1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________ to ________
Commission File No. 0-27072
HEMISPHERX BIOPHARMA, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-0845822
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1617 JFK Boulevard Phila., Pennsylvania 19103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 988-0080
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.001 par value
Class A Common Stock Redeemable
Purchase Warrant
Securities registered pursuant to Section 12(g) of the Act:
(Title of ,Each Class)
NONE
Indicate by check mark whether the registrant (1) has filed
all reports to be filed by Section 13 or 15(d) of the
Securities and Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III
of this Form 10-K or any amendment to
this Form 10-K. Yes ( ) No (X)
The aggregate market value of Common Stock held by
non-affiliates at March 7, 2002 was $120,107,594. For
purposes of this calculation, it was assumed that all Common
Stock is valued at the closing price of the stock as of March 6, 2002.
The number of shares of the registrant's Common Stock
outstanding as of March 31, 2001 was 32,060,280.
2
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K (this
"Form 10-K"), including statements under "Item 1. Business,"
"Item 3 Legal Proceedings" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Result of
Operations," constitute "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of
1934, as amended, and the Private Securities Litigation
Reform Act of 1995 (collectively, the "Reform Act"). Certain,
but not necessary all, of such forward-looking statements can
be identified by the use of forward-looking terminology such
as "believes," "expects," "may," "will," "should," or
"anticipates" or the negative thereof or other variations
thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. Such forward-
looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual
results, performance or achievements of Hemispherx Biopharma,
Inc. and its subsidiaries (collectively, the "Company", "we
or "us") to be materially different from any future results,
performance or achievements expressed or implied by such
forward-looking statements and other factors referenced in
this Form 10-K. The Company does not undertake and
specifically declines any obligation to publicly release the
results of any revisions which may be made to any forward-
looking statement to reflect events or circumstances after
the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
PART I
ITEM 1. Business
GENERAL
We were founded in the early 1970s as a contract researcher
for the National Institutes of Health (NIH). Dr. William A.
Carter, M.D., joined the Company in 1976 and ultimately
become its CEO in 1988. He has focused the Company on
exploring, understanding and mastering the mechanism of
nucleic acid technology to produce a promising new class of
drugs for treating chronic viral diseases and disorders of
the immune system. In the course of almost three decades, we
have established a strong foundation of laboratory, pre-
clinical and clinical data with respect to the development of
nucleic acids to enhance the natural antiviral defense system
of the human body and the development of therapeutic products
for the treatment of chronic diseases. Our strategy is to use
our proprietary drug, Ampligen, to treat diseases for which
adequate treatment is not available. We seek the required
3
regulatory approvals which will allow the progressive
introduction of Ampligen for Myalgic
Encephalomyelitis/Chronic Fatique Syndrome ("ME/CFS"), HIV,
Hepatitis C ("HCV") and Hepatitis B ("HBV") in the U.S.,
Canada, Europe and Japan. Ampligen is currently in phase III
clinical trials in the U.S. for use in treatment ME/CFS and
is in Phase IIb clinical trials in the U.S. for the treatment
of newly emerged multi-drug resistant HIV, and for the
induction of cell mediated immunity in HIV patients that are
under control using potentially toxic drug cocktails.
Our proprietary drug technology utilizes specifically
configured ribonucleic acid (RNA) and is protected by more
than 350 patents worldwide, with over 80 additional patent
applications pending to provide further proprietary
protection in various international markets. Certain patents
apply to the use of Ampligen alone and certain patents apply
to the use of Ampligen in combination with certain other
drugs. Some composition of matter patents pertain to other
new medications which have a similar mechanism of action.
The U.S. Food and Drug Administration has granted us "orphan
drug status" for our nucleic acid-derived therapeutics for
ME/CFS, HIV, and renal cell carcinoma and malignant melanoma.
Orphan drug status grants the Company protection against
competition for a period of seven years following Food and
Drug Administration ("FDA")approval, as well as certain
federal tax incentives, and other regulatory benefits.
We outsource certain components of our research and
development, manufacturing, marketing and distribution while
maintaining tight control over the entire process through an
elaborate "systems" management approach.
We employ 44 persons, 27 of whom are engaged in research and
development, preclinical development, manufacturing, and
regulatory affairs, and 17 of whom perform administrative,
financial, and investor relations functions. A portion of the
Company's research and development is provided for under
contract with scientists and technicians who are not employed
by Hemispherx but who are employed by academic institutions.
The Company also draws upon the expertise of outside, part-
time consultants from time to time. The Company conducts its
programs in many regions of the globe (North America, Europe,
Southern Hemisphere) which provides it a wide range of
potential commercial opportunities.
We expect to continue our research and clinical efforts for
4
the next several years with some financial benefit accruing
as a result of certain revenues expected from various cost
recovery treatment programs using Ampligen to treat ME/CFS,
notably in Canada, Europe and the United States. However, we
may continue to incur losses over the next several years due
to clinical costs incurred in the continued development of
Ampligen for commercial application. Possible losses may
fluctuate from quarter to quarter as a result of differences
in the timing of significant expenses incurred and receipt of
licensing fees and/or cost recovery treatment revenues in
Europe, Canada and in the United States. We are also pursuing
similar programs in other countries, especially within the
European Union, where resources have been expanded with
respect to pursuing regulatory approvals.
We have three domestic subsidiaries BioPro Corp., BioAegean
Corp. and Core BioTech Corp., all of which are incorporated
in Delaware. Our foreign subsidiaries include Hemispherx
BioPharma Europe, N.V./S.A. which was established in Belgium
in 1998 and Hemispherx Biopharma Europe, S.A. which was
established in Luxembourg during 2002. Our principal
executive offices are located at One Penn Center, 1617 JFK
Boulevard, Philadelphia, Pennsylvania 19103, and its
telephone number is (215) 988-0080.
Nucleic Acid Compounds
Nucleic acid compounds represent a potential new class of
pharmaceutical products that are designed to act at the
molecular level for treatment of human diseases. There are
two forms of nucleic acids, DNA and RNA. DNA is a group of
naturally occurring molecules found in chromosomes, the
cell's genetic machinery. RNA is a group of naturally
occurring informational molecules which orchestrate a cell's
behavior and which regulate the action of groups of cells,
including the cells which comprise the body's immune system.
RNA directs the production of proteins and regulates certain
cell activities including the activation of an otherwise
dormant cellular defense against virus and tumors. The
Company's drug technology utilizes specially-configured RNA.
Our double-stranded RNA drug product, trademarked Ampligen,
which is administered intravenously, is (or has been) in
human clinical development for various disease indications,
including treatment for ME/CFS, HIV, renal cell carcinoma and
malignant melanoma.
Based on the result of published, peer reviewed pre-clinical
studies and clinical trials, we believe that Ampligen may
have broad-spectrum anti-viral and anti-cancer properties.
Over 500 patients have received Ampligen in clinical trials
authorized by the FDA at over twenty clinical trial sites
5
across the U.S., representing the administration of more than
41,000 doses of this drug.
Other Product Development
In addition to developing Ampligen we are in the early pre-
clinical stages of developing OragenT drugs, a nucleic acid
technology related to Ampligen. OragenT drugs are low
molecular weight RNA compounds which we believe by virtue of
their small size, have the potential for becoming oral,
broad-spectrum treatments for various viral diseases such as
HIV infection and chronic HBV infection. The technology for
these products has been developed in part by us and has also
been developed in part by Temple University, which has
licensed to the Company certain technology for commercial use
on an exclusive basis, subject to certain limited exceptions.
Results from in vitro studies conducted in collaboration with
the National Institute of Allergy and Infectious Diseases
indicate that OragenT products may inhibit HBV infection, and
in vitro studies conducted in collaboration with the National
Cancer Institute and the University of Mainz, Germany,
indicate that OragenT products may inhibit HIV infections.
One compound, OragenT 0004, has shown inhibition of HBV
multiplication in vitro and another, OragenT 0044, has
demonstrated activity against HIV in vitro studies. These two
OragenT compounds have been produced in quantities, which we
believe, are sufficient to perform initial animal toxicology
testing. There has been no human clinical testing of OragenT
products to date. There can be no assurance that human
clinical testing, if initiated, will yield results consistent
with those achieved in in vitro or animal testing. Clinical
trials may be carried out beginning mid to late 2003.
We believe OragenT drugs may work at a somewhat different
stage of the anti-viral and anti-cancer response chain from
Ampligen and therefore may be useful where the activity of
Ampligen might be limited.
PolyadenurT is the trademark name of Poly A/poly U RNA
developed and tested independently of Hemispherx by the
laboratories of BEAUFOUR, a French corporation. BEAUFOUR
conducted Phase II/III trials in 1996-1998 on approximately
100 Hepatitis B patients using PolyadenurT in conjunction
with Interferonr. The results of this study as compared with
the use of Interferonr alone were promising. The use of Poly
A / poly U to treat Hepatitis B is covered by our U.S.
patents which has been confirmed recently by the European
Patent Application Review Board. The commercial strategy to
follow is still to be finalized as Ampligen might give
results in Hepatitis B similar to those obtained with
6
Polyadenur based on comparable mechanisms and molecular
structures.
MYALGIC ENCEPHALOMYELITIS/CHRONIC FATIGUE SYNDROME (ME/CFS)
ME/CFS is a debilitating disease that is difficult to
diagnose and for which, at present, there is no cure. People
suffering from this illness experience, among other symptoms,
a constant tiredness, recurring dull headaches, joint and
muscle aches, a feeling of feverishness and chills low grade
fever, depression, difficulty in concentrating on tasks, and
tender lymph glands. With progression of the disease they can
become bed-ridden, lose their jobs and become dependent upon
the state for support and medical care.
ME/CFS has been given official recognition by the U.S. Social
Security Administration, and some European nations, rendering
CFS/ME patients eligible for disability benefits and
heightening awareness of this debilitating disease in the
medical community. Further scientific publication by
independent academicians on the accurate laboratory diagnosis
of CFS/ME appeared in a peer-reviewed journal (American
Journal of Medicine) in February 2000. The U.S. Centers of
Disease Control ("CDC") reconfirmed its research commitment
to ME/CFS following an audit by the U.S. Government
Accounting Office ("GAO") which was announced July 28, 1999.
Estimates of ME/CFS patient numbers in the Unites States
range from a low of 500,000 (1995-Centers for Disease
Control, Atlanta, GA) to high of 1,000,000 (1999-DePaul
University study). Estimates of patient numbers in Europe
range from 600,000 to 2,200,000 as reported in the British
Medical Journal in January 2000. It is believed worldwide
patient total may be as high as ten million.
At least two-thirds of the people with ME/CFS are women; Most
people with ME/CFS relate the onset of the illness to a
particular infection, one that they might have had before
without such long-lasting consequences. These infections,
which at first do not seem severe, most often include
respiratory or gastrointestinal illness, flu-like disease,
bronchitis, sore throats, colds or diarrhea, mononulceosis,
hepatitis or jaundice. Most people recover completely from
these illnesses, but a small percentage are left feeling
extremely weak, tired and depressed, long after the main
symptoms of the infections have vanished, and if these
fatique-related symptoms persist for more than six months the
person may have ME/CFS.
In addition to the role that an acute infection may play in
7
triggering ME/CFS, many patients report that the onset of the
syndrome occurs at a time of great stress, such as a divorce,
job change, moving, or a death in the family. These traumatic
events seem to predate ME/CFS by a matter of weeks or a few
months. Several studies, including some dating back to the
1950s, show a correlation between stress and reduced ability
to recover from illness. Other studies show that people under
stress may be more susceptible to infection.
In 1989, we received FDA authorization to conduct a Phase
I/II study of Ampligen for ME/CFS. In 1991, we completed a
24-week, 92 patient, randomized, placebo-controlled, double-
blinded, multi-center trial of Ampligen for treating
patients with ME/CFS. The results, published in a peer review
journal in 1994, suggested enhanced physical performance,
greater cognitive functions and improved ability to perform
daily living activities. Patients required reduced
hospitalization and medical care, while suffering little or
no significant adverse side effects. The FDA raised certain
issues with respect to this clinical trial which required
further study. These issues were reviewed and satisfactorily
resolved.
In February 1993, Hemispherx presented results of its Phase
II study of Ampligen for ME/CFS to a FDA Advisory Committee
and these results were published in early 1994 in Clinical
Infectious Diseases, a peer reviewed medical journal which
emphasizes the understanding and potential treatment of
infectious diseases. The results suggested that patients on
Ampligen, in contrast to those receiving a placebo, showed
significant improvement in physical capacity as determined by
performance on treadmill testing. The Ampligen treated
patient group also required less pain medication than did the
placebo group.
In December 1993, when it was believed that fewer than
200,000 individuals in the U.S. were afflicted with Chronic
Fatique Syndrom,Ampligen was designated as an Orphan Drug by
the FDA for the treatment of Chronic Fatique Syndrome. Under
the Orphan Drug Act, the FDA may designate drug products as
orphan drugs if they are intended to treat a rare disease or
condition, which is defined as a disease or condition that
affects less than 200,000 person in the U.S., or if there is
no reasonable expectation of recovery of the costs of
research and development from sales in the U.S. A drug
retains its designation as an Orphan Drug even though, as is
the case with Chronic Fatique Syndrome, it is subsequently
determined that more than 200,000 individuals are afflicted
with the disease or condition.
In 1998, we were authorized by the FDA to initiate a Phase
III multicenter, placebo-controlled, randomized, double blind
clinical trial to treat 230 patients with ME/CFS in the U.S.
8
The objective of this Phase III, clinical study, deemed as
Amp 516, is to evaluate the safety and efficacy of Ampligen
as a treatment for ME/CFS. As of February 2002 we have
engaged the services of eleven (11) clinical investigators at
Medical Centers in California, New Jersey, Florida, North
Carolina, Wisconsin, Nevada, Illinois and Connecticut. These
clinical investigators are medical doctors with special
knowledge of ME/CFS who have recruited, prescreened and
enrolled ME/CFS patients for inclusion in the Phase III Amp
516 ME/CFS clinical trial. This clinical trial now has over
200 ME/CFS patients participating. The patients complete a
stage I, forty week, double-blind, randomized, placebo-
controlled portion of the clinical trial and then move into
the stage II or the open label treatment portion of the
clinical trial. To date there have been no serious adverse
events reported related to the study medication. Additional
ME/CFS patients are being recruited by the clinical
investigators. We expect to have in excess of the full
enrollment within the next several months, in order to
compensate for potential patient "drop outs", ie; patients
that discontinue the program prematurely for various reasons.
HIV/AIDS
About fifteen antiviral drugs are currently approved by the
FDA for the treatment of HIV infection. All target the
specific HIV enzymes, reverse transcriptase (RT) and
protease. The use of various combinations of three or more of
these drugs is often referred to as Highly Active Anti-
Retroviral Therapy ("HAART"). HAART involves the utilization
of several antiretrovirals with different mechanism of
actions to decrease viral loads in HIV-infected patients. The
goal of these combination treatments is to reduce the amount
of HIV in the body ("viral load") as to low as possible.
Treatments include different classes of drugs, but they all
work by stopping parts of the virus so the virus cannot
produce more of itself. Experience has shown that using
combinations of drugs from different classes is a more
effective strategy than using only one or two drugs. HAART
has provided dramatic decreases in morbidity and mortality of
HIV infection. Reduction of the viral load to undetectable
levels in patients with wild type virus (i.e., non-drug-
resistant virus)is routinely possible with the appropriate
application of HAART. HIV mainly infects important immune
system cells called CD4 cells After HIV has infected a CD4
cell, the CD4 cell becomes damaged and is eventually
destroyed. Fewer CD4 cells means more damage to the immune
system and, ultimately, results in AIDS. Originally,
reduction of HIV loads was seen as possibly allowing the
reconstitution of the immune system and led to early
speculation that HIV might be eliminated by HAART.
9
Subsequent experience has provided a more realistic view of
HAART and the realization that chronic HIV suppression using
HAART, as currently practiced, would require treatment for
life with resulting significant cumulative toxicities. There
is no question that the various reverse transcriptase and
protease inhibitor drug that go into HAART have profoundly
reduced the morbidity and mortality connected with HIV;
however there has been a significant cost due to drug
toxicity. It is estimated that 50% of HIV deaths are from the
toxicity of the drugs in HAART. Current estimates suggest
that it would require as many as 60 years of HAART for
elimination of HIV in the infected patient. Thus the toxicity
of HAART drugs and the enormous cost of treatment makes this
goal impractical.
Although more potent second generation drugs are under
development that target the RT and protease genes as well as
new HIV targets, the problem of drug toxicities, the complex
interactions between these drug classes, and the likelihood
of life-long therapy will remain a serious drawback to their
usage.
Failure of antiretroviral therapies over time and the
demonstration of resistance have stimulated intensive
searches for appropriate combinations of agents, or
sequential use of different agents, that act at the same or
different viral targets. This situation has created interest
in our technology which operates by a different mechanism.
The new concept of Strategic Therapeutic Interruption ("STI")
of HAART provides a unique opportunity to minimize the
current deficiencies of HAART while retaining the superb HIV
suppression capacities of HAART. STI is the cessation of
HAART until HIV again becomes detectable (i.e.,rebounds)
followed by resumption of HAART with subsequent suppression
of HIV. By re-institution of HAART, HIV is suppressed before
it can inflict damage to the immune system of the patient.
Based on recent publications in the peer reviewed medical
literature, it is expected that in just 30 days after
stopping HAART approximately 80% to 90%, of the patients will
suffer a relapse evidencing detectable levels of HIV. The
Company believes that Ampligen combined with the STI
(strategic treatment interruption) approach may offer a
unique opportunity to retain HAART's superb ability to
suppress HIV while potentially minimizing its deficiencies.
All present approved drugs block certain steps in the life
cycles of HIV. None of these drugs address the immune system,
as Ampligen potentially does, although HIV is an immune-
based disease.
By using Ampligen in combination with STI of HAART, we will
undertake to boost the patients' own immune system's response
10
to help them control their HIV when they are off of HAART.
The Company's minimum expectation is that Ampligen has
potential to lengthen the HAART-free time interval with a
resultant decrease in HAART-induced toxicities. The ultimate
potential, which of course requires full clinical testing to
accept or reject, is that Ampligen may potentiate STI of
HAART to the point that the cell mediated immune system will
be sufficient to eliminate requirement for HAART. We plan to
present the initial clinical result of using our technology
at several international AIDS scientific forums in 2002.
Our newly initiated AMP 720 HIV Clinical Trial is being
conducted with individuals infected with HIV who are
responding well to HAART at the moment. Patients in this
study are required to meet minimum immune system requirements
of CD4 cell levels greater than 400, maximum HIV infection
levels of less that 50 copies/ml, and a HAART regimen
containing at least one anti-viral drug showing therapeutic
synergy with Ampligen based on recently reported ex vivo
studies in peer-reviewed scientific journals. All patients
are chronically HIV infected and will have been receiving the
indicated HAART regimen prior to starting the STI. The trial
applies strategic treatment interruption of HAART based on
the hypothesis that careful management of HIV rebound
following STI may have potential to result in the development
of protective immune responses to HIV in order to achieve
control of HIV replication. The Company believes that the
addition of Ampligen, with its potential immunomodulatory
properties, may reasonably achieve this outcome. Half of the
participants in the trial are given 400 mg of Ampligen twice
a week and once they start the STI will remain off of HAART
until such time as their HIV rebounds. The other half of the
participants (the control group) are on STI, but they are
given no Ampligen during the "control" portion of the
clinical test.
The targeted enrollment in the AMP 720 Clinical Trial is 120
HIV-infected persons who meet the criteria. We expect to have
60 people on STI with Ampligen and 60 people on STI without
Ampligen. The Company expects enrollment in this clinical
trial to accelerate as we recruit more investigators and
based on the analysis and presentation of interim results on
March 18, 2002 in Prague, Czech Republic. The length of this
stage of the trial and other studies will be determined by an
analysis of the interim results.
HEPATITUS C VIRUS (HCV)
We currently have a research and development arrangement with
the California Institute of Molecular Medicine ("CIMM") to
collaborate and fund the replication of human Kupffer's cells
obtained from HCV infected patients. This proprietary CIMM
approach involves the in vitro growth of hepatic macrophages
(called Kupffer's cells) from the failing liver of a patient
and reinfusion of the in vitro grown Kupffer's liver cells
11
into the same patient. This would not raise the question of
immunological incompatibility. Testing by CIMM indicates that
their process of Kupffers's cell application in vitro is
reproducible (>95% efficacy) from individual patients. CIMM
is also developing a process for maintaining and propagating
Kuffer's cells reproducibly in defined cell cultures from
fine needle liver aspirates from living human volunteers with
potential as patients with failing liver due to a variety of
etiologies.
In January, 2001 CIMM filed a notice of Invention with the
U.S. patent office. This notice is titled "Replication of
Human Kupffer's cell obtained from HCV infected patients by
Fine Needle Biopsy Technique". This method can potentially
salvage critically needed liver function without major
surgery or aggressive medical intervention.
The immediate and potential market for the Kupffer's
maintenance and propagation techniques will be the 14,000
people in the U.S. actively seeking a liver transplant.
Additional thousands are progressing towards a failing liver
and will soon need transplantation or a successful
alternative method to restore function. Several hundred
thousand who have alcoholic cirrhosis may also benefit from
the proprietary process. Medical costs of a liver transplant
are approximately $300,000 and are far beyond the financial
reserves of most families. Reimbursement of these costs by
Health Insurance carriers is problematic at best.
We are also evaluating potential novel clinical programs
which would involve using Ampligen to treat both HCV and HIV
when they coexist in the same patient. We expect to commence
these studies in late 2002 in collaboration with one or more
prospective corporate partners.
We have a 30% equity position in CIMM, which is located in
California and recently opened a new state-of-the-art
research laboratory in Ventura, California.
EUROPEAN OPERATIONS
Our European subsidiary was formed and the office opened to
prepare for the introduction of Hemispherx products and to
accelerate market penetration into the European market once
full approval is obtained from the European Medicine
Evaluation. Agency ("EMEA"). The EMEA is the equivalent of
the United States Food and Drug Administration Agency (FDA).
12
From a regulatory point of view the member countries of the
European Economic Union (EEU) represent a common market under
the jurisdiction of the EMEA. However, from a practical point
of view, every country is different regarding developing
relations with the medical community, patient associations
and obtaining reimbursement for treatment from the equivalent
of Social Security Agencies and insurance carriers.
Recognizing this, our European operation has devoted its near
term efforts to five specific targets and programs in the
European Union.
1) Increasing awareness of ME/CFS among physicians and
related educational groups
Our European operation has assisted the growth of a number of
patient/physician educational associations. The French
association has grown from 10 members in the year 2000 to 800
currently. Every major country now has an active educational
association with substantial numbers of members who regularly
meet and "network". These programs have been modeled on the
successful experience in the U.S. of conducting twice a year
meetings on ME/CFS with Health and Human Services, FDA, NIH
and Centers for Disease Control.
The scientific media appear to have become aware of the
impact of the disease and as a result a number of television
shows in several countries, as well as numerous written
articles, have featured the disease and its negative impact
on society. As a result of these efforts, a textbook on
ME/CFS by a highly respected academic author will be
published in the first quarter, 2002.
Our medical staff has submitted technical papers and held
follow up meetings with numerous government officials in a
number of countries, all designed to heighten awareness of
the ME/CFS disease.
2) Contacts and activities with Regulatory Agencies
Our European operation maintains regular contact with the
EMEA, keeping the agency aware of its activities, as well as
the health ministries in numerous countries in the European
Union. In early 2001,our application for "orphan" drug status
for the use of Ampligen in ME/CFS was rejected because the
Board found that the prevalence of ME/CFS was significantly
above the 5 person per 10,000 limit required to grant orphan
drug status in the European Union. Our medical staff is
preparing an "orphan" drug application for the use of
13
Ampligen in connection with treating a specific category of
HIV patients in the European Union.
In addition, we are exploring various ways to accelerate the
commercial availability of Ampligen in the various nations
of the EU.
3) The Expanded Access Treatment Program in ME/CFS with Cost
Recovery
ME/CFS patients are being treated with Ampligen in the
United Kingdom, Austria and Belgium under existing regulatory
procedures in these countries which allow the therapeutic use
of an experimental drug under certain conditions. These
procedures allow us to recover the cost of Ampligen used as
well as to collect in addition clinical data. Corresponding
procedures are being developed in several other countries at
the request of locally based physicians.
4) HIV/AIDS Trials
Our European operation is in the process of implementing
clinical trials in Europe for the use of Ampligen in the
treatment of HIV/AIDS on the basis of the new U.S. Protocols
involving the use of the drug either in combination with
"cocktail" therapies or as part of a strategic interruption
of the "cocktail" therapies. We plan to present these
innovative programs at various European scientific
conferences in 2002.
5) Distribution, Pharma-Economics and Planning
The European staff is working toward:
a) Securing a pan-European delivery system for Ampligen
from a good manufacturing practice ("GMP") warehouse
system and, a network of approved Clinical treatment
Centers throughout the European Union for the necessary
intravenous infusion of Ampligen.
b) Reviewing the applicable regulations and procedures in
each EU country with respect to requirements for medical
care reimbursement and/or medical insurance coverage.
c) Preparing a pharma-economic study which documents the
cost of Ampligen drug therapy as compared to the cost of
other existing medical treatment programs used in
treating ME/CFS.
d) Developing a long term strategic plan for the marketing
and distribution of Ampligen in the European Union, if
approved by EMEA.
The Efforts of our European Operation has started to produce
results. In March, 2002 our European subsidiary, Hemispherx
Biopharma Europe S.A. ("Hemispherx S.A.") entered into a
Sales and distribution Agreement ("Agreement") with a
14
European Entity. Pursuant to the terms of the Agreement the
European entity has been granted the ("Exclusive Right") in
Spain, Portugal and Andorra to market Ampligen for the
treatment of myalgic encephalitis/chronic fatigue syndrome
("ME/CFS"). In exchange for the Exclusive Right, the European
entity is to pay to Hemispherx S.A. a current fee of 625,000
Euros, a fee of 1,000,000 Euros after FDA approval of
Ampligen for the treatment of ME/CFS and a fee of 1,000,000
Euros after issuance in Spain of final marketing
authorization for Ampligen for the treatment of ME/CFS.
Additionally, this entity is to currently purchase from
Hemispherx S.A. 1,000,000 Euros of its seven percent (7%)
convertible bonds due September 30, 2003.
OTHER ANTIVIRAL/ IMMUNOLOGIC TREATMENTS
After the terrorist acts of September 11, 2001 and the
resultant International concern for BIO-TERRORISM (including
Smallpox), we filed a regulatory application with the FDA for
permission to conduct a clinical trial, in the event of
Smallpox dissemination, using Ampligen therapy as a
treatment. This proposed study was based on an earlier peer
renewed laboratory study from Yale University in Partnership
with the U.S. Military Command at Fort Detrick. This is the
U.S. Biological warfare Specialty Research Center. The result
of this study indicated Ampligen to be promising in a
laboratory model of smallpox.
During the thirty day review period of our Clinical
application by the FDA, We became aware of a new ongoing
laboratory study of Ampligen in smallpox in Belgium. The
results of this study should to be available in the Spring of
2002. As such, we withdrew our FDA application for the time
being in order to review the result of the Belgium study and
incorporate such data into our Clinical study design and
protocol before resubmission.
COMPETITION
There are several publicly held companies that place emphasis
on nucleic acid technology such as ours.
These companies and their competing products may be more
effective and less costly than our products. In addition,
conventional drug therapy, surgery and other more familiar
treatments will offer competition to our products.
Furthermore, many of our competitors have significantly
greater experience than we in preclinical testing and human
clinical trials of pharmaceutical products and in obtaining
FDA, EMEA Health Protection Branch ("HPB") and other
regulatory approvals of products. Accordingly, our
15
competitors may succeed in obtaining FDA EMEA and HPB product
approvals more rapidly than we. If any of our products
receive regulatory approvals and we commence commercial sales
of our products, we will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in
which we have no experience. Our competitors may possess or
obtain patent protection or other intellectual property
rights that prevent, limit or otherwise adversely affect our
ability to develop or exploit our products.
Many of our existing or potential competitors have
substantially greater financial, technical and human
resources than we have. In addition, many of these
competitors may have significantly greater experience than we
do in undertaking certain aspects of research, preclinical
studies and human clinical trials of new pharmaceutical
products, obtaining FDA and other regulatory approvals, and
manufacturing and marketing such products. Accordingly, our
competitors may succeed in commercializing the products more
rapidly or more effectively than the Company.
GOVERNMENT REGULATION
Regulation by governmental authorities in the U.S. and
foreign countries is and will be a significant factor in the
manufacture and marketing of our proposed products and our
ongoing research and product development activities.
Ampligen and the products of the ongoing research and
product development activities will require regulatory
clearances prior to commercialization. In particular, human
new drug products for human are subject to rigorous
preclinical and clinical testing as a condition of clearances
by the FDA and by similar authorities in foreign countries.
The lengthy process of seeking these approvals, and the
ongoing process of compliance with applicable statutes and
regulations, has required and will continue to require the
expenditure of substantial resources. Any failure by us or
our collaborators or licensees to obtain, or any delay in
obtaining, regulatory approvals could materially adversely
affect the marketing of any products developed by the Company
and its ability to receive product or royalty revenue. We
have received orphan drug designation for certain therapeutic
indications which might, under certain conditions, accelerate
the process of drug commercialization.
A "Fast-Track" designation by the FDA, while not affecting
any clinical development time per se, has the potential
effect of reducing the regulatory review time by 50 percent
(50%) from the time that a commercial drug application is
16
actually submitted for final regulatory review. As of
December 31, 2001, we have not received a Fast-Track
designation for any of our potential therapeutic indications
although we have received "Orphan Drug Designation" for both
ME/CFS and HIV/AIDS in the United States. We will continue to
present data from time to time in support of obtaining
accelerated review. We have not yet submitted any New Drug
Application (NDA) for Ampligen or any other drug to a North
American regulatory authority. There are no assurances that
such designation will be granted, or if granted, there are no
assurances that such designation will materially increase the
prospect of a successful commercial application. In 2000 we
submitted an emergency treatment protocol for clinically-
resistant HIV patients which was withdrawn by us during the
statutory 30 day regulatory review period in favor of a set
of individual physician-generated applications. There are no
assurances that authorizations to commence such treatments
will be granted by any regulatory authority or that the
resultant treatments, if any, will support drug efficacy and
safety. In 2001, we did receive FDA authorization for two
separate Phase IIb HIV treatment protocols in which the
Company's drug is combined with certain presently available
antiretroviral agents.
We are subject to various federal, state and local laws,
regulations and recommendations relating to such matters as
safe working conditions, laboratory and manufacturing
practices, the experimental use of animals and the use of and
disposal of hazardous or potentially hazardous substances,
including radioactive compounds and infectious disease
agents, used in connection with our research work. We believe
that our Rockville, Maryland manufacturing and quality
assurance/control facility is in substantial compliance with
all material regulations applicable to these activities as
advanced by European Union Inspections team which conducted
detailed audits in year 2000. However, we cannot give
assurances that facilities owned and operated by third
parties, that are utilized in the manufacture of our
products, are in substantial compliance, or if presently in
substantial compliance, will remain so. These third party
facilities include manufacturing operations in San Juan,
Puerto Rico; Capetown, South Africa; Columbia, Maryland;
Melbourne, Australia; and potential expansion within the
United States to new and larger facilities in 2002.
RESEARCH AND DEVELOPMENT/COLLABORATIVE AGREEMENTS
In 1994, we entered into a licensing agreement with Bioclones
(Property) limited ("Bioclones") for manufacturing and
international market development in Africa, Australia, New
Zealand, Tasmania, the United Kingdom, Ireland and certain
17
countries in South Africa, of Ampligen and Oragen?.
Bioclones is to pursue regulatory approval in the areas of
its franchise and is required to conduct Hepatitis clinical
trials, based on international GMP and GLP standards.
Bioclones has been given the first right of refusal, subject
to pricing, to manufacture at least one-third of the
worldwide sales requirement of Ampligen and other nucleic
acid-derived drugs. Pursuant to this arrangement, we
received 1)access to worldwide markets 2)commercial-scale
manufacturing resources, 3)a $3 million cash payment in 1995
from Bioclones,4) a 24.9% ownership in Ribotech, Ltd. a
company set up by Bioclones to develop and manufacture RNA
drug compounds, and 5) royalties of 8% on Bioclones nucleic
acid-derived drug sales in the licensed territories. We
regularly conduct quality control audits of the the Ribothech
manufacturing facility.
In the United States, we entered into a strategic alliance
with Gentiva Health Services (formerly known as Olsten Health
Care Services) to develop certain marketing and distribution
capacity for Ampligen to patients suffering from ME/CFS,
both in the cost recovery treatment program as well as the
home infusion market upon commercialization. Gentiva is one
of the nation's largest home health care companies with over
400 offices and sixty thousand caregivers nationwide.
Pursuant to the agreement, Gentiva will be responsible for
marketing, distribution, billing and collecting. Through this
arrangement, Hemispherx mitigates the necessity of incurring
significant up-front marketing and distribution costs.
Gentiva also works with us in connection with the Amp 516
ME/CFS PHASE III and the Amp719 and Amp720 HIV Phase IIb
clinical trials now under way. There can be no assurances
that this alliance will develop a significant commercial
position in any of its targeted chronic disease markets.
We have acquired a series of patents on Oragen?, potentially
an oral broad spectrum antiviral, Immunological enhancers
through a licensing agreement with Temple University. We were
granted an exclusive worldwide license from Temple for the
Oragen? products. Pursuant to the arrangement, we are
obligated to pay royalties of 2% to 4% on sales of Oragen?,
depending on how much technological assistance is required of
Temple. We currently pay minimum royalties of $30,000 per
year to Temple. These compounds have been evaluated in
various academic and government laboratories for application
to Chronic viral and immunological disorders.
In December, 1999, we entered into an agreement with Biovail
18
Corporation International ("Biovail"). Biovail is an
international full service pharmaceutical company engaged in
the formulation, clinical testing, registration and
manufacture of drug products utilizing advanced drug delivery
systems. Biovail is headquartered in Toronto, Canada. The
agreement grants Biovail the exclusive distributorship of our
product in the Canadian territories subject to certain terms
and conditions. In return, Biovail agrees to conduct certain
pre-marketing clinical studies and market development
programs, including without limitation, expansion of the
Emergency Drug Release Program in Canada with respect to our
products. In addition, Biovail agrees to work with us in
preparing and filing a New Drug Submission with Canadian
Regulatory Authorities. Biovail invested several million
dollars in Hemispherx equity at prices above the then current
market price and agreed to make further payments based on
reaching certain regulatory milestones. The Agreement
requires Biovail to penetrate certain market segments at
specific rates in order to maintain market exclusivity.
In May 2000, we acquired an interest in Chronix Biomedical
Corp. ("CHRONIX"). Chronix focused upon the development of
diagnostics for chronic diseases. 100,000 shares of common
stock were issued from the treasury to Chronix toward a total
equity investment of $700,000. Pursuant to a strategic
alliance agreement, we provided Chronix with $250,000 to
conduct research in an effort to develop intellectual
property on potential new products for diagnosing and
treating various chronic illnesses such as ME/CFS. The
strategic alliance agreement provides us certain royalty
rights with respect to certain diagnostic technology
developed from this research and a right of first refusal to
license certain therapeutic technology developed from this
research.
In April, 1999 we acquired a 30% equity position in the
California Institute of Molecular Medicine ("CIMM") for
$750,000 and entered into a research and development
arrangement. CIMM'S research is focused on developing
therapies for use in treating patients affected by Hepatitis
C ("HCV"). We use the equity method of accounting with
respect to this investment. During the fourth quarter of 2001
we recorded a non-cash charge of $485,000 with respect to our
investment in CIMM. This is a result of our determination
that CIMM's operations have not yet evolved to the point
where the full carrying value of our investment could be
supported pursuant to the guidelines of the Accounting
Standards Board Opinion No. 18. The amount represents the
unamortized balance of goodwill included as part of our
investment. This charge is reflected in the Consolidated
Statements of Operations under the caption "Equity loss in
19
unconsolidared affiliates." This is not an indication that
CIMM will not be successful in its current financing
efforts nor does it hinder our belief that once adequate
funding is realized, CIMM will succeed in their efforts to
advance therapeutic treatment of HCV.
HUMAN RESOURCES
As of February 22, 2002 we had 48 employees consisting of 23
full time, 3 part-time employees and 22 regulatory/research
medical personnel on a part-time basis. Such parties are paid
on a per diem or monthly basis. 27 personnel are engaged in
our research, development, clinical, manufacturing effort,
including 5 individuals in Europe. Fourteen (14) of our
personnel perform regulatory, general administration, data
processing, including bio-statistics, financial and investor
relations functions. We consider our relationship with our
employees to be good and believe that this arrangement
provides the most efficient approach to drug development at
this point in time. While we have been successful in
attracting skilled and experienced scientific personnel,
there can be no assurance that the Company will be able to
attract or retain the necessary qualified employees and/or
consultants in the future.
FINANCING
The development of our products requires the commitment of
substantial resources to conduct the time-consuming research,
preclinical development, and clinical trials that are
necessary to bring pharmaceutical products to market and to
establish commercial-scale production and marketing
capabilities. During our last three fiscal years, we have
directly spent approximately $16,653,000 in research and
development, of which approximately $5,780,000 was expended
in the year ended December 31, 2001. These direct costs do
not include the overhead and administrative costs necessary
to support the research and development effort.
At the present time, we are funding our European subsidiary
from our cash flows. Proceeds to be received from the
recently executed licensing agreement with a European entity
and income from European expansion access programs (cost
recovery) should provide substantial funds to offset the costs
of our European operations for the near term. Our
presence in Europe allows us the opportunity to form
strategic alliances and licensing agreements with European
Businesses. These alliances could provide access to
additional funding and world class scientists and physicians.
20
Our European subsidiary has an exclusive license on all the
technology and support from us concerning Ampligen for the
use of ME/CFS and other applications for all countries of the
European Union (excluding the UK where Bioclones has a
marketing license) and Norway, Switzerland, Hungary, Poland,
the Balkans, Russia, Ukraine, Romania, Bulgaria, Slovakia,
Turkey, Iceland and Liechtenstein.
As of December 31, 2001, we had approximately $8,417,000 in
cash and short term investments. Based on our current
operating plan, we expect that these funds and anticipated
receipt of revenues from the cost recovery treatment
protocols and interest income on unused funds will be
sufficient to meet our operating requirements into the second
quarter of 2003. In addition, we may receive proceeds in the
form of equity from the exercise of shareholder warrants. For
the fiscal year 2001, the Company received $8,075,000 in
equity from shareholders exercising warrants. The amount of
additional funding required, if any, will depend on the
timing of regulatory approval and commercialization of
Ampligen .
Accordingly, we may raise substantial additional funds
through additional equity or debt financing, collaborative
arrangements with corporate partners, lease financing or from
other sources in order to complete the necessary clinical
trials and the regulatory approval processes and begin
commercializing our products. If adequate funds are not
available from operations and if we were not able to secure
additional sources of financing on acceptable terms, we would
be materially adversely affected in our commercialization
process.
Risk Factors
The following cautionary statements identify important
factors that could cause our actual results to differ
materially from those projected in the forward-looking
statements made in this Annual Report. Among the key
factors that have a direct bearing on our results of
operations are:
No assurance of successful product development of Ampligen.
The development of Ampligen and our other products is
subject to a number of significant risks. Ampligen may be
found to be ineffective or to have adverse side effects, fail
to receive necessary regulatory clearances, be difficult to
manufacture on a commercial scale, be uneconomical to market
or be precluded from commercialization by proprietary rights
of third parties. Our products are in various stages of
clinical and pre-clinical development and, require further
21
clinical studies and appropriate regulatory approval
processes before any such products can be marketed. We do not
know when, or if ever, Ampligen or our other products will
be generally available for commercial sale for any
indication. Generally, only a small percentage of potential
therapeutic products are eventually approved by the FDA for
commercial sale, although the regulatory approval possibility
improve when most drugs reach Phase III Human trial status.
Our drug and related technologies are investigational and
subject to regulatory approval
All of our drugs and associate technologies are
investigational and must receive prior regulatory approval
by appropriate regulatory authorities for general use and
are currently legally available only through clinical
trials with specified disorders. Our principal development
efforts are currently focused on Ampligen, which has not
been approved for commercial use. Ampligen and other
proposed products are subject to extensive regulation by
numerous governmental authorities in the U.S. and other
countries, including, but not limited to, the Food and Drug
Administration in the U.S., the Health Protection Branch of
Canada, and the European Medicines Evaluation Agency in
Europe. Obtaining regulatory approvals is a rigorous and
lengthy process and requires the expenditure of substantial
resources. In order to obtain final regulatory approval of
a new drug, we must demonstrate to the satisfaction of the
regulatory agency that the product is safe and effective
for its intended uses and that we are capable of
manufacturing the product to the applicable regulatory
standards. We require regulatory approval in order to
market Ampligen or any other proposed product and receive
product revenues or royalties. We cannot assure you that
the drug will ultimately be demonstrated to be safe or
efficacious. In addition, while Ampligen is authorized for
use in clinical trials in the United States and other
countries, we cannot assure you that additional clinical
trial approvals will be authorized in the United States or
in other countries in a timely fashion or at all, or that
we will complete these clinical trials. If Ampligen or one
of our other proposed products does not receive regulatory
approval in the U.S. or elsewhere, our operations will be
materially adversely effected.
We may continue to incur substantial losses and our future
profitability is uncertain
We began operations in 1966 and last reported net profit
22
from 1985 through 1987. Since 1987, we have incurred
substantial operating losses, as we pursued our Clinical
trial effort and expanded our efforts in Europe. As of
December 31, 2001 our accumulated deficit was approximately
$91,649,000. We have not yet generated significant revenues
from our products and may incur substantial and increased
losses in the future. We cannot assure that we will ever
achieve significant revenues from product sales or become
profitable. We require, and will continue to require, the
commitment of substantial resources to develop our
products. We cannot assure that our product development
efforts will be successfully completed or that required
regulatory approvals will be obtained or that any products
will be manufactured and marketed successfully, or
profitability.
Additional financing requirements.
The development of our products will require the commitment
of substantial resources to conduct the time-consuming
research, preclinical development, and clinical trials that
are necessary to bring pharmaceutical products to market.
Based on our current operating plan, we anticipate receipt
of limited revenues and proceeds from the sale of Ampligen
under the Cost Recovery Treatment Clinical Programs and
holders of non-public warrants exercising warrants from
time to time. We believe these proceeds and the cash on
hand will be sufficient to meet our capital requirements
for the near future. The Company may need to raise
substantial additional funds through additional equity or
debt financing or from other sources in order to complete
the necessary clinical trials and the regulatory approval
processes and begin commercializing its products. There can
be no assurances that our non-public Warrants will be
exercised or that we will raise any proceeds from possible
equity financing, which may have a material effect on our
ability to develop our products.
No regulatory agency has approved the full commercial sale
of any of the our products.
We cannot assure you that Ampligen or any of our other
products being developed will ultimately be demonstrated to
be safe or efficacious. While Ampligen is authorized for
use in clinical trials in the United States and other
countries, we cannot assure you that additional clinical
trial approvals will be authorized in the United States, or
in other countries in a timely fashion or at all or that we
will complete these clinical trials. If Ampligen or one of
our other products does not receive regulatory approval in
the United States or elsewhere, our operations will be
significantly affected.
23
We may not be profitable unless we can protect our patents
and/or receive approval for additional pending patents.
We need to acquire enforceable patents covering the use of
Ampligen and other products for a particular disease in
order to obtain exclusive rights for the commercial sale of
Ampligen for such disease. Our success depends, in large
part, on our ability to obtain patent protection for our
products and to obtain and preserve our trade secrets and
expertise. We have been issued certain patents including
those on the use of Ampligen and Ampligen in combination
with certain other drugs for the treatment of HIV. We have
also been issued patents on the use of Ampligen in
combination with certain other drugs for the treatment of
chronic hepatitis B virus, chronic hepatitis C virus, and a
patent which affords protection on the use of Ampligen in
patients with chronic fatigue syndrome. We have not been
issued any patents in the United States for the use of
Ampligen as a sole treatment for any of the cancers which
we have sought to target. We cannot assure you that any of
these applications will be approved or that our competitors
will not seek and obtain patents regarding the use of
Ampligen in combination with various other agents, for a
particular target indication prior to us. If we cannot
protect our patents covering the use of Ampligen for a
particular disease, or obtain additional pending patents,
we may not be able to successfully market Ampligen.
The patent position of biotechnology and pharmaceutical
firms is highly uncertain and involves complex legal and
factual questions.
To date, no consistent policy has emerged regarding the
breadth of protection afforded by pharmaceutical and
biotechnology patents. There can be no assurance that
patent applications relating to our products or technology
will result in patents being issued or that, if issued,
such patents will afford meaningful protection against
competitors with similar technology. It is generally
anticipated that there may be significant litigation in the
industry regarding patent and intellectual property rights.
Such litigation could requires substantial resources from
us. No assurance can be made that our patents will provide
competitive advantages for our products or will not be
successfully challenged by competitors. No assurance can be
given that patents do not exist or could not be filed which
would have a materially adverse effect on our ability to
market our products or to obtain or maintain any
competitive position the we may achieve with respect to our
products. Our patents also may not prevent others from
developing competitive products using a different
technology.
24
There can be no assurance that we will have the financial
resources necessary to enforce patent rights we may hold.
If we cannot enforce the patent rights we currently hold we
may be required to obtain licenses from others to develop,
manufacture or market our products. There can be no
assurance that we would be able to obtain any such licenses
on commercially reasonable terms, if at all. We currently
license certain proprietary information from third parties,
some of which may have been developed with government
grants under circumstances where the government maintained
certain rights with respect to the proprietary information
developed. No assurances can be given that such third
parties will adequately enforce any rights they may have or
that the rights, if any, retained by the government will
not adversely affect the value of our license. Certain of
our know-how and technology is not fully patentable,
particularly the procedures for the manufacture of our
Ampligen drug product which are carried out according to
standard operating procedure manuals.
We may not be profitable unless we can produce Ampligen in
commercial quantities at costs acceptable to us.
We have never produced Ampligen or any other products in
large commercial quantities. Ampligen is currently
produced only for use in clinical trials. We must
manufacture our products in compliance with regulatory
requirements in commercial quantities and at acceptable
costs in order for us to be profitable. We intend to
utilize third-party manufacturers and/or facilities if and
when the need arises or, if we are unable to do so, to
build or acquire commercial-scale manufacturing facilities.
We are dependent upon certain third party supplies for key
components of the eproposed products and for substantially
all of the production process. If we cannot manufacture
commercial quantities of Ampligen or enter into third
party agreements for its manufacture at costs acceptable to
us, our operations will be significantly affected.
If our distributors do not market our product successfully,
we may notgenerate significant revenues or become profitable.
We have limited marketing and sales capability.
Accordingly we may need to enter into marketing agreements
and third party distribution agreements for our products in
order to generate significant revenues and become
profitable. To the extent that we enter into co-marketing
or other licensing arrangements, any revenues received by
us will be dependent on the efforts of third parties, and
there is no assurance that these efforts will be
successful. Our treatment IND agreement with Gentiva Health
Services offers the potential to provide significant
marketing and distribution capacity in the United States
25
while licensing and marketing agreements with certain
foreign firms should provide an adequate sales force in
South America, Africa, United Kingdom, Australia and New
Zealand, Canada and Austria.
Our partners may not able to be deliver treatment and
services to chronic disease patients including infusion
services, home nursing and other medical services through a
national network of more than 500 locations. We cannot
assure that our domestic or our foreign marketing partners
will be able to successfully distribute our products, or that
we will be able to establish future marketing or third party
distribution agreements on terms acceptable to us, or that
the cost of establishing these arrangements will not exceed
any product revenues. The failure to continue these
arrangements or to achieve other such arrangements on
satisfactory terms could have a materially adverse effect on
us.
Ampligen safety profile and scientific literature.
We believe that Ampligen has been generally well tolerated
with a low incidence of clinical toxicity, particularly given
the severely debilitating or life threatening diseases that
have been treated. A mild flushing reaction has been observed
in approximately 15% of patients treated in our various
studies. This reaction is occasionally accompanied by
erythema, a tightness of the chest, tachycardia, anxiety,
shortness of breath, subjective reports of ''feeling hot,''
sweating and nausea. The reaction is usually infusion-rate
related and can generally be controlled by slowing the
infusion rate. Other adverse side effects include liver
enzyme level elevations, diarrhea, itching, urticaria
(swelling of the skin), bronchospasm, transient hypotension,
photophobia, rash, bradycardia, transient visual
disturbances, arrhythmias, decreases in platelets and white
blood cell counts, anemia, dizziness, confusion, elevation of
kidney function tests, occasional temporary hair loss and
various flu-like symptoms, including fever, chills, fatigue,
muscular aches, joint pains, headaches, nausea and vomiting.
These flu-like side effect typically subside within several
months. One or more of the potential side effects might deter
usage of Ampligen in certain clinical situations and
therefore, could adversely effect potential revenues and
physician/patient acceptability of our product. In general
the relative safety profile to date has been will tolerated
given the severe Chronic diseases being targeted.
26
There is no assurance that successful manufacture of a drug
on a limited scale basis for investigational use will lead to
a successful transition to commercial, large-scale
production.
Small changes in methods of manufacturing may affect the
chemical structure of Ampligen and other such RNA drugs, as
well as their safety and efficacy. Changes in methods of
manufacture, including commercial scale-up may affect the
chemical structure of Ampligen and, can, among other things,
require new clinical studies and affect orphan drug status,
particularly, market exclusivity rights, if any, under the
Orphan Drug Act. The transition from limited production of
pre-clinical and clinical research quantities to production
of commercial quantities of our products will involve
distinct management and technical challenges and will require
additional management and technical personnel and capital to
the extent such manufacturing is not handled by third
parties. There can be no assurance that our efforts will be
successful or that any given product will be determined to be
safe and effective, capable of being manufactured
economically in commercial quantities or successfully
marketed.
Rapid technological change.
The pharmaceutical and biotechnology industries are subject
to rapid and substantial technological change. Technological
competition from pharmaceutical and biotechnology companies,
universities, governmental entities and others diversifying
into the field is intense and is expected to increase. Most
of these entities have significantly greater research and
development capabilities than us, as well as substantial
marketing, financial and managerial resources, and represent
significant competition for us. There can be no assurance
that developments by others will not render our products or
technologies obsolete or noncompetitive or that we will be
able to keep pace with technological developments.
Substantial competition.
Competitors have developed or are in the process of
developing technologies that are, or in the future may be,
the basis for competitive products. Some of these products
may have an entirely different approach or means of
accomplishing similar therapeutic effects to products being
developed by us. These competing products may be more
effective and less costly than our products. In addition,
conventional drug therapy, surgery and other more familiar
treatments will offer competition to our products.
Furthermore, many of our competitors have significantly
greater experience than us in pre-clinical testing and human
clinical trials of pharmaceutical products and in obtaining
FDA, EMEA HPB and other regulatory approvals of products.
Accordingly, our competitors may succeed in obtaining FDA
EMEA and HPB product approvals more rapidly than us. If any
of our products receive regulatory approvals and we commence
commercial sales of our products, we will also be competing
with respect to manufacturing efficiency and marketing
27
capabilities, areas in which we have no experience. Our
competitors may possess or obtain patent protection or other
intellectual property rights that prevent, limit or otherwise
adversely affect our ability to develop or exploit our
products.
Limited manufacturing experience and capacity.
Ampligen is currently produced only in limited quantities
for use in our clinical trials and we are dependent upon
certain third party suppliers for key components of our
products. The failure to continue these arrangements on
satisfactory terms could have a material adverse affect on
us. Also, to be successful, our products must be manufactured
in commercial quantities in compliance with regulatory
requirements and at acceptable costs. To the extent we are
involved in the production process, our current facilities
are not adequate for the production of our proposed products
for large-scale commercialization, and we currently do not
have adequate personnel to conduct commercial-scale
manufacturing. We intend to utilize third-party facilities
if and when the need arises or, if we are unable to do so,
to build or acquire commercial-scale manufacturing
facilities. We will need to comply with regulatory
requirements for such facilities, including those of the FDA
EMEA and HPB pertaining to Good Manufacturing Practices
("GMP") regulations. There can be no assurance that such
facilities can be used, built, or acquired on commercially
acceptable terms, that such facilities, if used, built, or
acquired, will be adequate for our long-term needs.
We may be subject to product liability claims from the use of
Ampligen or other of our products which could negatively affect our
future operations.
We face an inherent business risk of exposure to
product liability claims in the event that the use of
Ampligen or other of our products results in adverse
effects. This liability might result from claims made
directly by patients, hospitals, clinics or other consumers,
or by pharmaceutical companies or others manufacturing these
products on our behalf. Our future operations may be
negatively effected from the litigation costs, settlement
expenses and lost product sales inherent to these claims.
While we will continue to attempt to take appropriate
precautions, we cannot assure that we will avoid significant
product liability exposure. Although we currently maintain
worldwide product liability insurance coverage, there can be
no assurance that this insurance will provide adequate
coverage against product liability claims. While no product
liability claims are pending or threatened against us to
date, a successful product liability claim against us in
28
excess of our insurance coverage could have a negative effect
on our business and financial condition.
Members of our Scientific Advisory Board may have conflicting
interests and may disclose data and technical know how to
our competitors.
All of our Scientific Advisory Board members are
employed by other entities, which may include our
competitors. Although we require each of our Scientific
Advisory Board members to sign a non-disclosure and
non-competition agreement with respect to the data and
information that he or she receives from us, we cannot assure
you that members will abide by them. If a member were to
reveal this information to outside sources, accidentally or
otherwise, our operations could be negatively effected.
Since our business depends in large part on our ability to
keep our technical expertise confidential, any revelation of
this information to a competitor or other source could have
an adverse effect on our operations.
There is no guarantee that our trade secrets will not be
disclosed or known by our competitors.
To protect our rights, we require certain employees
and consultants to enter into confidentiality agreements with
us. There can be no assurance that these agreements will not
be breached, that we would have adequate and enforceable
remedies for any breach, or that any trade secrets of ours
will not otherwise become known or be independently developed
by competitors.
The loss of Dr. Carter's services could hurt our chances for
success.
Our success is dependent on the continued efforts of Dr.
William A. Carter because of his position as a pioneer in the
field of Nucleic Acid drugs, his being co-inventor of
Ampligen and his knowledge of the Company's overall
activities, including patents, clinical trials, corporate
relationships and relationships with various governmental
regulatory agencies. The loss of Dr. Carter's services could
have a material adverse effect on our operations. While we
have an employment agreement with Dr. William A. Carter, and
have secured key man life insurance in the amount of $2
million on the life of Dr. Carter, the loss of Dr. Carter or
other key personnel, such as Dr. David Strayer or Dr. Carol
Smith, or the failure to recruit additional personnel as
needed could have a materially adverse effect on our ability
to achieve our objectives.
Uncertainty of health care reimbursement and potential
legislation.
Our ability to successfully commercialize our products will
depend, in part, on the extent to which reimbursement for the
cost of such products and related treatment will be available
from government health administration authorities, private
29
health coverage insurers and other organizations. Significant
uncertainty exists as to the reimbursement status of newly
approved health care products, and from time to time
legislation is proposed, which, if adopted, could further
restrict the prices charged by and/or amounts reimbursable to
manufacturers of pharmaceutical products. We cannot predict
what, if any, legislation will ultimately be adopted or the
impact of such legislation on us. There can be no assurance
that third party insurance companies will allow us to charge
and receive payments for products sufficient to realize an
appropriate return on our investment in product development.
Hazardous materials.
Our business involves the controlled use of hazardous
materials, carcinogenic chemicals and various radioactive
compounds. Although we believe that our safety procedures for
handling and disposing of such materials comply in all
material respects with the standards prescribed by applicable
regulations, the risk of accidental contamination or injury
from these materials cannot be completely eliminated. In the
event of such an accident or the failure to comply with
applicable regulations, we could be held liable for any
damages that result, and any such liability could be
significant. The company does not maintain insurance coverage
against such liabilities.
Litigation in Pennsylvania involving us and Manuel Asensio
and Asensio & Company,Inc.
In 1998, we filed a multi-count complaint against Manuel
P. Asensio, Asensio & Company, Inc.("Asensio"). The action
included claims of defamation, disparagement, tortious
interference with existing and prospective business relations
and conspiracy, arising out of the Asensio's false and
defamatory statements. The complaint further alleges that
Asensio defamed and disparaged us in furtherance of a
manipulative, deceptive and unlawful short-selling scheme
between August, 1998, and the present. In 1999, Asensio
filed an answer and counterclaim alleging that and in
response to Asensio's strong sell recommendation and other
press releases, we made defamatory statements about
Asensio. We denied the material allegations of the
counterclaim. In July 2000, following dismissal in federal
court for lack of subject matter jurisdiction, we
transferred the action to the Pennsylvania State Court. In
March 2001, the defendants responded to the complaints as
amended and a trial commenced on January 30, 2002 resulting
in a withdrawal with prejudice of the counterclaim against
us. The Court's dismissal of our claims of tortuous
interference and conspiracy resulted in a jury verdict
disallowing the claims against the defendants for
defamation and disparagement. The Court now has under
30
consideration a motion to enter a verdict in favor of the
Company against the defendants and award a new trial only
on the issues of causation and damage or to award a new
trial on all claims of the Company against the defendants.
In May 2000, we received notice of a claim by Asensio in
the Supreme Court of the State of New York against us, our
Chairman and Chief Executive Officer. William A Carter and
our prior auditors in which it was alleged that we defamed
them in oral and written communications made in March 2000.
The Supreme Court of the State of New York dismissed the
claim against Dr. Carter in March, 2001 and dismissed the
claim against us in January, 2002.
Because the risk factors referred to above could cause actual
results or outcomes to differ materially from those expressed in
any forward-looking statements made by us, you should not place
undue reliance on any such forward-looking statements. Further,
any forward-looking statement speaks only as of the date on which
it is made and we undertake no obligation to update any forward-
looking statement or statements to reflect events or circumstances
after the date on which such statement is made or reflect the
occurrence of unanticipated events. New factors emerge from time
to time, and it is not possible for us to predict which will
arise. In addition, we cannot assess the impact of each factor on
our business of the extent to which any factors, or combination of
factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
ITEM 2. Properties
We currently lease and occupy a total of approximately
18,850 square feet of laboratory and office space in two
states and some office space in Paris, France. Our
headquarters is located in Philadelphia, Pennsylvania
consisting of a suite of offices of approximately 15,000
square feet. We also lease space of approximately 3,850
square feet in Rockville, Maryland for research of
development, our pharmacy, packaging, quality assurance and
quality control laboratories, as well as additional office
space. Approximately 2,000 square feet are dedicated to the
pharmacy, packaging, quality assurance and control
functions. The Company believes that its Rockville
facilities will meet its requirements, for planned clinical
trials and treatment protocols, through 2002 and possibly
longer after which time it may need to increase its
Rockville facilities either through third parties or by
building or acquiring commercial-scale facilities.
31
We also have a 24.9% interest in Ribotech, Ltd. located in
South Africa. Ribotech was established by Bioclones to
develop and operate a manufacturing facility. Manufacturing
at the pilot facility commenced in 1996. We expect that
Ribotech will start construction on a new commercial
production facility in the future, although no assurance can
be given that this will occur. The Company has no obligation
to fund this construction. Our interest in Ribotech, is a
result of the marketing and manufacturing agreement executed
with Bioclones in 1994.
ITEM 3. Legal Proceedings
In 1998, we filed a multi-count complaint against Manuel P.
Asensio, Asensio & Company, Inc. ("Asensio"). The action
included claims of defamation, disparagement, tortious
interference with existing and prospective business
relations and conspiracy, arising out of the Asensio's false
and defamatory statements. The complaint further alleges
that Asensio defamed and disparaged us in furtherance of a
manipulative, deceptive and unlawful short-selling scheme
between August, 1998, and the present. In 1999, Asensio
filed an answer and counterclaim alleging that and in
response to Asensio's strong sell recommendation and other
press releases, we made defamatory statements about Asensio.
The Company denied the material allegations of the
counterclaim. In July 2000, following dismissal in federal
court for lack of subject matter jurisdiction, we
transferred the action to the Pennsylvania State Court. In
March 2001, the defendants responded to the complaint as
amended and a trial commenced on January 30, 2002 resulting
in a withdrawal with prejudice of the counterclaim against
the Company, the Court's dismissal of the Company's claims
of tortuous interference and conspiracy and a jury verdict
disallowing the Company's claims against the defendants for
defamation and disparagement. The Court now has under
consideration a motion to enter a verdict in favor of the
Company against the defendants and award a new trial only on
the issues of causation and damage or to award a new trial
on all claims of the Company against the defendants.
In May 2000, we received notice of a claim by Asensio in the
Supreme Court of the State of New York against us, our
Chairman and Chief Executive Officer, and our prior auditors
in which it was alleged that we defamed them in oral and
written communications made in March 2000. The Supreme Court
of the State of New York dismissed the claim against Dr.
Carter in March 2001 and dismissed the claim against the
Company in January 2002.
32
Cook Imaging Corp. ("Cook") commenced action against us in
March 2000, in the United States District Court for the
Eastern District of Pennsylvania. From approximately 1997
through 1999, Cook manufactured the drug Ampligen (as well
as Ampligen placebo) for us. Cook sued for in excess of
$300,000 in unpaid invoices, including interest, related to
four Ampligen batches manufactured by Cook and delivered to
us in 1999. These shipmenst were recorded and expensed in 1999.
We denied that such amounts are owed and asserted
a counterclaim for failure to consistently manufacture
Ampligen in strict conformance with federal regulations
known as current good manufacturing practices ("cGMP"). The
court awarded Cook Imaging approximately $248,000 which
reflects the amount of the unpaid invoices plus interest,
less approximately $63,800 awarded the Company on its
counterclaims. We paid this amount to Cook during the quarter
ended June 30, 2001.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders
during the year ended December 31, 2001.
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters
In the year 2001, we acquired 120,060 shares of common stock
on the open market at an average cost of $4.66 per share. The
acquisition of the shares was authorized under a stock buy-
back program authorized by the board of directors.
In fiscal 2001, we issued 710,500 new shares of common stock
to warrant holders exercising non-public warrants at an
average exercise price of $3.23. The warrants exercised were
granted by us in the period covering 1993 through 1996. In
addition, we issued 1,445,400 new shares of common stock to
warrant holders exercising publicly traded Class A Redeemable
Warrants at $4.00 per share, and 52,198 shares in settlement
of debt and stock compensation.
The foregoing private offerings were private transactions and
exempt from registration under section 4(2) and 4(6) of the
Securities Act and/or regulation D rule 506 promulgated
under the Securities Act. Investors in these transactions are
accredited.
33
Since October 1997 our common stock and warrants have been
listed and traded on the American Stock Exchange ("AMEX")
under the symbol HEB and HEBws, respectively. The following
table sets forth the high and low list prices for our Common
Stock and the Warrants for the last two fiscal years as
reported by the AMEX. Such prices reflect inter-dealer
prices, without retail markup, mark downs or commissions and
may not necessarily represent actual transactions.
COMMON STOCK High Low
------ ------
Time Period:
January 1, 2000 through March 31, 2000 $18.538 $8.625
April 1, 2000 through June 30, 2000 11.125 5.250
July 1, 2000 through September 30, 2000 7.938 7.500
October 1, 2000 through December 31, 2000 5.875 4.438
Time Period:
January 1, 2001 through March 31, 2001 5.75 3.01
April 1, 2001 through June 30, 2001 7.15 3.96
July 1, 2001 through September 30, 2001 6.85 3.89
October 1, 2001 through December 31, 2001 5.29 3.41
WARRANTS
Time Period:
January 1, 2000 through March 31, 2000 14.938 4.875
April 1, 2000 through June 30, 2000 6.750 1.750
July 1, 2000 through September 30, 2000 4.188 2.125
October 1, 2000 through December 31, 2000 3.500 0.875
Time Period:
January 1, 2001 through March 31, 2001 $2.187 $0.690
April 1, 2001 through June 30, 2001 2.740 0.750
July 1, 2001 through September 30, 2001 2.800 0.500
October 1, 2001 through December 31, 2001 0.650 0.010
As of December 31, 2001 there were approximately 300 holders
of record of our Common Stock. This number was determined
from records maintained by the Company's transfer agent and
does not include beneficial owners of the Company's
securities whose securities are held in the names of various
dealers and/or clearing agencies.
34
Public trading of the Company Class A Redeemable warrants
ceased as of November 2, 2001 as the term of the unexercised
warrants expired. As of March 7 2002, our common stock was
trading at $3.84 per share.
We have not paid any dividends on our Common Stock in recent
years. It is management's intention not to declare or pay
dividends on our Common Stock, but to retain earnings, if
any, for the operation and expansion of the Company's
business.
ITEM 6. Selected Financial Data ( in thousands except for
share and per share data)
Year Ended
December 31 1997 1998 1999 2000 2001
------ ------ ------ ------ ------
Statement of
Operations Data
Net revenues $ 259 $ 401 $ 678 $ 788 $ 390
Net loss (6,107) (7,324) (12,298) (8,552) (9,083)
Basic and diluted
loss per share (0.35) (0.32) (0.47) (0.29) (0.29)
Shares used in
computing basic and
diluted net loss
per share. 17,275,994 22,724,913 26,380,351 29,251,846 31,433,208
Balance Sheet Data
Total Assets $ 11,543 $ 16,327 $ 14,168 $ 13,067 $ 12,035
Common Stockholders'
Equity 10,745 15,185 12,657 11,572 10,763
Other Cash Flow Data
Cash used in
operating
activities (4,642) (5,751) (6,990) (8,074) (7,281)
Capital expenditures (15) (151) (251) (171) -
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis is related to our
financial condition and results of operations for the
three years ended December 31, 2001. This information
should be read in conjunction with the Item 6 - "Selected
consolidated financial data" and our consolidated
financial statements and related notes thereto beginning
on F-1 of this Form 10-K.
35
Statement of Forward-Looking Information
Certain statements in the section are "forward-looking
statements". You should read the information under Part I,
"Special Notes Regarding Forward-Looking Statements" for
more information about our presentation of forward-looking
information.
Background
We are actively engaged in various clinical efforts and
market development strategies in the United States,
European Union, Canada, Australia and South Africa.
Disease categories under active development include
ME/CFS, Hepatitis and HIV. We maintain offices and
clinical operations in both the United States and the
European Union. We have ownership interests in R.E.D.
Laboratories a European based diagnostic company Ribotech
Ltd. a South African manufacturing entity, which produces
our raw drug materials, Chronix Biomedical Corp, a U.S.
Company focusing on the development of diagnostics for
Chronic diseases and California Institute of Molecular
Medicine, a U.S. Company developing the replication of
human Kupffer's cells obtained from HCV infected patients.
We have reported net income only from 1985 through 1987.
Since 1987, we have incurred as expected substantial
operating losses due to our conducting clinical testing.
Prior to completing an Initial Public Offering ("IPO") in
November 1995, we financed operations primarily through
the private placement of equity and debt securities,
equipment lease financing, interest income and revenues
from licensing and royalty agreements.
Our consolidated financial statements include the
financial statements of Hemispherx BioPharma, Inc. and its
four wholly-owned subsidiaries, BioPro Corp., BioAegean
Corp., Core BioTech Corp. and Hemispherx Biopharma-Europe
N.V./S.A. The U.S. subsidiaries were incorporated in
September 1994 for the purpose of developing technology
for ultimate sale into certain non-pharmaceutical
specialty consumer markets. The European subsidiary was
formed for the purpose of serving our needs with respect
to pursuing clinical trials regulatory approval and
marketing in the European Union. The U.S. subsidiaries are
inactive at this time. All significant intercompany
balances and transactions have been eliminated in
consolidation.
In 1998, we initiated a Phase III clinical study using
Ampligen to treat 230 patients affected by ME/CFS at
various medical centers in the United States. ME/CFS
36
patients that are not eligible for the Phase III clinical
study may seek treatment under a ME/CFS Cost Recovery
Treatment Program that has been authorized by the FDA.
Under the cost recovery program, enrolled patients pay for
the cost of Ampligen administered, which totals
approximately $7,200 for a 24 week treatment program.
Patients are also treated in Belgium, the United Kingdom,
Austria, and Australia under similar cost recovery
programs.
We expect to continue our research and clinical efforts
for the next several years with some benefit of certain
revenues from our cost recovery treatment programs. These
cost recovery treatment sales were approximately $390,000
in fiscal year 2001. We may continue to incur losses over
the next several years due to clinical and operating costs
which may be partially offset by cost recovery treatment
revenues and potential licensing fees. Such losses may
fluctuate from quarter to quarter as a result of
differences in the timing of significant expenses incurred
and receipt of licensing fees and/or revenues.
Acquisition of full or conditional marketing approval in
any major market would significantly affect our cash flow.
There are no assurances that such approvals will ever
occur in any major pharmaceutical market.
37
Result of Operations
Years Ended December 31, 2001 vs. 2000
Net loss
We reported a net loss of approximately $9,083,000 for the
year ended December 31, 2001 versus a net loss of
approximately $8,552,000 for the year 2000. The increase
in losses of $531,000 in 2001 was basically due to lower
ME/CFS Cost Recovery Treatment Revenues and Interest
Income. In addition we recorded a non-operating, non-cash
charge of $485,000 with respect to our investments in
unconsolidated affiliates. This amount represents the
unamortized balance of Goodwill included in the
investments. Overall operating expenses in 2001 were
$639,000 lower than operating expenses experienced in
2000. Our loss per share was $0.29 in 2001 and 2000.
Revenues
At this time, our revenues come from our ME/CFS cost
recovery treatment programs principally underway in the
U.S., Canada and Europe. These clinical programs allow us
to provide Ampligen therapy at our cost to severely
debilitated ME/CFS patients. Under this program the
patients pay for the cost of Ampligen doses infused.
These costs total approximately $7,200 for a 24 weeks
treatment program. Revenues from cost recovery treatment
programs totaled some $788,000 in 2000. In 2001, these
revenues declined by $398,000 or 51%. We expected revenues
in the U.S. to decline due to the focus of our clinical
resources on conducting and completing the AMP516 ME/CFS
Phase III clinical trial as well as the start up of the
AMP 719 and AMP 720 HIV clinical trials. Revenues from the
European cost recovery treatment programs were lower than
expected primarily due to our European investigators
spending a great deal of time in reviewing and analyzing
the clinical data collected in the treatment of some 150
patients in Belgium. The clinical data collected from
treating patients under the cost recovery treatment
programs will augment and supplement the data collected in
the U.S. Phase III ME/CFS trial.
Research and Development costs
As previously noted, our research and development is
primarily directed at developing our lead product,
Ampligen, as a therapy for use in treating various
chronic illnesses as well as cancer. In 2000 and 2001,
most of this effort was directed toward conducting and
supporting clinical trials involving patients affected
with ME/CFS. Our research and development direct costs
38
were $5,780,000 in 2001 compared to $6,136,000 spent in
2000. The lower research and development costs basically
reflect the net sum of less costs related to lower cost
recovery treatment revenues and lower expenses related to
the ME/CFS clinical trials offset by increased purchases
of polymers and increased expenses relating to the HIV
trials initiated in 2001. As to be expected, costs related
to the cost recovery treatment programs were down
approximately $275,000 due to lower revenues recorded in
2001. Also expenses relating to the ME/CFS Phase III
clinical trial were down some $863,000 in 2001 versus 2000
due to fewer patients being treated in the cost-intensive
segment of the program as the clinical trial nears
completion. This clinical trial is a multicenter, placebo-
controlled, randomized, double blind study to evaluate the
efficacy and safety of treating 230 ME/CFS patients with
Ampligen. As of February 2002, more than 220 patients
have been enrolled. These lower costs relating to our
ME/CFS programs were partially offset by an increase in
polymer purchase in 2001 in the amount of $317,000 and an
increase due to spending on the new HIV clinical trials
now underway. The polymer purchase increase was needed to
boost our on hand inventory for the production of
Ampligen. The HIV clinical trials were initiated to
evaluate the use of Ampligen in concert with other
antiviral drugs in treating patients severely afflicted
with AIDS. We expect levels of these clinical trials to
continue throughout 2002. We expect research and
development expenditures to be lower than those incurred
during 2001
General and Administrative Expenses
Excluding stock compensation expense, general and
administrative expenses were approximately $2,741,000 in
2001 versus $3,298,000 in 2000. The decrease in expense is
primary due to lower professional fees in 2001. All other
general and administrative expenses were slightly less
than recorded in 2000. Stock compensation expenses were
$671,000 or some $274,000 higher than recorded in the year
2000. The compensation reflects the imputed non-cash
expense recorded to reflect the cost of warrants granted
to outside parties for services rendered to the Company.
Equity Loss-Unconsolidated Affiliates
During the fourth quarter of
2001, we recorded a non-cash charge of $485,000 with
respect to our investment in CIMM. This is a result of
management's determination that CIMM's operations had not
39
yet evolved to the point where our full carrying value of
its investment could be supported pursuant to the
guidelines of the Accounting Standards Board Opinion No.
18. The amount represents the unamortized balance of
goodwill included as part of our investment.
Other Income/Expense
Interest and other income of $284,000 in 2001 was lower
than the $572,000 recorded in 2000. Significantly lower
interest rates on money market accounts and lower cash
available for investment basically account for the
difference. All funds in excess of our immediate need are
invested in short term high quality securities which
earned much lower interest income in 2001.
Years Ended December 31, 2000 vs. 1999
Net loss
We reported a net loss of approximately $8,552,000 for the
year ended December 31, 2000 versus a net loss of
approximately $12,298,000 for the same period in 1999.
Several factors contributed to the $3,746,000 reduction of
net losses in 2000.
Revenues
Overall revenues from the Cost Recovery Treatment Programs
in the United States, Canada and Europe increased by
$110,000 in 2000 compared to 1999. Cost recovery revenues
in the United States were up $ 115,000 or 29.5%. European
cost recovery revenues declined by $5,000 or 18%. Our
European operation received a $97,000 research grant in
2000 from a France based pharmaceutical company.
Research and Development costs
In 2000, research and development costs increased
$1,399,000 primarily due to a major increase in patients
entering the AMP 516 ME/CFS clinical trial initiated by us
in 1998 and our efforts in Europe to increase the expanded
ME/CFS access program in European countries other than
Belgium. By year end 2000 we had engaged the services of
eleven (11) clinical investigators located throughout the
United States to enroll eligible ME/CFS patients in the
Amp 516 Clinical program. As of December 31, 2000 some 212
40
patients were involved in the clinical study. Cost
incurred in producing Ampligen and other drugs for
clinical studies were $919,000 in 2000 compared to
$1,503,000 in 1999. The 1999 production costs reflect the
build-up of drug supplies needed to support clinical
trials and other research and development efforts expected
in 2000 and 2001. At present, we charge all raw material
and related production costs to research and development
expense as incurred.
General and Administrative Expenses
General and administrative expenses were down $5,026,000
in 2000 compared to 1999. Lower stock compensation expense
accounted for $4,221,000 of this decrease. This expense
was $397,000 in 2000 versus $4,618,000 in 1999. Stock
compensation expense is a non-cash expense that reflects
the fair value of our common stock and warrants granted to
non-employees of our Company for services or benefits
provided. The decrease in 2000 reflects fewer warrants
granted to consultants and other service providers. Legal
and related expenses in 2000 were lower by $354,000
compared to 1999, primarily due to lower costs from
litigation associated with the Asensio & Company lawsuit,
and other legal matters. Legal expenses associated with
the Company's defense of the Asensio countersuit are
mostly paid by our Company's liability insurance carrier.
Expenses associated with stock transactions, the filing of
registration statements and financing costs were lower by
$173,000. The cost of evaluating the feasibility of the
proposed spin-off of the Company's wholly owned
subsidiary, Core Biotech Corp., was $124,000 in 1999 which
did not occur in 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short term investments at
December 31, 2001 were $7,587,000. Cash used
for operating activities in 2001 was
$7,281.000. Additional uses of cash included expenditures of
$218,000 for patent acquisition cost, $22,000 investments
in unconsolidated subsidiaries, and $560,000 to acquire
120,060 shares of our stock.
Cash proceeds from financing activities in 2001 were
$7,587,000. $72,000 was received from the
collection of stock subscriptions and $8,075,000 was
generated from the exercise of warrants to acquire
2,155,900 shares of our stock. These amounts were partially
offset by $560,000 for the repurchase of 120,060 shares of our
common stock.
41
Our net operating cash "burn rate" for the last three
months of fiscal year 2001 approximated $607,000 per
month or $7,281,000 on an annualized basis. All clinical
trial drug supplies produced in 2001 were fully expensed
although some costs are expected to be recovered under the
expanded access cost recovery programs authorized by FDA
and regulatory bodies in other countries. Our operating
cash "burn rate" should decline somewhat in 2002 as the
AMP 516 ME/CFS clinical trial nears completion and the
European market development activity increases cost
recovery treatment revenues in Europe. Also, certain of
the operating, as well as the non-operating cash outlays
are of a one-time nature and are expected to decline.
During March 2002, Hemispherx Biopharma Europe , S.A.
(Hemispherx S.A.) was authorized to issue up to 22,000,000
Euros of seven percent (7%) convertible debentures. Such
debentures will be guaranteed by the Company and will be
converted into a specified number of shares pursuant to
the debenture agreement. Conversion is to occur on the
earlier of an initial public offering of Hemispherx S.A.
on a European stock exchange or September 30, 2003.
Hemispherx S.A. has entered into a Sales
and distribution Agreement ("Agreement") with a European
Entity. Pursuant to the terms of the Agreement the
European entity has been granted the ("Exclusive Right")
in Spain, Portugal and Andorra to market Ampligen for
the treatment of myalgic encephalitis/chronic fatigue
syndrome ("ME/CFS"). In exchange for the Exclusive Right,
the European entity which is to pay to Hemispherx S.A. a
current fee of 625,000 Euros, a fee of 1,000,000 Euros
after FDA approval of Ampligen for the treatment of
ME/CFS and a fee of 1,000,000 Euros after issuance in
Spain of final marketing authorization for Ampligen for
the treatment of ME/CFS. Additionally, this entity
has agreed to purchase from Hemispherx S.A. 1,000,000 euros
of Hemispherx S.A. seven percent (7%) convertible debentures
due September 30, 2003.
As of December 31, 2000 we had 3,916,508 Class A
Redeemable Warrants outstanding. These warrants, issued in
connection with our initial public offering the company's
IPO in 1995, were originally termed to expire on November
2, 2000. In August, 2000 the Board of Directors extended
the term of the warrants until November 2, 2001. Due to
the disruptive events of September 11, 2001 and related
difficulties, the expiration date for exercising the Class
A Redeemable Warrants was extended to November 21, 2001.
Holders of these warrants exercised 1,445,400 at $4.00 per
share during the period between December 31, 2000 and
November 2, 2001. The remaining Class A Redeemable
Warrants expired on November 21, 2001. Holders of non-
public warrants exercised an aggregate of 710,500 shares
in 2001 at an average exercise price of $3.22 per share.
42
Many of the warrants exercised were granted in 1994 and
1995. Non-public warrants outstanding were 6,927,110 as of
December 31, 2001 with an average exercise price of $4.77
per share.
Based on cash, cash equivalents and short term investments
on hand at December 31, 2001 and projected operating cash
needs, we expect to have sufficient cash on hand to fund
operations through the second quarter of 2003.
Because of our long-term capital requirements, we may seek
to access the public equity market whenever conditions are
favorable, even if we do not have an immediate need for
additional capital at that time. Any additional funding
may result in significant dilution and could involve the
issuance of securities with rights which are senior to
those of existing stockholders. We may also need
additional funding earlier than anticipated, and our cash
requirements, in general, may vary materially from those
now planned, for reasons including, but not limited to,
changes in our research and development programs, clinical
trials, competitive and technological advances, the
regulatory process, and higher than anticipated expenses
and lower than anticipated revenues from certain of our
clinical trials for which cost recovery from participants
has been approved.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board
(FASB) finalized FASB Statements No. 141, "Business
Combinations" (SFAS 141"), and No. 142, "Goodwill and other
Intangible Assest" ("SFAS 142"). SFAS 141 requires the use of
the purchase method of accounting and prohibited the use of
the poling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also
requires that the Company recognized acquired intangible
assets apart from goodwill if the acquired intangible assets
meet certain criteria. SFAS 141 applies to all business
combination initiated after June 30, 2001 and for purchase
business combination completed on or after July 1, 2001. SFAS
142 address financial accounting for acquired goodwill and
other tangibles. It requires, among other things, that
companies no longer amortize goodwill, but instead test
goodwill for impairment at least annually. SFAS 142 is
required to be applied in fiscal years beginning after
December 15, 2001. Currently, the Company has no goodwill and
will assess how the adoption of SFAS 141 and SFAS 142 will
impact its financial position and results of operations on
future acquisitions.
43
In August 2001 the FASB issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). This statement addresses financial accounting and
reporting for the impairment of disposal of Long-Lived
assets. The new guidance resolves significant implementation
issues related to SFAS 121. "Accounting for the impairment of
Long-Lived assets to be disposed of "SFAS 144 is effected for
fiscal years beginning after December 21, 2001. Currently, we
are assessing but have not determined how the adoption of
SFAS 144 will impact our financial position and results of
operations.
Critical Accounting Policies
Financial Reporting Release No. 60., which was recently
released by the Securities And Exchange Commision,
requires all companies to include a discussion of critical
accounting policies or method used in the preparation of
financial statements. Our significant accounting
accounting policies are described in Notes to the
Consolidated Financial Statements. The significant
accounting policies that we believe are most critical to
aid in fully understanding our reported financial results
are the following:
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 for the reporting period. Actual results could
differ from those estimates.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards ("SFAS") No.
121. "Accounting for Long-Lived Assets to be disposed of,"
requires that long-lived assets and certain identifiable
intangibles, including goodwill, to be held and used by an
entity, be reviewed for impairment whenever events or
changes in circumstances indicated that the carrying
amount of the assets may not be recoverable. We assess the
recoverability of fixed assets and intangibles based on
undiscounted estimated future operating cash flows. If we
determine that the carrying values have been impaired, the
measurement and recognition of the impairment will be
based on estimated future operating cash flows. During the
44
fourth quarter of 2001, we recognized an impairment of
$485,000 in connection with goodwill related to equity
investments of ours. This impairment is reflected in the
Consolidated Statement of Operations under the caption
"Equity Loss in Unconsolidated Affiliates." As of December
31, 2001, management believes that the remaining carrying
value of long-lived assets and identifiable
intangibles have not been impaired.
Patents and Trademarks
Effective October 1, 2001, the Company adopted a 17 year
estimated useful life for amortization of its patent and
trademark rights in order to more accurately reflect their
useful life. Prior to October 1, 2001, the company was using
a 10 year estimated useful life.
The adoption of the 17 life has been accounted for as a
change in accounting estimate. As a result the effect on
the Company was a $68,000 reduction of research and
development costs in the fourth quarter of the calendar
year 2001.
Patents and trademarks are stated at cost (primarily legal
fees) and are amortized using the straight line method
over the life of the assets. The Company reviews its
patents and trademark rights periodically to determine
whether they have continuing value. Such review includes
an analysis of the patent and trademark's ultimate revenue
and profitability potential on an undiscounted cash basis
to support the realizability of its respective capitalized
cost. In addition, management's review addresses whether
each patent continues to fit into Company's strategic
business plans.
Research and Developments Costs
Research and development costs are direct costs related to
both future and present products and are charged to
operations as incurred. The Company recognized research
and development direct costs of $4,737,000, $6,136,000 and
$5,780,000 in 1999, 2000 and 2001 respectively.
ITEM 7a. Quantitative and Qualitative Market Risk
45
Market Risk
We had $8.4 million in cash, cash equivalents and short
term investments at December 31, 2001. To the extent that
our cash and cash equivalents exceed our near term funding
requirements, the excess cash was invested in three (3) to
six (6) month high quality financial instruments. We
employ established policies and procedures to manage any
risks with respect to any investment exposure.
ITEM 8. Financial Statements and Supplementary Data
The consolidated balance sheets as of December 31, 2000
and 2001, and our consolidated statements of operations,
changes in stockholders' equity (deficit) and
comprehensive loss and cash flows for each of the years in
the three year period ended December 31, 2001, together
with the reports of BDO Seidman, LLP and KPMG LLP,
independent public accountants, are included elsewhere
herein. Reference is made to the "Index to Financial
Statements and Financial Statement Schedule" on page F-1
which follows page 65.
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures
On May 3, 2000, KPMG LLP ("KPMG") resigned from the
client-auditor relationship with our Company. On May 3,
2000, pursuant to the prior decision of our Board Of
Directors and Audit Committee of the Board of Directors to
seek and retain the services of an independent accounting
firm other than KPMG, we accepted the resignation of KPMG
and confirmed that the client-auditor relationship with us
had ceased.
KPMG's report on our financial statements for the fiscal
year ended December 31, 1999, did not contain any adverse
opinion or any disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or
accounting principles.
During the fiscal year December 31, 1999, which was audited by KPMG, LLP,
and the subsequent interim period through May 3, 2000, there were no
"reportable events" as described in Items 304(a) (1)
(iv) and (v) of Regulation S-K and no disagreements
between the Registrant and KPMG on any matter of
accounting principles or practice, financial statement
disclosure or auditing scope of procedure which, if not
46
resolved to the satisfaction of KPMG would have caused
KPMG to make a reference to the subject matter thereof
in connection with its reports.
On June 5, 2000, we engaged the services of BDO Seidman,
LLP as our Independent Certified Public Accountants.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors and Executive Officers of the Registrant
The following sets forth biographical information about each
of our directors and executive officers as of the date of
this Agreement:
Name Age Position
William A. Carter, M.D. 64 Chairman,
Chief Executive Officer,
and President
Robert E. Peterson 65 Chief Financial Officer
David R. Strayer, M.D. 55 Medical Director,
Regulatory Affairs
Carol A. Smith, Ph.D. 50 Director of Manufacturing
and Process Development
Josephine M. Dolhancryk 38 Treasurer,
Assistant Secretary
Richard C. Piani 75 Director
William M. Mitchell, M.D. 65 Director
Ransom W. Etheridge 62 Director and Secretary
Each director has been elected to serve until the next annual
meeting of stockholders, or until his earlier resignation,
removal from office, death or incapacity. Each executive
officer serves at the discretion of the Board of Directors,
subject to rights, if any, under contracts of employment.
WILLIAM A. CARTER, M.D., the co-inventor of Ampligen, joined
Hemispherx in 1978, and has served as: (a) Hemispherx's Chief
Scientific Officer since May 1989; (b) the Chairman of
Hemispherx's Board of Directors since January 1992; (c)
Hemispherx's Chief Executive Officer since July 1993; (d)
Hemispherx's President since April, 1995; and (e) a director
since 1987. From 1987 to 1988, Dr. Carter served as
Hemispherx's Chairman. Dr. Carter was a leading innovator in
the development of human interferon for a variety of
treatment indications including various viral diseases and
cancer. Dr. Carter received the first FDA approval to
initiate clinical trials on a beta interferon product
manufactured in the U.S. under his supervision. From 1985 to
October 1988, Dr. Carter served as Hemispherx's Chief
47
Executive Officer and Chief Scientist. He received his M.D.
degree from Duke University and underwent his post-doctoral
training at the National Institutes of Health and Johns
Hopkins University. Dr. Carter also served as Professor of
Neoplastic Diseases at Hahnemann Medical University, a
position he held from 1980 to 1998. Dr. Carter served as
Director of Clinical Research for Hahnemann Medical
University's Institute for Cancer and Blood Diseases, and as
a professor at Johns Hopkins School of Medicine and the State
University of New York at Buffalo. Dr. Carter is a Board
certified physician and author of more than 200 scientific
articles, including the editing of various textbooks on anti-
viral and immune therapy.
ROBERT E. PETERSON has served as Chief Financial Officer of
the Company since April, 1993 and served as an Independent
Financial Advisor to the Company from 1989 to April, 1993.
Also, Mr. Peterson has served as Vice President of the Omni
Group, Inc., a business consulting group based in Tulsa,
Oklahoma since 1985. From 1971 to 1984, Mr. Peterson worked
for PepsiCo, Inc. and served in various financial management
positions including Vice President and Chief Financial
Officer of PepsiCo Foods International and PepsiCo
Transportation, Inc. Mr. Peterson is a graduate of Eastern
New Mexico University.
48
DAVID R. STRAYER, M.D. who served as Professor of Medicine at
the Medical College of Pennsylvania and Hahnemann University,
has acted as the Medical Director of the Company since 1986.
He is Board Certified in Medical Oncology and Internal
Medicine with research interests in the fields of cancer and
immune system disorders. Dr. Strayer has served as principal
investigator in studies funded by the Leukemia Society of
America, the American Cancer Society, and the National
Institutes of Health. Dr. Strayer attended the School of
Medicine at the University of California at Los Angeles where
he received his M.D. in 1972.
CAROL A. SMITH, PH.D has served as the Company's Director of
Manufacturing and Process Development since April 1995, as
Director of Operations since 1993 and as the Manager of
Quality Control from 1991 to 1993, with responsibility for
the manufacture, control and chemistry of Ampligen. Dr.
Smith was Scientist/Quality Assurance Officer for Virotech
International, Inc. from 1989 to 1991 and Director of the
Reverse Transcriptase and Interferon Laboratories and a
Clinical Monitor for Life Sciences, Inc. from 1983 to 1989.
She received her Ph.D. from the University of South Florida
College of Medicine in 1980 and was an NIH post-doctoral
fellow at the Pennsylvania State University College of
Medicine.
JOSEPHINE M. DOLHANCRYK joined the Company in 1990 as Office
Manager, was promoted to Executive Assistant to the Chairman
of the Board and Chief Executive Officer in 1991 and
Assistant Secretary, Treasurer and Executive Administrator in
1995. From 1989 to 1990 Ms. Dolhancryk was President of
Medical/Business Enterprises. Ms. Dolhancryk was employed by
Children's Hospital of Philadelphia from 1984 to 1989, where
she also served as research coordinator on a drug study from
1986 to 1988. Ms. Dolhancryk attended Saint Joseph's
University and Delaware County College.
RICHARD C. PIANI has been a director of Hemispherx since
1995. Mr. Piani has been employed as a principal delegate for
Industry to the City of Science and Industry, Paris, France,
a billion dollar scientific and educational complex. Mr.
Piani provided consulting to Hemispherx in 1993, with respect
to general business strategies for Hemispherx's European
operations and markets. Mr. Piani served as Chairman of
Industrielle du Batiment-Morin, a building materials
corporation, from 1986 to 1993. Previously Mr. Piani was a
Professor of International Strategy at Paris Dauphine
University from 1984 to 1993. From 1979 to 1985, Mr. Piani
served as Group Director in Ch