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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 25, 2004

Or

For the transition period from              to             

Commission File No. 0-24241

V.I. TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (617) 926-1551

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

The number of shares outstanding of each of the Registrant’s classes of common stock as of October 29, 2004:

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V. I. TECHNOLOGIES, INC.

INDEX

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V. I. TECHNOLOGIES, INC.

Consolidated Balance Sheets

(in thousands, except for share and per share data)

(unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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V.I. TECHNOLOGIES, INC.

Consolidated Statements of Operations

(in thousands, except for per share data)

(unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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V. I. TECHNOLOGIES, INC.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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V. I. TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements of V.I. Technologies, Inc. (the “Company” or “Vitex”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all material adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the thirteen and thirty-nine weeks ended September 25, 2004 are not necessarily indicative of the results that may be expected for the year ending January 1, 2005. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 27, 2003 as filed with the Securities and Exchange Commission on March 1, 2004.

The Company faces certain risks and uncertainties similar to those faced by other biotechnology companies, including its ability to obtain additional funding; its future profitability; protection of patents and proprietary rights; uncertainties regarding the development of the Company’s technologies; the success of its clinical trials; competition and technological change; governmental regulations, including the need for FDA product and other approvals; and attracting and retaining key officers and employees.

The accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates the realization of its assets and the satisfaction of its liabilities in the normal course of business. As shown in these consolidated financial statements, the Company has incurred recurring losses from operations and, as of September 25, 2004, has an accumulated deficit of $162.2 million. Management believes that its cash on hand at the end of the third fiscal quarter will be sufficient to support the Company’s operations through fiscal 2004 and into the first quarter of fiscal 2005.

Presentation of Fiscal Years

The Company prepares its consolidated financial statements on the basis of a fifty-two week fiscal year and a thirteen week quarter, ending on the Saturday closest to the end of the calendar year or quarter.

Revenue Recognition

The Company recognizes revenues under research collaborations, including grants received from the government and minimum royalty payments, as the research costs eligible for reimbursement under the collaboration agreements are incurred. Non-refundable up-front and milestone payments related to license and distribution agreements are deferred and amortized over the period in which the licensee has distribution rights. The Company continually reviews these estimates for any events which could result in a change in the deferral period. Amounts received in advance of the incurrence of reimbursable research expenses are deferred and recognized when the related expenses have been incurred.

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Included within research funding revenue is amortized revenue related to non-refundable up-front milestone payments of Amersham Pharmacia Biotech (“Amersham”) which are amortized over the life of the related agreement. These amounts totaled $13,000 and $39,000 for the thirteen weeks ended September 25, 2004 and September 27, 2003, respectively and $114,000 and $115,000 for the thirty-nine week periods ended September 25, 2004 and September 27, 2003, respectively. Research funding also includes grants received from the National Institutes of Health in the amount of $127,000 and $335,000 for the thirteen and thirty-nine week periods ended September 25, 2004, respectively and $66,000 and $199,000 for each of the thirteen and thirty-nine week periods ended September 27, 2003, respectively.

Research and Development

All research and development costs are charged to operations as incurred.

Reclassifications

Certain prior year balances have been reclassified to conform to current year presentation. Specifically, intellectual property costs were reclassified from research and development costs to general and administrative expenses in the amount of $0.16 million and $0.45 million for the thirteen and thirty-nine weeks ended September 27, 2003, respectively.

Intangible Assets, Net

Intangible assets, net, comprised of core technology, are amortized over their estimated useful life of fifteen years. At September 25, 2004, core technology was recorded at gross carrying value of $3.7 million less accumulated amortization of $1.2 million. Amortization expense was $0.06 million and $0.19 million for both of the thirteen and thirty-nine weeks ended September 25, 2004 and September 27, 2003, respectively. In each of the next five years, amortization expense is estimated to be approximately $0.25 million per annum.

Net Loss Per Share

Basic net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per share is the same as basic net loss per share since the inclusion of potential common stock equivalents (stock options and warrants) in the computation would be anti-dilutive. The dilutive effect of common stock equivalents, had they been included in the computation, would have been approximately 25,000 and 45,000 for the thirteen and thirty-nine weeks ended September 25, 2004, respectively, and 302,000 and 145,000 for the thirteen and thirty-nine weeks ended September 27, 2003, respectively. Excluded from the dilutive effect calculation are approximately 274,000 shares of restricted stock which vest evenly on October 1, 2004 and January 1, 2005.

Stock-based Compensation

The Company accounts for its stock-based compensation plans and employee stock purchase plans in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) and complies with the disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), and SFAS No. 148, “Accounting for Stock-Based Compensation- Transition and Disclosure”. No stock-based compensation cost is reflected in net loss, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of the grants.

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The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation.

The fair value of each stock option is estimated on the date of grant using the Black-Scholes option valuation model. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

2. Equity Transactions

On February 10, 2004, the Company sold 11.1 million shares of its common stock for total gross proceeds of $10.9 million. This private placement was effected under two separate stock purchase agreements, one dated January 13, 2004 and one dated January 29, 2004. Investors received a purchaser option to buy an additional 25% of the shares sold in the offering (1.8 million shares and 0.9 million shares at an exercise price of $0.90 per share and $1.15 per share, respectively) within the five-month period following the effectiveness of the registration statement filed to cover the resale of the shares issued in the offering. Investors also received four-year warrants to purchase an additional 2.9 million shares at an exercise price of $1.32 per share and 1.5 million shares at an exercise price of $1.75 per share. The placement agent received warrants to purchase an additional 0.5 million shares and has the ability to receive warrants to purchase up to an additional 0.08 million shares if and when the purchaser options are exercised. The shares were registered for resale by the purchasers with the Securities and Exchange Commission in March 2004. Total transaction costs of approximately $0.9 million were offset within stockholders’ equity against the proceeds of the financings.

During the thirty-nine week period ended September 25, 2004, the Company received gross proceeds of $1.6 million for the exercise of purchaser options from its December 2003 and February 2004 private placement transactions and incurred associated transaction costs of approximately $0.1 million.

3. Settlement of Plasma Operations Receivable

As of December 27, 2003, the Company reported outstanding receivables from Precision Pharma Services, Inc. (“Precision”) in the total amount of $5.5 million. These receivables related to the 2001 sale of the Company’s Plasma Operations to Precision. In January 2004, the Company and Precision settled the receivables under an agreement in which Precision paid the Company $1.7 million in cash and returned 4.4 million shares of Vitex common stock with a value of $4.9 million, based on the closing price of the Nasdaq National Market on the date prior to settlement. The Company recorded the full realization of the Precision obligation and a treasury stock purchase in the amount of $3.7 million for the return of the 4.4 million shares of its common stock.

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4. Red Cell Processing Laboratory

During 2003, the Company determined that it did not require for its operations a laboratory it had previously leased near Boston, Massachusetts. In 2003, the Company recorded a charge of $1.4 million to write-off leasehold improvements and for costs relating to exiting the facility lease. In February 2004, the lease on that facility was terminated by the landlord who retained a twelve-month security deposit posted by the Company in the amount of $0.17 million, which was charged against a previously established reserve. The Company believes this to be the final settlement of all leasehold obligations.

5. INACTINE^™ Update

The Company is conducting a Phase III clinical trial for its INACTINE^™ red cell system in an acute population. An independent safety monitoring committee (“DSMC”) convened in October 2004 to perform an interim safety evaluation of the acute trial and concluded that the Phase III acute clinical trial study may continue without modification. The DSMC also concluded that further review of submitted data was warranted as enrollment in the acute study continues, and requested that the Company provide clarification of certain data and other information. The Company has subsequently provided the data that was requested by the DSMC. The DSMC arrived at its conclusion after it reviewed preliminary data on approximately 20% of the 200 evaluable patients expected to be enrolled in the study. This subset of patients enrolled to-date reflects the first group of patients that completed the study.

The Company is in ongoing discussions with the FDA regarding its plan to pursue an acute only indication for the INACTINE^™ red blood cell system. These discussions were initiated following the halting of the Phase III chronic study of INACTINE^™ red cells in 2003 due to antibody formation in sickle cell anemia patients receiving repeat transfusions of INACTINE^™ treated red cells The FDA has expressed concerns regarding the licensing of the INACTINE^™ system in light of the presence of antibodies observed in the chronic trial, and recently requested justification for pursuit of an acute-only indication in the context of these findings. The Company believes that some of these concerns may be addressed through the combination of supplemental clinical trials and the implementation of a control system to ensure that patients who have previously received INACTINE^™ red cells do not receive INACTINE^™ red cells in subsequent hospitalizations. The Company has met with the FDA and presented proposals on supplemental clinical trials. The type and design of supplemental clinical trials are expected to be the subject of continuing discussions between the Company and the FDA. The FDA has indicated that it will require the review of additional data, including the results of the Phase III trial for INACTINE^™ in acute indications, before fully responding to the Company’s proposals for additional clinical trials.

The FDA has also indicated that, in addition to the need for both the Company and the FDA to reach agreement on the clinical development program, an acceptable INACTINE^™ control system would likely be a condition of licensure for INACTINE^™ red cells. The Company believes that such a control system may be technically feasible and may be capable of being implemented by hospitals purchasing INACTINE^™ red cells. Such a control system also would have to be economically viable and approved by the FDA. The Company is initiating discussions with the FDA on its approach to the development of such a control system.

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In addition to the DSMC review, the FDA has directed the Company to implement additional patient safety monitoring procedures in the ongoing Phase III acute trial. The Company has implemented these procedures and is periodically updating the FDA on their trial data. While the Company believes that the steps taken will address the FDA recommendations, further steps could be required by the FDA.

The Company also recently received from the FDA a written request for further information relating to an August 2004 amendment to their IND. The amendment included responses to questions raised by the FDA relating to procedures for patient safety monitoring used in the previously halted Phase III chronic study. The Company has responded to the FDA’s request.

At this time the Company is unable to determine the exact nature of the additional studies the FDA will require the Company to undertake or whether these and other recommendations the FDA might make would be available in a timely manner or practical to implement. The Company cannot ensure that the acute trial will complete enrollment in a timely manner and cannot predict whether unanticipated events or circumstances, including antibody responses to INACTINE^™ treated red cells observed in the chronic study or further DSMC review of the acute study data, could delay or prevent completion of the trial.

The exact nature, timing and estimated costs of the efforts necessary to bring to market the product resulting from our pathogen inactivation research and development projects involve a number of key variables which are either unpredictable or outside the Company’s control, including the enrollment rates and results of the Phase III clinical trial, the extent of further studies which could be required for filing a Biologics License Application (“BLA”) with the FDA, the length of the FDA and foreign regulatory approval processes, the success of the Company’s fundraising efforts, its ability to establish and maintain relationships with marketing partners and strategic collaborators, and the timing of commencement of commercialization of its product. These factors are also described in the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for fiscal year 2003. Accordingly, the Company is unable to estimate, with any degree of precision, either the total future costs that will be required to continue and complete the commercialization of the INACTINE^™ system, or the period in which the Company can expect net cash inflows from the system

6. Nasdaq Notification

On August 30, 2004, the Company received notice from the Nasdaq Stock Market, Inc. that the bid price of the Company’s Common Stock had closed below the minimum price of $1.00 per share over the previous 30 consecutive trading days, and that in accordance with Nasdaq Marketplace Rule 4450 (e)(2), the Company had until February 28, 2005 to regain its compliance with the minimum bid price requirement set forth in Nasdaq Marketplace Rule 4450 (a)(5). In the event that at any time before February 28, 2005, the bid price of the Company’s Common Stock closes at $1.00 per share or more for a minimum of 10 consecutive trading days, Nasdaq staff will notify the Company in writing that the Company had achieved compliance with the Rule.

7. Proposed Merger

On June 2, 2004, the Company entered into a definitive merger agreement with privately-held Panacos Pharmaceuticals, Inc. (“Panacos”), a biotechnology company discovering and developing novel antiviral drugs for the treatment of HIV infection and other major human viral diseases. The proposed merger will expand the Company’s anti-infective capabilities beyond blood safety into therapeutic pharmaceutical products.

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Under the terms of the proposed merger, the Company will issue 25 million common shares to Panacos shareholders in exchange for all outstanding Panacos common and preferred shares at the close of the merger. The merger requires the approval of Vitex and Panacos shareholders. Upon the achievement of certain clinical milestones, Vitex will issue 20 million additional shares of Vitex common stock payable in two tranches of 5 million shares and 15 million shares, respectively (“milestone shares”). If the first clinical milestone is met and the combined valuation of the initial 25 million share issuance and the 5 million milestone share issuance does not result in the issuance of shares worth a minimum of $30 million to Panacos shareholders, additional shares will be issued to achieve a value of $30 million in the aggregate. The shares to be issued by Vitex in the merger have been registered on a Form S-4 registration statement. Vitex is currently soliciting shareholder approval of the proposed merger. The merger will be recorded under the purchase method of accounting. The total purchase price will be allocated to the net tangible and intangible assets acquired in the merger based upon their estimated fair value. As of September 25, 2004, Vitex has incurred approximately $1.0 million in merger-related costs as shown on the consolidated balance sheet.

On October 29, 2004, the company reported that it is involved in negotiations with Panacos concerning modifications of the merger agreement. The likely outcome of those negotiations cannot presently be predicted.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

VITEX is a development stage biotechnology company developing novel anti-infective products. Our INACTINE^™ Pathogen Reduction System for red cells (the “INACTINE^™ system”) is designed to inactivate a wide range of viruses, bacteria, parasites and lymphocytes from red blood cells and to remove soluble prion proteins. Prion proteins in their pathogenic forms are the agents that cause “Mad Cow Disease”, or in humans, variant Creutzfeldt-Jakob Disease (“vCJD”), which is 100% fatal, and for which no diagnostic test or therapy currently exists. Over 40 million red cell units are transfused annually in North America, Europe and Japan, making it one of the most frequently prescribed and important products in medicine. A pathogen reduction product for both acute and chronic patients could represent a $4 billion market with acute indications representing approximately $3 billion out of that total. We currently do not have any FDA approved products and have not made any commercial sales of our products under development.

Blood safety and availability remain a significant concern as new pathogens are discovered and the demand for blood products continues to increase. To reduce the risk of contamination of the blood supply with pathogens, blood banks currently screen donors using detailed questionnaires and screen the donated blood for six known pathogens. Although these safety measures have increased the safety of blood products overall, the risk of transmitting pathogens remains. Our goal is to diminish this risk with our INACTINE^™ system. Our lead product candidate, the INACTINE^™ system, is currently in a Phase III clinical trial for patients requiring acute transfusions. Until November 2003, we were also conducting a Phase III clinical trial with patients diagnosed with sickle cell disease requiring chronic transfusions. On the advice of an independent data safety monitoring committee, referred to as the DSMC, we stopped enrollment in the sickle cell trial due to a concern with antibody responses to INACTINE^™ treated red cells and associated clinical assessments in trial participants. The future testing of the INACTINE^™ system for use in sickle cell patients and other patients requiring chronic transfusions is currently under review. We continue to evaluate possible corrective actions to address the issues observed in the trial. Possible corrective actions, if identified, might require us to

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significantly change the INACTINE^™ system before we continue to test the system for use with sickle cell patients and other patients requiring chronic transfusions. Notwithstanding these results in sickle cell patients receiving chronic transfusions, we are pursuing an indication for use of the existing process in acute transfusions. We may later choose to address the combined acute and chronic markets such as sickle cell patients in a second generation INACTINE^™ system.

The Phase III clinical trial for patients requiring acute transfusions continues to enroll patients. The DSMC convened in October 2004 to perform an interim safety evaluation of the acute trial and concluded that the study may continue without modification. The DSMC also concluded that further review of submitted data was warranted as enrollment in the acute study continues, and requested that we provide clarification of certain data and other information. We have subsequently provided the data that was requested by the DSMC. The DSMC arrived at its conclusion after it reviewed preliminary data on approximately 20% of the 200 evaluable patients expected to be enrolled in the study. This subset of patients enrolled to-date reflects the first group of patients that completed the study. The need for the review was established during our discussions with the FDA, together with other steps designed to ensure the continuing safety of the study.

We are in ongoing discussions with the FDA regarding our plan to pursue an acute only indication for our INACTINE^™ red blood cell system. These discussions were initiated following halting of the Phase III chronic study of INACTINE^™ red cells in 2003 due to antibody formation in sickle cell anemia patients receiving repeat transfusions of INACTINE^™ treated red cells. The FDA has expressed concerns regarding the licensing of our INACTINE^™ system in light of the presence of antibodies observed in the chronic trial, and recently requested justification for pursuit of an acute-only indication in the context of these findings. We believe that some of these concerns may be addressed through the combination of supplemental clinical trials and the implementation of a control system to ensure that patients who have previously received INACTINE^™ red cells do not receive INACTINE^™ red cells in subsequent hospitalizations. We have met with the FDA and presented proposals on supplemental clinical trials. The type and design of supplemental clinical trials are expected to be the subject of continuing discussions between us and the FDA. The FDA has indicated that it will require the review of additional data, including the results of the Phase III trial for INACTINE^™ in acute indications, before fully responding to our proposals for additional clinical trials.

The FDA has also indicated that, in addition to the need for us to reach agreement on the clinical development program, an acceptable INACTINE^™ control system would likely be a condition of licensure for INACTINE^™ red cells. We believe that such a control system may be technically feasible and may be capable of being implemented by hospitals purchasing INACTINE^™ red cells. Such a control system also would have to be economically viable and approved by the FDA. We are initiating discussions with the FDA on our approach to the development of such a control system.

In addition to the DSMC review, the FDA has directed us to implement additional patient safety monitoring procedures in the ongoing Phase III acute trial. We have implemented these procedures and are periodically updating the FDA on our trial data. While we believe that the steps we have taken will address the FDA recommendations, further steps could be required by the FDA.

We also recently received from the FDA a written request for further information relating to an August 2004 amendment to our IND. The amendment included responses to questions raised by the FDA relating to procedures for patient safety monitoring used in the previously halted Phase III chronic study. We have responded to the FDA’s request.

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At this time we are unable to determine the exact nature of the additional studies the FDA will require us to undertake or whether these and other recommendations the FDA might make would available in a timely manner or practical to implement. We cannot ensure that the acute trial will complete enrollment in a timely manner and cannot predict whether unanticipated events or circumstances, including antibody responses to INACTINE^™ treated red cells observed in the chronic study or further DSMC review of the acute study data, could delay or prevent completion of the trial.

The exact nature, timing and estimated costs of the efforts necessary to bring to market the product resulting from our pathogen inactivation research and development projects involve a number of key variables which are either unpredictable or outside the Company’s control, including the enrollment rates and results of the Phase III clinical trial, the extent of further studies which could be required for filing a Biologics License Application (“BLA”) with the FDA, the length of the FDA and foreign regulatory approval processes, the success of the Company’s fundraising efforts, its ability to establish and maintain relationships with marketing partners and strategic collaborators, and the timing of commencement of commercialization of its product. These factors are also described in the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for fiscal year 2003. Accordingly, the Company is unable to estimate, with any degree of precision, either the total future costs that will be required to continue and complete the commercialization of the INACTINE^™ system, or the period in which the Company can expect net cash inflows from the system.

A 2001 analysis by an outside consultant estimated that over 80% of the approximately 14 million annual red cell transfusions in the U.S. involved acute care patients. A more recent analysis suggested that patients with sickle cell disease represent less than 10% of the total transfusions of red cells in the U.S. annually. We believe that the relative usage of transfusion red cells in the major international markets we are targeting is similarly proportioned between acute and chronic patients. At present we are not aware of any other pathogen reduction systems for red blood cells in human clinical trials.

The Phase III clinical trial in patients requiring acute transfusions is our most significant current activity. We fund our operations primarily through sale of common stock, partner collaborations, research and development grants and debt. Our current cash burn rate from operations is approximately $1.2 million per month. Unrestricted cash reserves of approximately $5.3 million as of October 29, 2004 should be sufficient to fund operations for the remainder of 2004 and into the first quarter of fiscal 2005.

RECENT DEVELOPMENTS

Proposed Merger with Panacos Pharmaceuticals, Inc.

On June 2, 2004, we entered into a definitive merger agreement with privately-held Panacos Pharmaceuticals, Inc. (“Panacos”), a biotechnology company discovering and developing novel antiviral drugs for the treatment of HIV infection and other major human viral diseases. The proposed merger will expand our anti-infective capabilities beyond blood safety into therapeutic pharmaceutical products. Panacos has sufficient cash to fund its operations through 2004 and into early 2005.

Under the terms of the proposed merger, we will issue 25 million common shares to Panacos shareholders in exchange for all outstanding Panacos common and preferred shares at the close of the merger. The merger requires the approval of Vitex and Panacos shareholders. Upon the achievement of certain clinical milestones, we will issue 20 million additional shares of Vitex common stock payable in two tranches of 5 million shares and 15 million shares, respectively (“milestone shares”). If the first clinical milestone is met and the combined valuation of the initial 25 million share issuance and the 5 million milestone share issuance does not result in the issuance of shares worth a minimum of $30 million to Panacos shareholders, additional shares will be issued to

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achieve a value of $30 million in the aggregate. The shares to be issued by Vitex in the merger have been registered on a Form S-4 registration statement. Vitex is currently soliciting shareholder approval of the proposed merger. The merger will be recorded under the purchase method of accounting. The total purchase price will be allocated to the net tangible and intangible assets acquired in the merger based upon their estimated fair value. As of September 25, 2004, Vitex has incurred approximately $1.0 million in merger-related costs as shown on the consolidated balance sheet.

The Boards of Directors of Vitex and Panacos have each approved the transaction. Our Board of Directors received an opinion from our financial advisor that the consideration to be paid to the Panacos stockholders in connection with the merger is fair to Vitex from a financial point of view.

On October 29, 2004, we reported that we are involved in negotiations with Panacos concerning modifications of the merger agreement. The likely outcome of those negotiations cannot presently be predicted.

CRITICAL ACCOUNTING POLICIES

We prepare our consolidated financial statements in conformity with generally accepted accounting principles in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the consolidated financial statements as well as reported revenues and expenses during the reporting periods. Our actual results could differ from these estimates.

The significant accounting policies that we believe are most critical to aid in fully understanding and evaluating our reported financial results and the accounting policies most critical to the preparation of our consolidated financial statements include the following:

Research and Development Revenue and Cost Recognition

We recognize revenue in accordance with Staff Accounting Bulletin (SAB) No. 104 (SAB 104), “Revenue Recognition”. We recognize revenues under research collaborations, including grants received from the government and minimum royalty payments, as we incur research costs eligible for reimbursement under the collaboration agreements. Non-refundable, up-front and milestone payments related to license and distribution agreements are deferred and amortized over the period in which the licensee has distribution rights. We continually review these estimates for any events which could result in a change in the deferral period. Amounts received in advance of the incurrence of reimbursable research expenses are deferred and recognized when the related expenses have been incurred.

Research and development costs are charged to operations as incurred.

Long-Lived Assets

Our long-lived assets, which consist of property and equipment and intangible assets, are recorded at cost and amortized over the estimated useful life of the asset. We generally depreciate property and equipment using the straight-line method over their economic life, which ranges from 3 to 15 years. We amortize acquired intangible assets using the straight-line method over their economic lives, which range from 5 to 15 years. Determining the economic lives of our long-lived assets requires us to make significant judgments and estimates, and can materially impact our operating results.

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Asset Impairments

We review the valuation of long-lived assets, including property and equipment and intangible assets, under the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. We are required to assess the recoverability of long-lived assets on an interim basis whenever events and circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an interim impairment review include the following:

In accordance with SFAS No. 144, when we determine that the carrying value of applicable long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we evaluate whether the carrying amount of the asset exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of that asset. If such a circumstance were to exist, we would measure an impairment loss to the extent the carrying amount of the particular long-lived asset or group of assets exceeds its fair value. We would determine the fair value based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Use of different estimates and judgments on any of these factors could yield materially different results in our analysis, and could result in significantly different asset impairment charges.

Under SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is required to be tested for impairment annually in lieu of being amortized. We perform an annual test for the impairment of goodwill in the fourth quarter. Furthermore, goodwill is required to be tested for impairment on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. An impairment loss shall be recognized to the extent that the carrying amount of goodwill exceeds its implied fair value. Impairment losses shall be recognized in operations.

Contingencies

Contingencies are addressed by assessing the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of losses. A determination of the amount of reserves required, if any, for these contingencies is made after reviewing the relevant facts and circumstances, seeking outside professional advice of lawyers or accountants where appropriate, and then making and recording our best judgment of potential loss under the guidance of Statement of Financial Accounting Standards No. 5, “Contingencies”. This process is repeated in each reporting period as circumstances evolve and are reevaluated. Any changes in our assumptions or estimates that impact our estimates of loss will be recorded in operations immediately in the period of the change.

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RESULTS OF OPERATIONS

Comparison of Thirteen and Thirty-nine Weeks Ended September 25, 2004 and September 27, 2003

Revenues:

Research Funding

The increase in revenues in the thirty-nine weeks ended September 25, 2004 arose from an increase in grant revenue from the National Institutes of Health.

Costs and Expenses:

Research and Development Costs

Our research and development activities all relate to the development of pathogen inactivation technologies for blood products of which our INACTINE^™ chemistry is currently the core technology and our INACTINE^™ system for red cells is the lead product candidate. The INACTINE^™ system has completed Phase I and Phase II clinical trials in human subjects and is currently in a Phase III trial with patients requiring acute transfusions of red blood cells.

Our research and development spending on pathogen inactivation technologies principally includes clinical trials conducted by medical institutions and scientific and development work under contract to independent vendors and our internal research efforts.

Following the decision to halt our INACTINE^™ system Phase III chronic clinical trial in the fourth quarter of 2003, we restructured our operations to reduce spending and to concentrate our efforts on the acute trial. We reduced staffing by over 50% and curtailed non-essential activities. Accordingly, employee costs were $0.8 million lower in the third quarter of 2004 than in 2003. Lab supplies, outside testing and other related costs decreased by $0.3 million. System development costs decreased by $0.5 million because the development of the INACTINE^™ system is nearing completion. Also, the Company recorded a charge of $1.4 million in the third quarter of fiscal 2003 to reflect costs associated with the closure of a red cell processing facility.

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The November 2003 restructuring had a similar effect on the year to date comparisons. Employee costs were $2.0 million lower for the thirty-nine weeks ended September 25, 2004. In the third quarter of fiscal 2003, the Company recorded a charge of $1.4 million to reflect costs associated with the closure of a red cell processing facility. Lab supplies, outside testing and related expenses decreased by $1.7 million. System development costs decreased by $2.9 million. Licensing fees decreased by $0.2 million due to the discontinuation of a study. Offsetting these decreases, Phase III clinical trial costs were higher by $0.3 million in 2004 due to higher enrollment rates in the acute study.

Cumulatively, we have invested $154.5 million in research and development of pathogen inactivation technologies for blood products since our inception in 1995, including the cost of in-process research and development resulting from our 1999 merger with Pentose Pharmaceuticals, Inc.

Our lead product candidate, the INACTINE^™ system, is currently in a Phase III clinical trial for patients requiring acute transfusions. Until November 2003, we were also conducting a Phase III clinical trial with patients diagnosed with sickle cell disease requiring chronic transfusions. On the advice of an independent data safety monitoring committee, referred to as the DSMC, we stopped enrollment in the sickle cell trial due to a concern with antibody responses to INACTINE^™ treated red cells and associated clinical assessments in trial participants. The future testing of the INACTINE^™ system for use in sickle cell patients and other patients requiring chronic transfusions is currently under review. We continue to evaluate possible corrective actions to address the issues observed in the trial. Possible corrective actions, if identified, might require us to significantly change the INACTINE^™ system before we continue to test the system for use with sickle cell patients and other patients requiring chronic transfusions. Notwithstanding these results in sickle cell patients receiving chronic transfusions, we are pursuing an indication for use of the existing process in acute transfusions. We may later choose to address the combined acute and chronic markets such as sickle cell patients in a second generation INACTINE^™ system.

The Phase III clinical trial for patients requiring acute transfusions continues to enroll patients. The DSMC convened in October 2004 to perform an interim safety evaluation of the acute trial and concluded that the study may continue without modification. The DSMC also concluded that further review of submitted data was warranted as enrollment in the acute study continues, and requested that we provide clarification of certain data and other information. We have subsequently provided the data that was requested by the DSMC. The DSMC arrived at its conclusion after it reviewed preliminary data on approximately 20% of the 200 evaluable patients expected to be enrolled in the study. This subset of patients enrolled to-date reflects the first group of patients that completed the study. The need for the review was established during our discussions with the FDA, together with other steps designed to ensure the continuing safety of the study.

We are in ongoing discussions with the FDA regarding our plan to pursue an acute only indication for our INACTINE^™ red blood cell system. These discussions were initiated following halting of the Phase III chronic study of INACTINE^™ red cells in 2003 due to antibody formation in sickle cell anemia patients receiving repeat transfusions of INACTINE^™ treated red cells. The FDA has expressed concerns regarding the licensing of our INACTINE^™ system in light of the presence of antibodies observed in the chronic trial, and recently requested justification for pursuit of an acute-only indication in the context of these findings. We believe that some of these concerns may be addressed through the combination of supplemental clinical trials and the implementation of a control system to ensure that patients who have previously received INACTINE^™ red cells do not receive INACTINE^™ red cells in subsequent hospitalizations. We have met with the FDA and presented proposals on supplemental clinical trials. The type and design of supplemental clinical trials are expected to be the subject of continuing discussions between us and the FDA. The FDA has indicated that it will require the review of additional data, including the results of the Phase III trial for INACTINE^™ in acute indications, before fully responding to our proposals for additional clinical trials.

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The FDA has also indicated that, in addition to the need for us to reach agreement on the clinical development program, an acceptable INACTINE^™ control system would likely be a condition of licensure for INACTINE^™ red cells. We believe that such a control system may be technically feasible and may be capable of being implemented by hospitals purchasing INACTINE^™ red cells. Such a control system also would have to be economically viable and approved by the FDA. We are initiating discussions with the FDA on our approach to the development of such a control system.

In addition to the DSMC review, the FDA has directed us to implement additional patient safety monitoring procedures in the ongoing Phase III acute trial. We have implemented these procedures and are periodically updating the FDA on our trial data. While we believe that the steps we have taken will address the FDA recommendations, further steps could be required by the FDA.

We also recently received from the FDA a written request for further information relating to an August 2004 amendment to our IND. The amendment included responses to questions raised by the FDA relating to procedures for patient safety monitoring used in the previously halted Phase III chronic study. We have responded to the FDA’s request.

At this time we are unable to determine the exact nature of the additional studies the FDA will require us to undertake or whether other these or other recommendations the FDA might make would be available in a timely manner or practical to implement. We cannot ensure that the acute trial will complete enrollment in a timely manner and cannot predict whether unanticipated events or circumstances, including antibody responses to INACTINE^™ treated red cells observed in the chronic study or further DSMC review of the acute study data, could delay or prevent completion of the trial.

The exact nature, timing and estimated costs of the efforts necessary to bring to market the product resulting from our pathogen inactivation research and development projects involve a number of key variables which are either unpredictable or outside our control, including the enrollment rates and results of the Phase III clinical trial, the extent of further studies which could be required for filing a Biologics License Application (“BLA”) with the FDA, the length of the FDA and foreign regulatory approval processes, the success of our fundraising efforts, our ability to establish and maintain relationships with marketing partners and strategic collaborators, and the timing of commencement of commercialization of our product. These factors are also described in the section entitled “Risk Factors” in our Annual Report on Form 10-K for fiscal year 2003. Accordingly, we are unable to estimate, with any degree of precision, either the total future costs that will be required to continue and complete the commercialization of the INACTINE^™ system, or the period in which we can expect net cash inflows from the system.

General and Administrative Expenses

General and administrative expenses remained relatively constant for the thirteen and thirty-nine weeks ended September 25, 2004 and September 27, 2003, respectively.

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Interest Income (Expense), Net

The changes in interest income (expense), net for the thirteen and thirty-nine weeks ended September 25, 2004 were due to decreased interest income resulting from lower cash balances. This was partially offset by decreased interest expense recorded under advances reflecting lower principal balances outstanding.

FINANCIAL CONDITION

Liquidity and Capital Resources

We finance our operations primarily through sales of our common stock and research and development grants.

At September 25, 2004, we had cash and cash equivalents of $6.6 million and working capital of $4.5 million in comparison with cash and cash equivalents of $4.3 million and working capital of $6.2 million at December 27, 2003.

Our monthly spending rate in the first three quarters of 2004 was approximately $1.2 million per month. We expect our monthly spending rate to remain stable for the balance of 2004 as we continue our clinical trial. The most significant factors affecting future spending will be the rate of enrollment in the clinical trial and the extent of supplemental clinical trials which might be required by the FDA. Our available unrestricted cash balances on October 29, 2004 were approximately $5.3 million. These cash balances are invested with the primary objectives of safety of principal and liquidity. We believe that these resources will be sufficient to fully meet our cash needs during the fourth quarter of fiscal 2004 and into the first quarter of fiscal 2005.

In June 2004 we announced our intention to merge with Panacos Pharmaceuticals, Inc. in an all stock transaction which is subject to approval by the shareholders of both companies and is anticipated to close during the fourth quarter of fiscal 2004. Panacos has sufficient cash balances to fund its operations into the first quarter of fiscal 2005, similar to the Vitex cash horizon. Following the merger, including Panacos’ cash spending rate of approximately $1.0 million in cash per month, the combined company expects to spend approximately $2.0-$2.5 million in cash per month.

On October 29, 2004, the company reported that it is involved in negotiations with Panacos concerning modifications of the merger agreement. The likely outcome of those negotiations cannot presently be predicted.

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Our cash activity during the thirty-nine weeks of 2004 was comprised of the following (in millions):

The following table represents our outstanding contractual obligations at September 25, 2004, in thousands:

FORWARD-LOOKING STATEMENTS

This document and other documents we may file with the Securities and Exchange Commission contain forward-looking statements. Also, our company management may make forward-looking statements orally to investors, analysts, the media and others. Forward-looking statements express our expectations or predictions of future events or results. They are not guarantees and are subject to many risks and uncertainties. There are a number of factors that could cause actual events or results to be significantly different from those described in the forward-looking statement. Forward-looking statements might include one or more of the following:

Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate”, “estimate”, “expect”, “project”, “intend”, “opportunity”, “plan”, “potential”, “believe” or words of similar meaning. They may also use words such as “will”, “would”, “should”, “could” or “may”. Given these uncertainties, you should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. You should review carefully the risks and uncertainties identified in this report and in more detail in our Annual Report on Form 10-K. We may not revise these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our earnings and cash flows are subject to fluctuations due to the effects of changes in interest rates on our investments of available cash balances in money market funds and in portfolios of investment grade corporate and U.S. government securities. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were adequate and effective to ensure that material information relating to us, including our consolidated subsidiary, was made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. – OTHER INFORMATION

ITEM 6. EXHIBITS

Exhibits

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SIGNATURES

Pursuant to the requirements 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.

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EXHIBIT INDEX

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