -- -- 527,000
------------ ------------ ------------ -------------
Total revenues 1,582,000 895,000 275,000 2,752,000
Operating expenses:
Research and development:
Genentech charges 1,313,000 2,422,000 3,210,000 13,091,000
Other 19,662,000 14,279,000 15,303,000 72,764,000
------------ ------------ ------------ -------------
Total research and development 20,975,000 16,701,000 18,513,000 85,855,000
General and administrative expenses 14,373,000 11,823,000 17,465,000 55,683,000
------------ ------------ ------------ -------------
Loss from operations (33,766,000) (27,629,000) (35,703,000) (138,786,000)
------------ ------------ ------------ -------------
Other income (expense):
Investment income 2,037,000 3,274,000 3,922,000 13,299,000
Interest expense (4,000) (19,000) (22,000) (92,000)
Equity in loss of affiliate (11,000) -- -- (11,000)
------------ ------------ ------------ -------------
Total other income, net 2,022,000 3,255,000 3,900,000 13,196,000
------------ ------------ ------------ -------------
Net loss (31,744,000) (24,374,000) (31,803,000) (125,590,000)
Charges related to convertible
preferred stock:
Dividends (1,090,000) (740,000) -- (1,830,000)
Accretion to redemption value (1,758,000) (1,010,000) -- (2,768,000)
Beneficial conversion charge (11,061,000) (734,000) -- (11,795,000)
------------ ------------ ------------ -------------
Net loss applicable to common
stockholders $(45,653,000) $(26,858,000) $(31,803,000) $(141,983,000)
============ ============ ============ =============
Basic and diluted loss per share
applicable to common stockholders $ (3.13) $ (1.90) $ (2.33)
============ ============ ============
Weighted average shares used in
computing basic and diluted
loss per share 14,567,000 14,145,000 13,636,000
============ ============ ============
See accompanying notes to financial statements.
46
VaxGen, Inc.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
Period from
Inception
November 27,
Year Ended December 31, 1995) through
-------------------------------------------- December 31,
2002 2001 2000 2002
------------ ------------ ------------ -------------
Cash flows from operating activities:
Net loss $(31,744,000) $(24,374,000) $(31,803,000) $(125,590,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,001,000 891,000 779,000 3,259,000
Amortization of premiums and
discounts on investment securities 66,000 (311,000) 296,000 (764,000)
Stock compensation expense 730,000 1,267,000 9,958,000 15,287,000
Note receivable allowance -- 487,000 -- 487,000
Warrants issued to consultants 135,000 228,000 -- 363,000
Equity in loss of affiliate 11,000 -- -- 11,000
Changes in assets and liabilities:
Accounts receivable (1,304,000) 2,183,000 (2,604,000) (1,742,000)
Deferred costs (1,379,000) -- -- (1,379,000)
Prepaid expenses and other current assets (436,000) (15,000) (578,000) (448,000)
Restricted cash (1,033,000) -- -- (1,033,000)
Employee loans receivable (80,000) -- (55,000) (135,000)
Other assets (241,000) 25,000 -- (274,000)
Payable to Genentech (350,000) 179,000 1,254,000 1,900,000
Deferred revenues 917,000 -- -- 917,000
Deferred rent 606,000 -- -- 606,000
Accounts payable, accrued liabilities
and other long-term obligations 4,061,000 (559,000) 430,000 7,070,000
------------ ------------ ------------ -------------
Net cash used in operating activities (29,040,000) (19,989,000) (22,323,000) (103,684,000)
------------ ------------ ------------ -------------
Cash flows from investing activities:
Purchase of investment securities (15,767,000) (25,060,000) (23,335,000) (181,274,000)
Proceeds form sale and maturities of
investment securities 42,461,000 28,081,000 34,891,000 168,764,000
Purchase of property and equipment (1,323,000) (676,000) (1,124,000) (6,421,000)
Investment in affiliate (279,000) -- -- (279,000)
Long-term lease deposits -- -- -- (120,000)
------------ ------------ ------------ -------------
Net cash provided by (used in)
investing activities 25,092,000 2,345,000 10,432,000 (19,330,000)
------------ ------------ ------------ -------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock -- 18,342,000 -- 18,342,000
Payments under capital lease obligations (38,000) (33,000) (34,000) (123,000)
Proceeds from issuance of common stock, net of issuance
costs of $8,594,000 -- -- -- 103,960,000
Return of capital on redeemable convertible preferred stock (300,000) -- -- (300,000)
Exercise of employee stock options 962,000 1,306,000 1,288,000 4,208,000
Employee stock purchase plan 274,000 102,000 -- 376,000
Loans from Genentech -- -- -- 1,000,000
------------ ------------ ------------ -------------
Net cash provided by financing activities 898,000 19,717,000 1,254,000 127,463,000
------------ ------------ ------------ -------------
Increase (decrease) in cash and cash equivalents (3,050,000) 2,073,000 (10,637,000) 4,449,000
Cash and cash equivalents at beginning of
period 7,499,000 5,426,000 16,063,000 --
------------ ------------ ------------ -------------
Cash and cash equivalents at end
of period $ 4,449,000 $ 7,499,000 $ 5,426,000 $ 4,449,000
============ ============ ============ =============
47
VaxGen, Inc.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
(continued)
Period from
Inception
(November 27,
Year Ended December 31, 1995) through
----------------------------------------- December 31,
2002 2001 2000 2002
----------- ----------- ----------- -----------
Supplemental schedule of non cash
investing and financing activities:
Dividends paid to redeemable convertible preferred
stockholders through the issuance of common stock $ 1,090,000 $ 740,000 $ -- $ 1,830,000
Accretion of redemption value of redeemable
convertible preferred stock 1,758,000 1,010,000 -- 2,768,000
Recognition of beneficial conversion feature
of redeemable convertible preferred stock 11,061,000 734,000 -- 11,795,000
Recognition of fair value of common stock warrants issued
with redeemable convertible preferred stock -- 3,507,000 -- 3,507,000
Conversion of redeemable convertible preferred stock
into common stock 16,200,000 -- -- 16,200,000
Reclassification of unaccreted portion of financing costs
and fair value of warrants from preferred stock to
equity 2,244,000 -- -- 2,245,000
Equipment acquired through capital leases -- -- -- 138,000
Issuance of stock through conversion of
Genentech note payable -- -- -- 1,000,000
Note receivable partially settled by
severance obligation -- 406,000 -- 406,000
=========== =========== =========== ===========
See accompanying notes to financial statements.
48
VaxGen, Inc.
(A Development Stage Enterprise)
Statement of Stockholders' Equity (Deficit) and Comprehensive Loss
Common Stock Additional Deferred
-------------------------- Paid-In Stock
Shares Amount Capital Compensation
----------- ----------- ------------ ------------
Balance at inception (November 27, 1995) -- $ -- $ -- $ --
Net and total comprehensive loss for the
period from inception to
December 31, 1995 -- -- -- --
----------- ----------- ------------ -----------
Balance at December 31, 1995 -- -- -- --
Shares issued at $0.02 per share from April
through October 1996:
Genentech for technology 1,150,000 11,000 12,000 --
Other founders for cash 980,000 10,000 10,000 --
Net and total comprehensive loss -- -- -- --
Balance at December 31, 1996 2,130,000 21,000 22,000 --
Sale of shares in private placement at $7.00
per share from March through June 1997 for
cash, net of issuance costs of $2,248,000 3,607,047 36,000 22,965,000 --
Sale of shares to Genentech concurrent
with private placement in March 1997
at $7.00 per share for cash 285,714 3,000 1,997,000 --
Genentech exercise of warrants at $0.02 per
share in October 1997 for cash 86,640 1,000 1,000 --
Comprehensive loss:
Net loss -- -- -- --
Net unrealized gain on
investment securities -- -- -- --
Total comprehensive loss -- -- -- --
----------- ----------- ------------ -----------
Balance at December 31, 1997 6,109,401 61,000 24,985,000 --
Exercise of employee stock options
at $7.00 per share in June and
July 1998 for cash 5,750 -- 40,000 --
Sale of shares in private placement in
December 1998 at $9.50 per share for
cash, net of issuance costs of $ 764,000 986,097 10,000 8,594,000 --
Comprehensive loss:
Net loss -- -- -- --
Net unrealized gain on
investment securities -- -- -- --
Total comprehensive loss -- -- -- --
----------- ----------- ------------ -----------
Balance at December 31, 1998 7,101,248 71,000 33,619,000 --
Sale of shares in private placement in
January 1999 at $9.50 per share for
cash, net of issuance costs of $274,000 583,913 6,000 5,267,000 --
Deferred compensation on options and
warrants -- -- 5,557,000 (3,197,000)
Compensation expense from stock options -- -- -- 972,000
Sale of shares in initial public offering on
June 30, 1999 at $13.00 per share for cash,
net of issuance costs of $3,963,000 3,100,000 31,000 36,306,000 --
Sale of shares in over allotment on July 13,
1999 at $13.00 per share for cash, net of
issuance costs of $423,000 465,000 5,000 5,617,000 --
Sale of shares in private placement in
December 1999 at $11.50 per share for
cash, net of issuance costs of $922,000 2,173,913 21,000 24,057,000 --
Exercise of employee stock options at $7.00
per share for cash 87,491 1,000 611,000 --
Comprehensive loss:
Net loss -- -- -- --
Net unrealized loss on investment securities -- -- -- --
Total comprehensive loss -- -- -- --
----------- ----------- ------------ -----------
Balance at December 31, 1999 13,511,565 135,000 111,034,000 (2,225,000)
Accumulated Deficit
Other Accumulated Total
Comprehensive During The Stockholders'
Income Development Equity
(Loss) Stage (Deficit)
------------- ------------ -------------
Balance at inception (November 27, 1995) $ -- $ -- $ --
Net and total comprehensive loss for the
period from inception to
December 31, 1995 -- (30,000) (30,000)
--------- ------------ -----------
Balance at December 31, 1995 -- (30,000) (30,000)
Shares issued at $0.02 per share from April
through October 1996:
Genentech for technology -- -- 23,000
Other founders for cash -- -- 20,000
Net and total comprehensive loss -- (2,082,000) (2,082,000)
Balance at December 31, 1996 -- (2,112,000) (2,069,000)
Sale of shares in private placement at $7.00
per share from March through June 1997 for
cash, net of issuance costs of $2,248,000 -- -- 23,001,000
Sale of shares to Genentech concurrent
with private placement in March 1997
at $7.00 per share for cash -- -- 2,000,000
Genentech exercise of warrants at $0.02 per
share in October 1997 for cash -- -- 2,000
Comprehensive loss:
Net loss -- (3,060,000) (3,060,000)
Net unrealized gain on
investment securities 8,000 -- 8,000
-----------
Total comprehensive loss -- -- (3,052,000)
--------- ------------ -----------
Balance at December 31, 1997 8,000 (5,172,000) 19,882,000
Exercise of employee stock options
at $7.00 per share in June and
July 1998 for cash -- -- 40,000
Sale of shares in private placement in
December 1998 at $9.50 per share for
cash, net of issuance costs of $ 764,000 -- -- 8,604,000
Comprehensive loss:
Net loss -- (9,163,000) (9,163,000)
Net unrealized gain on
investment securities 35,000 -- 35,000
-----------
Total comprehensive loss -- -- (9,128,000)
--------- ------------ -----------
Balance at December 31, 1998 43,000 (14,335,000) 19,398,000
Sale of shares in private placement in
January 1999 at $9.50 per share for
cash, net of issuance costs of $274,000 -- -- 5,273,000
Deferred compensation on options and
warrants -- -- 2,360,000
Compensation expense from stock options -- -- 972,000
Sale of shares in initial public offering on
June 30, 1999 at $13.00 per share for cash,
net of issuance costs of $3,963,000 -- -- 36,337,000
Sale of shares in over allotment on July 13,
1999 at $13.00 per share for cash, net of
issuance costs of $423,000 -- -- 5,622,000
Sale of shares in private placement in
December 1999 at $11.50 per share for
cash, net of issuance costs of $922,000 -- -- 24,078,000
Exercise of employee stock options at $7.00
per share for cash -- -- 612,000
Comprehensive loss:
Net loss -- (23,334,000) (23,334,000)
Net unrealized loss on investment securities (168,000) -- (168,000)
-----------
Total comprehensive loss -- -- (23,502,000)
--------- ------------ -----------
Balance at December 31, 1999 (125,000) (37,669,000) 71,150,000
See accompanying notes to financial statements.
49
VaxGen, Inc.
(A Development Stage Enterprise)
Statement of Stockholders' Equity (Deficit) and Comprehensive Loss (Continued)
Common Stock Additional Deferred
----------------------- Paid-In Stock
Shares Amount Capital Compensation
---------- --------- ------------ ------------
Exercise of stock options and warrants at prices
ranging from $7.00 to $17.69 for cash 208,334 2,000 1,286,000 --
Issuance of common stock at $24.25 per
share in November 2000 in connection with
success bonus 325,757 3,000 7,897,000 --
Deferred compensation on stock options, net -- -- 473,000 (528,000)
Compensation expense from stock options -- -- 1,027,000 1,086,000
Comprehensive loss:
Net loss -- -- -- --
Net unrealized gain on investment securities -- -- -- --
Total comprehensive loss -- -- -- --
---------- -------- ------------- -----------
Balance at December 31, 2000 14,045,656 $140,000 $ 121,717,000 $(1,667,000)
Exercise of stock options and
warrants at prices ranging from $7.00 to
$17.69 for cash 149,214 2,000 1,304,000 --
Recognition of fair value of common stock
warrants issued with redeemable convertible
preferred stock -- -- 3,507,000 --
Beneficial conversion feature
of redeemable convertible
preferred stock -- -- 734,000 --
Accretion of redemption value of
redeemable convertible preferred stock -- -- -- --
Issuance of common stock as a dividend
payment associated with redeemable
convertible preferred stock 65,253 1,000 739,000 --
Issuance of common stock in connection
with 401(k) matching contribution 12,127 -- 206,000 --
Issuance of common stock for Employee
Stock Purchase Plan 9,975 -- 102,000 --
Issuance of common stock in connection
with employee's separation agreement 18,375 -- 347,000 --
Warrants issued to consultants -- -- 228,000 --
Deferred compensation on stock options, net -- -- (497,000) 497,000
Compensation expense from stock options -- -- -- 654,000
Comprehensive loss:
Net loss -- -- -- --
Net unrealized gain on investment securities -- -- -- --
Total comprehensive loss -- -- -- --
---------- -------- ------------- -----------
Balance at December 31, 2001 14,300,600 $143,000 $ 128,387,000 $ (516,000)
Exercise of stock options and
warrants at prices ranging from $7.00 to
$14.63 for cash 104,401 1,000 961,000 --
Conversion of preferred stock to common
stock 1,172,436 12,000 16,559,000 --
Recognition of unaccreted portion of financing
costs and fair value of warrants as a charge to
equity related to conversion of preferred stock -- -- (2,244,000) --
Beneficial conversion feature
of redeemable convertible
preferred stock -- -- 11,061,000 --
Accretion of redemption value of
redeemable convertible preferred stock -- -- -- --
Issuance of common stock as a dividend
payment associated with redeemable
convertible preferred stock 114,300 1,000 718,000 --
Issuance of common stock in connection
with 401(k) matching contribution 36,002 -- 297,000 --
Issuance of common stock for Employee
Stock Purchase Plan 49,325 -- 274,000 --
Warrants issued to consultants -- -- 135,000 --
Deferred compensation on stock options, net -- -- (29,000) 29,000
Accumulated Deficit
Other Accumulated Total
Comprehensive During The Stockholders'
Income Development Equity
(Loss) Stage (Deficit)
------------- ------------ -------------
Exercise of stock options and warrants at prices
ranging from $7.00 to $17.69 for cash -- -- 1,288,000
Issuance of common stock at $24.25 per
share in November 2000 in connection with
success bonus -- -- 7,900,000
Deferred compensation on stock options, net -- -- (55,000)
Compensation expense from stock options -- -- 2,113,000
Comprehensive loss:
Net loss -- (31,803,000) (31,803,000)
Net unrealized gain on investment securities 479,000 -- 479,000
------------
Total comprehensive loss -- -- (31,324,000)
-------- ------------ ------------
Balance at December 31, 2000 $354,000 $(69,472,000) 51,072,000
Exercise of stock options and
warrants at prices ranging from $7.00 to
$17.69 for cash -- -- 1,306,000
Recognition of fair value of common stock
warrants issued with redeemable convertible
preferred stock -- -- 3,507,000
Beneficial conversion feature
of redeemable convertible
preferred stock -- (734,000) --
Accretion of redemption value of
redeemable convertible preferred stock -- (1,010,000) (1,010,000)
Issuance of common stock as a dividend
payment associated with redeemable
convertible preferred stock -- (740,000) --
Issuance of common stock in connection
with 401(k) matching contribution -- -- 206,000
Issuance of common stock for Employee
Stock Purchase Plan -- -- 102,000
Issuance of common stock in connection
with employee's separation agreement -- -- 347,000
Warrants issued to consultants -- -- 228,000
Deferred compensation on stock options, net -- -- --
Compensation expense from stock options -- -- 654,000
Comprehensive loss:
Net loss -- (24,374,000) (24,374,000)
Net unrealized gain on investment securities 523,000 -- 523,000
------------
Total comprehensive loss -- -- (23,851,000)
-------- ------------ ------------
Balance at December 31, 2001 $877,000 $(96,330,000) $ 32,561,000
Exercise of stock options and
warrants at prices ranging from $7.00 to
$14.63 for cash -- -- 962,000
Conversion of preferred stock to common
stock -- (371,000) 16,200,000
Recognition of unaccreted portion of financing
costs and fair value of warrants as a charge to
equity related to conversion of preferred stock -- -- (2,244,000)
Beneficial conversion feature
of redeemable convertible
preferred stock -- (11,061,000) --
Accretion of redemption value of
redeemable convertible preferred stock -- (1,758,000) (1,758,000)
Issuance of common stock as a dividend
payment associated with redeemable
convertible preferred stock -- (719,000) --
Issuance of common stock in connection
with 401(k) matching contribution -- -- 297,000
Issuance of common stock for Employee
Stock Purchase Plan -- -- 274,000
Warrants issued to consultants -- -- 135,000
Deferred compensation on stock options, net -- -- --
50
VaxGen, Inc.
(A Development Stage Enterprise)
Statement of Stockholders' Equity (Deficit) and Comprehensive Loss (Continued)
Common Stock Additional Deferred
----------------------- Paid-In Stock
Shares Amount Capital Compensation
---------- --------- ------------ ------------
Compensation expense from stock options -- -- -- 393,000
Comprehensive loss:
Net loss -- -- -- --
Net unrealized loss on investment securities -- -- -- --
Total comprehensive loss -- -- -- --
---------- -------- ------------- -----------
Balance at December 31, 2002 15,777,064 $157,000 $ 156,117,000 $ (94,000)
========== ======== ============= ===========
Accumulated Deficit
Other Accumulated Total
Comprehensive During The Stockholders'
Income Development Equity
(Loss) Stage (Deficit)
------------- ------------ -------------
Compensation expense from stock options -- -- 393,000
Comprehensive loss:
Net loss -- (31,744,000) (31,744,000)
Net unrealized loss on investment securities (579,000) -- (579,000)
------------
Total comprehensive loss -- -- (32,323,000)
-------- ------------ ------------
Balance at December 31, 2002 $298,000 $(141,983,000) $ 14,495,000
======== ============ ============
See accompanying notes to financial statements.
51
VAXGEN, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Nature of Development Stage Activities
VaxGen, Inc. (the "Company") is a development stage biotechnology company
originally formed to develop a vaccine (AIDSVAX(R)) intended to prevent HIV. In
2002, the Company broadened its product development portfolio to also include
bio-defense vaccines. The Company was incorporated on November 27, 1995 and
since that date its principal activities have included defining and conducting
research programs, conducting human clinical trials, raising capital and
recruiting scientific and management personnel.
The Company's development activities involve inherent risks. These risks
include, among others, dependence on key personnel and determination of
patentability of the Company's products and processes. The Company is dependent
on Genentech to provide certain research and development support and vaccine
production (Note 4).
Going Concern Uncertainty
The financial statements of the Company have been presented on the basis of a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. However, the Company may not be
able to continue its operations because it has experienced significant operating
losses, which it expects will continue, and has insufficient sources of funding
its operations. In order for the Company to remain a going concern it will
require significant additional funding in the near term. The Company is
exploring opportunities to raise capital through equity offerings, the issuance
of debt securities, strategic alliances and other financing vehicles. However,
there can be no assurance that any such additional financing will be available
to the Company on the terms that it deems acceptable, if at all. The financial
statements do not include any adjustments relating to the recoverability and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company expects the cash and cash
equivalents at December 31, 2002, will be sufficient to fund operations
according to its current plan through the third quarter of 2003. External cash
requirements are expected to be lower during the last half of 2003 because of
anticipated revenues from the Company's contract with the NIH related to the
development of an anthrax vaccine and other revenue sources. Should management's
plan not develop as anticipated, the Company will restrict additional planned
activities and operations, as necessary, to sustain operations and conserve cash
resources.
Cash Equivalents
All short-term investments with an original maturity at date of purchase of
three months or less are considered to be cash equivalents. Cash equivalents
consisting of commercial paper amounted to $4,274,000 and $7,254,000 at December
31, 2002 and 2001, respectively. We maintain our cash at one financial
institution. Our balances are in excess of federal depository insurance
limitations.
Investment Securities
Investment securities are classified as available-for-sale and carried at market
value with unrealized gains and losses excluded from the statement of operations
and reported as other comprehensive income.
52
Realized gains and losses on sales of investment securities are determined on
the specific identification method and are included in investment income.
Property and Equipment
Equipment, consisting of laboratory equipment, computers and other office
equipment, is depreciated using the straight-line method over the assets'
estimated useful lives of three to ten years. Leasehold improvements and capital
lease assets are amortized using the straight-line method over the shorter of
the assets' estimated useful lives or the remaining term of the lease.
Revenue Recognition
The Company recognizes revenue when all of the following conditions have
occurred:
o Persuasive evidence of an arrangement exists;
o Delivery has occurred or services have been rendered;
o The price is fixed and determinable; and
o Collectibility is reasonably assured.
The Company's fees are typically considered to be fixed or determinable at the
inception of an arrangement and are negotiated at the outset of an arrangement,
and are generally based on specific services or products to be delivered. In the
event payment terms are provided that differ significantly from our standard
business practices and collectibility is not reasonably assured, the fees are
deemed to not be fixed or determinable and revenue is recognized as the fees are
paid.
Grant and contract revenue where the Company has continuing involvement is
recognized once the milestone is achieved or the outcome can be determined with
an appropriate degree of certainty. Payments received in advance of being earned
are recorded as deferred revenue.
Research and Development Costs
Research and development costs are charged to expense as incurred. Research and
certain clinical trial activities are conducted by various third parties,
including contract research organizations, which provide contractually defined
administration and management services. The Company recognizes expense for these
contracted activities as they are incurred.
53
Income Taxes
Deferred income taxes are provided based on the estimated future tax effects of
temporary differences between financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates that are expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is
established to reduce deferred tax assets to the amount expected to be realized.
Fair Value of Financial Instruments
The Company has financial instruments other than cash, cash equivalents and
investment securities, consisting of interest receivable, accounts receivable,
accounts payable, and a payable to Genentech. The fair value of these financial
instruments approximates their carrying amount due to their short-term nature.
Stock-Based Compensation
The Company accounts for stock-based compensation based on the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), which states that, for fixed plans, no compensation
expense is recorded for stock options or other stock-based awards to employees
that are granted with an exercise price equal to or above the estimated fair
value per share of the Company's common stock on the grant date. In the event
that stock options are granted with an exercise price below the estimated fair
value of the Company's common stock at the grant date, the difference between
the fair value of the Company's common stock and the exercise price of the stock
option is recorded as deferred compensation. Deferred compensation is amortized
to compensation expense over the vesting period of the stock option. The Company
has adopted the disclosure requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" and Statement of
Financial Accounting Standards No. 148, "Accounting for Stock Based
Compensation--Transition and Disclosure--an Amendment of FASB Statement No.
123", which requires compensation expense to be disclosed based on the fair
value of the options granted at the date of the grant.
Year ended December 31,
----------------------------------------------
2002 2001 2000
------------ ------------ ------------
Net loss applicable to common
stockholders--as reported $(45,653,000) $(26,858,000) $(31,803,000)
Add: Stock-based employee compensation
expense included in reported net loss,
net of related tax effects 595,000 1,039,000 2,058,000
Less: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (6,332,000) (5,641,000) (4,470,000)
------------ ------------ ------------
Net loss applicable to common
stockholders--pro forma $(51,390,000) $(31,460,000) $(34,215,000)
Loss per share--basic and diluted, as reported $ (3.13) $ (1.90) $ (2.33)
Loss per share--basic and diluted, pro forma $ (3.53) $ (2.22) $ (2.51)
54
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other gains and
losses affecting stockholders' equity that, under generally accepted accounting
principles are excluded from net income (loss). For the Company, these include
unrealized gains or losses on available-for-sale securities.
Loss Per Share
Basic loss per share is computed as net loss applicable to common stockholders
divided by the weighted average number of common shares outstanding for the
period. Potential common shares include dilutive shares issuable upon the
exercise of outstanding common stock options, warrants, and shares of the
Company's Series A 6% cumulative convertible preferred stock, which are listed
below assuming that the shares of the convertible preferred stock converted into
shares of the Company's common stock. For all periods presented, such potential
common shares were excluded from the computation of diluted net loss per share,
as their effect is antidilutive.
Potentially dilutive securities include:
December 31,
-------------------------------------
2002 2001 2000
--------- --------- ---------
Options to purchase common stock 3,196,130 2,213,252 1,560,656
Warrants to purchase common
stock 950,261 717,265 416,488
Convertible preferred stock 268,875 861,383 --
--------- --------- ---------
Total 4,415,266 3,791,900 1,977,144
========= ========= =========
Investment in Affiliated Companies
Investments in affiliates in which the Company own less than a majority of the
voting interests, but exercises significant influence over operating and
financial policies are accounted for on the equity method.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Impairment of Long-Lived Assets
The Company adopted SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets," effective January 1, 2002. SFAS 144 supersedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," however it retains the fundamental provisions of that statement
related to the recognition and measurement of the impairment of long-lived
assets to be "held and used." Additionally, SFAS No. 144 established more
restrictive criteria to classify an asset
55
(group) as "held for sale." The adoption of SFAS No. 144 did not have a material
impact on the Company's financial results.
Accordingly, the Company evaluates its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
group may not be recoverable. Recoverability of assets held and used is measured
by a comparison of the carrying amount of an asset group to future net cash
flows (undiscounted and excluding interest) expected to be generated by the
asset group. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the discounted future cash flows expected to be generated by such
assets. Assets "held for sale" are reported at the lower of their carrying
amount or fair market value less costs to sell.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
Business Segments
The Company operates one business segment, the development of vaccines that
immunize against infectious diseases.
New Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
146, "Accounting for Exit or Disposal Activities." SFAS 146 addresses the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including costs related to terminating a contract that
is not a capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS 146 supersedes Emerging Issues Task Force
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring), and requires liabilities associated with exit and disposal
activities to be expensed as incurred. SFAS 146 is effective for exit or
disposal activities initiated after December 31, 2002.
In November 2002, the FASB issued Emerging Issues Task Force (referred to as
EITF) Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF
Issue No. 00-21 addresses certain aspects of the accounting by a company for
arrangements under which it will perform multiple revenue-generating activities.
EITF Issue No. 00-21 addresses when and how an arrangement involving multiple
deliverables should be divided into separate units of accounting. The provisions
of EITF Issue No. 00-21 will apply to revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The Company does not expect the
adoption of EITF Issue No. 00-21 to have a material effect on its financial
condition or results of operations.
In November 2002, the FASB issued Financial Interpretation No. 45, "Guarantor's
Accounting and Disclosure requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). The initial recognition and
initial measurement provisions apply on a prospective basis to guarantees issued
or modified after December 31, 2002, regardless of the guarantor's fiscal
year-end. The disclosure requirements in the Interpretation are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company does not have any guarantees nor does it provide any
guarantees
56
for others. The Company does not expect the adoption of FIN 45 to have a
material effect on its financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" - an amendment of FASB Statement No.
123. SFAS 148 amends FASB Statement No. 123, Accounting for Stock Based
Compensation and provides alternative methods for accounting for a change by
registrants to the fair value method of accounting for stock-based compensation.
Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require
disclosure in the significant accounting policy footnote of both annual and
interim financial statements of the method of accounting for stock
based-compensation and the related pro forma disclosures when the intrinsic
value method continues to be used. The statement is effective for fiscal years
beginning after December 15, 2002, and disclosures are effective for fiscal
years ending after December 15, 2002. The disclosures are included in the notes
to these consolidated financial statements.
In January 2003, the FASB issued Financial Interpretation No. 46, "Consolidation
of Variable Interest Entities" (FIN 46). The consolidation requirements of
Interpretation 46 apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements apply to existing entities in
the first fiscal year or interim periods beginning after June 15, 2003. Certain
of the disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The Company does not expect the adoption of FIN 46 to have a
material effect on its financial condition or results of operations.
2. Investment Securities
The following summarizes the Company's available for sale investment securities
at December 31:
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
2002:
Government obligations $ 7,059,000 $ 170,000 $ -- $ 7,229,000
Corporate obligations 6,215,000 128,000 -- 6,343,000
----------- --------- ---------- -----------
$13,274,000 $ 298,000 $ -- $13,572,000
=========== ========= ========== ===========
2001:
Government obligations $11,098,000 $ 157,000 $ (6,000) $11,249,000
Corporate obligations 28,936,000 731,000 (5,000) 29,662,000
----------- --------- ---------- -----------
$40,034,000 $ 888,000 $ (11,000) $40,911,000
=========== ========= ========== ===========
Amortized cost and market value of investment securities at December 31, 2002 by
contractual maturity are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Maturities Cost Value
- ----------------------------- ----------- -----------
Due in 1 year or less $ 1,211,000 $ 1,234,000
Due between 1 year to 3 years 12,063,000 12,338,000
----------- -----------
$13,274,000 $13,572,000
=========== ===========
Investment income, net, includes interest of $1,635,000, $2,832,000 and
$3,909,000 earned on investments and realized gains of $402,000, $442,000 and
$13,000 realized upon the sale of investments for 2002, 2001 and 2000,
respectively.
57
3. Property and Equipment
The following is a summary of property and equipment as of December 31:
2002 2001
---------- ----------
Furniture and equipment $4,028,000 $3,273,000
Leasehold improvements 2,495,000 1,959,000
---------- ----------
6,523,000 5,232,000
Less accumulated depreciation and amortization 3,214,000 2,245,000
---------- ----------
$3,309,000 $2,987,000
========== ==========
4. Relationship with Genentech
The Company was founded in 1995 to develop and commercialize an HIV vaccine in
partnership with Genentech. In 1996, in return for an equity interest (1,150,000
shares or 54% of the then outstanding and subscribed shares) in the Company,
rights to maintain 25% ownership of the Company's common stock (through common
stock warrants), a seat on the Board of Directors and certain manufacturing and
marketing rights to the vaccine, Genentech granted the Company an exclusive
license to certain technology.
Genentech financed the formation of the Company by means of a $1,000,000 line of
credit. Additionally, Genentech and the Company entered into an agreement
whereby Genentech could convert the line of credit plus additional capital
totaling $2,000,000 into shares of the Company's common stock. The conversion
was made concurrent with an initial private placement in March 1997. The
conversion resulted in the issuance of 285,714 shares of common stock. Upon the
final closing of the private placement, Genentech exercised its option to retain
a 25% common stock ownership interest and thereby acquired an additional 86,640
shares of common stock for cash. At December 31, 1998, Genentech retained
warrants for the exercise of additional common stock in the event of a second
private placement in excess of $10 million or an Initial Public Offering (IPO).
Such warrants were exercisable at the issue price per share of the additional
capital raised and would allow Genentech to maintain its 25% ownership interest.
The warrants expired unexercised at the completion of the Company's 1998 private
placement in January 1999. Genentech no longer has any rights to maintain its
proportionate ownership position.
The license and supply agreement, which was amended and restated as of May 1,
2002, between the Company and Genentech, in part, defines the working
relationship between the companies. Genentech has granted the Company an
exclusive license to all patents and proprietary know-how that Genentech is free
to license or sublicense related to the development of a vaccine to prevent HIV
infection. Certain of the licensed technology is sublicensed or assigned to the
Company under licenses from third parties to Genentech. The Company, as the
exclusive licensee of Genentech, has assumed all of Genentech's obligations
under these third-party license agreements. Such obligations consist primarily
of royalties on product sales. However, the vaccine in its current form does not
incorporate any technology sublicensed or assigned to the Company for which
there is an obligation under licenses from third parties. The initial term of
the license agreement is 15 years from the commercial introduction date of a
licensed product and will be determined on a country-by-country,
product-by-product basis. In addition, upon entering the original agreement,
Genentech transferred to the Company 300,000 doses of the vaccine. Under the
license and supply agreement, the Company is required to use due diligence in
developing, seeking regulatory approval for, and marketing and commercializing
the vaccine. Due diligence is defined in the agreement as meaning that the
Company shall use the maximum effort consistent with prudent business and
scientific judgment in developing, seeking regulatory approval for, marketing of
and commercializing licensed products in the field of use.
In connection with reaching this goal, the Company is required to achieve the
filing of the first market approval for a product with the FDA by May 2004, if
it is able to meet all of the primary endpoints
58
established in it's current Phase III clinical trial. However if the Company
does not meet all of its primary endpoints, the filing requirement date would be
extended to May 2006. In addition, the Agreement could be terminated if either
party fails to comply with any of its material obligations or in the event of
insolvency or bankruptcy of either party.
As part of the amended and restated license and supply agreement, Genentech gave
up its option to manufacture the vaccine and a one-time option to be responsible
for marketing the vaccine worldwide. Under the amended and restated Agreement,
the Company granted Genentech an exclusive option to use, sell, offer for sale
and import, on an exclusive basis, the licensed vaccine in the U.S., Mexico and
Canada (North America). This option would be exercisable by Genentech any time
prior to 90 days from the date the Company delivers the final report of the
Phase III clinical trial and a detailed calculation of the Company's development
costs to Genentech. Should Genentech exercise its North American marketing
option, Genentech will pay a license fee to the Company equal to 33% of the
Company's developmental costs of the initial AIDSVAX product (including the
Phase III clinical trials and regulatory submissions). In addition, Genentech
and the Company would share in the net profits in North America, whereby 70%
would go to Genentech and 30% would go to the Company. If Genentech does not
elect its marketing option for North America, and in any event for all sales
outside of North America, the Company will pay a royalty equal to fifteen
percent of net sales to Genentech, except that the royalty owed to Genentech for
sales made by the Company to the World Health Organization or the United Nations
for use in a third world county at a price lower than the average price charged
in private markets in such a country, then the royalty owed Genentech will be
proportionately adjusted to a minimum rate of 7.5%.
The Company had a service agreement with Genentech whereby Genentech supplied
research, process science, regulatory and various support services to the
Company. The contract expired on December 31, 2000, however, the Company, under
the amended and restated license and supply agreement shall have the right to
require Genentech to transfer technology to the Company and Genentech would
continue to provide the aforementioned services on an agreed upon basis.
Expenses incurred by the Company for 2002, 2001 and 2000 were $1,313,000,
$2,422,000 and $3,210,000, respectively, under the contract. In excess of 95% of
costs represent research and development expenses in each period and the
remainder is general and administrative expenses.
Prior to September 1998, the Company leased office space from Genentech. Rent
expense under this lease was $80,000 in 1998.
Management believes that the terms of the agreement provided Genentech full
reimbursement for specifically identified actual direct costs as well as
indirect and overhead costs incurred related to the Company. Charges for
indirect and overhead costs were based upon a percentage of direct costs.
Management believes this method resulted in a reasonable allocation of costs to
the Company.
5. Redeemable Convertible Preferred Stock Financing
The Company entered into a Securities Purchase Agreement dated as of May 23,
2001 with four investors, whereby the Company received approximately $20,000,000
in consideration for the sale of 20,000 shares of the Company's Series A 6%
Cumulative Convertible Preferred Stock ("Preferred Stock") and the issuance of
Common Stock Purchase Warrants described below. Expenses relating to the
transaction were approximately $1,700,000, resulting in net proceeds of
approximately $18,300,000. These proceeds will be used to prepare the Company's
HIV/AIDS vaccine, AIDSVAX, for commercial-scale manufacturing if it proves
effective, the potential development of new adjuvants and general corporate
purposes. As of December 31, 2002, 3,800 shares of Preferred Stock were
outstanding.
59
A summary of the significant terms of the Preferred Stock financing are as
follows:
Conversion
Each share of Preferred Stock can be converted into common stock at the option
of the holder at any time after issuance according to a conversion ratio,
subject to adjustment for dilution or certain equity adjustments. The initial
conversion ratio is determined by dividing the liquidation value ($1,000 per
share plus accrued dividends) by the original conversion price of $23.2185 per
share then multiplied by the number of shares to be converted. During the fourth
quarter of 2002, one of the holders of Preferred Stock exercised a warrant,
which had the effect, under the anti-dilution provisions applicable to the
Preferred Stock, of reducing the conversion price of the Preferred Stock to
$14.133. During the fourth quarter of 2002, two investor's converted 16,200
shares in the aggregate of Preferred Stock in exchange for 1,172,436 shares of
common stock, which included shares issued for accrued but unpaid dividends.
We may also force conversion of the Preferred Stock into common stock if, at any
time after May 23, 2002, the weighted average price per share of our stock for
at least 20 out of 30 consecutive trading days equals or exceeds $24.73.
Redemption
In the event that there is no earlier conversion, the Company must redeem the
Preferred Stock for cash on May 23, 2004, at a redemption price equal to $1,000
per share plus all accrued and unpaid dividends. The Company may, within certain
limits, pay up to 50% of such redemption price in shares of the Company's common
stock.
The Company accounts for the difference between the carrying amount of
redeemable preferred stock and the redemption amount by increasing the carrying
amount for periodic accretion, so that the carrying amount will equal the
redemption amount at the scheduled redemption date. The accretion of the
redemption value of the Preferred Stock for 2002 and 2001 was $1,758,000 and
$1,010,000, respectively.
Dividends
Each share of Preferred Stock is entitled to receive annual dividends of 6%
payable on June 30 and December 31, beginning on December 31, 2001. If not paid
within five days of either such date, the dividend will accumulate and compound.
Payment may be made in cash or in shares of common stock at the Company's
option. During 2002, payment was made in 114,300 shares of common stock, along
with an additional 26,182 shares of common stock that were paid upon conversion
for accrued but unpaid dividends. Payment on December 31, 2001 was made in
65,253 shares of common stock. Net loss applicable to common stockholders for
the years ended December 31, 2002 and 2001 included non-cash charges of
$1,090,000 and $740,000, respectively, for Preferred Stock dividends.
Voting
Each share of Preferred Stock has voting rights equal to the number of shares of
common stock into which it is convertible on the record date of the vote, based
on a conversion price of $19.824 per share.
Liquidation
In the event of liquidation, dissolution or winding up of the Company, either
voluntary or involuntary, each holder of shares of Preferred Stock will be
entitled to receive, out of the assets of the Company available for distribution
to stockholders and prior to any distribution to holders of common stock, $1,000
per preferred share plus accrued dividends.
60
Common Stock Purchase Warrants
In connection with the Preferred Stock financing, we issued Common Stock
Purchase Warrants (the "Warrants") initially for the purchase of 297,177 shares
of common stock to the Preferred Stock investors. The Warrants, which expire on
May 23, 2006, originally had an exercise price of $25.2375 per share; however,
effective as of May 23, 2002, the exercise price was automatically adjusted to
$14.133 per share and the number of shares issuable on exercise of the warrants
increased to 530,674, in accordance with the terms of the Warrants.
We have valued the Warrants at $11.80 per share, resulting in a total value of
approximately $3,500,000. This amount was accounted for as a reduction in the
carrying value of the Preferred Stock until the scheduled redemption of the
Preferred Stock, and an increase to additional paid-in-capital. The fair value
of the Warrants was calculated using the Black-Scholes model. The discount is
being amortized over three years, and accordingly, net loss to common
stockholders for the years ended December 31, 2002 and 2001 reflected non-cash
charges of $1,169,000 and $682,000. As a result of the conversion of Preferred
Stock in the fourth quarter of 2002, the Company recorded the pro-rata share of
the unaccreted portion of the fair value assigned to the Warrants as a charge to
equity upon conversion. The charge to equity amounted to $1,397,000.
Effect of Beneficial Conversion Feature
The Company's Preferred Stock was issued with a beneficial conversion feature,
which was valued at $734,000. The beneficial conversion amount has been
accounted for as an increase in additional paid-in capital and as an
in-substance dividend to the preferred stockholders, which increases the net
loss applicable to common stockholders.
As noted above, one of the holders of Preferred Stock exercised a warrant, which
had the effect, under the anti-dilution provisions applicable to the Preferred
Stock, of reducing the conversion price of the Preferred Stock to $14.133. The
reduction in conversion price resulted in an additional 553,044 shares of common
stock issuable upon conversion. The incremental shares issuable upon conversion
were accounted for as a contingent beneficial conversion feature in accordance
with EITF No. 00-27, "Application of Issue No. 98-5 to Certain Convertible
Instruments". The contingent beneficial conversion feature was measured by
multiplying the incremental shares by the fair value of the Company's common
stock on the commitment date of May 23, 2001. The fair value of the Company's
common stock on the commitment date was $20.00 per share. Accordingly, the
Company recorded a contingent beneficial conversion feature in the amount of
$11,061,000. The contingent beneficial conversion feature was treated as a
deemed dividend to preferred stockholders.
6. Celltrion Joint Venture
In February 2002, the Company and a group of South Korean investors announced
the formation of a joint venture, which intends to raise up to approximately
$122 million, consisting of up to approximately $52 million in cash, a $40
million bank loan secured by the South Korean investors and an in-kind
investment by the Company of cell culture technology and production support
valued at a minimum of $30 million, to build and operate a facility in Incheon,
South Korea, to manufacture AIDSVAX. The Company has no further funding
obligation to Celltrion, although the Company is responsible for all costs of
validation, operation and licensure of the manufacturing facility in South San
Francisco, California, which initially will be a wholly-owned subsidiary of
Celltrion. The joint venture is obligated to contribute $7 million to this
subsidiary for the purpose of funding construction of the manufacturing facility
in South San Francisco, California. The facility is intended to support the
licensure and commercial launch of AIDSVAX or other biologics. The Company would
fund any additional capital equipment costs related to the smaller facility. The
Company believes that both facilities, once constructed, would be designed for
commercial manufacture of AIDSVAX or other biopharmaceutical products, if it
proves safe and effective and is licensed by the U.S. Food and Drug
61
Administration. The South Korean investors participating in the joint venture,
known as Celltrion Inc., are Nexol Corp., Nexol Biotech Co. Ltd., Korea Tobacco
& Ginseng Corp., and J. Stephen & Co. Ventures Ltd.
As of December 31, 2002, the South Korean investors had contributed
approximately $40.75 million in cash to Celltrion of the $47.0 million in cash
that the joint venture agreement between the Company and Celltrion requires to
have been funded by the end of August 2002, and secured a $40 million loan with
a Korean bank. As a result of the cash investment, the Company currently has a
48.9% interest in Celltrion, although if funding is completed as intended, the
Company's interest will be approximately 44%. In the event that AIDSVAX is
proven successful and the Incheon facility is validated and licensed to produce
AIDSVAX, Celltrion would produce bulk material that will be sold to the Company.
The Board of Directors of Celltrion is comprised of five individuals, two from
the Company and the remaining three from the joint venture partners. The Company
is contractually entitled to hold two of the five director seats for so long as
the Company retains at least 66 2/3% of its initial shareholdings. Based on the
management structure of Celltrion, the Company does not have outright control of
Celltrion regardless of ownership. Also, the Company has less than 50% ownership
of the voting stock of Celltrion. As a result, the Company will account for the
joint venture using the equity method of accounting from inception of the joint
venture. Since the historical cost of the non-monetary assets that the Company
contributed is zero, there is no investment to be recorded for the technology
contributed. Additionally, the Company would not be able to pick up equity in
earnings until such time that the Company has recovered losses not recognized.
Under the terms of the joint venture agreement, Celltrion is obligated to invest
$7 million to capitalize a new corporation, VaxGen-Celltrion, Inc. ("VCI"), and
Celltrion will initially be the sole shareholder of VCI, receiving seven million
shares of common stock in exchange for its $7 million capital contribution. The
capitalization of VCI will be used to design and construct the manufacturing
facility in the South San Francisco, California area for the Company's use to
support licensure and commercial launch of AIDSVAX, if it proves successful. If
the Incheon facility is validated and licensed to produce AIDSVAX, the Company
believes the VCI facility would be utilized to develop and manufacture other
biopharmaceutical products for the Company. In addition, if the Company receives
FDA approval to market AIDSVAX, the Company is required to purchase all VCI
shares held by Celltrion, at a purchase price of $1.00 per share plus interest.
In July 2002, Celltrion made an initial investment of $3 million to capitalize
VCI, with the remaining $4 million funded in December 2002. At December 31,
2002, the Company's direct interest in VCI equated to approximately 279,000
shares. The Board of Directors of VCI is comprised of three individuals, two of
whom are from VaxGen. The Company will supervise the design and construction of
the manufacturing facility and is responsible for all costs of validation,
operation and licensure of the facility, provided, that the Company shall have
the right to suspend or terminate its obligation with respect to such costs in
the event that the outcome of the Company's pending Phase III clinical trials of
AIDSVAX are unfavorable or in the event that regulatory approval of AIDSVAX is
otherwise delayed or denied. At the end of each calendar year, VCI will issue
the Company one share of its common stock for every dollar expended by the
Company in connection with the validation, operation and licensure of the
facility. Based on the direct ownership interest in VCI as of December 31, 2002,
the Company has determined that the equity method of accounting should be
applied. Accordingly, equity in losses of VCI of $11,000 has been recognized.
7. Related Party Transactions
In July 2002, the Company announced that the Genentech license agreement had
been amended and restated to give the Company greater flexibility in
commercializing AIDSVAX. Details of the amended and restated license agreement
along with additional information regarding the relationship with Genentech are
disclosed in Note 4 to the financial statements.
As of December 31, 2002, the Company had loans outstanding to two executive
officers in the amount of $135,000. In May 2002, an executive received a
non-interest bearing loan in the amount of $80,000. The loan will be forgiven at
the rate of 25% per year for each of the first four full years of the
executive's employment with the Company. In August 2000, an executive received a
non-interest bearing loan in the
62
amount of $55,000. The loan is payable in full on April 30, 2003 and is secured
by the executive's stock options on a dollar for dollar basis out of any
proceeds received as a result of sale of shares of common stock. Both loans were
made for the purchase of residences in connection with job-related relocations.
8. Initial Public and Private Placement Stock Offerings
In 1997, the Company completed a private placement sale of 3,607,047 shares of
its common stock at a price of $7.00 per share resulting in proceeds of
$23,001,000, net of issuance costs of $2,248,000. A total of 149,270 shares in
this private placement were sold to related parties. In conjunction with the
1997 private placement and under agreements with the Company, Genentech
converted a $1,000,000 line of credit with the Company and invested an
additional $1,000,000 in the Company in return for 285,714 shares of the
Company's common stock. Additionally, in October 1997, Genentech exercised its
option to maintain a 25% ownership interest in the Company (note 4), which
resulted in the issuance of 86,640 shares of the Company's common stock.
In 1998, the Company initiated a private placement sale of its common stock at a
price of $9.50 per share. The first closing and issuance of common shares in the
private placement was completed in December 1998 and resulted in the sale of
986,097 shares of the Company's common stock and proceeds of $8,604,000, net of
issuance costs of $764,000. A total of 33,629 shares in the first closing were
sold to related parties. The final closing and issuance of 583,913 shares of
common stock for proceeds of $5,273,000, net of issuance costs of $274,000,
occurred in January 1999. A total of 2,000 shares were sold to related parties
in the final closing.
The Company completed its initial public offering (the "IPO") in July 1999, in
which it issued and sold 3,565,000 shares of common stock for aggregate proceeds
to the Company of $46,400,000. Of the aggregate proceeds received in the IPO,
$4,400,000 was used to pay underwriting discounts and commissions and expenses
related to the IPO, resulting in net proceeds of approximately $42,000,000.
In 1999, the Company completed a private placement of common stock with Vulcan
Ventures, Inc. The issuance of the common shares in the private placement was
completed in December 1999 and resulted in the sale of 2,173,913 shares of the
Company's common stock and proceeds of approximately $24,000,000, net of
issuance costs.
9. Employee Benefit Plans
(a) Company 401(k) Plan
The VaxGen 401(k) Retirement Plan (the "401(k) Plan") covers substantially all
full-time employees of the Company. Under the 401(k) Plan, the company, at its
discretion, can match employee contributions with Company common stock. A total
of 100,000 shares of Company commons stock have been reserved for issuance under
the 401(k) Plan. In 2002, 36,002 shares were issued under the 401(k) Plan
representing expense of $337,000. In 2001, 12,127 shares were issued under the
401(k) Plan representing expense of $206,000. No Company match was made in 2000.
(b) Company Employee Stock Purchase Plan
In May 2001, the stockholders of the company approved the VaxGen 2001 Employee
Stock Purchase Plan (the "2001 Purchase Plan"). A total of 300,000 shares of
Company common stock have been reserved for issuance under the 2001 Purchase
Plan. All full-time employees are eligible to participate in the 2001 Purchase
Plan. The 2001 Purchase Plan will be implemented by a series of offerings of
approximately 24-months in duration. The initial offering will commence on July
2, 2001, and end on June 30, 2003. An additional offering will commence on the
first business day of each subsequent calendar quarter of each year during the
term of the 2001 Purchase Plan and end of last business day of the second
December,
63
March, June and September, respectively, occurring thereafter. Within the
offering, there will be a series of eight quarterly "purchase period" commencing
on the first business day of each July, October, January and April during the
offering and ending on the last business day of the next September, December,
March and June, respectively thereafter. The purchase price for shares of common
stock purchased at the end of a purchase period in an offering will be the
lesser of 85% of the market price of common stock on the commencement date of
the offering, or 85% of the market price of common stock on the last business
day of the purchase period. During any one calendar year, the maximum value of
the common stock that may be purchased by a participant is $25,000. In 2002,
49,325 shares were issued under the 2001 Purchase Plan at a weighted average
purchase price of $5.54. In 2001, 9,975 shares were issued under the 2001
Purchase Plan at a weighted average purchase price of $10.23. The 15% discount
from the market price is considered compensation for SFAS No. 123 disclosure
purposes only and is included in the SFAS No. 123 disclosure in note 9(a).
10. Stock Options and Warrants
(a) Stock Option Plans
1996 Stock Option Plan
In May 2002, our stockholders approved amendments to our 1996 Stock Option Plan
(the Plan) and increasing the number of shares of common stock reserved for
issuance under the Plan from 3,250,000 to 4,750,000, and also added a provision
that will automatically increase the number of shares reserved under the Plan by
3.5% of the issued and outstanding common stock on the last trading day of the
December immediately preceding each fiscal year, beginning with January 2003 and
ending with January 2007. Options granted under the Plan may be designated as
qualified or nonqualified at the discretion of the compensation committee of the
Board of Directors. At December 31, 2002, 1,523,543 shares were available for
grant under the Plan.
Generally, shares under option vest ratably over four years, beginning one year
from the date of grant; however, options can vest upon grant. All options expire
no later than 10 years from the date of grant. Qualified stock options are
exercisable at not less than the fair market value of the stock at the date of
grant and nonqualified stock options are exercisable at prices determined at the
discretion of the Board of Directors, but not less than 85% of the fair market
value of the stock at the date of grant.
1998 Director Stock Option Plan
In 1998, the Board of Directors approved the 1998 Director Stock Option Plan
(the Director Plan) for non-employee directors. In May 2002, the stockholders of
the Company approved an increase in the number of shares of common stock
authorized for issuance under the Director Plan to a total of 300,000 shares. As
of December 31, 2002, non-employee directors have been granted options to
purchase 56,520 shares of the Company's common stock at exercise prices ranging
from $7.00 per share to $20.85 per share. Such options vested immediately. Under
the Director Plan, 10,000 options will automatically be granted to non-employee
directors on the date of the annual shareholders' meeting. The exercise price of
each annual option grant is to be the fair market value of the Company's common
stock on the grant date. Each annual option grant fully vests on the first
anniversary of its grant date, subject to certain meeting attendance
requirements. At December 31, 2002, 243,480 shares were available for grant
under the Director Plan.
64
The following is a summary of the Company's stock option activity, and related
information for the periods ended December 31, 2002, 2001 and 2000:
2002 2001 2000
------------------------ ----------------------- -----------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
---------- -------- ---------- -------- ---------- --------
Balance at 2,213,252 $ 14.83 1,560,656 $ 12.47 1,255,138 $ 9.26
beginning of
year
Granted 1,307,407 8.60 1,047,267 17.98 503,064 19.18
Exercised (97,817) 9.84 (144,252) 9.06 (151,528) 8.50
Canceled (226,712) 18.96 (250,419) 16.10 (46,018) 11.38
---------- ------- ---------- ------- ---------- -------
Balance at end
of year 3,196,130 12.14 2,213,252 14.83 1,560,656 12.47
========== ======= ========== ======= ========== =======
Options
exercisable at
year end 1,449,327 13.18 1,118,923 13.46 646,897 9.83
========== ======= ========== ======= ========== =======
The weighted average remaining contractual life of stock options outstanding at
December 31, 2002 is 8.2 years.
Detailed information on the options outstanding on December 31, 2002 by price
range is set forth below:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -------------------------
Weighted
Average Weighted Weighted
Remaining Average Remaining Average
Range of Options Contractual Exercise Shares Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ----------- -------- ----------- --------
$5.17 - $5.74 420,200 9.5 $ 5.61 0 $ 0.00
$5.77 - $9.17 454,821 7.0 $ 7.42 282,221 $ 7.10
$9.25 - $9.50 577,043 7.3 $ 9.43 356,930 $ 9.50
$9.65 - $12.00 466,860 9.1 $ 11.03 123,942 $ 11.16
$12.05 - $14.80 323,717 8.2 $ 14.00 167,084 $ 13.90
$14.90 - $14.90 400,000 8.7 $ 14.90 200,000 $ 14.90
$14.99 - $24.00 494,842 8.0 $ 21.24 279,229 $ 21.54
$24.50 - $26.00 58,647 7.9 $ 25.09 39,921 $ 25.09
--------- --------- --------- --------- ---------
Total 3,196,130 8.2 $ 12.14 1,449,327 $ 13.18
65
The value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted assumptions:
Stock Option Plans
Year Ended December 31,
-------------------------------
2002 2001 2000
------- ------- -------
Risk-free interest rate 2.5% 4.8% 6.0%
Expected average life 4 years 4 years 4 years
Volatility 89% 87% 95%
Expected dividends -- -- --
Employee Stock Purchase Plan
Year Ended December 31,
-------------------------------
2002 2001 2000
--------- --------- -------
Risk-free interest rate 2.5% 4.8% --
Expected average life .25 years .25 years --
Volatility 89% 87% --
Expected dividends -- -- --
The risk-free interest rate was calculated in accordance with the grant date and
expected average life. The weighted average per share fair value of options
granted during the years ended December 31, 2002, 2001 and 2000 was $5.57,
$11.80 and $12.34, respectively.
During 1998, the Board of Directors approved for grant options to purchase
174,925 shares of the Company's common stock at an exercise price of $7.00 per
share and 302,900 shares at an exercise price of $9.50 per share. However, since
the grant of such options would have caused the number of shares outstanding to
exceed the number of shares reserved for grant under the Plan, the Company's
stockholders had to approve an increase in the number of shares reserved for
grant under the Plan. On April 1, 1999, the stockholders of the Company approved
an increase in the number of shares reserved for grant under the Plan to
1,750,000 shares. This represents the measurement date for previously awarded
but unapproved options. As a result, the Company recorded deferred compensation
in the amount of $3,223,000, representing the excess of fair market value of the
common shares on April 1, 1999, $13.00 per share, over the exercise price of the
options on the date stockholder approval was obtained. The Company has recorded
charges to compensation expense of $393,000, $556,000 and $998,000 for the
portion of the vesting period lapsed during the years ended December 31, 2002,
2001 and 2000, respectively. The balance of deferred compensation is being
amortized to expense over the remaining vesting period of the options.
(b) Common Stock Warrants
In connection with the Company's 1997 private placement, certain consultants
were issued warrants to purchase 218,947 shares of the Company's common stock
exercisable at $7.00 per share through June 2007. As of December 31, 2002,
71,517 warrants have been exercised resulting in the issuance of 50,610 shares.
The Company similarly agreed to issue warrants to purchase 90,883 shares of the
Company's common stock exercisable at $9.50 per share to certain consultants in
connection with the Company's 1998 private
66
placement. Such warrants were earned in December 1998 and January 1999. The
warrants are exercisable through 2009. As of December 31, 2002, 11,421 warrants
have been exercised resulting in the issuance of 6,137 shares.
During the second quarter of 1999, in connection with the resolution of an
employment matter, the Company issued warrants to purchase 150,000 shares of the
Company's common stock exercisable at $7.00 per share. As a result of the
warrant issuance, the Company recorded compensation expense of approximately
$2,000,000. As of December 31, 2002, 10,000 warrants have been exercised
resulting in the issuance of 7,760 shares.
In 1999, the Company agreed to issue warrants to purchase 34,783 shares of the
Company's common stock exercisable at $11.50 per share to certain consultants in
connection with the Company's 1999 private placement with Vulcan Ventures, Inc.
The warrants are exercisable through 2009. As of December 31, 2002, 6,087
warrants have been exercised resulting in the issuance of 3,842 shares.
In 2001 and 2002, the Company agreed to issue warrants to purchase 24,000 shares
of the Company's common stock at exercise prices ranging from $11.52 to $20.25
per share to a legal consultant. As a result of the warrant issuance, the
Company recorded legal expense of $135,000 in 2002 and $228,000 in 2001. The
warrants are exercisable through 2012. As of December 31, 2002, none of the
warrants have been exercised.
11. Income Taxes
The Company has reported no income tax benefits due to limitations on the
recognition of deferred tax assets for financial reporting purposes.
The tax effects of temporary differences and carryforwards that give rise to
deferred tax assets are as follows:
December 31
----------------------------
2002 2001
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 47,659,000 $ 35,632,000
Equity compensation 168,000 132,000
Depreciation 289,000 90,000
Accrued liabilities 624,000 497,000
Research and experimentation credit carryforwards 5,636,000 4,303,000
Other 19,000 12,000
------------ ------------
Total gross deferred tax assets 54,395,000 40,666,000
Less valuation allowance (54,395,000) (40,666,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
Based on the weight of available evidence, including cumulative losses since
inception and expected future losses, the Company has determined that it is more
likely than not the entire deferred tax asset amount will not be realized and,
therefore, a valuation allowance has been provided on all gross deferred tax
assets.
The increase in the valuation allowance for deferred tax assets of $13,729,000
in 2002, is primarily attributable to increases in net operating loss and tax
credit carryforwards.
67
At December 31, 2002 the Company had federal and California net operating loss
carryforwards of approximately $122,692,000 and $67,238,000. The federal and
California net operating loss carryforwards expire by 2022 and 2014,
respectively. Additionally, the Company has federal research credits, expiring
through 2022, of approximately $3,288,000 and State of California research
credits, carrying forward indefinitely of approximately $2,348,000. These
carryforwards could be subject to certain limitations in the event there is a
change in control of the Company.
12. Commitments
(a) Leases
The Company leases office facilities under non-cancelable operating leases,
which expire from 2002 to 2008.
In August 1998, the Company commenced a lease for office space at Mahidol
University in Bangkok, Thailand, ending at the conclusion of Phase II clinical
trials in Thailand. The lease requires monthly payments of $2,000. Additionally,
the Company began renovation of project office space at Taksin Hospital, also in
Bangkok. The company was required to pay up to $100,000 for renovations, for
which the Company will receive use of the facility for a five-year term at no
additional cost. As of December 31, 2002, the Company had fulfilled its
obligation related to the renovations.
The Company entered into an 88-month laboratory lease commencing January 1,
1999, which requires the Company to expend a minimum of $500,000 in leasehold
improvements, in addition to its scheduled lease payments. This lease is for
9,675 square feet, which is used for laboratories and offices. As of December
31, 2002, the Company had fulfilled its obligations with respect to the
leasehold improvements.
The Company entered into an 84-month office lease commencing June 2000. This
lease is for 20,057 square feet. In connection with this lease agreement, a
letter of credit in the amount of $477,097 was issued to the Company's landlord.
The letter of credit is collateralized by a certificate of deposit held by the
bank that issued the letter of credit. The certificate of deposit is included in
restricted cash in the accompanying balance sheet as of December 31, 2002.
The Company entered into a 30-month laboratory sublease commencing October 2001.
This lease is for 10,305 square feet of laboratory and office space.
In August 2002, the Company entered into a 75-month sublease agreement. This
lease is for 49,919 square feet, which will be improved as manufacturing,
laboratory and office space. In connection with this lease agreement, a letter
of credit in the amount of $450,000 was issued to the Company's landlord. The
letter of credit is collateralized by a certificate of deposit held by the bank
that issued the letter of credit. The certificate of deposit is included in
restricted cash in the accompanying balance sheet as of December 31, 2002.
Minimum annual payments under non-cancelable operating leases are as follows:
2003........................................... $ 2,269,000
2004........................................... 2,169,000
2005........................................... 2,176,000
2006........................................... 2,186,000
2007........................................... 1,581,000
Thereafter..................................... 1,044,000
Rent expense for 2002, 2001, and 2000 was $3,110,000, $1,274,000 and $1,198,000,
respectively.
68
(b) Clinical Trials
In connection with Phase III clinical trials, the Company has contracted for the
services of 59 medical clinics in North America and Europe and 17 medical
clinics in Thailand associated with the Bangkok Metropolitan Administration. The
clinics will provide the location, clinicians, oversight and volunteers for the
three-year testing of the Company's vaccine candidate. Payments will be made
over the period based on the number of volunteers vaccinated, the number of
return visits and the subsequent testing and follow-up of these volunteers.
Total commitments are estimated to aggregate approximately $27,450,000, of which
the company had paid approximately $4,800,000, $4,600,000 and $5,000,000 for the
years ended December 31, 2002, 2001 and 2000, respectively.
Of the following estimated future payments, $2,400,000 of payments are for the
medical clinics in the North America and Europe that were accrued for in 2002.
Since these payments will be made in first quarter 2003, they are reflected in
the $3,750,000 of payment obligations in 2003.
2003.......................................... $ 3,750,000
13. Legal Proceedings
VaxGen is party to various claims, investigations and legal proceedings
arising in the ordinary course of business. The claims, investigations and legal
proceedings related to shareholder suits alleging improper conduct and other
issues. While there is no assurance that an adverse determination of any such
matters could have a material adverse impact in any future period, management
doe snot believe, based upon information known to it, that the final resolution
of any of these matters will have a material adverse effect upon the Company's
financial position and results of operations and cash flows.
14. Non-cash Compensation Expense
Non-cash compensation expense for 2002, 2001 and 2000 was $730,000, $1,267,000
and $9,958,000, respectively.
Employment contracts with three members of management provided for the issuance
of an aggregate of 325,757 shares of the Company's common stock to these
individuals if the public market valuation of a share of the Company's common
stock, as computed on a 30-day trailing average of the closing price of the
Company's common stock over such period as reported by The NASDAQ Stock
Market(R), is equal to or greater than $28.00 per share. In November 2000, the
average price of $28.00 was achieved and accordingly, the 325,757 shares of
common stock were issued to the three members of management. The Company
recorded an immediate non-cash compensation charge to expense equal to the per
share value of the common stock issued. The per share value of the stock upon
issuance was $24.25 with a charge to expense equaling $7,900,000. The Company
granted three 6-month loans aggregating $2,619,000 to three members of
management. The loans are related to payroll taxes paid by the Company on behalf
of the officers in connection with compensation incurred as a result of shares
issued to the officers. Interest accrues on a monthly basis at a rate of 6% per
annum beginning January 2001. Two of the secured loans were paid in full in June
2001, while the remaining loan is in default and is outstanding in the amount of
$487,000, which is fully reserved as of December 31, 2002.
In December 2000, the Company recorded a $1,800,000 charge for costs related to
the resignation of the Company's chairman and chief executive officer. Costs
included cash payments totaling $650,000 and a non-cash compensation charge of
$1,150,000 related to acceleration of stock options.
69
15. Selected Quarterly Financial Data (Unaudited)
Year Ended December 31, 2002
-----------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Revenues $ 18,000 $ 220,000 $ 132,000 $ 1,212,000
Net loss $(6,965,000) $(6,663,000) $(7,760,000) $(10,355,000)
Net loss applicable to
common stockholders $(7,699,000) $(7,399,000) $(8,526,000) $(22,028,000)
Net loss per share
applicable to common
stockholders - basic and
diluted $ (0.54) $ (0.52) $ (0.59) $ (1.46)
Weighted average shares
used in computing basic
and diluted loss per share 14,318,000 14,343,000 14,472,000 15,127,000
Year Ended December 31, 2001
-----------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Revenues $ 75,000 $ 346,000 $ -- $ 474,000
Net loss $(5,931,000) $(5,854,000) $(6,192,000) $(6,397,000)
Net loss applicable to
common stockholders $(5,931,000) $(6,857,000) $(6,922,000) $(7,148,000)
Net loss per share
applicable to common
stockholders - basic and
diluted $ (0.42) $ (0.49) $ (0.49) $ (0.50)
Weighted average shares
used in computing basic
and diluted loss per share 14,061,000 14,100,000 14,184,000 14,226,000
70
Item 9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
71
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Director
Name of Director Age Principal Occupation Since
- --------------- --- -------------------- --------
Lance K. Gordon 55 Chief Executive Officer of VaxGen 2001
Donald P. Francis 60 President of VaxGen 1995
Phillip W. Berman 54 Senior Vice President, Research & Development of VaxGen 1997
David W. Beier 54 Partner, Hogan & Hartson L.L.P. 2001
Randall L-W. Caudill 56 President, Dunsford Hill Capital Partners 2001
Stephen C. Francis 62 Vice-Chairman, Fischer, Francis, Trees & Watts 1996
Michel Greco 59 Retired 2003
William D. Young 58 Chairman of the Board and Chief Executive Officer of ViroLogic, 1995
Inc.
Lance K. Gordon, Ph.D. Dr. Gordon has served as our Chief Executive Officer and
as a director since September 2001. Dr. Gordon served from May 1999 through
March 2001, as the Executive Vice President of OraVax (now known as Acambis,
Inc.) and the Director North America for Peptide Therapeutics as well as a
member of the board of directors of Peptide. Peptide Therapeutics acquired
OraVax in May 1999. Dr. Gordon served from 1990 to 1999 as the President and
Chief Executive Officer and a member of the Board of Directors of OraVax, Inc.
From January 1989 to June 1990, Dr. Gordon served as Senior Vice President and a
member of the board of directors of North American Vaccine, Inc., a
biopharmaceutical company. From April 1988 to January 1989, he served as Chief
Executive Officer of American Vaccine Corporation and Selcore Laboratories,
Inc., both of which are biopharmaceutical companies. From 1987 to 1988, Dr.
Gordon was Associate Director, Infectious & Inflammatory Diseases, Clinical
Pharmacology-- Drug Medical Affairs, of E.R. Squibb & Sons, Inc., a
pharmaceutical company. From 1981 to 1987, he was Director, Immunobiology
Research at Connaught Laboratories, Ltd., a pharmaceutical company. During his
seven years with Connaught Laboratories, Ltd., Dr. Gordon was responsible for
both bacterial and viral research and development programs. He was the inventor
and Project Director of the Connaught Haemophilus influenzae type b conjugate
vaccine, ProHibit(R). Dr. Gordon also serves on the advisory boards of the
not-for-profit Albert Sabin Foundation and BioSciences Contract Production, a
private biopharmaceutical services company. Dr. Gordon received a B.A. from
California State University at Humboldt and a Ph.D. in Biomedical Science from
the University of Connecticut. Dr. Gordon completed his postdoctoral fellowship
at the Howard Hughes Medical Institute.
Donald P. Francis, M.D., D.Sc. Dr. Francis co-founded VaxGen in November 1995
and has served as its President and as a director since inception. From 1993 to
1995, Dr. Francis directed HIV vaccine clinical research at Genentech. Prior to
joining Genentech, Dr. Francis served from 1971 to 1992 in various positions at
the Centers for Disease Control and Prevention (CDC). During this period, Dr.
Francis established and directed the HIV laboratory for the CDC and served as an
Assistant Director, Viral Diseases Program. At that time he was also a principal
investigator in one of the two Phase III clinical trials that led to licensure
of the hepatitis B vaccine in the United States. In 1976, Dr. Francis was the
lead epidemiologist on the first clinical team to encounter and control the
Ebola virus. Prior to such time, Dr. Francis had a central role in the World
Health Organization's smallpox eradication program, which eradicated smallpox
from the world. Dr. Francis received an M.D. from Northwestern University and
completed his training in pediatrics at Los Angeles County/USC Medical Center.
Dr. Francis received a doctorate in virology from the Harvard School of Public
Health. Dr. Francis is the brother of Stephen Francis.
72
Phillip W. Berman, Ph.D. Dr. Berman is the inventor of AIDSVAX and has served as
the Company's Senior Vice President, Research & Development since April 1999.
Dr. Berman served as Vice President of Research & Development from November 1997
to April 1999, and has served as a director since October 1997. From 1982 to
1997, Dr. Berman served in various capacities with Genentech, including Senior
Scientist, Molecular Biology Department, and Staff Scientist, Department of
Immunology and Department of Process Sciences. From 1984 until he joined VaxGen,
Dr. Berman had research responsibilities in Genentech's AIDS Vaccine Project.
Dr. Berman received an A.B. in biology from the University of California,
Berkeley, and a Ph.D. in biochemistry from Dartmouth College, and performed
post-doctoral research at the Neurobiology Laboratory of the Salk Institute and
the Department of Biochemistry and Biophysics at the University of California,
San Francisco.
David W. Beier. Mr. Beier has served as a director since November 2001. Mr.
Beier is a partner in the Washington, D.C., law office of Hogan & Hartson L.L.P.
From 1998 to 2000, Mr. Beier served as chief domestic policy adviser to Vice
President Gore. From 1989 to 1998, Mr. Beier served as Vice President of
Government Affairs for Genentech. Mr. Beier received a B.A. from Colgate
University and his J.D. from Albany Law School at Union University.
Randall L-W. Caudill, D. Phil. Dr. Caudill has served as a director since
February 2001; he had previously served as director from 1997 through 1999. Dr.
Caudill is President of Dunsford Hill Capital Partners, a San Francisco-based
financial consulting firm, serving emerging growth companies. From 1987 to 1997
he served in various capacities including heading the Merger and Acquisition
Department and co-heading the Investment Bank at Prudential Securities. Dr.
Caudill serves on the board of directors of Northwest Biotherapeutics, Inc.,
Ramgen Power Systems Inc., Helix BioMedix, Inc., MediQuest, Inc., SCOLR, Inc.
and SBE, Inc. as well as several non-profit entities. Dr. Caudill received a
D. Phil. from Oxford University, where he was a Rhodes Scholar, and an M.A. in
Public and Private Management from Yale University.
Stephen C. Francis. Mr. Francis has served as a director since October 1996. Mr.
Francis is Vice-Chairman of Fischer, Francis, Trees & Watts, an investment
management firm, which he co-founded in 1972. Mr. Francis has served on the
board of several for profit and not-for-profit organizations. Mr. Francis is a
member and former chairman of the Treasury Borrowing Advisory Committee, which
advises the United States Treasury, and is a former member of the Stanford
University Graduate School of Business Advisory Council. Mr. Francis received an
A.B. from Dartmouth College and an M.B.A. from Stanford University. Mr. Francis
is the brother of Donald Francis.
Michel Greco. Mr. Greco has served as a director since February 2003. From 1998
until his retirement in January 2003, Mr. Greco was President and Chief
Operating Officer of Aventis Pasteur and later deputy CEO. From 1994 to 1998, he
helped create and also served as president and CEO of Pasteur Merieux MSD, a
joint venture between Merck & Co. and Pasteur Merieux Connaught. In addition to
his nearly 35 years of experience in the pharmaceuticals industry, with an
emphasis on vaccines, Mr. Greco has served as president of the European Vaccine
Manufacturers, chairman of IFPMA'S biological group and a member of the World
Health Organization's Strategic Advisory Group of Experts. He also was a member
of the European Union Task Force on Bioterrorism, and a board member of the
French Pharmaceutical Association and president of its European Affairs
Commission. Mr. Greco serves on the board of directors of ID Biomedical
Corporation and PowderJect Pharmaceuticals Plc. Mr. Greco received a Master's
degree of Institut d'Etudes Politiques de Paris and an MBA from the Richard Ivey
School of Business Administration at the University of Western Ontario.
William D. Young. Mr. Young has served as a director since November 1995. Since
September 1999, Mr. Young has been the Chairman of the Board and Chief Executive
Officer of ViroLogic, Inc. From 1997 to September 1999, Mr. Young served as the
Chief Operating Officer of Genentech, where he had been employed since 1980. Mr.
Young serves on the board of directors of IDEC Pharmaceuticals and Enchira
Biotechnology Corporation. He received a B.S. in chemical engineering from
Purdue University and an M.B.A. from Indiana University.
73
EXECUTIVE OFFICERS
Name Age Position
- ---- --- --------
Lance K. Gordon 55 Chief Executive Officer -- Director
Donald P. Francis 60 President -- Director
Phillip W. Berman 54 Senior Vice President, Research & Development --
Director
Marc J. Gurwith 63 Senior Vice President, Medical Affairs
Carter A. Lee 50 Senior Vice President, Finance & Administration
Corporate Secretary
James P. Panek 49 Senior Vice President, Manufacturing Operations
Carmen M. Betancourt 47 Vice President, Regulatory Affairs & Quality Systems
William L. Heyward 52 Vice President, International Clinical Research
Roland Lance Ignon 46 Vice President, Corporate Communications
Piers C. Whitehead 40 Vice President, Corporate and Business Development
The biographies of Lance K. Gordon, Donald P. Francis and Philip W. Berman
appear under "Directors" above.
Marc J. Gurwith, M.D. Dr. Gurwith has served as Senior Vice President, Medical
Affairs and Chief Medical Officer since October 2001. From August 1997 through
October 2001, Dr. Gurwith served as Vice President, Drug Development and Chief
Medical Officer at Genelabs Technologies, Inc. From January 1995 until August
1997 Dr. Gurwith was Vice President, Clinical Research and Associate Medical
Director at Sequus Pharmaceuticals. Previously, Dr. Gurwith served as Vice
President of Medical and Scientific Affairs at Boehringer Mannheim
Pharmaceuticals and as Senior Director of Clinical Research at Wyeth-Ayerst
Research. Dr. Gurwith received his M.D. from Harvard University, his J.D. from
Temple University School of Law and his B.A. from Yale University.
Carter A. Lee. Mr. Lee has served as Senior Vice President, Finance &
Administration since April 1999. During September 1998 through March 1999, Mr.
Lee served as General Manager. From 1991 to 1997, Mr. Lee served as Senior Vice
President and Chief Financial Officer of Diefenbach Elkins International, Inc.
(now known as FutureBrand), a corporate branding consultancy. From 1990 to 1991,
Mr. Lee served as Vice President, Finance & Administration of EDAW, Inc., a
landscape architecture and planning firm. From 1987 to 1990, Mr. Lee served as
Vice President and Corporate Controller of Landor Associates, a strategic
design consulting firm. Prior to such time, Mr. Lee served in various positions
at Coopers & Lybrand (now known as PricewaterhouseCoopers LLP). Mr. Lee received
a B.A. from the University of California, Berkeley, and an M.B.A. from
California State University, Hayward.
James P. Panek. Mr. Panek has served as VaxGen Senior Vice President,
Manufacturing Operations, since February 2002. From 1982 to 2001, Mr. Panek
served in various capacities with Genentech, including Senior Vice President,
Product Operations, and Vice President, Manufacturing, Engineering and
Facilities, where he led the development of the world's largest biotechnology
manufacturing facility and was responsible for all operations involved in
supplying products for pre-clinical, clinical, and commercial use. Mr. Panek led
the development of manufacturing facilities that enabled FDA approval and launch
of recombinant products to treat pediatric growth hormone deficiency (Nutropin
Depot(R)and Protropin(R)), heart attack (TNKaseTM), non-Hodgkin's lymphoma
(Rituxan(R)) and breast cancer (Herceptin(R)). Mr. Panek was also responsible
for the purification of all human pharmaceuticals for clinical and commercial
use, and led the successful start-up and licensure of operations for
purification of Activase(R), the first large-scale cell culture product approved
by the FDA. Prior to joining Genentech, Mr. Panek spent six years with Eli Lilly
in a variety of engineering and development positions. Mr. Panek received a B.S.
and an M.S. in chemical engineering from the University of Michigan.
74
Carmen M. Betancourt. Ms. Betancourt has served as Vice President, Regulatory
Affairs and Quality Systems since January 2002. Ms. Betancourt is the company's
chief liaison with the U.S. Food and Drug Administration and is responsible for
overseeing the preparation of biologics license applications for all products
the company seeks to market. From August 2001 until December 2001, Ms.
Betancourt served as Vice President, Regulatory Affairs, at Titan
Pharmaceutical, where she managed multiple product development programs
supporting the clinical investigation of pharmaceutical products. From 1977 to
2000, Ms. Betancourt held various regulatory positions at Genentech, Coulter
Pharmaceutical and Bayer. Ms. Betancourt received a B.S. degree in Biological
Sciences from the University of California, Davis and an M.B.A. from Golden Gate
University.
William L. Heyward, M.D., M.P.H. Dr. Heyward has served as our Vice President,
International Clinical Research, since January 2000. Dr. Heyward served at the
Centers for Disease Control and Prevention (CDC) for more than 20 years, where
he coordinated vaccine trial research in Alaska on hepatitis B and Haemophilus
influenzae type b and was involved in the investigation of the Ebola epidemic in
Kikwit, Zaire. His most recent position at the CDC entailed coordinating
domestic and international HIV vaccine development and evaluation. Prior to that
he was director of the largest AIDS research project in Africa and was detailed
to the World Health Organization and UNAIDS as a specialist in HIV vaccines and
vaccine trials. Dr. Heyward received a B.A. from Emory University, an M.D. from
the Medical College of Georgia and an M.P.H. from The Johns Hopkins University
School of Hygiene and Public Health.
Roland Lance Ignon. Mr. Ignon has served as our Vice President, Corporate
Communications, since September 2001. Mr. Ignon has more than 15 years of
experience as a business journalist and communications professional. Prior to
joining VaxGen, Mr. Ignon served as Director, Corporate Communications, for
Tenet Healthcare Corporation, one of the nation's largest operators of acute
care hospitals. Mr. Ignon also served as Vice President of Investor Relations at
Sitrick and Company, one of the nation's leading crisis communications firms. As
a journalist, Mr. Ignon served as founding editor of an award-winning business
newspaper and as a finance reporter and editor at Investor's Business Daily. Mr.
Ignon also was a reporter for Bloomberg Business News, The Economist Group and
the Los Angeles Times. Mr. Ignon earned a B.A. degree in political science from
the University of California, Irvine, and an M.A. from the Graduate School of
Journalism at Columbia University.
Piers C. Whitehead Mr. Whitehead has served as our Vice President, Corporate and
Business Development, since July 2002. Mr. Whitehead served as vice president
and head of Mercer Management Consulting's San Francisco office from 1991
through 2002. There he led marketing, strategy and manufacturing projects, with
an emphasis on global health and vaccines, for clients that included the Global
Alliance for Vaccines and Immunization, UNICEF and several private sector
clients. Mr. Whitehead gained international prominence for his wide-ranging
analysis of the biologics, pharmaceutical, global health and vaccine markets.
His reports on the state of international vaccine development, including the
analysis of manufacturing economics for the developing world, have become
standard references for the field. Prior to joining Mercer he was a manager with
London-based investment bank Robert Fleming Securities Ltd. There he led a team
of seven analysts covering the European goods sector. Mr. Whitehead received a
B.A. and an M.A. from Oriel College in Oxford, England.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers and persons who own more than ten
percent of a registered class of the Company's equity securities to file reports
of ownership and reports of changes in their ownership with the Securities and
Exchange Commission. Such persons are required by SEC regulations to furnish the
Company with copies of all such reports they file.
75
Based solely on its review of the copies of such reports received by the Company
with respect to its fiscal year ended December 31, 2002, and representations
made with respect to their compliance with the reporting requirements under
Section 16(a) of the Exchange Act, the Company believes that all directors and
executive officers and ten percent shareholders timely filed all applicable
reports with respect to such fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Each non-employee director currently receives $10,000 per year. The non-employee
directors currently receive $1,000 per Board meeting and committee meeting
attended and $500 per telephonic meeting as cash compensation for their service
as members of the Board of Directors, and are reimbursed for certain expenses in
connection with attendance at Board and Committee meetings. The members of the
Board of Directors are also eligible for reimbursement for their expenses
incurred in connection with attendance at Board meetings in accordance with our
policy.
Each non-employee director also receives automatic stock option grants under the
1998 Director Stock Option Plan (Director Plan). During 2002, in accordance with
the Directors' Plan, we granted options covering 40,000 shares to four
non-employee directors and 40,000 shares to two of our non-employee directors,
at an exercise price per share of $7.74 and $11.22, respectively, under the
Director Plan. One-time option grants have been made to certain non-employee
directors under the 1996 Stock Option Plan in certain previous years. The
options were all granted with an exercise price equal to the fair market value
of our Common Stock on the date of grant.
76
The following table sets forth the compensation earned during the years ended
December 31, 2002, 2001 and 2000 by the Company's Chief Executive Officer and
the Company's four other most highly compensated executive officers:
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------------------ -------------------------------------------
Other Securities
Annual Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Compensation Options(#) Compensation($)
- --------------------------- ---- --------- -------- ------------ ---------- ---------------
Lance K. Gordon (1) 2002 330,850 29,250 123,300(2) 75,000 0
Chief Executive Officer 2001 104,271 -- 109,744(2) 400,000 0
Donald F. Francis 2002 341,250 81,250 0 75,000 0
President 2001 325,000 72,000 0 15,000 0
2000 288,750 3,105,500(3) 0 13,500 0
Phillip W. Berman 2002 273,700 35,250 0 33,000 0
Senior Vice President, 2001 210,000 52,500 0 30,000 0
Research & Development 2000 210,000 1,891,107(3) 0 13,500 0
Carter A. Lee 2002 221,540 42,400 0 24,000 0
Senior Vice President, Finance 2001 212,000 29,693 0 5,000 0
& Administration 2000 197,950 33,300 0 9,000 0
Marc J. Gurwith (4) 2002 226,556 40,000 0 0 0
Senior Vice President, Medical 2001 16,604 0 0 125,000 0
Affairs
- ----------
(1) Dr. Gordon became Chief Executive Officer in September 2001.
(2) As part of his employment agreement, Dr. Gordon received $120,652 and
$109,744 in 2002 and 2001 respectively, for a relocation allowance.
(3) The employment contracts of Drs. Francis and Berman provided for a success
bonus of 125,000 and 75,757 shares of the Common Stock, respectively, if
the market value of the Common Stock reached an average of $28.00 per
share over a 30-day period. In November 2000, this condition was met and
accordingly, these 200,757 shares of Common Stock were issued, resulting
in non-cash compensation to Drs. Francis and Berman in the amounts of
$3,031,250 and $1,837,107, respectively.
(4) Dr. Gurwith became an executive officer in October 2001.
77
The following table provides information relating to stock options awarded to
each of the Named Executive Officers during the year ended December 31, 2002.
All such options were awarded under the 1996 Plan.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
-------------------------------------------------- Potential Realizable
of Total Value at Assumed
Number of % Options Exercise Annual Rates of Stock
Securities Granted to or Price Appreciation for
Underlying Employees Base Option Term (1)
Options in Price Expiration ----------------------
Name Granted(#) 2002 ($/Sh) Date 5% ($) 10% ($)
- ---- ---------- ---------- -------- ---------- -------- -------
Lance K. Gordon 75,000 5.7% 5.74 7/22/12 270,739 686,106
Donald P. Francis 75,000 5.7% 5.74 7/22/12 270,739 686,106
2/7/12
--
Phillip W. Berman 63,000 4.8% 5.74/9.43 7/22/12 297,040 752,756
Carter A. Lee 24,000 1.8% 5.74 7/22/12 86,637 219,554
Marc J. Gurwith -- -- -- -- -- --
(1) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance that the actual stock price appreciation over the option
term will be at the assumed 5% or 10% level or at any other defined level.
Unless the market price of the Common Stock appreciates over the option
term, no value will be realized from the option grants made to the
executive officers. The potential realizable value is calculated by
assuming that the fair value of the Common Stock on the date of grant
appreciates at the indicated rate for the entire term of the option and
that the option is exercised on the last day of its term and the shares
issued upon exercise are immediately sold at the appreciated price. The
potential realizable value computation is net of the applicable exercise
price, but does not take into account applicable federal or state tax
consequences or other expenses of the option exercises or the ensuing
stock sales.
78
The following table sets forth for each of the Named Executive Officers the
number of shares of Common Stock acquired and the dollar value realized upon
exercise of options during the year ended December 31, 2002 and the number and
value of securities underlying unexercised options held at December 31, 2002:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END VALUES
Number of Securities
Underlying Unexercised Value of Unexercised
Options In-The-Money Options
At Fiscal Year-End(#) At Fiscal Year-End($)(1)
--------------------------- ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Lance K. Gordon 200,000 275,000 882,000 1,899,750
Donald P. Francis 28,718 89,782 185,539 1,057,796
Phillip W. Berman 234,968 86,532 2,709,289 870,706
Carter A. Lee 131,019 34,481 1,241,614 387,131
Marc J. Gurwith 36,458 88,542 164,426 399,324
- ----------
(1) Value of unexercised in-the-money options is based on a value of $19.31
per share, the closing price of the Common Stock as reported on The Nasdaq
Stock Market(R) on December 31, 2002, the per share exercise price,
multiplied by the number of shares underlying the option.
EMPLOYMENT AGREEMENTS
Dr. Gordon's employment agreement provides for a base salary of $325,000. Dr.
Gordon may receive an annual bonus of up to 30% of his base salary as determined
in the discretion of the Board of Directors. In the event of a termination by
VaxGen without cause, or termination by Dr. Gordon for good reason (as defined
in his employment agreement), the Company may be required to pay Dr. Gordon's
base salary for twelve (12) months following his termination. In addition Dr.
Gordon's options will fully accelerate upon termination without cause, or
termination by Dr. Gordon for good reason, or upon certain events after a change
of control (as defined in Dr. Gordon's employment agreement). Upon termination
of employment, Dr. Gordon is subject to a one-year non-solicitation period.
Dr. Francis' employment agreement provides for a base salary of $325,000. Dr.
Francis may receive an annual bonus of up to 30% of his base salary as
determined in the discretion of the Board of Directors. In the event of a
termination by VaxGen without cause, or termination by Dr. Francis for good
reason (as defined in his employment agreement), the Company may be required to
pay Dr. Francis' base salary for six months, plus one additional month of base
salary for each full year of employment with VaxGen following his termination,
up to a maximum of 12 months annual base salary. In addition Dr. Francis'
options will fully accelerate upon termination without cause, or termination by
Dr. Francis for good reason, or upon certain events after a change of control
(as defined in Dr. Francis' employment agreement). Upon termination of
employment, Dr. Francis is subject to a one-year non-solicitation period.
Dr. Berman's employment agreement provides for a base salary of $235,000. Dr.
Berman may receive an annual bonus of up to 30% of his base salary as determined
in the discretion of the Board of Directors. In the event of a termination by
VaxGen without cause, or termination by Dr. Berman for good reason (as defined
in his employment agreement), the Company may be required to pay Dr. Berman's
base salary for six months, plus one additional month of base salary for each
full year of employment with VaxGen following his termination, up to a maximum
of 12 months annual base salary. In addition Dr. Berman options will fully
accelerate upon termination without cause, or termination by Dr. Berman for good
reason, or upon certain events after a change of control (as defined in Dr.
Berman's employment agreement). Upon termination of employment, Dr. Berman is
subject to a one-year non-solicitation period.
79
Mr. Lee's employment agreement provides for a annual base salary of $185,000
which was increased to $221,540 by the Board of Directors, on July 22, 2002. Mr.
Lee may also receive an annual bonus of up to 30% of his base salary, and
options for up to 10,000 shares of Common Stock. Mr. Lee has received an option
to purchase up to 125,000 shares of Common Stock which vests over a four-year
period. In the event of a change of control, Mr. Lee may receive a one-time
bonus of 37,500 shares of Common Stock. In the event of termination prior to the
expiration of the term of his employment agreement, the Company may be required
to pay Mr. Lee's base salary for twelve months following his termination. Mr.
Lee's options will fully accelerate if (i) there is a change in control (as
defined in Mr. Lee's employment agreement) or (ii) termination of his employment
without cause or by Mr. Lee for good reason (as defined in Mr. Lee's employment
agreement). Upon termination of employment, Mr. Lee is subject to a one-year
non-competition period.
Dr. Gurwith's employment agreement provides for a base salary of $235,000. Upon
the start of his employment, Dr. Gurwith received a $40,000 start-up bonus along
with an option to purchase up to 125,000 shares of common stock which vests over
a four-year period. Dr. Gurwith may receive an annual bonus of up to 30% of his
base salary as determined in the discretion of the Board of Directors. In the
event of a change of control or termination of employment prior to the
expiration of the term of his employment agreement, the Company may be required
to pay all salary due to Dr. Gurwith. Dr. Gurwith's options were granted
pursuant to the 1996 Stock Option Plan and are governed by the terms of such
plan. Upon termination of employment, Dr. Gurwith is subject to a one-year
non-solicitation period.
EQUITY COMPENSATION PLAN INFORMATION
The table below sets forth certain information with respect to our Common Stock
which is authorized for issuance under our equity compensation plans as of
December 31, 2002.
(a) (b) (c)
Number of
securities
remaining available
Number of for future issuance
securities to be under equity
issued upon Weighted-average compensation plans
exercise of exercise price of (excluding
outstanding outstanding securities
options, warrants options, warrants reflected in column
Plan Category and rights and rights (a))
------------- ----------------- ----------------- -------------------
Stock option plans
approved by
stockholders 2,796,13 $ 11.75 1,767,023
Stock option plans not
approved by
stockholders 400,000 $ 14.90 0
Employee Stock Purchase
Plan approved by
stockholders -- -- 240,700
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of our Compensation Committee was, at any time since our
formation, an officer or employee of VaxGen. None of our executive officers
serves as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving as a member of Board or
Compensation Committee. Stephen Francis is a member of the Compensation
Committee and is the brother of Dr. Donald Francis.
80
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership of
the Company's common stock and preferred stock as of March 24, 2003 by: (i) each
director; (ii) each of the executive officers; (iii) all executive officers and
directors of the Company as a group; and (iv) all those known by the Company to
be beneficial owners of more than five percent of its common stock.
Beneficial Ownership (1)
Number of Percent of
Number of Percent of Shares of Preferred
Shares of Common Stock Preferred Stock
Beneficial Owner Common Stock Outstanding Stock Outstanding
Genentech, Inc.
1 DNA Way
South San Francisco, CA 94080 1,522,354 9.6% 0 -
Societe Generale (2)
1221 Avenue of the Americas
New York, NY 10020 269,393 1.7% 2,500 65.8%
Velocity Investment Partners, Ltd. (3)
c/o Velocity Asset Management LLC
333 West Wacker Drive, Ste. 1410
Chicago, IL 60606 61,027 * 300 7.9%
SDS Merchant Fund, L.P. (4)
c/o SDS Capital Partners
One South Shore Drive
Greenwich, CT 06830 107,780 * 1,000 26.3%
Lance K. Gordon (5) 200,877 1.3% 0 -
Donald P. Francis (5) 422,950 2.7% 0 -
Phillip W. Berman (5) 252,126 1.6% 0 -
David W. Beier 16,667 * 0 -
Randall L-W. Caudill (5)(6) 48,627 * 0 -
Stephen C. Francis (5) 68,404 * 0 -
Michel Greco 0 * 0 -
William D. Young (5) 29,942 * 0 -
Carter A. Lee (5) 138,506 * 0 -
Marc J. Gurwith (5) 47,846 * 0 -
All executive officers and directors as a
group (15 persons) 1,394,574 8.3% 0 -
- ----------
* Less than one percent.
(1) This table is based upon information supplied by officers,
directors and principal stockholders and Schedules 13D and 13G
filed with the Securities and Exchange Commission (the "SEC").
Unless otherwise indicated in the footnotes to this table and
subject to community property laws where applicable, the
Company believes that each of the
81
stockholders named in this table has sole voting and
investment power with respect to the shares indicated as
beneficially owned . Applicable percentages are based on
15,853,540 shares outstanding on March 24, 2003, adjusted as
required by rules promulgated by the SEC.
(2) Includes 176,891 shares of Common Stock, issuable upon the
conversion of 2,500 shares of Preferred Stock, and a warrant
for the purchase of 66,334 shares of Common Stock that is
exercisable within 60 days of March 24, 2003.
(3) Includes 21,227 shares of Common Stock, issuable upon the
conversion of 300 shares of Preferred Stock, and a warrant for
the purchase of 39,800 shares of Common Stock that is
exercisable within 60 days of March 24, 2003.
(4) Includes 70,756 shares of Common Stock, issuable upon the
conversion of 1,000 shares of Preferred Stock, and a warrant
for the purchase of 26,534 shares of Common Stock that is
exercisable within 60 days of March 24, 2003.
(5) Includes options under the Company's stock option plans
exercisable within 60 days of March 24, 2003 for the following
number of shares: Dr. Gordon -- 200,000; Dr. Francis --
32,655; Dr. Berman -- 249,842; Mr. Beier -- 16,667; Dr.
Caudill -- 20,484; Mr. Francis -- 17,404; Mr. Young -- 29,942;
Mr. Lee -- 136,666; Dr. Gurwith -- 46,875; and all executive
officers and directors as a group -- 912,863.
(6) Includes 17,143 shares underlying warrants issued to Dunsford
Hill Capital Partners pursuant to an early stage corporate
finance advisory engagement. Dr. Caudill is President of
Dunsford Hill Capital Partners. Also includes 1,000 shares
owned by Dr. Caudill's wife. Dr. Caudill disclaims any
beneficial ownership of the 1,000 shares except to the extent
of any pecuniary interest therein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a summary of certain related party transactions with the
Company in which certain of the Company's executive officers, directors or
greater than five percent stockholders or any members of the immediate family of
any of the foregoing had or have a direct or indirect material interest. The
Company believes that each of these transactions was on terms at least as fair
to the Company as could have been obtained from unaffiliated third parties.
In December 2000, the Company lent to Drs. Francis and Berman $1,074,578 and
$651,255, respectively. In addition, in April 2001, the Company lent to Drs.
Francis and Berman $432,172 and $240,787, respectively. The proceeds of their
loans were used to fund payment of payroll taxes in connection with stock
bonuses paid to these officers. See footnote 3 of the Summary Compensation
Table. In June 2001, Drs. Francis and Berman paid the loans in full. Interest
accrued on the loans at a rate of 6% per annum.
The Company paid legal fees and expenses on behalf of Dr. Heyward, an executive
officer of the Company, in the aggregate of $53,548 and $130,633 in each of 2000
and 2001 for a legal matter pertaining to the circumstances surrounding Dr.
Heyward's departure from his former employer.
All future transactions, including any loans from the Company to its officers,
directors, principal stockholders or affiliates, will be approved by a majority
of the Board of Directors, including a majority of the independent and
disinterested members of the Board of Directors or, if required by law, a
majority of disinterested stockholders, and will be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.
ITEM 14. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures Within the ninety days prior to
the date of this Annual Report, VaxGen carried out an evaluation under the
supervision and with the participation of VaxGen's management, including
VaxGen's Chief Executive Officer (CEO) and Principal Financial Officer (PFO), of
the effectiveness of the design and operation of VaxGen's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14 or 15d-14. Based on that
evaluation, VaxGen's management, including the CEO and PFO, concluded that
VaxGen's disclosure controls and procedures were effective in timely alerting
them to material information relating to VaxGen, required to be included in
VaxGen's periodic SEC filings.
82
Changes in internal controls There have been no significant changes in VaxGen's
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of their evaluation.
Limitations on the effectiveness of controls It should be noted that any system
of controls, however well designed and operated, can provide only reasonable,
and not absolute, assurance that the objectives of the system are met. In
addition, the design of any control system is based in part upon certain
assumptions about the likelihood of future events. Because of these and other
inherent limitations of control systems, there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions.
83
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
Page
----
VaxGen, Inc.
Independent Auditors' Report 44
Balance Sheets - December 31, 2002 and 2001 45
Statements of Operations - Years ended December 31, 2002, 2001, 2000 and
Period from Inception (November 27, 1995) through December 31, 2002 46
Statements of Cash Flows - Years ended December 31, 2002, 2001, 2000 and
Period from Inception (November 27, 1995) through December 31, 2002 47
Statements of Stockholders' Equity (Deficit) and Comprehensive Loss -
Years ended December 31, 2002, 2001, 2000, 1999, 1998, 1997, 1996 and
Period from Inception
(November 27, 1995) through December 31, 1995 49
(a)(2) Financial Statement Schedules
Financial statement schedules have been omitted because they are not
applicable, not required, or the required information is included in the
financial statements and notes thereto.
(a)(3) Exhibits
Incorporated by Reference
Exhibit No. Exhibit Form File No. Filing Date Exhibit Filed
No. Herewith
3.1 Amended and Restated Certificate of S-8 333-84922 3-26-02 4.1
Incorporation.
3.2 Amendment to the Amended and S-8 333-84922 3-26-02 4.3
Restated Certificate of
Incorporation.
3.3 Amended and Restated Bylaws S-1 333-78065 6-11-99 3.2
4.1 Reference is made to
Exhibits 3.1, 3.2 and 3.3.
4.2 Certificate of Designations, Rights S-8 333-84922 3-26-02 4.2
and Preferences of Series A 6%
Cumulative Convertible Preferred
Stock.
4.3 Securities Purchase Agreement by 8-K 000-26483 5-24-01 10.1
and among Registrant and Certain
Stockholders.
4.4 Registrant Rights Agreement by and 8-K 000-26483 5-24-01 10.2
among Registrant and Certain
Stockholders.
4.5 Form of Common Stock Purchase 8-K 000-26483 5-24-01 4.1
Warrant.
4.6 Specimen Stock Certificate for S-1 333-78065 6-11-99 4.1
Common Stock of Registrant.
84
10.1 Registration Rights Agreement S-1 333-78065 5-7-99 10.1
between VaxGen and Genentech, dated
as of May 5, 1997.
10.2 1996 Registration Rights Agreement S-1 333-78065 5-7-99 10.2
between VaxGen and certain
stockholders.
10.3 1998 Registration Rights Agreement S-1 333-78065 5-7-99 10.3
between VaxGen and certain
stockholders.
10.4 VaxGen, Inc. Amended and Restated S-8 333-85391 8-17-99 99.1
1996 Stock Option Plan.
10.5 1998 Director Stock Option Plan. S-1 333-78065 5-7-99 10.5
10.6 Form of stock option agreement. S-1 333-78065 5-7-99 10.6
10.7 Form of common stock warrant. S-1 333-78065 5-7-99 10.7
10.9 Amended and Restated Employment. S-8 333-85391 8-17-99 99.5
Agreement between VaxGen and
Phillip W. Berman.
10.10 Employment Agreement between VaxGen S-1 333-78065 5-7-99 10.13
and Carter A. Lee, dated as of
April 1, 1999.
10.11 License and Supply Agreement with S-1 333-78065 5-7-99 10.14
Genentech, dated as of May 1, 1996.
10.12 Letter of Intent for Supply S-1 333-78065 5-7-99 10.16
Development Agreement between
VaxGen and Pasteur Merieux Serums
et Vaccins (Pasteur Merieux
Connaught), dated April 10, 1998.
10.12.1 Amendment to Letter of Intent for S-1 333-78065 5-7-99 10.16.1
Supply Development Agreement
between VaxGen and Pasteur Merieux
Serums et Vaccins (Pasteur Merieux
Connaught), dated May 3, 1999.
10.13 Form of trial clinic agreement. S-1 333-78065 5-7-99 10.17
10.14 Lease Agreement between VaxGen and S-1 333-78065 5-7-99 10.18
Oyster Point Tech Center LLC, dated
October 26, 1998.
10.15 Lease Agreement between VaxGen and S-1 333-78065 5-7-99 10.19
Spieker Properties, L.P., dated May
20, 1998.
10.16 Common Stock Purchase Agreement 10-K 000-26483 3-30-00 10.20
between VaxGen and Vulcan Ventures,
Inc., dated October 15, 1999.
10.17 Loan and Security Agreement 10-K 000-26483 3-30-01 10.22
entered into between
Donald P. Francis and VaxGen, Inc.
dated as of December 20, 2000.
10.18 Loan and Security Agreement 10-K 000-26483 3-30-01 10.24
entered into between
Phillip W. Berman and VaxGen, Inc.
dated as of December 20, 2000.
10.19 Employment Agreement between VaxGen 10-K 000-26483 3-30-01 10.25
and William Heyward, dated as of
January 3, 2000.
85
10.20 Employment Agreement between VaxGen 10-K 000-26483 3-30-01 10.26
and George T. Baxter, dated as of
September 5, 2000.
10.21 Subcontract Agreement entered into 10-Q 000-26483 5-03-01 10.27
between BBI Biotech Research
Laboratories, Inc. and VaxGen, Inc.
dated as of May 1, 1999.
10.22 Employment Agreement between VaxGen 10-Q 000-26483 11-01-01 10.28
and Lance K. Gordon, dated as of
September 6, 2001.
10.23 Employment Agreement between VaxGen 10-Q 000-26483 11-01-01 10.29
and Lance Ignon, dated as of
September 25, 2001.
10.24 Joint Venture Agreement between 10-K 000-26483 4-01-02 10.24
VaxGen and certain investors, dated
February 25, 2002.
10.25 Land Purchase and Sale Agreement 10-K 000-26483 4-01-02 10.25
between VaxGen and Incheon
Metropolitan City, dated February
25, 2002.
10.26 Contribution Agreement between 10-K 000-26483 4-01-02 10.26
VaxGen and certain investors, dated
February 25, 2002.
10.27 Employment Agreement between VaxGen 10-K 000-26483 4-01-02 10.27
and Donald P. Francis, dated as of
October 2, 2001.
10.28 Employment Agreement between VaxGen 10-K 000-26483 4-01-02 10.28
and Marc Gurwith, dated as of
October 28, 2001.
10.29 Sublease Agreement between VaxGen 10-K 000-26483 4-01-02 10.29
and TSI Communications, dated as of
September 21, 2001.
10.30 Stock Option Agreement between VaxGen and 10-K 000-26483 4-01-02 10.30
Lance K. Gordon, dated September 6, 2001.
10.31 Assignment Agreement between VaxGen 10-K 000-26483 4-01-02 10.31
and Celltrion, Inc., dated March 25, 2002.
10.32 Employment Agreement between VaxGen and 10-Q 000-26483 5-15-02 10.32
Carmen M. Betancourt, dated as of January
28, 2002.
10.33 Employment Agreement between VaxGen and 10-Q 000-26483 5-15-02 10.33
James P. Panek, dated as of
February 4, 2002.
10.34 Employment Agreement between VaxGen and 10-Q 000-26483 5-15-02 10.34
Phillip W. Berman, dated as of February 7,
2002.
10.35 License Agreement between VaxGen and 10-Q 000-26483 5-15-02 10.35
Celltrion, dated as of March 25, 2002.
10.36 Sub-License Agreement between VaxGen and 10-Q 000-26483 5-15-02 10.36
Celltrion, dated as of March 25, 2002.
10.37 Supply Agreement between VaxGen and 10-Q 000-26483 5-15-02 10.37
Celltrion, dated as of March 25, 2002.
10.38 Amended and Restated License and Supply 8-K 000-26483 7-15-02 99.2
Agreement between VaxGen, Inc., and
Genentech, Inc., entered into as of May 1,
2002.
86
10.39 Contract between VaxGen and the National 10-Q 000-26483 11-14-02 10.39
Institute of Allergy and Infectious
Diseases, National Institutes of Health,
under Contract No. N01-AI-25494, dated
September 30, 2002.
10.40 Amendment of contract between VaxGen and 10-Q 000-26483 11-14-02 10.40
the, National Institutes of Health, under
Contract No. N01-AI-95373,
dated September 30, 2002.
10.41 Employment Agreement between VaxGen and 10-Q 000-26483 11-14-02 10.41
Piers C. Whitehead, dated as of July 1,
2002.
10.42 Joint Venture Agreement between VaxGen and 10-Q 000-26483 11-14-02 10.42
Celltrion, Inc., dated as of June 7, 2002.
10.43 License Agreement between VaxGen and 10-Q 000-26483 11-14-02 10.43
VaxGen-Celltrion, Inc., dated June 7, 2002.
10.44 Sub-License Agreement between VaxGen and 10-Q 000-26483 11-14-02 10.44
VaxGen-Celltrion, Inc., dated June 7, 2002.
10.45 Consulting Services Agreement between 10-Q 000-26483 11-14-02 10.45
VaxGen and VaxGen-Celltrion, Inc., dated
June 7, 2002.
10.46 Contract between VaxGen and the National 10-Q 000-26483 11-14-02 10.46
Institute of Allergy and Infectious
Diseases, National Institutes of Health,
under Contract No. N01-AI-95373, dated
July 9,
1999.
23.1 Consent of KPMG LLP X
99.1 Certification X
(a) Reports on Form 8-K:
A current report on Form 8-K, dated October 4, 2002, was filed with the
Securities and Exchange Commission, reporting under Item 5 that we had announced
we had awarded a $13.6 million contract from the National Institute of Allergy
and Infectious Diseases (NIAID), part of the U.S. National Institutes of Health
(NIH), to develop a new anthrax vaccine and to create a feasibility plan to
manufacture an emergency stockpile of 25 million doses.
A current report on Form 8-K, dated October 22, 2002, was filed with the
Securities and Exchange Commission, reporting under Item 5 that we had announced
that the independent board that oversees the Company's clinical trials completed
the final safety and conduct review of our Phase III trial in Thailand and again
concluded that the study was being conducted appropriately and that our AIDS
vaccine candidate appears safe. The independent board also conducted an interim
analysis of efficacy using data from the trial in Thailand and recommended that
the study continue to its planned conclusion in the second half of 2003.
A current report on Form 8-K, dated November 7, 2002, was filed with the
Securities and Exchange Commission, reporting under Item 5 the press release
announcing our third quarter financial results.
A current report on Form 8-K, dated November 19, 2002, was filed with the
Securities and Exchange Commission, reporting under Item 5, announcing that
Halifax Fund, L.P., the largest investor in VaxGen's May 2001 $20 million equity
financing, has converted all 15,000 of its Series A 6% Cumulative Convertible
Preferred Stock ("Preferred Stock") into 1,085,138 shares of VaxGen Common
Stock.
A current report on Form 8-K, dated December 16, 2002, was filed with the
Securities and Exchange Commission, reporting under Item 5, announcing that the
U.S. Food and Drug Administration has designated HIV/AIDS vaccine candidates,
AIDSVAX B/B and AIDSVAX B/E, Fast Track Products for the prevention of HIV
infection.
A current report on Form 8-K, dated December 17, 2002, was filed with the
Securities and Exchange Commission, reporting under Item 5, announcing that
VaxGen, Inc. ("VaxGen") and the Chemo-Sero-Therapeutic Research Institute
("Kaketsuken") have entered into an initial agreement that will allow VaxGen to
initiate development of Kaketsuken's attenuated smallpox vaccine for use in the
United States.
A current report on Form 8-K, dated December 19, 2002, was filed with the
Securities and Exchange Commission, reporting under Item 5, announcing the
correction of statements reported in the news media, including Bloomberg
Business News, The New York Times, Reuters, San Jose Mercury News and other
publications that report or suggest VaxGen has commercial rights to market and
sell in the U.S. an attenuated smallpox vaccine which VaxGen is developing with
the Chemo-Sero-Therapeutic Research Institute.
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
VaxGen, Inc.
(Registrant)
By:/s/Carter A. Lee
----------------------------
Carter A. Lee
Senior Vice President
Finance & Administration
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By: /s/ Lance K. Gordon
- -----------------------------
Lance K. Gordon
Chief Executive Officer and Director
(Principal Executive Officer) March 31, 2003
By: /s/ Carter A. Lee
- -----------------------------
Carter A. Lee
Senior Vice President
Finance & Administration
(Principal Financial and Accounting
Officer) March 31, 2003
/s/ Donald P. Francis
- -----------------------------
Donald P. Francis
President and Director March 31, 2003
- -----------------------------
Phillip W. Berman
Senior Vice President,
Research and Development, Director March __, 2003
/s/ David W. Beier
- -----------------------------
David W. Beier
Director March 31, 2003
/s/ Randall L-W. Caudill
- -----------------------------
Randall L-W. Caudill
Director March 30, 2003
/s/ Stephen C. Francis
- -----------------------------
Stephen C. Francis
Director March 31, 2003
88
/s/ Michel Greco
- -----------------------------
Michel Greco
Director March 29, 2003
/s/ William D. Young
- -----------------------------
William D. Young
Director March 31, 2003
89
CERTIFICATION
I, Lance K. Gordon, certify that:
1. I have reviewed this annual report on Form 10-K of VaxGen, Inc.:
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Lance K. Gordon
- -------------------
Lance K. Gordon
Chief Executive Officer
90
CERTIFICATION
I, Carter A. Lee, certify that:
1. I have reviewed this annual report on Form 10-K of VaxGen, Inc.:
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Carter A. Lee
- -----------------
Carter A. Lee
Principal Financial Officer
91