ITEM 1. BUSINESS
GENERAL
Virus Research Institute, Inc. (the "Company") is engaged in the discovery and development of systems for the delivery of vaccines and immunotherapeutics, and improved and novel vaccines for adults and children. The Company is developing a portfolio of proprietary vaccine delivery systems designed to improve the efficacy, lower the cost of administration and improve patient compliance for a variety of vaccine products. As part of the Company's strategy to bring its vaccine delivery technologies to market, the Company collaborates with corporate partners that offer substantial market presence, unique antigens and/or complementary technologies. The Company and its collaborators currently are applying the Company's vaccine delivery systems to develop vaccines for the prevention of influenza, Lyme disease, respiratory syncytial virus (RSV) and H. pylori infections. The Company has entered into agreements with Pasteur Merieux Connaught ("PMC"), Pasteur Merieux-OraVax ("PM-O") and CSL, Ltd., Australia ("CSL") pursuant to which these companies may utilize the Company's vaccine delivery systems in developing a number of vaccines. During 1997, the Company entered into a collaboration with SmithKline Beecham (SB) for the development and commercialization of the Company's oral rotavirus vaccine. Rotavirus infection causes acute diarrhea and dehydration in infants. The Company is also developing its own proprietary vaccines utilizing antigens licensed exclusively by the Company, including a vaccine for HSV2, the virus that causes genital herpes. In addition, the Company is engaged in the research and development of Therapore(TM), a novel system for the delivery of immunotherapeutics for chronic viral infections and cancers.
While vaccines have proven to be safe and effective for the prevention of certain infectious diseases, the Company believes that there is significant potential for improvement, including: enhancement of the immune response; reduction in the number of doses required for an effective immune response; increase in the percentage of the population responding to certain vaccines; delivery of vaccines through methods other than by injection; and stimulation of a mucosal immune response. To address these shortcomings, the Company is developing vaccine delivery systems that may lead to more effective and less costly vaccines, increased patient compliance and the introduction of new vaccines.
The Company's strategy is to utilize its expertise in the design and application of vaccine delivery systems to develop vaccine products for infectious diseases that have significant and growing market potential. The Company is developing three vaccine delivery systems. The Adjumer(TM) vaccine delivery system utilizes a novel polymer, which is a synthetic polyphosphazene derivative ("PCPP"), as an adjuvant for use with a variety of antigens administered by injection. The Company believes that Adjumer(TM)-formulated vaccines will be capable of producing an enhanced and longer-lived immune response with fewer injections. In preclinical studies, Adjumer(TM)-formulated vaccines elicited an immune response that was greater than either vaccines formulated with alum, the only approved adjuvant for commercial use in humans, or non-adjuvanted vaccines. The Micromer(TM) vaccine delivery system utilizes a mixture of PCPP and antigens formed into hydrogel microparticles for the intranasal and oral delivery of vaccines. Mucosal vaccine delivery has potential advantages over conventional delivery by injection, including ease of administration and the generation of immunity at the mucosal surfaces, where most infectious organisms enter the body, as well as the generation of systemic (blood and other organs) immunity. The VibrioVec(TM) vaccine delivery system utilizes a recombinant bacterial vector for the oral delivery of antigens to the gastrointestinal tract. The Company believes that VibrioVec(TM)-delivered vaccines will be capable of inducing both a systemic and a mucosal immune response.
The Company is developing Therapore(TM) for the treatment and prevention of certain persistent viral infections and cancers. Early stage research studies indicate that Therapore(TM) is distinguished from other systems by its ability to deliver large proteins and peptides with high efficiency. Therapore(TM) transports these therapeutic polypeptides into the cell where normal cellular processes induce potent cell mediated immune responses. The Company believes that Therapore(TM)-delivered antigens will be capable of producing an enhanced cell mediated response with fewer injections.
VACCINE OVERVIEW
The Vaccine Market. Vaccines have long been recognized as a safe and cost-effective method for preventing infection caused by certain bacteria and viruses. The Centers for Disease Control and Prevention (the "CDC") have estimated that every dollar spent on vaccination saves $16 in healthcare costs. There are currently 16 vaccines in routine use in the United States against such life-threatening infectious organisms as tetanus, diphtheria, poliovirus, hepatitis A virus, hepatitis B virus, Haemophilus influenzae B, measles, mumps and rubella. From 1990 to 1996, annual worldwide vaccine sales increased from $1.6 billion to $4.0 billion, a compound annual growth rate of approximately 16.5%. The Company believes that this growth may be accelerated as a result of advances in vaccine technologies and formulations that address the shortcomings of existing vaccines. Areas of potential improvement include enhancement of immune responses, which could lead to a reduction in the number of doses required for effective protection as well as effective immunization in a higher percentage of the population, and delivery of vaccines through methods other than injection. The vaccine market may also expand due to the introduction of new purified antigens, produced as a result of advances in molecular biology. The Company also believes that the growing awareness and incidence of certain infectious diseases, such as H. pylori, hepatitis C virus, HIV1 and HSV2 infection, could further expand the vaccine market.
The Immune System and Vaccines. The function of the human immune system is to respond to pathogens, including infectious bacteria and viruses, that enter the body. However, a pathogen may establish an infection and cause disease before it is eliminated by an immune response. Antibodies are produced as part of the immune response to antigens, which are components of the pathogen. These antibodies can continue to circulate in the human body for many years, providing continued protection against reinfection by the same pathogen.
Protective antibodies can be produced in both the systemic and mucosal branches of the immune system. The systemic immune system produces IgG antibodies to protect against infection occurring in blood and deep tissue. The mucosal immune system produces IgA antibodies that protect against infection occurring in the mucosal layer lining the digestive, respiratory and genitourinary tracts. Mucosal immunity may act as a first line of defense, by attacking pathogens at the point of entry into the body, prior to systemic penetration, as well as by targeting certain pathogens such as H. pylori, influenza and rotavirus that propagate exclusively at the mucosal layer.
Vaccines are a pre-emptive means of generating a protective antibody response. A vaccine consists of either a weakened pathogen or pathogen-specific, non-replicating antigens which are deliberately administered to induce the production of antibodies. When weakened pathogens are used as a vaccine, they replicate in the body, extending presentation to the immune system and inducing the production of antibodies without causing the underlying disease. When non-replicating antigens are used as a vaccine, they must be delivered in sufficient quantity and remain in the body long enough to generate an effective antibody response. To achieve this goal, many vaccines require multiple administrations. Of the 16 vaccines currently in routine use, 14 are delivered by injection and stimulate only systemic immunity. Only polio and typhoid vaccines can be administered orally and induce both a mucosal and a systemic immune response. Both of these vaccines are live, weakened pathogens that localize in the intestines and do not require a separate vaccine delivery system.
Adjuvants. The antigens contained in many injectable vaccines will not produce an immune response sufficient to confer protection against infection and require the use of an adjuvant to sustain the presentation of the antigens to the human immune system. Alum (aluminum hydroxide) is the only adjuvant currently approved by the FDA for commercial use in humans. While alum has gained widespread use, it does not
sufficiently enhance the immune response to permit administration of many existing injected vaccines in a single dose. In the case of certain vaccines, such as influenza, alum is ineffective as an adjuvant.
The Company believes that alum will not prove to be sufficiently effective for use with many of the new purified recombinant antigens being developed. Further, alum cannot be used for mucosal delivery of vaccines. Accordingly, the Company believes that there is a significant need for a new adjuvant that is safe, works with a wide variety of antigens, induces a protective immune response with only one or two injections and can be administered mucosally. These attributes could result in certain benefits, including cost savings and improved patient compliance.
COMPANY VACCINE DELIVERY SYSTEMS
The Company is developing a portfolio of proprietary vaccine delivery systems designed to improve the efficacy, lower the cost of administration and improve patient compliance for a variety of vaccine products. The following summarizes the Company's three main vaccine delivery systems:
- --------------- (1) Based upon preclinical studies conducted by the Company. The Company's vaccine delivery systems are in various stages of development. The summary information included in the above table is qualified in its entirety by the detailed discussion of each of the vaccine delivery systems that follows.
Adjumer(TM). The Company is developing Adjumer(TM), a proprietary vaccine delivery system as an adjuvant to enhance the immune response to injected vaccines. Adjumer(TM) is a water soluble, synthetic derivative of the polymer polyphosphazene (PCPP). The water soluble nature of PCPP facilitates a simple aqueous-based manufacturing process for vaccines, thereby preserving the integrity of the antigen.
In preclinical studies conducted by the Company, Adjumer(TM) demonstrated sustained presentation of influenza, hepatitis B, HSV2, HIV1 and tetanus antigens to the immune system. In those preclinical studies, single intramuscular injections of Adjumer(TM)-formulated vaccines elicited a higher immune response than both alum-formulated vaccines and non-adjuvanted vaccines as measured by resulting IgG antibody levels. In additional preclinical studies, an Adjumer(TM)-formulated influenza vaccine using lower antigen doses sustained higher antibody levels over a longer time period than both alum-formulated vaccines and non-adjuvanted vaccines. In certain other preclinical studies Adjumer(TM)-formulated vaccines produced an effective immune response in a higher percentage of animals than in animals receiving existing vaccine formulations. Furthermore, in these studies, as well as tests conducted using Adjumer(TM) alone, the Company observed no material adverse reactions when Adjumer(TM) was administered at effective levels.
Based on these preclinical results, the Company believes that an Adjumer(TM)-formulated vaccine may provide a number of benefits over existing injected vaccines. These benefits include reducing the number of doses required for an effective immune response, thereby improving compliance; providing cost savings as a result of the reduction in the number of doses and the amount of antigen required; and increasing the time period over which immune protection can be sustained. In addition, based on the results of these preclinical studies, the Company believes that an Adjumer(TM)-formulated vaccine may be able to induce an immune response in a number of subjects who would not otherwise respond to existing vaccines. The first human
clinical trials of a vaccine using Adjumer(TM) as a delivery system commenced in 1996. See "Product Development Programs."
Micromer(TM). The Company is conducting ongoing research on Micromer(TM), a proprietary vaccine delivery system designed to facilitate the mucosal (intranasal or oral) delivery of antigens and stimulate both the systemic and mucosal branches of the immune system. The focus of the Company's current efforts are on intranasal delivery. Micromer(TM) is synthesized utilizing a manufacturing process in which PCPP and an antigen are formulated into hydrogel microparticles. The Company believes that the physical characteristics of these microparticles will facilitate absorption by mucosal surfaces.
In preclinical studies conducted by the Company, several Micromer(TM)-formulated antigens delivered intranasally elicited both a mucosal (IgA) immune response and a systemic (IgG) immune response. IgA antibodies were detected at all mucosal sites, and the level of IgG antibodies was comparable to the level obtained through Adjumer(TM)-formulated injections of the same antigen. A Micromer(TM)-formulated influenza vaccine required only a single, intranasal dose to provide an immune response sufficient to protect the animals against subsequent infection by the influenza virus. In addition to conducting further research on the Micromer(TM) vaccine delivery system, the Company has commenced research on additional Micromer(TM)-formulated vaccines.
VibrioVec(TM). The Company is developing VibrioVec(TM), a proprietary vaccine delivery system that uses a bacterial vector for the oral delivery of antigens. This vector is a live organism that has been genetically altered to make it non-virulent, incapable of reacquiring virulence and capable of delivering selected antigens. VibrioVec(TM) is an attenuated form of the bacterium Vibrio cholerae.
In preclinical studies conducted by the Company, single, oral doses of VibrioVec(TM) engineered to express genes encoding antigens from selected bacteria have generated systemic and mucosal immune responses that protected against infection from the virulent organism. In addition, in 1995 the Company completed Phase II human clinical studies involving more than 100 subjects administering VibrioVec(TM) as a potential cholera vaccine. The subjects in this study showed no clinically significant vaccine-related side effects. Separate clinical trials will be needed to test each antigen proposed to be delivered by VibrioVec(TM).
Based on its preclinical studies, the Company believes that VibrioVec(TM) will be an effective oral delivery system that can deliver antigens to the gastrointestinal tract where the VibrioVec(TM) vector will grow and express the antigens for a limited period of time. The Company is currently inserting the genes which encode certain H. pylori antigens into VibrioVec(TM) to determine if the vector containing these genes can grow and express the antigen.
STRATEGY
The Company's strategy is to utilize its expertise to design and develop vaccine and immunotherapeutic products that have significant and growing market potential; to establish commercial alliances that permit funding of clinical development and rapid commercialization; and to retain rights to important market opportunities.
Develop Novel Vaccine Delivery Systems. The Company is developing a portfolio of vaccine delivery systems to address shortcomings in currently available delivery methods, as well as to provide new methods of vaccine delivery. The Company's vaccine delivery systems, which are based on a novel polymer and on bacterial vectors, have the potential to improve existing injectable vaccines and to permit intranasal and oral delivery of vaccines. These systems may be applicable to most of the vaccines in routine use and may enable the introduction of new vaccines to prevent bacterial or viral diseases for which there is currently no adequate treatment or prevention. The Company intends to pursue the broad application of its current vaccine delivery systems, as well as to continue to invest in the development of new vaccine delivery technologies.
Develop Proprietary Vaccines. The Company is currently developing several proprietary vaccines believed to have significant near-term commercial promise. The Company is continuing to seek exclusive licenses for suitable antigens to be used to develop vaccines with a significant market potential. The Company believes that the development of its own proprietary vaccines complements its development of novel vaccine
delivery systems. The Company believes that its ability to combine its vaccine delivery technology with its own proprietary antigens may lead to the introduction of new vaccines with competitive advantage.
Develop Immunotherapeutic Products. The Company is developing Therapore(TM), a proprietary technology that uses a bacterial protein system for the injectable delivery of proteins and peptides to generate potent cell-mediated immune responses. The bacterial protein system is a bacterial toxin that has been genetically altered to make it non-toxic, and capable of transporting certain antigens. Based on research conducted to date, the Company believes that Therapore(TM) will be able to introduce both peptide and protein antigens into human cells leading to the development of potent cell-mediated immune responses. The Company believes Therapore(TM) will be a core technology in the development of novel immunotherapeutic products and that the development of these products complements its development of novel vaccine delivery systems and proprietary vaccines. The Company intends to pursue the broad application of Therapore(TM) across the field of persistent viral infections and cancers.
Establish Collaborations for Product Development and Commercialization. The Company has entered into and intends to seek additional collaborative agreements with established vaccine companies to develop vaccines utilizing the Company's vaccine delivery systems and its collaborators' antigens. By entering into these collaborations, the Company believes it will benefit from the antigen development work already performed by its collaborators and from access to their extensive clinical testing capabilities, wide distribution and marketing infrastructure and market presence. This strategy may permit the Company to take advantage of the expertise of its collaborators and thereby expedite commercialization of products incorporating the Company's technologies.
With respect to the proprietary vaccines and immunotherapeutics being developed, the Company generally intends to seek collaborators who will be responsible for completing the clinical testing and for the manufacturing and marketing of the product. However, the Company intends to develop such proprietary vaccines and immunotherapeutics to the point at which it believes it can establish the most commercially favorable collaborations. The Company believes that this strategy will allow the successful market introduction of products incorporating the Company's technologies without the Company incurring the substantial costs associated with Phase II and III clinical development.
One of the Company's significant collaborative arrangements is with PMC. The Company is a party to two license agreements entered into in December 1994 and August 1995 with PMC relating to Adjumer(TM)- and Micromer(TM)-formulated vaccines, respectively, for the prevention of a variety of infectious diseases. Under the agreements, PMC has been granted the exclusive right to make, use and sell Adjumer(TM)- and Micromer(TM)-formulated vaccines for prevention of influenza, Lyme disease and diseases caused by meningococcus and the co-exclusive right (exclusive, except for the right of the Company or one other person licensed by the Company) to make, use and sell Adjumer(TM)- and Micromer(TM)-formulated vaccines directed against five other pathogens, including pneumococcus and RSV. The licenses to PMC apply to specified territories, including North and South America, Europe, Africa, Thailand and the countries of the former Soviet Union. The Company has retained rights to make, use, sell and license Adjumer(TM)- and Micromer(TM)-formulated vaccines against the subject infections in most of the Far East, including China and Japan, subject to certain geographical extension rights available to PMC.
PMC made a $3.0 million equity investment in the Company in December 1994 upon the execution of the agreement relating to Adjumer(TM). In addition, in connection with this collaboration, in 1996 PMC made milestone payments of $4.5 million to the Company and an additional equity investment of $1.0 million in the Company. Contingent upon achieving certain milestones, PMC has agreed to pay the Company up to an additional $6.2 million in connection with the development of Adjumer(TM)-formulated vaccines for influenza and Lyme disease. Contingent upon achieving certain milestones, PMC has also agreed to make payments, on a product by product basis with respect to the development of other Adjumer(TM)- and Micromer(TM)-formulated vaccines. PMC is required to fund all costs associated with the development and commercialization, including the costs of clinical trials, of any vaccines it elects to develop utilizing the Company's technology. In addition, the Company will be entitled to royalties based on net sales of any vaccine products developed and sold by PMC pursuant thereto.
In connection with its agreement relating to Micromer(TM), the Company agreed to conduct research through 1997 to develop Micromer(TM)-formulated vaccines directed against influenza and PIV. Through December 31, 1997, PMC has paid the Company $2.5 million to fund this research. The Company will fund the costs associated with any Phase I clinical trial of a Micromer(TM)-formulated influenza vaccine (see "Product Development Programs").
Under the agreement relating to Adjumer(TM), the Company was required to use commercially reasonable efforts to establish a process capable of yielding quantities of clinical grade PCPP for use by PMC in clinical studies. The Company has satisfied this requirement. In addition, the Company has facilitated the production of commercial grade PCPP in a contractor's cGMP manufacturing facility according to agreed upon specifications. The PMC agreement, while reserving to PMC the right to manufacture PCPP, anticipates that the Company will supply PCPP under a cost-plus supply agreement.
The Company also has a collaborative arrangement with Pasteur Merieux-OraVax for the use of the Company's vaccine delivery system, VibrioVec(TM), to develop vaccines against H. pylori infections. The agreement grants to PM-O a worldwide license to use VibrioVec(TM) for the delivery of specific H. pylori antigens. A license issue fee as well as research support payments totalling $1.0 million has been earned under this agreement through December 31, 1997. The agreement also provides for future milestone payments and royalties on net sales of any future products developed by PM-O. The option previously granted to PM-O for the use of PCPP in the delivery of H. pylori vaccines has expired.
During 1997, the Company entered into an agreement with SmithKline Beecham (SB) to collaborate on the development and commercialization of the Company's oral rotavirus vaccine. Rotavirus infection causes acute diarrhea and dehydration in infants. Under the terms of the agreement, SB will receive an exclusive worldwide license to commercialize the Company's rotavirus vaccine. The Company will be responsible for continuing the Phase II clinical efficacy study of the rotavirus vaccine which was initiated in 1997 (see "Product Development Programs"). Upon successful completion of the Phase II study, SB will assume responsibility for all subsequent clinical and other development activities. SB made an initial license payment in 1997 upon execution of the agreement and has agreed to make further payments upon the achievement of certain milestones. In addition, the Company will be entitled to royalties based on net sales of the rotavirus vaccine.
In January 1998, the Company entered into an agreement with Heska Corporation whereby Heska will have the right to use PCPP in certain animal health vaccines. The agreement provides for the payment of license fees, milestone and royalties based on net sales of PCPP-formulated animal vaccines.
PRODUCT DEVELOPMENT PROGRAMS
The Company and its collaborators are engaged in research and development efforts on vaccine programs using the Company's technologies. The Company and PMC, the leading worldwide supplier of influenza vaccines, are currently collaborating on the development of an Adjumer(TM)-formulated vaccine for influenza. The Company is conducting research on the mucosal administration of an influenza vaccine using its Micromer(TM) vaccine delivery system. Influenza accounts for an average of 20,000 deaths annually in the United States; the greatest number of fatalities occur among the elderly. In preclinical studies conducted by the Company and PMC, an Adjumer(TM)-formulated influenza vaccine produced a significantly enhanced and longer-lived immune response than one of the influenza vaccines currently on the market. PMC completed Phase I human clinical trials of this Adjumer(TM)-formulated influenza vaccine in France during 1997. A total of 48 young and 41 elderly adults participated in this study, which was designed to measure the safety and level of immune response to the vaccine. Based on the results of the study, which showed the Adjumer(TM)- formulated vaccine was well tolerated and elicited improved responses, a Phase II safety and immunogenicity study was initiated by PMC during 1997. A total of 430 elderly adults participated in the Phase II study, which was conducted in Peru. Preliminary results of the Phase II clinical trial confirmed that the Adjumer(TM)-formulated vaccine was well tolerated. However, results of the Phase II study appear to be inconsistent in certain respects with Phase I results. The degree of improvement in immune responses elicited by the Adjumer(TM) influenza vaccine was less in comparison to the control group than was elicited in the Phase I study. At the same time, certain control group results also appear to be significantly higher in Phase II than in
Phase I. The Company and PMC are currently analyzing and assessing the results of the Phase II study to determine the appropriate next steps to take with the clinical development of the product.
PMC is continuing to investigate the use of Adjumer(TM) in other vaccines. The Company understands that Phase I trials of Adjumer(TM)-formulated vaccines for Lyme disease and for RSV will be initiated by PMC during 1998.
The Company is also developing a novel vaccine against rotavirus infection. Rotavirus, a major cause of diarrhea and vomiting in infants, affects approximately 80% of the approximately 4 million infants born each year in the United States. As a result, on an annual basis, about 500,000 infants require medical attention and 50,000 are hospitalized. The economic burden in the United States is estimated at over $1 billion in direct and indirect costs. The Company anticipates a vaccine against rotavirus disease will become a universal pediatric vaccine. The Company has completed Phase I clinical trials of an orally delivered live human rotavirus vaccine selected to elicit a broadly protective immune response to the most prevalent strains of rotavirus. During 1997 the Company completed a Phase I/II clinical trial designed to define the optimal vaccine dose and optimal age for immunization. Based on the assessment of the safety and immunogenicity of the vaccine, the Company initiated a Phase II efficacy study in 1997. The results of this study are expected to be available by mid-1998 and depending upon the outcome of this study, the Company anticipates that the product will advance to Phase III clinical studies in 1999. As discussed in the preceding section, following the successful completion of the Phase II clinical trial, SB will assume financial responsibility for all subsequent clinical and development activities.
The Company is developing a vaccine against HSV2, a sexually transmitted virus which causes genital herpes. HSV2 has an estimated incidence of 500,000 new cases occurring in the United States each year. At present, there is no approved vaccine for prevention of HSV2 infection. The Company plans to initiate Phase I clinical trials of the vaccine for the prevention of genital herpes during 1998. In addition, the Company is currently conducting animal studies in preparation for a Phase I trial of a Micromer(TM)-formulated influenza vaccine during the second half of 1998.
During 1997, the Company received an exclusive worldwide license from Harvard College to Therapore(TM), which the Company believes to be the core of a novel technology for the development of immunotherapeutics. The system is initially being evaluated in therapies to treat chronic viral infections such as Hepatitis B, Hepatitis C and HIV, and cancers including melanoma.
COMPETITION
Competition in the biotechnology and vaccine industries is intense. The Company faces competition from many companies in the United States and abroad, including a number of large pharmaceutical companies, firms specialized in the development and production of vaccines, adjuvants and vaccine delivery systems and major universities and research institutions. Most of the Company's competitors have substantially greater resources, more extensive experience in conducting preclinical studies and clinical testing and obtaining regulatory approvals for their products, greater operating experience, greater research and development and marketing capabilities and greater production capabilities than those of the Company. There can be no assurance that the Company's competitors will not develop technologies and products that are safer or more effective than any which are being developed by the Company or which would render the Company's technology and products obsolete and noncompetitive, and the Company's competitors may succeed in obtaining FDA approval for products more rapidly than the Company. There can be no assurance that the vaccines under development by the Company and its collaborators will be able to compete successfully with existing products or products under development by other companies, universities and other institutions or that they will attain regulatory approval in the United States or elsewhere. The Company believes that the principal competitive factors in the vaccine market are product quality, measured by efficacy and safety, ease of administration and price.
The Company's competitive position will also depend upon its ability to attract and retain qualified personnel, obtain patent protection or otherwise develop proprietary products or processes and secure sufficient capital resources for the often lengthy period between technological conception and commercial sales.
MANUFACTURING
The Company has no manufacturing facilities, no experience in volume manufacturing and plans to rely upon collaborators or contract manufacturers to manufacture its proposed products for both clinical and commercial purposes. The Company believes that there is currently sufficient capacity worldwide for the production of its potential products by the Company's collaborators or through contract manufacturers.
To date, the Company has been arranging on a purchase order basis with contract manufacturers for the manufacture of PCPP and vaccines in quantities sufficient for preclinical studies and for clinical trials of the Company's rotavirus vaccine candidate. The Company has a contract for the development and initial supply of the starting materials for PCPP but does not yet have a written contract with a manufacturer for production of PCPP or for any other components of its vaccine delivery systems or vaccine candidates. The manufacturing processes for the Company's vaccine delivery systems and vaccines utilize known technologies. The Company believes that the vaccine delivery systems and vaccines it currently has under development can be readily scaled up to permit manufacture in commercial quantities. However, there can be no assurance that the Company will not encounter difficulties in scaling up the manufacturing processes.
In addition, the Company has facilitated the production of commercial grade PCPP in a contractor's cGMP manufacturing facility according to agreed upon specifications. The PMC agreement, while reserving to PMC the right to manufacture PCPP, anticipates that the Company will supply PCPP under a cost-plus supply agreement.
The Company intends to establish manufacturing arrangements with manufacturers that comply with the FDA's requirements and other regulatory standards, although there can be no assurance that the Company will be able to do so. In the future, the Company may, if it becomes economically attractive to do so, establish its own manufacturing facilities to produce any vaccine products that it may develop. In order for the Company to establish a manufacturing facility, the Company will require substantial additional funds and will be required to hire and retain significant additional personnel and comply with the extensive cGMP regulations of the FDA applicable to such facility. The product manufacturing facility would also need to be licensed for the production of vaccines by the FDA.
MARKETING
Under the terms of existing and future collaborative agreements, the Company relies and expects to continue to rely on the efforts of its collaborators for the sale and marketing of any vaccine products. There can be no assurance that the Company's collaborators will market vaccine products incorporating the Company's technologies, or, if marketed, that such efforts will be successful. The failure of the Company's collaborators to successfully market products will have an adverse effect on the Company's business.
The Company has retained, and in the future intends to retain, marketing rights to certain of its vaccine delivery systems and vaccine candidates in selected geographic areas. The Company intends to seek marketing and distribution agreements and/or co-promotion agreements for the distribution of vaccines in such territories. The Company believes that these arrangements could enable the Company to generate a higher level of financial return than might be obtained from early stage licensing and collaboration agreements for its vaccine candidates. The Company has no marketing and sales staff and limited experience relating to vaccine marketing. If the Company determines in the future to engage in direct marketing of vaccine products, it will be required to recruit an experienced marketing group and incur significant additional expenditures. There can be no assurance that the Company will be able to establish a successful marketing force.
PATENTS, LICENSES AND PROPRIETARY RIGHTS
Licenses
The Company has entered into several significant license agreements relating to technology which is being developed by the Company or its collaborators, including licenses from: Massachusetts Institute of Technology covering certain proprietary technologies for vaccine delivery related to PCPP microparticles; Penn State Research Foundation covering the production of polyphosphazene polymer; Harvard College relating to proprietary technology involving genetically altered Vibrio and Salmonella typhi strains; Cincinnati Children's Hospital involving proprietary rights and technologies relating to an attenuated rotavirus strain for a rotavirus vaccine; Harvard College and the Dana Farber Cancer Institute relating to a genetically-altered HSV2 virus for herpes virus vaccines; and Harvard College for a novel immunotherapy delivery system to be developed to deliver products for the treatment of chronic viral infections and cancers. In general, these institutions have granted the Company an exclusive worldwide license (with right to sublicense) to certain proprietary technologies (including rights to patents and patent applications) to make, use and sell products using the licensed technology, subject to the reservation by the licensor of a non-exclusive right to use the technologies for non-commercial purposes. Generally, the term of each license is through the expiration of the last of the patents issued with respect to the technologies covered by such license. The Company has generally agreed to use its reasonable efforts to develop and commercialize products and achieve certain milestones and pay license fees, milestone payments and royalties based on the net sales of the licensed products or to pay a percentage of sublicense income. If the Company breaches its obligations, the licensor has the right to terminate the license, and, in some cases, convert the license to a non-exclusive license.
Patents and Proprietary Rights
The Company's policy is to protect its technology by filing patent applications. In addition to filing patent applications in the United States, the Company has filed, and intends to file, patent applications in foreign countries on a selective basis. The Company also relies on trade secrets, unpatented know-how and technological innovation to develop and maintain its competitive position.
The Company owns an issued United States patent which expires on July 12, 2013, and corresponding foreign applications, directed to the use of vaccines which incorporate the Company's Adjumer(TM) vaccine delivery technology. In addition, the Company owns an issued United States patent which expires September 21, 2013, and corresponding foreign applications, directed to the use of vaccines incorporating the Company's Micromer(TM) vaccine delivery technology. Further, the Company owns and has licensed other United States patents and patent applications which are directed to technology which may be useful for the Company's Micromer(TM) and Adjumer(TM) vaccine delivery systems and corresponding foreign applications. The Company has an exclusive license to a United States patent application, and corresponding foreign applications, directed to a vector construct which is used in the Company's VibrioVec(TM) vaccine delivery system. The Company has an exclusive license to an issued United States patent which expires on December 12, 2012, directed to a rotavirus antigen which forms a part of the Company's rotavirus vaccine and to a United States patent application, and corresponding foreign applications, directed to a defective HSV2 virus for use in the Company's vaccine directed against genital herpes. The Company has an exclusive license to a United States patent application which is directed to technology which may be useful for the Company's Therapore(TM) system.
Although a patent has a statutory presumption of validity in the United States, the issuance of a patent is not conclusive as to such validity or as to the enforceable scope of the claims of the patent. There can be no assurance that the Company's issued patents or any patents subsequently issued to or licensed by the Company will not be successfully challenged in the future. The validity or enforceability of a patent after its issuance by the patent office can be challenged in litigation. If the outcome of the litigation is adverse to the owner of the patent, third parties may then be able to use the invention covered by the patent without payment. There can be no assurance that the Company's patents will not be infringed or successfully avoided through design innovation.
There can be no assurance that patent applications owned by or licensed to the Company will result in patents being issued or that, if issued, the patents will afford protection against competitors with similar technology. It is also possible that third parties may obtain patent or other proprietary rights that may be necessary or useful to the Company. In cases where third parties are first to invent a particular product or technology, it is possible that those parties will obtain patents that will be sufficiently broad so as to prevent the Company from using certain technology or from further developing or commercializing certain vaccine delivery systems and vaccine candidates. If licenses from third parties are necessary but cannot be obtained, commercialization of the vaccine candidates would be delayed or prevented.
The Company is aware of a domestic patent and a foreign patent which cover claims that could conflict with the Company's vaccine candidates and delivery systems. The Company believes that the relevant claim under the domestic patent is invalid and that the relevant claim under the foreign patent does not extend to or restrict the Company's activities. There can be no assurance that the applicable patent office or court would reach the same conclusions. In addition to the patents and the patent applications referred to in the previous two paragraphs, there may be other patent applications and issued patents belonging to competitors that may require the Company to alter its vaccine candidates and vaccine delivery systems, pay licensing fees or cease certain activities. If the Company's vaccine candidates conflict with patents that have been or may be granted to competitors, universities or others, such other persons could bring legal actions against the Company claiming damages and seeking to enjoin manufacturing and marketing of the affected products. If any such actions are successful, in addition to any potential liability for damages, the Company could be required to obtain a license in order to continue to manufacture or market the affected products. There can be no assurance that the Company would prevail in any such action or that any license required under any such patent would be made available on acceptable terms or at all. The Company believes that there may be significant litigation in the industry regarding patent and other intellectual property rights. If the Company becomes involved in such litigation, it could consume substantial resources.
The Company also relies on unpatented technology, trade secrets and information and no assurance can be given that others will not independently develop substantially equivalent information and techniques or otherwise gain access to the Company's technology or disclose such technology, or that the Company can meaningfully protect its rights in such unpatented technology, trade secrets and information. The Company requires each of its employees, consultants and advisors to execute a confidentiality agreement at the commencement of an employment or consulting relationship with the Company. The agreements generally provide that all inventions conceived by the individual in the course of employment or in providing services to the Company and all confidential information developed by, or made known to, the individual during the term of the relationship shall be the exclusive property of the Company and shall be kept confidential and not disclosed to third parties except in limited specified circumstances. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's information in the event of unauthorized use or disclosure of such confidential information.
GOVERNMENT REGULATION
The Company's activities and products are significantly regulated by a number of governmental entities, especially by the FDA in the United States and by comparable authorities in other countries. These entities regulate, among other things, the manufacture, testing, safety, effectiveness, labeling, documentation, advertising and sale of the Company's products. Product development within this regulatory framework takes a number of years and involves the expenditure of substantial resources. Many products that initially appear promising ultimately do not reach the market because they are found to be unsafe or ineffective when tested.
In the United States, vaccines for human use are subject to FDA approval as "biologics" under the Public Health Service Act and "drugs" under the Federal Food, Drug and Cosmetic Act. The steps required before a new product can be commercialized include: preclinical studies in animals, clinical trials in humans to determine safety and efficacy, and FDA approval of the product for commercial sale.
The FDA provides that human clinical trials may begin thirty (30) days after receipt and review of an Investigational New Drug application (IND), unless the FDA requests additional information or changes to
the study protocol within that period. The IND summarizes the preclinical testing and outlines the plan for the clinical trial. Authorization to conduct a clinical trial in no way assures that the FDA will ultimately approve the product. Clinical trials are conducted in three sequential phases; in Phase I, the product is given to a small number of healthy volunteers to test for safety (adverse effects). Phase II trials are conducted on a limited group of the target patient population; safety, optimal dosage and efficacy are studied. A Phase III is performed in a large patient population over a wide geographic area to prove that significant efficacy exists. The FDA has ongoing oversight over all these trials and can order a temporary or permanent discontinuation if that action is warranted. Such an action could materially and adversely affect the company.
The results of the clinical trials and all supporting data are submitted to the FDA for approval. A Biologics License Application (BLA) is submitted for a biologic product; a New Drug Application (NDA) for a drug product. The interval between IND filing and BLA/NDA filing is usually at least several years due to the length of the clinical trials; and the BLA/NDA review process can take over a year. During this time the FDA may request further testing, additional trials or may turn down the application. Even with approval, the FDA frequently requires post-marketing safety studies (known as Phase IV trials) to be performed.
The FDA requires that the manufacturing facility that produces a licensed product meet certain standards, undergo an inspection and obtain an establishment license prior to commercial marketing of a vaccine.
The Advisory Committee on Immunization Practices (ACIP) of the CDC has a role in setting the public market in the United States for most of the products the Company intends to develop. The Committee makes recommendations on the appropriate use of vaccines and related products and the CDC develops epidemiologic data relevant to vaccine requirements and usage.
To market its products abroad, the Company is subject to varying foreign regulatory requirements. Although international efforts are being made to harmonize these requirements, applications must currently be made in each country. The data necessary and the review time varies significantly from one country to another. Approval by the FDA does not ensure approval by the regulatory bodies of other countries.
The Company's collaborators are subject to all of the above-described regulations in connection with the commercialization of products utilizing the Company's technology.
PRODUCT LIABILITY
The testing and marketing of vaccines entail an inherent risk of product liability attributable to unwanted and potentially serious health effects. If and when the Company manufactures vaccines which are recommended for routine administration to children, the Company will be required to participate in the National Vaccine Injury Compensation Program. This program compensates children having adverse reactions to certain routine childhood immunizations with funds collected through an excise tax from the manufacturers of these vaccines.
The Company has clinical trial liability insurance coverage in the amount of $2 million. However, there can be no assurance that such insurance coverage is or will continue to be adequate or available. The Company intends to seek product liability insurance coverage prior to commercialization of its product candidates but there can be no assurance that insurance will be available at all or in sufficient amounts to protect the Company at a reasonable cost.
HUMAN RESOURCES
As of December 31, 1997, the Company had 54 employees, 45 of whom were engaged in research and development activities, including 15 Ph.D.'s. The Company's employees are not governed by any collective bargaining agreement and the Company believes that its relationship with its employees is good.
ITEM 2.
ITEM 2. PROPERTIES
The Company currently leases approximately 17,800 square feet of laboratory and office space in Cambridge, Massachusetts. The lease has a five year term, which commenced on December 1, 1996, and is extendable at the Company's option for an additional five years.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 1997.
Executive Officers of the Registrant
The executive officers of the Company are as follows:
J. Barrie Ward, Ph.D. has served as Chairman of the Board of Directors and Chief Executive Officer since joining the Company in July 1994. From 1984 to June 1994, Dr. Ward served as Director of the Microbiology Division of Glaxo Research and Development Ltd., a pharmaceutical company, with responsibility for infectious disease research. Dr. Ward received a Ph.D. in microbial biochemistry from the University of Bath, England.
William A. Packer joined the Company in 1992 as President and a Director and was also elected Chief Financial Officer in March 1996. Prior to joining the Company, Mr. Packer held various senior management positions with SmithKline Beecham plc, a pharmaceutical company, from 1964 to 1991, most recently as Senior Vice President, Biologicals, where he was responsible for the direction of SB's global vaccine business. Mr. Packer is a Fellow of the Institute of Chartered Accountants in England and Wales.
Bryan E. Roberts, Ph.D. joined the Company in 1991. Dr. Roberts served as Research Director from 1991 to 1993 and as Vice President of Research from 1993 until March 1996, when he was appointed Executive Vice President. From 1984 to 1990, Dr. Roberts was the Research Director of Applied BioTechnology, Inc., a biotechnology company he co-founded. From 1978 to 1986, Dr. Roberts was an Associate Professor of Biological Chemistry at the Harvard Medical School. Dr. Roberts received a D.Phil. from the University of Oxford.
Lendon Payne, Ph.D., M.D. joined the Company in 1991 and in January 1997 became an officer of the Company. Dr. Payne served as a Research Director from 1993 to 1995, and since 1996, was the Vice President of Research. Dr. Payne received his Ph.D. in virology and his M.D. from Karolinska Institute School of Medicine, Stockholm, Sweden. Dr. Payne terminated his employment with the Company on January 30, 1998.
Dale R. Spriggs, Ph.D. joined the Company in May 1993, and became an officer of the Company in January 1997. Dr. Spriggs served as the Director of Clinical Research and Development until May 1995, and as Director of Clinical and Regulatory Affairs from May 1995 to March 1996, when he was appointed Vice President of Development. From 1987 to 1993, Dr. Spriggs held several positions at the National Institute of Allergy and Infectious Diseases. Dr. Spriggs received a Ph.D. in microbiology from the University of Cincinnati College of Medicine.
Lisa P. McGillis joined the Company in 1994. In 1996, Ms. McGillis was appointed Director of Finance. Ms. McGillis became an officer of the Company in January 1997. Prior to joining the Company, Ms. McGillis served as Controller at ISI Systems, Inc. and as a Certified Public Accountant at Price Waterhouse. Ms. McGillis received a B.A. from Williams College and an M.S. in Accounting from Northeastern University.
Scientific Advisory Board
The Company's Scientific Advisory Board currently consists of seven individuals who have extensive experience in the field of polymer chemistry, virology, infectious disease, immunology, microbiology and molecular genetics. At the Company's request, the scientific advisors review and evaluate the Company's research programs and advise the Company about technical matters in the scientific fields in which the Company is involved. The Company's Scientific Advisory Board generally meets as a group at least once a year to review and discuss the Company's progress in research and development, and certain members of the Scientific Advisory Board meet informally in smaller groups or individually with Company scientists on a more frequent basis. Each member of the Scientific Advisory Board has entered into a consulting agreement with the Company. The consulting agreements are for varying terms and provide for each of the members to render advice to the Company in the area of the Company's business and such member's expertise. Members of the Scientific Advisory Board are entitled to receive annual compensation of up to $10,000 for their services and may receive options to purchase Common Stock under the Plan. In addition, Drs. Essex and Mekalanos have separate consulting agreements with the Company pursuant to which they receive additional compensation. It is possible that any inventions or processes discovered by the scientific advisors will remain the property of such person or of such persons' employers. In addition, the institutions with which the scientific advisors are affiliated may make available the research services of their personnel, including the scientific advisors, to competitors of the Company pursuant to sponsored research agreements.
The following table sets forth the name and current position of each scientific advisor:
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Common Stock of the Company began trading in June 1996 (subsequent to the initial public offering) on the NASDAQ National Market under the symbol "VRII". The following table lists the high and low sales prices for each quarter the common stock traded during 1996 and 1997. Prior to the offering in June 1996, no established public trading market existed.
As of February 2, 1998, the approximate number of common shareholders of record was 81. Many of these shares of Common Stock are held by brokers and other institutions on behalf of stockholders. Consequently, the Company is unable to estimate the total number of stockholders represented by these record holders.
The Company has not paid a dividend with respect to its Common Stock nor does the Company anticipate paying dividends in the foreseeable future.
(b) Use of Proceeds from the Company's Initial Public Offering (the "IPO")
(1) Effective date of Registration Statement on Form S-1: June 5, 1996; Commission file number: 333-3378
(2) The Offering commenced on June 6, 1996.
(3) Not applicable.
(4) (i) All securities registered in the Offering were sold.
(ii) The managing underwriters of the Offering were: Oppenheimer & Company, Inc. Pacific Growth Equities, Inc.
(iii) Common Stock, par value $.001 per share
(iv) Issuer: Amount registered -- 2,300,000 shares Aggregate purchase price of the Offering amount registered -- $27,600,000 Amount sold -- 2,300,000 shares Aggregate Offering price of the amount sold -- $27,600,000
Selling Security holder: Not applicable
(v) $1,932,000 in underwriting discounts and expenses paid to underwriters; $925,000 of other expenses incurred; and $2,857,000 in total underwriting discounts and expenses
(vi) Net offering proceeds to the Company: $24,743,000
(vii) Use of Proceeds: Purchase and installation of machinery and equipment: $417,000 Repayment of indebtedness: $1,000,000 Working Capital -- $9,117,000 Temporary investments (money market account and short-term instruments): $14,209,000
(viii) Use of proceeds does not represent a material change in the use of proceeds described in the Offering prospectus.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information presented below has been derived from the audited financial statements of the Company, and should be read in conjunction with the Company's Financial Statements and related Notes thereto.
STATEMENT OF OPERATIONS DATA:
BALANCE SHEET DATA:
The Company has paid no cash dividends since inception.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of the Company for the years ended December 31, 1997, 1996 and 1995 should be read in conjunction with the accompanying audited financial statements and the related notes thereto.
This report may contain certain forward looking statements which involve risks and uncertainties. Such statements are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain factors which may cause the Company's plans and results to differ significantly from the plans and results discussed in forward looking statements. Factors that may cause such differences include, but are not limited to: (i) the scope and results of preclinical and clinical testing, including the progress and results of the Phase II rotavirus clinical trial and the further review of the Phase I and Phase II Adjumer(TM)-formulated influenza vaccine results and further clinical or preclinical testing after evaluation of the results; (ii) the progress of the Company's research and development programs, including further development of the Adjumer(TM) delivery system; (iii) changes in existing and potential relationships with corporate collaborators; (iv) the Company's ability to compete successfully with larger companies; (v) risks of failure inherent in product development based on new technologies and novel delivery systems; (vi) the Company's ability to attract and retain qualified personnel; (vii) the time and costs of obtaining regulatory approvals, patents, proprietary rights and licenses; (viii) the ability of the Company to establish development and commercialization capacities or relationships; (ix) the costs of manufacturing; and (x) the Company's ability to secure future funding.
OVERVIEW
Virus Research Institute, Inc. (the "Company") is engaged in the discovery and development of systems for the delivery of vaccines and immunotherapeutics, and improved and novel vaccines for adults and children. The Company is developing a portfolio of proprietary vaccine delivery systems designed to improve the efficacy, lower the cost of administration and improve patient compliance for a variety of vaccine products. The Company and its collaborators currently are applying the Company's vaccine delivery systems to develop vaccines for the prevention of influenza, Lyme disease, respiratory syncytial virus (RSV), and H. pylori infections. The Company has entered into long-term collaboration agreements with Pasteur Merieux Connaught (PMC), Pasteur Merieux-OraVax (PM-O) and CSL, Ltd. pursuant to which they may utilize the Company's vaccine delivery systems in developing a number of vaccines. During 1997, the Company entered into a collaboration with SmithKline Beecham (SB) for the development and commercialization of the Company's oral rotavirus vaccine. The Company is also developing its own proprietary vaccine, utilizing antigens licensed exclusively by the Company, for the virus causing genital herpes, HSV2. In addition, the Company has acquired the exclusive license to Therapore(TM), a novel delivery system for the delivery of immunotherapeutics for chronic viral infections and cancers.
The Company is in the development stage and has devoted substantially all of its resources to the research and development of its vaccine delivery systems and vaccine candidates and general and administrative expenses. Through December 31, 1997 the Company has not generated any revenue from product sales, but has received an aggregate of $13,584,000 in revenues from licensing and option agreements, research and development agreements and grants, and interest income. There can be no assurance that the Company will receive such revenue in the future.
The Company has realized losses in every year since inception, principally as a result of expenditures incurred in its research and development programs. The Company expects to continue to incur significant operating losses over the next several years due primarily to expanded research and development efforts, preclinical and clinical testing of its product candidates, investment in new technologies, investment in production capabilities for certain product candidates and expenditures for commercialization activities. The Company's results of operations may vary significantly from quarter to quarter and year to year due to the timing of license and milestone payments, development expenditures and other factors.
NEW DEVELOPMENTS
Preliminary results from the Company's Phase I/II clinical trial of its rotavirus vaccine candidate became available during the first quarter of 1997. Rotavirus infections are a major cause of acute diarrhea and dehydration in infants. The clinical trial was a double-blinded, placebo controlled study designed to define the optimal vaccine dose and optimal age for immunization. The results demonstrated that the vaccine was
generally well tolerated in younger infants and elicited broad immune responses in all infants. Based on these findings and the results of an earlier Phase I study, the Company initiated a Phase II efficacy study during the second quarter of 1997. This trial, which is being conducted at four U.S. medical centers, is designed to examine the vaccine's ability to prevent rotavirus disease and to further study the safety of the vaccine. A total of 215 infants were enrolled in the study and have been immunized with the vaccine. Results from the study are expected to be available during 1998. The Company cautions investors that the presence of statistically significant results in one clinical trial does not ensure that these results will be repeated in subsequent trials.
During 1997, the Company established a collaboration with SB to develop and commercialize the Company's rotavirus vaccine. The Company will be responsible for the continuation of the Phase II efficacy study as discussed above. Following successful completion of the Phase II trial, SB will assume responsibility for and fund all subsequent clinical and other development activities. The Company will be entitled to receive milestone payments and royalties on vaccine sales under the agreement which grants SB exclusive worldwide marketing rights to the rotavirus vaccine.
Based on the results of an earlier Phase I clinical trial, the Company's collaborator, PMC, conducted a Phase II safety and immunogenicity clinical trial of an Adjumer(TM)-formulated influenza vaccine during 1997. In the Phase I study conducted in France, 48 young and 41 elderly adults were given single injections of either the vaccine formulated with Adjumer(TM) or the same vaccine without Adjumer(TM). A total of 430 elderly adults participated in the Phase II study, which was conducted in Peru. Preliminary results of the Phase II clinical trial confirmed that the Adjumer(TM)-formulated vaccine was well tolerated. However, results of the Phase II study appear to be inconsistent in certain respects with Phase I results. The degree of improvement in immune responses elicited by the Adjumer(TM) influenza vaccine was less in comparison to the control group than was elicited in the Phase I study. At the same time, certain control group results also appear to be significantly higher in Phase II than in Phase I. The Company and PMC are currently analyzing and assessing the results of the Phase II study to determine the appropriate next steps to take with the clinical development of the product. The Adjumer(TM) research and development program with PMC, which encompasses a number of additional vaccine products, continues.
During 1997, the Company was granted an exclusive worldwide license by Harvard University to Therapore(TM), a novel immunotherapeutic delivery system. Therapore(TM) will initially be evaluated in therapies to deliver products for the treatment of chronic viral infections and cancers. Under the terms of the agreement, the Company will be obligated to pay license fees, milestone payments and royalties to Harvard.
In January 1998, the Company entered into a license agreement with Heska Corporation (Heska) to collaborate on the development and commercialization of a number of Heska's animal health vaccines through the use of Adjumer(TM). Under the terms of the agreement, based on progress in development, the Company will be entitled to receive license fees, milestone payments and royalties.
RESULTS OF OPERATIONS
REVENUE
Total revenue declined by $3,043,000 to $3,805,000 in 1997 from $6,848,000 in 1996 and increased by $4,884,000 in 1996 from $1,964,000 in 1995. Licensing and option revenue declined by $3,614,000 from $4,520,000 in 1996 to $906,000 in 1997 due to the receipt in 1996 of $4,500,000 for the achievement of
milestones pursuant to the agreement with PMC. Revenue in 1997 consisted primarily of $650,000 related to agreements with PM-O. Revenue from licensing and option sources in 1995 consisted primarily of $750,000 received under a collaboration agreement with Chiron Corporation. Research and development revenue increased by $123,000 to $1,600,000 in 1997 from $1,477,000 in 1996. During 1997, the greater part of research and development revenue was generated from agreements with PMC and PM-O. The Company's research and development revenue in 1996 included $1,250,000 received from PMC while research and development revenue in 1995 consisted primarily of a payment of $625,000 received in conjunction with the PMC agreement. Interest income increased by $448,000 to $1,299,000 in 1997 from $851,000 in 1996 and by $725,000 in 1996 from $126,000 in 1995. The increase is due to an increase in cash, cash equivalents and investments derived principally from the proceeds of the Company's initial public offering.
EXPENSES
The Company's total expenses increased by $1,940,000 to $10,369,000 in 1997 from $8,429,000 in 1996 and increased by $168,000 in 1996 from $8,261,000 in 1995. Research and development expenses increased by $2,294,000 to $7,557,000 in 1997 from $5,263,000 in 1996. The increase is primarily attributable to costs associated with the polyphosphazene manufacturing and scale up process and to an increase in rotavirus clinical trial costs. Research and development expenses declined by $471,000 to $5,263,000 in 1996 from $5,734,000 in 1995 principally due to a reduction in outside consulting costs, the conclusion of certain sponsored research agreements and a reduction in polyphosphazene manufacturing costs. General and administrative expenses increased slightly, by $17,000, to $2,345,000 in 1997 from $2,328,000 in 1996. A reduction in foreign withholding taxes associated with milestone payments from PMC was offset by higher investor relations and other costs associated with being a public company. General and administrative costs increased by $473,000 to $2,328,000 in 1996 from $1,855,000 in 1995 principally due to an increase in compensation and recruiting costs, and the payment of $250,000 in foreign withholding taxes associated with milestone payments from PMC. These increases were partially offset by reductions in consulting and legal costs. Depreciation expense declined $272,000 to $401,000 in 1997 from $673,000 in 1996 as a result of the full depreciation of various leasehold improvements. From 1995 to 1996, depreciation expense increased $89,000 to $673,000 in 1996 from $584,000 in 1995 due to the Company's increased investment in laboratory equipment and leasehold improvements during that time.. Interest and other expense declined $99,000 to $66,000 in 1997 from $165,000 in 1996 and increased by $77,000 in 1996 from $88,000 in 1995. Interest and other expense in 1996 reflects the increased costs associated with short term loans entered into in 1995 and 1996. These short term loans were either repaid or converted into common stock upon completion of the Company's initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
From inception (February 11, 1991) through December 31, 1997, the Company's cash expenditures have exceeded revenues. The Company's operations have been funded principally through the sale of equity, loans from stockholders, equipment lease financing and payments under licensing, option and research and development agreements. Net cash used by the Company's operations since inception was $30,088,000, primarily to fund research and development efforts and general and administrative expenses. Since inception the Company has incurred $3,149,000 in capital expenditures, primarily for leasehold improvements and equipment for the Company's laboratories. During the year ended December 31, 1997 the Company incurred
$235,000 in capital expenditures primarily on expenditures required for the polyphosphazene manufacturing process and on improvements to its laboratory facilities. The Company anticipates incurring approximately $400,000 in capital expenditures during 1998, primarily on equipment necessary for the polyphosphazene manufacturing process.
From inception through December 31, 1997, the Company raised net proceeds of approximately $51,829,000 through the sale of equity securities. Included in this amount are net proceeds of $24,743,000 from the Company's initial public offering in 1996 and the conversion to common stock of an aggregate of $7,974,000 in notes payable to certain stockholders. In addition, from inception the Company has funded $751,000 of capital expenditures through sale and leaseback transactions.
In December 1994, PMC made a $3,000,000 equity investment in the Company in connection with the execution of a collaboration agreement relating to Adjumer(TM). In January 1996, PMC and OraVax, Inc. each made an equity investment of $250,000 in connection with the execution of an option agreement relating to VibrioVec(TM). PMC made an additional equity investment of $1,000,000 in April 1996 associated with the Adjumer(TM) collaboration agreement. These amounts are included in the $51,829,000 referenced above.
As of December 31, 1997 the Company's federal net operating loss carryforwards were approximately $12,480,000. If not used, the tax loss carryforwards will expire at various dates through 2012. The Company's ability to use these carryforwards is subject to limitations resulting from an ownership change as defined in Internal Revenue Code Sections 382 and 383. See Note H of Notes to Financial Statements.
The Company has undertaken an assessment of the cost and impact on operations of addressing the Year 2000 issue in connection with its computer systems. As a result of such assessment, the Company believes that all of its major software will be Year 2000 compliant and the Company does not believe the Year 2000 issue will have a material impact on its business, operations or financial condition.
The Company expects to incur substantial additional costs, including those related to research and development activities, preclinical studies, clinical trials, obtaining regulatory approvals, process scale up and manufacture and the expansion of its facilities. The Company anticipates that its existing funds, which include the proceeds from its initial public offering and interest earned thereon, should be sufficient to fund its operating and capital requirements as currently planned for the next twenty months. However, the Company's cash requirements may vary materially from those now planned, due to many factors, including, but not limited to, the progress of the Company's research and development programs, the scope and results of preclinical and clinical testing, changes in existing and potential relationships with corporate collaborators, the time and cost in obtaining regulatory approvals, the costs involved in obtaining and enforcing patents, proprietary rights and any necessary licenses, the ability of the Company to establish development and commercialization capacities or relationships, the costs of manufacturing and other factors. In the future, the Company may need to raise substantial additional funds through further financing, including public or private equity offerings and collaborations with corporate partners. There can be no assurance that funds will be available on terms acceptable to the Company, if at all. If adequate funds are not available, the Company may be required to delay, scale back, or eliminate certain of its product development programs or to license to others the right to commercialize products or technologies the Company would otherwise seek to develop and commercialize itself, any of which could have a material adverse effect on the Company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this Form 10-K. See Item 14.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding Directors required by this Item is incorporated by reference to the Section entitled "Proposal 1: Election of Directors" of the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders (the "Proxy Statement"). The information regarding Executive Officers is included in Part I of this Form 10-K.
The information regarding Compliance with Section 16(a) of the Exchange Act required by this Item is incorporated by reference to the Section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's Proxy Statement.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the Section entitled "Compensation of Executive Officers" of the Company's Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the Section entitled "Security Ownership of Management and Certain Beneficial Owners" of the Company's Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the Section entitled "Certain Relationships and Related Transactions" of the Company's Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements are filed as part of this Form 10-K.
2. Financial Statement Schedule and Auditors' Report
Schedules are omitted since the required information is inapplicable or because the information required is shown in the Financial Statements or Notes thereto.
3. Exhibits
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Commission.
- --------------- (1) Incorporated by reference to the relevant exhibit to Virus Research Institute, Inc.'s Registration Statement on Form S-1 (File No. 333-3378) as filed with the SEC on June 6, 1996.
(2) Incorporated by reference to the relevant exhibit to Virus Research Institute, Inc.'s Form 10-Q for the quarter ended June 30, 1996 as filed with the SEC on August 8, 1996.
(3) Incorporated by reference to the relevant exhibit to Virus Research Institute, Inc.'s Form 10-K for the year ended December 31, 1996 as filed with the SEC on March 26, 1997.
(4) Confidential treatment requested.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter of fiscal 1997.
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, in the City of Cambridge, Commonwealth of Massachusetts on the 17th day of March, 1998.
VIRUS RESEARCH INSTITUTE, INC.
By: /s/ J. BARRIE WARD, PH.D. ------------------------------------ J. Barrie Ward, Ph.D. Chief Executive Officer and Chairman of the Board
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders Virus Research Institute, Inc. Cambridge, Massachusetts
We have audited the accompanying balance sheets of Virus Research Institute, Inc. (a development stage company) as at December 31, 1997 and December 31, 1996, and the related statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, and for the period from February 11, 1991 (inception) through December 31, 1997. 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 generally accepted auditing standards. 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 enumerated above present fairly, in all material respects, the financial position of Virus Research Institute, Inc. at December 31, 1997 and December 31, 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997, and the period from February 11, 1991 (inception) through December 31, 1997 in conformity with generally accepted accounting principles.
RICHARD A. EISNER & COMPANY, LLP
Cambridge, Massachusetts January 30, 1998
VIRUS RESEARCH INSTITUTE, INC. (A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
See Notes to Financial Statements
VIRUS RESEARCH INSTITUTE, INC. (A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
See Notes to Financial Statements
VIRUS RESEARCH INSTITUTE, INC. (A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
See Notes to Financial Statements
VIRUS RESEARCH INSTITUTE, INC. (A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
See Notes E, F and G with respect to noncash financing and leasing transactions.
See Notes to Financial Statements
VIRUS RESEARCH INSTITUTE, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997
(NOTE A) -- THE COMPANY:
Virus Research Institute, Inc. (the "Company") is a development stage company engaged in the discovery and development of systems for the delivery of vaccines and immunotherapeutics, and improved and novel vaccines for adults and children.
The Company has incurred substantial losses since inception while it has been in the development stage and such losses are expected to continue. In June 1996, the Company completed an initial public offering of 2,300,000 shares of common stock for $12.00 per share, resulting in net proceeds of approximately $24,743,000. The Company anticipates that the proceeds from the initial public offering in conjunction with payments received from collaborative partners will allow the Company to meet its obligations through December 31, 1999.
(NOTE B) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(1) Revenue recognition:
Nonrefundable, noncreditable licensing and option fees and milestone payments are recognized when they are earned in accordance with the performance requirements and contractual terms. Research and development revenues and grants are recognized over the period of performance under the terms of the related agreements.
Licensing revenue represents amounts paid by companies for the use of or access to the Company's proprietary technology. Option revenue represents payments for the right to evaluate the Company's proprietary technology which may or may not result in a licensing or collaborative development agreement. Research and development revenue represents amounts earned by the Company from several collaborative partners for sponsored research activities. Certain of the Company's collaborators are also stockholders of the Company.
(2) Depreciation and amortization:
Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the life of the lease.
(3) Patent and licensing costs:
As a result of research and development efforts conducted by the Company, it has received and applied for, and is in the process of applying for, a number of patents to protect proprietary inventions and licenses to use certain intellectual property. Costs incurred in connection with patent applications and licenses have been expensed as incurred and are reflected as general and administrative expenses.
(4) Cash and cash equivalents:
The Company considers all highly liquid investments with maturities of three months or less, when acquired, to be cash equivalents. Cash equivalents are recorded at cost, which approximates fair value.
(5) Investments in marketable securities:
In addition to cash equivalents, the Company has investments in corporate and municipal debt securities that are classified in the balance sheet as held-to-maturity in accordance with the provisions of Statement of Financial Accounting Standard No. 115 (SFAS No. 115), "Accounting for Certain Instruments in Debt and Equity Securities." Held-to-maturity investments are securities the Company has the positive intent and
VIRUS RESEARCH INSTITUTE, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ability to hold to maturity. These securities are accounted for at amortized cost, which approximates fair value.
(6) Income taxes:
Deferred income taxes are recognized for the tax consequences in future years for differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities.
(7) Use of estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used when accounting for depreciation and amortization, taxes and contingencies.
(8) Stock-based compensation:
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation." The Company adopted this standard in 1996 by making the required note disclosures only. Therefore, the adoption of this standard has not had an effect on the Company's financial position or results of operations.
(9) Net loss per share:
During 1997, the Company adopted Statement of Financial Accounting Standard No. 128, "Earnings per Share" requiring certain changes in the calculation of per share results. As the Company has reported net losses from operations in the years presented, the computation for basic and diluted earnings per share is identical.
Pro forma net loss per common share is based on the pro forma weighted average number of common shares outstanding during the periods presented as adjusted to reflect the conversion of all preferred stock on a retroactive basis as of January 1, 1995 or date of issuance, if later.
(NOTE C) -- RESEARCH, LICENSE AND CONSULTING AGREEMENTS:
The Company has entered into various research, license and consulting agreements to support its research and development activities. These agreements generally expire over several future years although some are automatically renewable on an annual basis unless cancelled by either party. Amounts charged to operations in connection with these agreements for the years ended December 31, 1997, 1996 and 1995 amounted to approximately $705,000, $650,000 and $1,255,000, respectively. The Company expects to incur similar expenses in future years. Some of the above agreements contain provisions for future royalties to be paid on sales of products developed under the agreements.
During 1997, the Company entered into an agreement pursuant to which the Company licensed certain patents and technology to a collaborator. Under the terms of the agreement, the collaborator is required to pay the Company $400,000 for licensing rights and $600,000 for research which was completed as of Decem-
VIRUS RESEARCH INSTITUTE, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ber 31, 1997. The total $1,000,000 is recorded as a contract receivable at December 31, 1997. The agreement also provides for future payments contingent upon the achievement of certain milestones.
(NOTE D) -- LEASEHOLD IMPROVEMENTS AND EQUIPMENT:
Leasehold improvements and equipment, including approximately $413,000 acquired under capital leases, are stated at cost and are summarized as follows:
(NOTE E) -- INVESTMENTS IN DEBT SECURITIES:
As of December 31, 1997 and 1996, the aggregate fair value of the held-to-maturity securities was $15,966,179 and $16,866,045, respectively. These amounts include an unrealized loss of $2,744 at December 31, 1997 and an unrealized gain of $26,056 at December 31, 1996.
These securities are reflected in the balance sheet as follows:
(NOTE F) -- COMMITMENTS:
(1) Operating lease:
The Company has an operating lease for office and research facilities which expires in December 2001. The Company has the option to renew the lease for an additional five years. The lease also provides that the Company pay all real estate taxes levied against the premises. The lease requires minimum annual rentals in 1998 through 2001 of $294,000.
Rent expense for 1997, 1996 and 1995 amounted to approximately $332,000, $267,000 and $269,000, respectively.
(2) Capital lease:
The Company has entered into several capital leases for equipment, including sale and leaseback transactions. Future minimum payments under these leases at December 31, 1997 amount to $72,352.
VIRUS RESEARCH INSTITUTE, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(NOTE G) -- CAPITALIZATION:
(1) Warrants:
The Company has issued warrants to purchase common and preferred stock in connection with the issuance of notes payable and the establishment of capital leases.
Warrants outstanding at December 31, 1997 are as follows:
The warrant agreements contain antidilution provisions related to future issuances of stock.
(2) Common stock options:
The Company has adopted an equity incentive plan providing for the issuance of restricted stock and the granting of options to purchase up to a combined total of 1,751,176 shares of common stock. The plan provides for the granting of both incentive stock options and nonstatutory stock options. The exercise price for any incentive stock options cannot be less than the fair market value on the date of grant, while the exercise price for nonstatutory options will be determined by the Board of Directors. The vesting periods for all options are determined by the Board of Directors. The Company had the following option activity during 1995, 1996 and 1997:
Options for 539,569 shares are exercisable at December 31, 1997 at a weighted average option price of $1.90 per share, with a weighted average remaining contractual life of approximately 7 years. At December 31, 1997, there were 585,545 shares available for future grant.
VIRUS RESEARCH INSTITUTE, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) Stock-based compensation:
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" but applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its plan. There was no compensation expense recognized in 1997, 1996 or 1995. If the Company had elected to recognize compensation cost for the plan based on the fair value at the grant date for awards under the plan, consistent with the method prescribed by SFAS No. 123, net loss per share would have been changed to the pro forma amounts indicated below:
The fair value of the Company's stock options used to compute pro forma net loss and net loss per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for 1997, 1996 and 1995: dividend yield of 2.5%; expected volatility of 45%; a risk free interest rate of 7.3%; and an expected holding period of nine years.
The weighted average grant date fair value of options granted was $2.37 per share, $3.21 per share, and $3.07 per share for the years ended December 31, 1997, 1996 and 1995, respectively.
(NOTE H) -- INCOME TAXES:
Through December 31, 1993, pursuant to provisions of the Internal Revenue Code, the Company was deferring all start-up costs because operations, as defined by the Internal Revenue Code, had not commenced. In addition, the Company elected to defer all research and development costs until revenues were generated. Effective January 1994, the Company began generating revenues and commenced operations for tax purposes and is amortizing all costs deferred through December 31, 1993 over 60 months. From January 1994 forward, the Company continues to defer internal research and development costs and amortizes such costs over 60 months for tax purposes.
At December 31, 1997 and 1996, the Company had no current or deferred tax liability.
The components of the Company's net deferred tax asset and the tax effects of the primary differences giving rise to the Company's deferred tax asset are as follows:
VIRUS RESEARCH INSTITUTE, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, the Company's net operating loss carryovers for federal income tax purposes amount to approximately $12,480,000 and expire through 2012. The Company's ability to use these carryforwards is subject to limitations resulting from an ownership change as defined in Internal Revenue Code Sections 382 and 383.