FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No. 1-13441
HEMISPHERX BIOPHARMA, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-0845822
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1617 JFK Boulevard Philadelphia, Pennsylvania 19103
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(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
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. ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes (X) No ()
The aggregate market value of Common Stock held by non-affiliates at June 30,
2004, the last business day of the registrant's most recently completed second
fiscal quarter, was $171,234,810. For purposes of this calculation, it was
assumed that all Common Stock is valued at the closing price as of such date of
$3.44 per share.
The number of shares of the registrant's Common Stock outstanding as of March
11, 2005 was 49,849,325.
DOCUMENTS INCORPORATED BY REFERENCE: None.
TABLE OF CONTENTS
Page
PART I
Item 1. Business 1
Item 2. Properties 39
Item 3. Legal Proceedings 39
Item 4. Submission of Matters to a Vote of Security Holders 41
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 41
Item 6. Selected Financial Data 43
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 44
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk 59
Item 8. Financial Statements and Supplementary Data 59
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 59
Item 9A. Controls and Procedures 59
Item 9B. Other Information 61
PART III
Item 10. Directors and Executive Officers of the Registrant 62
Item 11. Executive Compensation 65
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 76
Item 13. Certain Relationships and Related Transactions 79
Item 14. Principal Accountant Fees and Services 80
PART IV
Item 15. Exhibits, Financial Statement Schedules 81
1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K (the "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
necessarily 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. All statements other than statements of historical fact included
in this Form 10-K regarding our financial position, business strategy and plans
or objectives for future operations are forward-looking statements. Without
limiting the broader description of forward-looking statements above, we
specifically note that statements regarding potential drugs, their potential
therapeutic effect, the possibility of obtaining regulatory approval, our
ability to manufacture and sell any products, market acceptance or our ability
to earn a profit from sales or licenses of any drugs or our ability to discover
new drugs in the future are all forward-looking in nature.
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. We do 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 are a biopharmaceutical company engaged in the manufacture and
clinical development of new drugs for the treatment of viral and immune based
chronic disorders. We were founded in the early 1970s, as a contract researcher
for the National Institutes of Health. After almost 30 years, 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 to aid the development of
therapeutic products for the treatment of chronic diseases. We own a
manufacturing facility in New Jersey, and have corporate offices in
Philadelphia, PA.
Our flagship products include Ampligen and Alferon. Ampligen is an
experimental drug undergoing clinical trials for the treatment of: Myalgic
Encephalomyelitis/Chronic Fatigue Syndrome (ME/CFS), HIV, and HIV/Hepatitis C
co-infection. In August 2004, we completed a Phase III clinical trial treating
over 230 ME/CFS patients with Ampligen and are in the process of preparing a new
drug application to be filed with the FDA. Alferon N Injection is the registered
trademark for our injectable formulation of Natural Alpha Interferon, which is
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approved by the U.S. Food and Drug Administration ("FDA") for the treatment of
genital warts. Alferon N is also in clinical development for treating Hepatitis
C ("HEP-C"), Multiple Sclerosis, Human Immunodeficiency Virus (HIV), West Nile
Virus ("WNV") and Severe Acute Respiratory Syndrome (SARS).
We have over 170 patents worldwide with 14 additional patents pending
comprising our core intellectual property, a fully commercialized product
(Alferon), and a GMP (good manufacturing practice) certified manufacturing
facility.
In March 2003, we began the step by step acquisition from Interferon
Sciences, Inc. ("ISI") of ISI's commercial assets, inventory concerning Alferon
N, including a limited license for the production, manufacture, use, marketing
and sale of Alferon N. Alferon N is a natural alpha interferon that has been
approved by the FDA for commercial sale for the intra-lesional treatment of
refractory or recurring external genital warts in patients 18 years of age or
older. The acquisition was completed in Spring 2004 with the acquisition of all
world wide commercial rights, the FDA approval, acquisition of 43,000 square
feet of manufacturing space in New Jersey and acquisition of all intellectual
property related to Alferon.
We outsource certain components of our research and development,
manufacturing, marketing and distribution while maintaining control over the
entire process through our quality assurance group and our clinical monitoring
group.
Since the completion of our AMP 516 ME/CFS Phase III clinical trial for use
of Ampligen(R) in the treatment of ME/CFS we have received inquiries from and,
under confidentiality agreements, are having dialogue with other companies
regarding marketing opportunities. No proposal or agreements have resulted from
the dialogue, nor can we be assured that any proposals or agreements will result
from these inquiries.
OUR PRODUCTS
Our primary products consist of our experimental compound, Ampligen,
our FDA approved natural interferon product, Alferon N Injection and our
experimental liquid natural interferon LDO.
Ampligen(R)
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.
Our drug technology utilizes specially configured RNA. Our double-stranded RNA
drug product, trademarked Ampligen(R), 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. Further studies are planned in cancer treatment but initiation dates
have not been set.
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Our proprietary development drug technology Ampligen(R) utilizes
specially configured ribonucleic acid ("RNA") and currently is protected by more
than 170 patents worldwide with 14 additional patent applications pending to
provide further proprietary protection in various international markets. Certain
patents apply to the use of Ampligen(R) alone and certain patents apply to the
use of Ampligen(R) in combination with certain other drugs. Some composition of
matter patents pertain to other new medications which have a similar mechanism
of action. During 2004, we reviewed our patents and patent applications. As a
result, various patents and patent applications were elected not to be renewed.
The non-renewed patents consisted mostly of international origin or were not
conducive to oral application.
The main U.S. ME/CFS treatment patent (#6130206) expires October 10,
2017. Our main patents covering HIV treatment (#4795744, #4820696, #5063209, and
#5091374) expire on January 3, 2006, April 11, 2006, November 5, 2008, and
February 25, 2009, respectively; Hepatitis treatment coverage is conveyed by
U.S. patent #5593973 which expires on January 14, 2014. The U.S. Ampligen(R)
Trademark (#1,515,099) expires on December 6, 2008 and can be renewed thereafter
for an additional 10 years. The U.S. FDA 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 us protection against
competition for a period of seven years following FDA approval, as well as
certain federal tax incentives, and other regulatory benefits.
Based on the results of published, peer reviewed pre-clinical studies
and clinical trials, we believe that Ampligen(R) may have broad-spectrum
anti-viral and anti-cancer properties. Over 500 patients have received
Ampligen(R) in clinical trials authorized by the FDA at over twenty clinical
trial sites across the U.S., representing the administration of more than 45,000
doses of this drug.
Alferon N Injection(R)
Interferons are a group of proteins produced and secreted by cells to
combat diseases. Researchers have identified four major classes of human
interferon: alpha, beta, gamma and omega. The ALFERON N Injection(R) product
contains a multi-species form of alpha interferon. The worldwide market for
injectable alpha interferon-based products has experienced rapid growth and
various alpha interferon injectable products are approved for many major medical
uses worldwide. Alpha interferons are manufactured commercially in three ways:
by genetic engineering, by cell culture, and from human white blood cells. All
three of these types of alpha interferon are or were approved for commercial
sale in the U.S. Our natural alpha interferon is produced from human white blood
cells.
The potential advantages of natural alpha interferon over recombinant
interferon may be based upon their respective molecular compositions. Natural
alpha interferon is composed of a family of proteins containing many molecular
species of interferon. In contrast, recombinant alpha interferon each contain
only a single species. Researchers have reported that the various species of
interferons may have differing antiviral activity depending upon the type of
virus. Natural alpha interferon presents a broad complement of species, which we
believe may account for its higher activity in laboratory studies. Natural alpha
interferon is also glycosylated (partially covered with sugar molecules). Such
glycosylation is not present on the currently U.S. marketed recombinant alpha
interferons. We believe that the absence of glycosylation may be, in part,
responsible for the production of interferon-neutralizing antibodies seen in
patients treated with recombinant alpha interferon. Although cell
culture-derived interferon is also composed of multiple glycosylated alpha
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interferon species, the types and relative quantity of these species are
different from our natural alpha interferon.
The FDA approved ALFERON N Injection(R) in 1989 for the intralesional
(within lesions) treatment of refractory (resistant to other treatment) or
recurring external genital warts in patients 18 years of age or older. Certain
types of human papillomaviruses ("HPV") cause genital warts, a sexually
transmitted disease ("STD"). A published report estimates that approximately
eight million new and recurrent causes of genital warts occur annually in the
United States alone.
The U.S. Alferon(R) Patents expire February 10, 2012 (5,503,828 and
5,676,942) and December 22, 2017 (5,989,441).
Alferon N Injection(R) [Interferon alfa-n3 (human leukocyte derived)]
is a highly purified, natural-source, glycosylated, multi-species alpha
interferon product. There are essentially no antibodies observed against natural
interferon to date and the product has a relatively low side-effect profile.
Alferon is the only natural-source, multi-species alpha interferon currently
sold in the U.S.
The recombinant DNA derived alpha interferon are now reported to have
decreased effectiveness after one year, probably due to antibody formation and
other severe toxicities. These detrimental effects have not been reported with
the use of Alferon N Injection(R) which could allow this product to assume a
much larger market share.
It is our belief that the use of Alferon N in combination with
Ampligen(R) has the potential to increase the positive therapeutic responses in
chronic life threatening viral diseases. Combinational therapy is evolving to
the standard of acceptable medical care based on a detailed examination of the
Biochemistry of the body's natural antiviral response.
Alferon LDO
ALFERON LDO is an experimental low-dose, oral liquid formulation of
Natural Alpha Interferon. It is an experimental immunotherapeutic believed to
work by stimulating an immune cascade response in the cells of the mouth and
throat, enabling it to bolster an immune response through the entire body
orally. Oral interferon would be much more economically feasible for patients
and logistically manageable in development programs in third-world countries
primarily affected by HIV and other emerging viruses (SARS, Ebola, bird flu,
etc.). Oral administration of Alferon N(R), with its affordability, low
toxicity, no production of antibodies, and broad range of potential bio
activity, could be a breakthrough treatment for viral diseases.
RESEARCH AND DEVELOPMENT
Our focus is on developing drugs for use in treating viral and immune
based chronic disorders and diseases including ME/CFS, HIV, HEP-C, HPV, SARS and
West Nile Virus. Our current clinical trial projects target treatment therapies
for ME/CFS, HIV, HPV and HEP-C and other diseases.
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Myalgic Encephalomyelitis/Chronic Fatigue Syndrome (ME/CFS)
Chronic Fatigue Syndrome (CFS), also known as Chronic Immune
Dysfunction Syndrome (CFIDS) and, myalgic encephalomyelitis (ME) is a serious
and debilitating chronic illness and a major public health problem. Long
misunderstood, under-recognized, and under-diagnosed, ME/CFS is now recognized
by both the government and private sector as a major health problem, including
the National Institutes of Health, U.S. Centers for Disease Control and
Prevention (CDC), Food and Drug Administration and Social Security
Administration, which recognizes CFS as one of the most common chronic illnesses
of our time. The CDC listed ME/CFS as a priority disease, causing severe health
and financial problems for the patients, their family, and the community. ME/CFS
is endemic in the population, but occasionally seen in clusters suggesting an
infectious basis. A variety of immunological, endocrine, autonomic nervous
system, and metabolic abnormalities have been documented. A groundbreaking,
community-based study of ME/CFS by Dr. Leonard Jason was published in the
Archives of Internal Medicine in 1999 and showed a prevalence rate of 422 of
every 100,000 Americans. As many as 800,000 people nationwide suffer from CFS,
twice the number previously estimated by the Centers for Disease Control and
Prevention. Furthermore, 90% of the patients with the illness are struggling
without the benefit of medical diagnosis or treatment. While ME/CFS strikes
people of all age, racial, ethnic, and socioeconomic groups, it is most
prevalent amongst women. Research has shown that ME/CFS is about three times as
common in women (522/100,000) as men, a rate similar to that of many autoimmune
diseases, such as multiple sclerosis and lupus. To put this into perspective,
ME/CFS is over four times more common than HIV infection in women (125/100,000),
and the rate of ME/CFS in women is considerably higher than a woman's lifetime
risk of getting lung cancer (63/100,000) as published by the CFIDS Association
of America.
The most common symptom of ME/CFS is incapacitating fatigue, which does
not subside with rest. Many severe ME/CFS patients become completely disabled or
totally bedridden and are afflicted with severe pain and mental confusion even
at rest. This debilitating tiredness is associated with flu-like symptoms such
as chills, fever, headache, sore throat, painful lymph nodes, muscle aches,
weakness and joint pain. Diagnosis of ME/CFS is a time-consuming and difficult
process which is generally arrived at by excluding other illnesses with similar
symptoms and comparing a patient's symptoms with the case definition.
Overlapping symptoms can occur with several diseases, such as fibromyalgia, Gulf
War Illnesses, and multiple chemical sensitivities. Many diseases have similar
symptoms including Lupus and Lyme disease which so closely mimic ME/CFS that
they need to be considered when making a diagnosis to rule them out.
The case definition for ME/CFS criteria calls for certain symptoms to
be present along with fatigue that interferes with physical, mental, social, and
educational activities. Both the fatigue and symptoms must have occurred for (at
least) a six month period. People with ME/CFS may experience many more than the
symptoms named in the case definition, so knowledgeable physicians will take
this fact into consideration when making a diagnosis (after other possible
reasons for symptoms have been ruled out).
The leading model of CFS pathogenesis is thought to be rooted in
abnormalities in the immune system and brain (central nervous system), both of
which affects and alters the function of the other. Because some cases of
chronic fatigue begin with a flu-like infection, several viruses have been
6
studied as possible causes because all are relatively common in the general
population, including Human Herpesvirus (HHV) 6 and 7, Retroviruses,
Epstein-Barr Virus, Enteroviruses, , as well as, Mycoplasmas, etc.. Whilst, the
etiology is likely to be caused by a collection of factors, including viral,
hormonal, stress, and other triggers for the illness in genetically,
environmentally or otherwise susceptible individuals and continues to be a
subject of discussion.
Most ME/CFS patients are treated symptomatically with traditional
treatments geared toward treating symptoms of the disease, such as improving
quality of sleep, reducing pain and treatment of depression. Clinically, a
number of different therapeutic approaches have been pursued, but with no
significant clinical success.
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. The objective of this Phase III,
clinical study, denoted as Amp 516, was to evaluate the safety and efficacy of
Ampligen(R) as a treatment for ME/CFS. Over the course of the study, we engaged
the services of 12 clinical investigators at Medical Centers in California, New
Jersey, Florida, North Carolina, Wisconsin, Pennsylvania, Nevada, Illinois, Utah
and Connecticut. These clinical investigators were 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 enrolled and randomized over 230 ME/CFS patients. We completed drug dosing
in this trial in August 2004. A preliminary review of the data collected during
this trial indicated that Ampligen improved exercise treadmill performance by
19.3% versus 4.1% in the placebo group, or more than twice the minimum
considered medically significant (6.5%), a statistically significant increase
(p=0.037). The major significance is the ability to safely obtain medical
benefits (increased physical performance) which have largely eluded others.
Also, Ampligen significantly improved important secondary endpoints associated
with Quality of Life. There was no significant difference in the number of
serious adverse events, suggesting that the drug was generally well tolerated.
Given that the FDA has already granted Ampligen Treatment Protocol Status and
Orphan Drug Status based on earlier studies, we believe these medically and
statistically significant results, when finalized, will facilitate FDA review
and approval.
Human Immunodeficiency Virus (HIV)
The Human Immunodeficiency Virus (HIV) is the cause of Acquired Immune
Deficiency Syndrome (AIDS). HIV has high rates of viral replication and
mutation, there by developing drug resistance. Resistance is least likely to
develop if treatment is based on a combination of drugs. With this approach,
resistance takes longer to develop because a virus strain resistant to one drug
could still be sensitive to another. To overcome the action of two or more drugs
simultaneously, the virus has to acquire multiple mutations. Its chances of
getting multiple mutations in the right combination to resist a number of drugs
are much smaller than its chance of acquiring a single mutation that enables it
to resist just one drug. Therefore, properly sequencing HIV drug treatment
allows for the maximum number of options and alternatives to be available for
long term.
Over fifteen antiviral drugs are currently approved by the FDA for the
treatment of HIV infection. Most target the specific HIV enzymes, reverse
7
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 mechanisms of action 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") to as low as possible. Treatments include
different classes of drugs, but they all work by stopping parts of the virus so
the virus cannot reproduce. 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.
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. The various reverse transcriptase and protease inhibitor
drugs that go into HAART have significantly 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. Some 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 make this goal impractical.
Although more potent second generation drugs are under development,
which target the reverse transcriptase and protease genes as well as new HIV
targets, such as, HIV integrase and HIV fusion inhibitors, 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 upon the same or
different viral targets. This situation has created interest in our drug
technology, which operates by a different mechanism.
We believe that the concept of Strategic Therapeutic Interruption
("STI") of HAART provides a unique opportunity to minimize the current
deficiencies of HAART while retaining the 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 may be suppressed before it can inflict damage to
the immune system of the patient. Based on recent publications (AIDS 2001,15:
F19-27 and AIDS 2001, 15:1359-1368) in 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. We
believe that Ampligen(R) combined with the STI 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(R) potentially does, although HIV is an immune-based disease.
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By using Ampligen(R) in combination with STI of HAART, we will
undertake to boost the patients' own immune system's response to help them
control their HIV when they are off of HAART. Our minimum expectation is that
Ampligen(R) 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 the hypothesis, is
that Ampligen(R) may potentiate STI of HAART to the point that the cell mediated
immune system will be sufficient to eliminate requirement for HAART. Clinical
results of using our technology has been presented at several International AIDS
Scientific Forums in 2003, including the XVI International Conference on
Antiviral Research in Savannah, Georgia in April 2003 and the 2nd IAS Conference
on HIV Pathogenesis and Treatment in Paris, France in July 2003.
Our AMP 720 HIV clinical trial is being conducted by treating
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(R) based on recently reported ex vivo
study in a peer-reviewed scientific journal (Reference: Robinson W. McDougall B
and Essay R. Mixed Dose Effect Analysis of a Biological Response Modifier
(Ampligen) with 14 FDA-approved anti-HIV Agents. Antiviral Res, 46:A48, No. 46,
2000). 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. We believe that the addition of Ampligen(R), with its potential
immunomodulatory properties, may reasonably achieve this outcome. Half of the
participants in the trial are given 400 mg of Ampligen(R) 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(R) 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 enroll 60 people on STI
with Ampligen(R) and 60 people on STI without Ampligen(R). Presently, this study
is approximately 35% enrolled at approximately ten medical centers around the
U.S.
Human Papilloma Virus (HPV)
Human papillomavirus (HPV) is one of the most common causes of sexually
transmitted infection in the world. Experts estimate that there are more cases
of genital HPV infection than of any other sexually transmitted disease (STD) in
the United States. Overall, in the United States, an estimated 20 million people
(15% of the population) are currently infected with HPV, 50-75% of which is with
high-risk types, and about 5.5 million people are infected every year. It has
been estimated that a least 50% of sexually active men and women acquire genital
HPV infection at some point in their lives: a recent estimate suggests that 80%
of women will have acquired genital HPV by age 50. An estimated 9.2 million
sexually active adolescents and young adults 15 to 24 years of age are currently
infected with HPV.
Treating genital warts does not cure a HPV infection. The virus remains
in the body in an inactive state after warts are removed. A person treated for
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genital warts may still be able to transmit the infection. Common methods for
removing genital warts involve surgically removing them. Cryotherapy is a method
that entails freezing off the wart with liquid nitrogen and is relatively
inexpensive, safe and effective. The downside to this procedure beyond the pain
factor is it must be performed by a trained health care provider. Laser therapy
(using an intense light to destroy the warts) or surgery (cutting off the warts)
has the advantage of getting rid of warts in a single office visit. However,
treatment can be expensive and the operator must be well-trained in these
methods. In addition, surgery will most likely cause scarring over the afflicted
area.
There are additionally a number of topical creams and solutions
available to treat genital warts. Bloodroot paste is made from naturally
occurring substances, but its effects on treating genital warts are not
conclusively supportive. Condylox (also called podophyllin) is a brown liquid
that causes a burning sensation as it dries, but it must be washed off by 4 to 6
hours otherwise it may be dangerous. Condylox can be quite expensive as well.
Condysil is an additional cream that may be applied. It consists of "all
natural" ingredients and its producers claim it produces no scarring. The
current leading treatment of genital warts is the topical cream Aldara, but in
fact there may be a reoccurrence rate of up to 40% when this drug is used.
Treatment for genital warts may also come in the form of injections. Intron A is
a substance that must be injected 3 times weekly and Alferon N, which is the
only natural source, multi-species alpha interferon currently sold in the US for
HPV treatment, is injected twice weekly.
Hepatitis C Virus
We are evaluating potential novel clinical programs which would involve
using Ampligen(R) to treat both HCV and HIV when they coexist on the same
patient. We expect to commence these studies in collaboration with one or more
prospective corporate partners. A collaborative Clinical study in Europe, in
conjunction with Laboratorios Del Dr. Esteve S.A., was initiated in December
2004.
This clinical program is a randomized pilot study in Phase II to
evaluate the antiretroviral effect of Ampligen in the treatment of HIV infected
patients co-infected with HCV. At present, no single drug or biological product
has bee deemed by internationally recognized regulatory agencies as being
effective against both viruses when coexisting in patents.
Severe Acute Respiratory Syndrome (SARS)
A clinical study has been approved by the Clinical Research Ethics
Committee of the Kowloon West Cluster at the Princess Margaret Hospital in Hong
Kong to evaluate the use of Alferon(R) LDO (Low Dose Oral Interferon Alfa-N3,
Human Leukocyte Derived) in normal volunteers and/or asymptomatic subjects with
exposure to a person known to have Severe Acute Respiratory Syndrome (SARS).
SARS (Severe Acute Respiratory Syndrome) is one of a group of
"emerging" infectious disease that recently attracted the intense scrutiny of
public health officials due to the severity of disease in epidemics based in
Asia, but also involving Europe and North America as well. An international
effort to limit its spread and to identify the infectious agent has been
spectacularly successful and of major significance in the prevention of a
pandemic. A replicating virus of classic coronavirus morphology was identified
initially by electron microscopy. This identification of the virus family
10
allowed the rapid identification of a new human coronavirus (SARS-CoV) as the
etiological agent of SARS. Recently it has been observed that the US FDA
approved antiviral drug, Alferon(R) (i.e.-natural interferon) has significant
activity against SARS-CoV in vitro as indicated by reduction in cytopathic
effect (CPE). This protocol is designed to respond to the anticipated
reemergence of SARS with a prophylaxis trial at epidemic sites to be conducted
to evaluate the activity of Alferon LDO (low dose oral) to prevent symptomatic
infection by SARS-CoV. Gene microarray analysis of infection by SARS-CoV and the
effect of Alferon LDO are used in the design and conduct of this clinical trial.
Differential cellular gene responses to infection and the response to Alferon
may predict clinical outcomes.
The trial methodology may have implications for treating other emerging
viruses such as avian influenza (bird flu). Present production methods for
vaccines involve the use of millions of chicken eggs and would be slow to
respond to an outbreak according to a recently convened World Health
Organization (WHO) expert panel in November 2004. Health officials are also
concerned that bird flu could mutate to cause the next pandemic and render
present vaccines under development ineffective. We have prepared more than
300,000 doses of Alferon LDO for appropriate clinical programs.
Other Diseases
In June 2004 we initiated a clinical trial in collaboration with the infectious
disease section, New York Hospital at Queens and The Medical College of Cornell
University to conduct a clinical trial for treating West Nile Virus
(WNV)infected patients with Alferon N injection. The approved clinical protocol
is entitled "Double Blinded, Placebo Controlled Trial of Alpha-Interferon
(Alferon) Therapy for West Nile Meningo Encephalitis (Protocol WN-102). As of
December 31, 2004 three patients have been enrolled in this protocol. While the
population of patients affected by WNV is relatively small, there is an ever
increasing rate of new infections each year. Forty states reported over 2,000
WNV infected people in 2004.
An FDA authorized Phase I/II study of Ampligen(R) in cancer, including
patients with renal cell carcinoma was completed in 1994. The results of this
study indicated that patients receiving high doses (200-500mg) twice weekly
experienced an increase in medium survival compared to the low dose group and as
compared to an historical control group. We received authorization from the FDA
to initiate a Phase II study using Ampligen(R) to treat patients with metastatic
renal cell carcinoma. Patients with metastatic melanoma were included in the
Phase I/II study of Ampligen(R) in cancer. The FDA has authorized us to conduct
a Phase II clinical trial using Ampligen(R) in melanoma. We do not expect to
devote any significant resources to funding these studies in the near future.
We have acquired a series of patents on Oragen(TM), potentially a set
of oral broad spectrum antivirals, immunological enhancers through a licensing
agreement with Temple University in Philadelphia, PA. We were granted an
exclusive worldwide license from Temple for the Oragen(TM) products. Pursuant to
the arrangement, we are obligated to pay royalties of 2% to 4% on sales of
Oragen(TM), 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 laboratories for application
to chronic viral and immunological disorders.
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EUROPEAN OPERATIONS
We executed a Memorandum of Understanding (MOU) in January 2004 with
Fujisawa Deutschland GmbH, ("Fuji") a major pharmaceutical corporation, granting
them an exclusive option for a limited number of months to enter a Sales and
Distribution Agreement with exclusive rights to market Ampligen(R) for ME/CFS in
Germany, Austria and Switzerland. The MOU required us to file the full report on
the results of our AMP 516 Clinical Trial with Fuji by May 31, 2004. If the full
report was not provided to Fuji by May 31, 2004 and Fuji did not wish to
exercise its option, we would have been required to refund one half of the
400,000 Euro fee. We submitted our initial report to Fuji on May 28, 2004 and
responded to subsequent inquiries for additional information. The option period
was to end 12 weeks after the later of Fuji's review of the full report on the
results of our Amp 516 clinical trial and Fuji's meeting with three of the
trial's principal investigators. We received an initial fee of 400,000 Euros
(approximately $497,000 US). If we did not provide them with the full report by
December 31, 2004 and Fuji did not wish to exercise its option, we would be
required to refund the entire fee. On November 9, 2004, we and Fuji terminated
the MOU by mutual agreement. We did not agree on the process to be utilized in
certain European Territories for obtaining commercial approval for the sale of
Ampligen(R) in the treatment of patients suffering from Chronic Fatigue Syndrome
(CFS). Instead of a centralized procedure, and in order to obtain an earlier
commercial approval of Ampligen(R) in Europe, we have determined to follow a
decentralized filing procedure which was not anticipated in the MOU. We believe
that it now is in the best interest of our stockholders to potentially
accelerate entry into selected European markets whereas the original MOU
specified a centralized registration procedure. Pursuant to mutual agreement of
the parties we refunded 200,000 Euros to Fuji in 2004.
In April 2004 we entered into an agreement with the World Foundation
AIDS Research and Prevention headquarters in Paris, France to provide Alferon
LDO and some funding in support of a clinical trial to be conducted in the Ivory
Coast area of Africa. The purpose of this clinical trial was to test the use of
Alferon N LDO (low dose oral) in treating young children of HIV infected
mothers. Unfortunately, the political unrest in that country has caused the
World Foundation to postpone the clinical trial. Efforts are underway by the
World Foundation to locate another African country in which to initiate and
conduct this trial. Dr. Luc Montagnier is President of the World Foundation AIDS
Research and Prevention and also serves as a member of our Scientific Advisory
Board.
In December 2004, Laboratorios Del Dr. Esteve S.A. ("Esteve") initiated
clinical trials in Spain to evaluate the use of Ampligen in the treatment of
patients infected by HIV/HEP-C ("co-infection"). This trial plans to recruit and
treat patients in a double-blind, randomized, Phase II B study. Patients
affected with HIV/HEP-C suffer disproportionately high death rates and,
currently, there is limited treatment available.
We continue to contact the EMEA, keeping the agency aware of our
activities, as well as the health ministries in numerous countries in the
European Union. Although no applications are on file currently with the EEU, we
are exploring various ways to accelerate the commercial availability of our
products in the various nations of the EEU, including potential appreciation of
the "foreign import" rule for accepting products already approved in the U.S.
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MANUFACTURING
Historically, we outsourced the manufacturing of Ampligen(R) to certain
contractor facilities in the United States and South Africa while maintaining
full quality control and supervision of the process. Nucleic Acid polymers
constitute the raw material used in the production of Ampligen(R). We had
acquired our raw materials from Ribotech, Ltd. ("Ribotech") located in South
Africa. Ribotech, is jointly owned by us (24.9%) and Bioclones (Proprietary),
Ltd. (75.1%). Bioclones manages and operates Ribotech. There are a limited
number of manufacturers in the United States available to provide the polymers.
At present, we do not have any agreements with third parties for the supply of
any of such materials. In order to obtain Ampligen(R) raw materials of higher
quality (GMP certified) and on a more regular production basis, we are
implementing the consolidation and transfer of manufacturing operations into our
New Brunswick facility, as well as continuing to search for additional contract
manufacturers for the manufacture of the polymers. This consolidation and
transfer of manufacturing operations has been implemented in response to a
recent inspection of the Ribotech facility in South Africa, our previous
supplier of polymers. This facility is not, at present, suitable for the
commercial manufacture of polymers used to make Ampligen(R). This transfer of
polymer manufacturing to our own facilities, and/or to another contract
manufacturer may delay certain steps in commercialization process, specifically,
an NDA filing.
Until 1999, we distributed Ampligen(R) in the form of a freeze-dried
powder to be formulated by pharmacists at the site of use. We perfected a
production process to produce ready to use liquid Ampligen(R) in a dosage form,
which will mainly be used upon commercial approval of Ampligen(R). We had
engaged the services of Schering-Plough ("Shering") to mass produce ready-to-use
Ampligen(R) doses; however, in connection with settling various manufacturing
infractions previously noted by the FDA, Schering entered into a "Consent
Decree" with the FDA whereby, among other things, it agreed to discontinue
various contract (third party) manufacturing activities at various facilities
including its San Juan, Puerto Rico, plant. Ampligen(R) (which was not involved
in any of the cited infractions) was produced at this Puerto Rico plant from
year 2000-2004. Operating under instructions from the Consent Decree, Schering
has advised us that it would no longer manufacture Ampligen(R) in this facility
at the end of the applicable term (which was 4th quarter, 2004) and would assist
us in an orderly transfer of said activities to other non Schering facilities.
Accordingly, we have entered into a Confidentiality Agreement with Mayne Pharma
Pty, Ltd ("Mayne") to lead to reinitiation and expansion of its Ampligen(R)
manufacturing program. We are currently in discussion with Mayne to provide us
with proposals on manufacturing Ampligen(R) at their facility. Mayne (formerly
known as Faulding Pharma) has already successfully manufactured Ampligen(R)
several times for research and development conducted by Bioclones, and maintains
a fully GMP compliant facility. Simultaneously, we expect to qualify at least
one other GMP facility to maintain a minimum of two independent production
sites. If we are unable to engage Mayne and/or additional manufacturers in a
timely manner, our plans to file an NDA for Ampligen(R) and, eventually, to
market and sell Ampligen(R) will be delayed. There are other pharmaceutical
processing companies that can supply our production needs.
Bioclones (PTY) Ltd. is the majority owner in Ribotech, Ltd. (we own
24.9%) which produced most of the polymers used to date in manufacturing
Ampligen(R). The licensing agreement with Bioclones presently includes South
Africa, South America, Ireland, Australia, New Zealand and the United Kingdom.
The agreement imposes certain clinical trial requirements on Ribotech, as well
as, certain GMP standards on their facilities. Bioclones has conducted limited
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clinical studies in patients with ME/CFS in Australia and South Africa. On
December 27, 2004, we initiated a lawsuit in Federal Court identifying a
conspiratorial group seeking to illegally manipulate our stock for purposes of
bringing about a hostile takeover of Hemispherx. This conspiratorial group
includes Bioclones. This legal action may adversely affect our relationship and
collaborative agreement with Bioclones.
We currently occupy and use the New Brunswick, New Jersey laboratory
and production facility that we acquired from ISI. This facility is approved by
the FDA for the manufacture of Alferon N Injection(R).
MARKETING/DISTRIBUTION
Our marketing strategy for Ampligen(R) reflects the differing health
care systems around the world, and the different marketing and distribution
systems that are used to supply pharmaceutical products to those systems. In the
U.S., we expect that, subject to receipt of regulatory approval, Ampligen(R)
will be utilized in four medical arenas: physicians' offices, clinics, hospitals
and the home treatment setting. We currently plan to use a service provided in
the home infusion (non-hospital) segment of the U.S. market to execute direct
marketing activities, conduct physical distribution of the product and handle
billing and collections. Accordingly, we are developing marketing plans to
facilitate the product distribution and medical support for indication, if and
when they are approved, in each arena. We believe that this approach will
facilitate the generation of revenue without incurring the substantial costs
associated with a sales force. Furthermore, management believes that the
approach will enable us to retain many options for future marketing strategies.
In February 1998, we and Accredo Health Services (formerly Gentiva Health
Services) entered into a Distribution/Specialty Agreement for the distribution
of Ampligen(R) for the treatment of ME/CFS patients under the U.S. treatment
protocols.
In Europe, we plan to adopt a country-by-country and, in certain cases,
an indication-by-indication marketing strategy due to the heterogeneity
regulation and alternative distribution systems in these areas. We also plan to
adopt an indication-by-indication strategy in Japan. Subject to receipt of
regulatory approval, we plan to seek strategic partnering arrangements with
pharmaceutical companies to facilitate introductions in these areas. The
relative prevalence of people from target indications for Ampligen(R) varies
significantly by geographic region, and we intend to adjust our clinical and
marketing planning to reflect the specialty of each area. We have a marketing
arrangement with Bioclones that covers South America, the United Kingdom,
Ireland, Africa, Australia, Tasmania, New Zealand, and certain other countries
and territories. In Spain, Portugal and Andorra we have entered into a Sales
Distribution Agreement with Esteve.
On December 27, 2004 we initiated a lawsuit in Federal Court
identifying a conspiratorial group seeking to illegally manipulate our stock for
purposes of bringing about a hostile takeover of Hemispherx. This conspiratorial
group includes Bioclones. This legal action may adversely affect our
relationship and collaborative agreement with Bioclones.
Our sales and marketing agreement with Engitech, LLC. to distribute
Alferon N on a nationwide basis did not produce the desired result. Sales have
not increased as planned and we are currently expanding our in house sales and
marketing effort. After much consideration, we are establishing an internal
marketing and sales infrastructure to support the sales of Alferon N Injection
in the United States, including marketing and sales support professionals based
at our headquarters in Philadelphia, Pennsylvania. We have hired and trained our
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regional sales managers and are aggressively hiring and training more expertise
in this field. We are targeting sales representatives with an average of 6-8
years of experience. Our sales force will promote Alferon to OB GYN's,
dermatologists, physicians and particularly STD Clinics, who are involved in the
treatment of patients with indications of refractory or reoccurring external
genital warts, as well as educate physicians about the growing problem and the
risks of HPV. In addition to marketing and sales personnel, we have hired The
Schwartz Group, a telemarketing group.
The Schwartz Group is a marketing partner organization that works
exclusively with companies selling products or services to Physicians,
Hospitals, and Retail Pharmacies. They perform telemarketing campaigns that are
designed to assist their clients and expand their reach and market share. We
expect to use their leads to assist our sales force in making sales calls.
COMPETITION
Our potential competitors are among the largest pharmaceutical
companies in the world, are well known to the public and the medical community,
and have substantially greater financial resources, product development, and
manufacturing and marketing capabilities than we have.
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, our competitors have significantly greater experience than we do in
pre-clinical 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 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
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.
The major competitors with drugs to treat HIV diseases include Gilead
Pharmaceutical, Pfizer, Bristol-Myers, Abbott Labs, Glaxo Smithkline, Merck and
Schering-Plough Corp. ("Schering"). ALFERON N Injection(R) currently competes
with a product produced by Schering for treating genital warts. 3M
Pharmaceutical also has received FDA approval for its immune response modifier
product for the treatment of genital and perianal warts.
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 ALFERON N products and our ongoing research and product development
activities. Ampligen(R) and the products developed from the ongoing research and
product development activities will require regulatory clearances prior to
commercialization. In particular, new human drug products for humans are subject
to rigorous preclinical and clinical testing as a condition for clearance 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
15
licensees to obtain, or any delay in obtaining, regulatory approvals could
materially adversely affect the marketing of any products developed by us and
our 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. ALFERON N
Injection(R) is only approved for use in intralesional treatment of refractory
or recurring external genital warts in patients 18 years of age or older. Use of
Alferon N Injection(R) for other applications requires regulatory approval.
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 fifty percent (50%) from the time that a commercial drug
application is actually submitted for final regulatory review. Regulatory
agencies may apply a "Fast Track" designation to a potential new drug to
accelerate the approval and commercialization process. Criteria for "Fast Track"
include: a) a devastating disease without adequate therapy and b) laboratory or
clinical evidence that the candidate drug may address the unmet medical need. As
of this date, 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 U.S. 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(R) or any
other drug to a North American regulatory authority. 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 our drug is combined with certain
presently available antiretroviral agents. Interim results were presented in
2002 and 2003 at various international scientific meetings.
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. The laboratory and production facility in New Brunswick, New
Jersey, which we acquired from ISI, is approved for the manufacture of Alferon N
Injection(R) and we believe it is in substantial compliance with all material
regulations. 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.
RESEARCH AND DEVELOPMENT/COLLABORATIVE AGREEMENTS
In 1994, we entered into a licensing agreement with Bioclones
(Proprietory) limited ("Bioclones") for manufacturing and international market
development in Africa, Australia, New Zealand, Tasmania, the United Kingdom,
Ireland and certain countries in South Africa, of Ampligen(R) and Oragen(TM).
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. Thus far, these Hepatitis studies have not yet commenced to a
meaningful level. Bioclones has been given the first right of refusal, subject
to pricing, to manufacture that amount of polymers utilized in the production of
Ampligen(R) sufficient to satisfy at least one-third of the worldwide sales
16
requirement of Ampligen(R) 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 6%
to 8% on Bioclones nucleic acid-derived drug sales in the licensed territories,
after the first $50 million of sales. The agreement with Bioclones terminates
three years after the expiration of the last of the patents supporting the
license granted to Bioclones, subject to earlier termination by the parties for
uncured defaults under the agreement, or bankruptcy or insolvency of either
party. The last patent expires on December 22, 2012. On December 27, 2004, we
initiated a lawsuit in Federal Court identifying a conspiratorial group seeking
to illegally manipulate our stock for purposes of bringing about a hostile
takeover of Hemispherx. This conspiratorial group includes Bioclones. This legal
action may adversely affect our relationship and collaborative agreement with
Bioclones.
In 1998, we entered into a strategic alliance with Accredo to develop
certain marketing and distribution capacities for Ampligen(R) in the United
States. Accredo is one of the nation's largest home health care companies with
over 400 offices and sixty thousand caregivers nationwide. Pursuant to the
agreement, Accredo assumed certain responsibilities for distribution of
Ampligen(R) for which they received a fee. Through this arrangement, Hemispherx
may mitigate the necessity of incurring certain up-front costs. Accredo has also
worked with us in connection with the Amp 511 ME/CFS cost recovery treatment
program, Amp 516 ME/CFS Phase III clinical trial and the Amp 719 (combining
Ampligen with other antiviral drugs in HIV-salvage therapy and Amp 720 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. The agreement had an initial one year term from
February 9, 1998 with successive additional one year terms unless either party
notifies the other not less than 180 days prior to the anniversary date of its
intent to terminate the agreement. Also, the agreement may be terminated for
uncured defaults, or bankruptcy, or insolvency of either party and will
automatically terminate upon our receiving an NDA for Ampligen(R) from the FDA,
at which time, a new agreement will need to be negotiated with Accredo or
another major drug distributor. There were no initial fees.
We have acquired a series of patents on Oragen(TM), potentially an oral
broad spectrum antiviral, immunological enhancer through a licensing agreement
with Temple University. We were granted an exclusive worldwide license from
Temple for the Oragen(TM) products. Pursuant to the arrangement, we are
obligated to pay royalties of 2% to 4% on sales of Oragen(TM), depending on how
much technological assistance is required of Temple. There were no initial fees
and we currently pay minimum royalties of $30,000 per year to Temple. These
compounds have been evaluated in various academic laboratories for application
to chronic viral and immunological disorders. This agreement is to remain in
effect until the date that the last licensed patent expires unless terminated
sooner by mutual consent or default due to royalties not being paid. The last
Oragen(TM) patent expires on June 1, 2018.
In December, 1999, we entered into an agreement with Biovail
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
17
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 at the appropriate time. Biovail invested $2,250,000 in Hemispherx
equity at prices above the then current market price and agreed to make an
additional investment of $1,750,000 based on receiving approval to market
Ampligen(R) in Canada from the appropriate regulatory authorities in Canada. The
agreement requires Biovail to buy exclusively from us and penetrate certain
market segments at specific rates in order to maintain market exclusivity. The
agreement terminates on December 15, 2009, subject to successive two-year
extensions by the parties and subject to earlier termination by the parties for
uncured defaults under the agreement, bankruptcy or insolvency of either party,
or withdrawal of our product from Canada for a period of more than ninety days
for serious adverse health or safety reasons.
In May 2000, we acquired an interest in Chronix Biomedical Corp.
("CHRONIX"). Chronix focuses upon the development of diagnostics for chronic
diseases. We issued 100,000 shares of common stock 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. The strategic alliance
agreement provides us with a royalty payment of 10% of all net sales of
diagnostic technology developed by Chronix for diagnosing Chronic Fatigue
Syndrome, Gulf War Syndrome and Human Herpes Virus-6 associated diseases. The
royalty continues for the longer of 12 years from September 15, 2000 or the life
of any patent(s) issued with regard to the diagnostic technology. The strategic
alliance agreement also provides us with the right of first refusal to acquire
an exclusive worldwide license for any and all therapeutic technology developed
by Chronix on or before September 14, 2012 for treating Chronic Fatigue
Syndrome, Gulf War Syndrome and Human Herpes Virus-6 associated diseases. During
the quarter ended December 31, 2002 and September 30, 2004 we recorded a noncash
charge of $292,000 and $373,000, respectively, with respect to our investment in
Chronix. This impairment reduces our carrying value to reflect a permanent
decline in Chronix's market value based on its then proposed equity offerings.
In 1998, we invested $1,074,000 for a 3.3% equity interest in R.E.D.
Laboratory ("R.E.D."). R.E.D. is a privately held biotechnology company for the
development of diagnostic markers for Chronic Fatigue Syndrome and other chronic
immune diseases. Primarily, R.E.D.'s research and development is based on
certain technology owned by Temple University and licensed to R.E.D. We have an
informal collaboration arrangement with R.E.D. to assist in this development. We
have supplied scientific data with respect to ME/CFS and engaged R.E.D. to
conduct certain blood tests for our ME/CFS clinical trials. We have no other
obligations to R.E.D. R.E.D. is headquartered in Belgium. The investment was
recorded at cost in 1998. During the three months ended June 2002 and December
2002 respectively, we recorded a non-cash charge of $678,000 and $396,000,
respectively, to operations with respect to our investment in R.E.D. These
charges were the result of our determination that R.E.D.'s business and
financial position had deteriorated to the point that our investment had been
permanently impaired.
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In April, 1999 we acquired a 30% equity position in the California
Institute of Molecular Medicine ("CIMM") for $750,000. 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 was 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 based on that company's
financial position and operating results. During 2002, CIMM continued to suffer
significant losses resulting in a deterioration of its financial condition. The
$485,000 written off during 2001 represented the unamortized balance of goodwill
included as part of our investment. Additionally, during 2001 we reduced our
investment in CIMM based on our percentage interest in CIMM's continued
operating losses. Our remaining investment at December 31, 2001 in CIMM,
representing our 30% interest in CIMM's equity at such date, was not deemed to
be permanently impaired, but was completely written off during 2002. Such amount
was not material. These charges are reflected in the Consolidated Statements of
Operations under the caption "Equity loss in unconsolidated affiliate". We still
believe CIMM will succeed in their efforts to advance therapeutic treatment of
HCV. We believe that CIMM's Hepatitis C diagnostic technology has great promise
and will fill a long-standing global void in the collective abilities to
diagnose and treat Hepatitis C infection at an early stage of the disorder.
In March 2002, our European subsidiary Hemispherx S.A. entered into a
Sales and Distribution agreement with Esteve. Pursuant to the terms of the
Agreement, Esteve was granted the exclusive right to market Ampligen(R) in
Spain, Portugal and Andorra for the treatment of ME/CFS. In addition to other
terms and other projected payments, Esteve agreed to conduct certain clinical
trials using Ampligen(R) in the patient population coinfected with HCV and HIV
viruses. The Agreement runs for the longer of ten years from the date of first
arms-length sale in the Territory, the expiration of the last Hemispherx patent
exploited by Esteve or the period of regulatory data protection for Ampligen(R)
in the applicable territory. Pursuant to the terms of the agreement Esteve is to
conduct clinical trials using Ampligen(R) to treat patients with both HCV and
HIV and is required to purchase certain minimum annual amounts of Ampligen(R)
following regulatory approval. Esteve initiated the HIV/HCV clinical trials in
Spain in late 2004. The agreement is terminable by either party if Ampligen(R)
is withdrawn from the territory for a specified period due to serious adverse
health or safety reasons; bankruptcy, insolvency or related issues of one of the
parties; or material breach of the agreement. Hemispherx may transform the
agreement into a non-exclusive agreement or terminate the agreement in the event
that Esteve does not meet specified percentages of its annual minimum purchase
requirements under the agreement. Esteve may terminate the agreement in the
event that Hemispherx fails to supply Ampligen(R) to the territory for a
specified period of time or certain clinical trials being conducted by
Hemispherx are not successful. The last patent with respect to this agreement
expires on June 5, 2012.
The development of our nucleic acid based 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 $11,938,000 in research and development, of which
approximately $3,842,000 was expended in the year ended December 31, 2004. These
direct costs do not include the overhead and administrative costs necessary to
support the research and development effort. Our European subsidiary has an
exclusive license on all the technology and support from us concerning
19
Ampligen(R) 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 mentioned above,
Hemispherx S.A. entered into a Sales and Distribution Agreement with Esteve.
Pursuant to the terms of this agreement, Esteve has been granted the exclusive
right in Spain, Portugal and Andorra to market Ampligen(R) for the treatment of
ME/CFS. See "European Operations", above for more detailed information.
HUMAN RESOURCES
As of January 31, 2005, we had 54 personnel consisting of 37 full time
employees, 17 regulatory/research medical personnel on a part-time basis. Part
time personnel are paid on a per diem or monthly basis. 35 personnel are engaged
in our research, development, clinical, and manufacturing effort. 19 of our
personnel perform regulatory, general administration, data processing, including
bio-statistics, financial and investor relations functions. We have no union
employees and we believe our relationship with our employees is good.
We believe that the combination of Hemispherx and ISI Scientific
employees has 1) significantly strengthened our overall organization, 2) added
expertise to monitor and complete our ongoing clinical trials and 3) improved
our data management and system administration.
While we have been successful in attracting skilled and experienced
scientific personnel, there can be no assurance that we will be able to attract
or retain the necessary qualified employees and/or consultants in the future.
SCIENTIFIC ADVISORY BOARD
Our Scientific Advisory Board consists of individuals who we believe
have particular scientific and medical expertise in Virology, Cancer,
Immunology, Biochemistry and related fields. These individuals will advise us
about current and long term scientific planning including research and
development. The Scientific Advisory Board will hold periodic meetings as needed
by the clinical studies in progress by us. In addition, individual Scientific
Advisory Board Members sometimes will consult with, and meet informally with our
employees. All members of the Scientific Advisory are employed by others and may
have commitments to and/or consulting agreements with other entities, including
our potential competitors. Members of the Scientific Advisory Board are
compensated at the rate of $1,000 per meeting attended or per day devoted to our
affairs.
In January 2004 a meeting was held in Philadelphia where certain
Scientific Advisory Board members from Cornell University, University of
Virginia and the Pasteur Institute gathered to review and make suggestions
pertaining to our clinical and research programs in 2004. A member of our Board
of Directors, Dr. William Mitchell of Vanderbilt University, also attended the
meeting.
RECENT FINANCING AND ASSET ACQUISITIONS
On March 12, 2003, we issued an aggregate of $5,426,000 in principal
amount of 6% Senior Convertible Debentures due January 2005 (the "March
Debentures") and an aggregate of 743,288 warrants to two investors in a private
placement for aggregate gross proceeds of $4,650,000. The March Debentures were
to mature on January 31, 2005 and bore interest at 6% per annum, payable
quarterly in cash or, subject to satisfaction of certain conditions, common
stock. Any shares of common stock issued to the investors as payment of interest
20
were valued at 95% of the average closing price of the common stock during the
five consecutive business days ending on the third business day immediately
preceding the applicable interest payment date. Pursuant to the terms and
conditions of the March Debentures, we pledged all of our assets, other than our
intellectual property, as collateral and were subject to comply with certain
financial and negative covenants, which include but were not limited to the
repayment of principal balances upon achieving certain revenue milestones.
The March Debentures were convertible at the option of the investors at
any time through January 31, 2005 into shares of our common stock. The
conversion price under the March Debentures was fixed at $1.46 per share,
subject to adjustment for anti-dilution protection for issuance of common stock
or securities convertible or exchangeable into common stock at a price less than
the conversion price then in effect.
The investors also received Warrants to acquire at any time through
March 12, 2008 an aggregate of 743,288 shares of common stock at a price of
$1.68 per share.
We entered into a Registration Rights Agreement with the investors in
connection with the issuance of the March Debentures and the Warrants. The
Registration Rights Agreement requires that we register the shares of common
stock issuable upon conversion of the Debentures, as interest shares under the
Debentures and upon exercise of the Warrants. In accordance with this agreement,
we have registered these shares for public sale.
As of December 31, 2003, the investors had converted the total
$5,426,000 principal of the March Debentures into 3,716,438 shares of our common
stock. The total interest on these debenture was $111,711 of which $17,290 was
paid in cash and $94,421 was paid by the issuance of shares of our common stock.
The investor exercised all 743,288 warrants in July 2003 which produced proceeds
in the amount of $1,248,724.
On July 10, 2003, we issued an aggregate of $5,426,000 in principal
amount of 6% Senior Convertible Debentures due July 31, 2005 (the "July 2003
Debentures") and an aggregate of 507,102 Warrants (the "July 2008 Warrants") to
the same investors who purchased the March Debentures, in a private placement
for aggregate proceeds of $4,650,000. Pursuant to the terms of the July 2003
Debentures, $1,550,000 of the proceeds from the sale of the July 2003 Debentures
were to have been held back and released to us if, and only if, we acquired
ISI's facility with in a set timeframe. These funds were released to us in
October 2003 although we had not acquired ISI's facility at that time. The July
2003 Debentures mature on July 31, 2005 and bear interest at 6% per annum,
payable quarterly in cash or, subject to satisfaction of certain conditions,
common stock. Any shares of common stock issued to the investors as payment of
interest shall be valued at 95% of the average closing price of the common stock
during the five consecutive business days ending on the third business day
immediately preceding the applicable interest payment date.
The July 2003 Debentures are convertible at the option of the investors
at any time through July 31, 2005 into shares of our common stock. The
conversion price under the July 2003 Debentures was fixed at $2.14 per share;
however, as part of the subsequent debenture placement closed on October 29,
2003 (see below), the conversion price under the July 2003 Debentures was
lowered to $1.89 per share. The conversion price is subject to adjustment for
anti-dilution protection for issuance of common stock or securities convertible
or exchangeable into common stock at a price less than the conversion price then
21
in effect. In addition, in the event that we do not pay the redemption price at
maturity, the Debenture holders, at their option, may convert the balance due at
the lower of (a) the conversion price then in effect and (b) 95% of the lowest
closing sale price of our common stock during the three trading days ending on
and including the conversion date.
The July 2008 Warrants received by the investors, as amended, were an
aggregate of 507,102 shares of common stock at a price of $2.46 per share. These
Warrants were exercised in July 2004 which produced gross proceeds in the amount
of $1,247,470.
On June 25, 2003, we issued to each of the March 12, 2003 Debenture
holders warrants to acquire at any time through June 25, 2008 an aggregate of
1,000,000 shares of common stock at a price of $2.40 per share (the "June 2008
Warrants"). These warrants were issued as incentive for the Debenture holders to
exercise prior warrant issuances. This issuance resulted in an additional debt
discount to the March debentures of $2,640,000. Pursuant to our agreement with
the Debenture holders, we have registered the shares issuable upon exercise of
these June 2008 Warrants for public sale. These warrants were exercised in May
2004 and we received gross proceeds of $2,400,000.
As of December 31, 2004, the investors had converted all of the
$5,426,000 principal of the July Debentures into 2,870,900 shares of common
stock.
On October 29, 2003, we issued an aggregate of $4,142,357 in principal
amount of 6% Senior Convertible Debentures due October 31, 2005 (the "October
2003 Debentures") and an aggregate of 410,134 Warrants (the "October 2008
Warrants") in a private placement for aggregate gross proceeds of $3,550,000.
Pursuant to the terms of the October 2003 Debentures, $1,550,000 of the proceeds
from the sale of the October 2003 Debentures were held back and were to be
released to us if, and only if, we acquired ISI's facility within 90 days of
January 26, 2004 and provide a mortgage on the facility as further security for
the October 2003 Debentures. In March 2004, we acquired the facility and we
subsequently provided the mortgage of the facility to the Debenture holders. The
October 2003 Debentures mature on October 31, 2005 and bear interest at 6% per
annum, payable quarterly in cash or, subject to satisfaction of certain
conditions, common stock. Any shares of common stock issued to the investors as
payment of interest shall be valued at 95% of the average closing price of the
common stock during the five consecutive business days ending on the third
business day immediately preceding the applicable interest payment date.
Upon completing the sale of the October 2003 Debentures, we received
$3,275,000 in net proceeds consisting of $1,725,000 from the October 2003
Debentures and $1,550,000 that had been withheld from the July 2003 Debentures.
As noted above, pursuant to the terms of the October 2003 Debentures, $1,550,000
of the proceeds from the sale of the October 2003 Debentures had been held back.
However, these proceeds were released to us in April 2004. As required by the
Debentures, we have provided a mortgage on the ISI facility as further security
for the Debentures.
The October 2003 Debentures are convertible at the option of the
investors at any time through October 31, 2005 into shares of our common stock.
The conversion price under the October 2003 Debentures is fixed at $2.02 per
share, subject to adjustment for anti-dilution protection for issuance of common
stock or securities convertible or exchangeable into common stock at a price
less than the conversion price then in effect. In addition, in the event that we
22
do not pay the redemption price at maturity, the Debenture holders, at their
option, may convert the balance due at the lower of (a) the conversion price
then in effect and (b) 95% of the lowest closing sale price of our common stock
during the three trading days ending on and including the conversion date.
The October 2008 Warrants, as amended, received by the investors were
to acquire an aggregate of 410,134 shares of common stock at a price of $2.32
per share. These Warrants were exercised in July 2004 which produced gross
proceeds in the amount of $951,510.
As of December 31, 2004, the investors had converted $2,071,178
principal amount of the Debenture into 1,025,336 shares of common stock.
On January 26, 2004, we issued an aggregate of $4,000,000 in principal
amount of 6% Senior Convertible Debentures due January 31, 2006 (the "January
2004 Debentures"), an aggregate of 790,514 warrants (the "July 2009 Warrants")
and 158,103 shares of common stock, and Additional Investment Rights (to
purchase up to an additional $2,000,000 principal amount of January 2004
Debentures commencing in six months) in a private placement for aggregate net
proceeds of $3,695,000. The January 2004 Debentures mature on January 31, 2006
and bear interest at 6% per annum, payable quarterly in cash or, subject to
satisfaction of certain conditions, common stock. Any shares of common stock
issued to the investors as payment of interest shall be valued at 95% of the
average closing price of the common stock during the five consecutive business
days ending on the third business day immediately preceding the applicable
interest payment date. Commencing July 26, 2004, we are required to start
repaying the then outstanding principal amount under the January 2004 Debentures
in monthly installments amortized over 18 months in cash or, at our option, in
shares of common stock. After one installment payment of $111,111 in our common
stock, one debenture holder exercised their right to waive further installment
payments on their note. Any shares of common stock issued to the investors as
installment payments shall be valued at 95% of the average closing price of the
common stock during the 10-day trading period commencing on and including the
eleventh trading day immediately preceding the date that the installment is due.
The January 2004 Debentures are convertible at the option of the
investors at any time through January 31, 2006 into shares of our common stock.
The conversion price under the January 2004 Debentures was fixed at $2.53 per
share, subject to adjustment for anti-dilution protection for issuance of common
stock or securities convertible or exchangeable into common stock at a price
less than the conversion price then in effect. In addition, in the event that we
do not pay the redemption price at maturity, the Debenture holders, at their
option, may convert the balance due at the lower of (a) the conversion price
then in effect and (b) 95% of the lowest closing sale price of our common stock
during the three trading days ending on and including the conversion date. Upon
completion of the August 2004 Private Placement (see below), the conversion
price was lowered to $2.08 per share. As of December 31, 2004, the remaining
principal on these debentures was $3,083,073. The investors converted $139,150
principal amount of the January 2004 Debenture into 55,000 shares of our common
stock. In addition, installment payments of $777,777 were made to our investors
amounting to 358,932 shares of our common stock.
There are two classes of July 2009 Warrants received by the Investors:
Class A and Class B. The Class A warrants are to acquire any time from July 26,
2004 through July 26, 2009 an aggregate of up to 395,257 shares of common stock
at a price of $3.29 per share. The Class B warrants are to acquire any time from
July 26, 2004 through July 26, 2009 an aggregate of up to 395,257 shares of
23
common stock at a price of $5.06 per share. On January 27, 2005, the exercise
price of these July 2009 Class A and Class B Warrants was to reset to the lesser
of their respective exercise price then in effect or a price equal to the
average of the daily price of the common stock between January 27, 2004 and
January 26, 2005. The exercise price (and the reset price) under the July 2009
Warrants also is subject to similar adjustments for anti-dilution protection.
Notwithstanding the foregoing, the exercise prices as reset or adjusted for
anti-dilution, will in no event be less than $2.58 per share. Upon completion of
the August 2004 Private Placement (see below), the exercise price was lowered to
$2.58 per share.
We also issued to the investors Additional Investment Rights pursuant
to which the investors have the right to acquire up to an additional $2,000,000
principal amount of January 2004 Debentures (the July 2004 Debentures") from us.
The July 2004 Debentures are identical to the January 2004 Debentures except
that the conversion price is $2.58. The investors exercised the Additional
Investment Rights on July 13, 2004 and we received net proceeds of 1,860,000.
Upon completion of the August 2004 Private Placement (see below), the conversion
price was lowered to $2.08 per share. As of December 31, 2004, the Debenture
holders had not converted any portion of this debenture.
Pursuant to the terms and conditions of all of the outstanding
Debentures (collectively, the "Debentures"), we have pledged all of our assets,
other than our intellectual property, as collateral, and we are subject to
comply with certain financial and negative covenants.
On May 14, 2004, in consideration for the Debenture holders' exercise
of all of the June 2008 Warrants, we issued to the holders warrants (the "May
2009 Warrants") to purchase an aggregate of 1,300,000 shares of our common
stock. As a result, the warrants were valued at $2,355,000 which was recorded as
additional debt discount. We issued 1,000,000 shares of common stock and
received gross proceeds of $2,400,000 from the exercise of the June 2008
Warrants.
The May 2009 Warrants are to acquire at any time commencing on November
14, 2004 through April 30, 2009 an aggregate of 1,300,000 shares of common stock
at a price of $4.50 per share. On May 14, 2005, the exercise price of these May
2009 Warrants will reset to the lesser of the exercise price then in effect or a
price equal to the average of the daily price of the common stock between May
15, 2004 and May 13, 2005. The exercise price (and the reset price) under the
May 2009 Warrants also is subject to adjustments for anti-dilution protection
similar to those in the other Warrants. Notwithstanding the foregoing, the
exercise price as reset or adjusted for anti-dilution, will in no event be less
than $4.008 per share. This transaction generated a non-cash charge of about
$2,300,000 financing costs in the second quarter of 2004. Upon completion of the
August 2004 Private Placement (see below), the exercise price was lowered to
$4.008 per share.
We entered into Registration Rights Agreements with the investors in
connection with the issuance of (i) the Debentures; (ii) the June 2008, July
2008, October 2008, July 2009, and May 2009 Warrants (collectively, the
"Warrants"); and (iii) the shares issued in January 2004. Pursuant to the
Registration Rights Agreements we have registered on behalf of the investors the
shares issued to them in January 2004 and 135% of the shares issuable upon
conversion of the Debentures and upon exercise of all of the Warrants. If,
subject to certain exceptions, sales of all shares so registered cannot be made
pursuant to the registration statements, then we will be required to pay to the
24
investors their pro rata share of $.00067 times the outstanding principal amount
of the relevant Debentures for each day the above condition exists.
Section 713 of the American Stock Exchange ("AMEX") Company Guide
provides that we must obtain stockholder approval before issuance, at a price
per share below market value, of common stock, or securities convertible into
common stock, equal to 20% or more of our outstanding common stock (the
"Exchange Cap"). The Debentures (including the July 2004 Debentures) and
Warrants have provisions that require us to pay cash in lieu of issuing shares
upon conversion of the Debentures or exercise of the Warrants if we are
prevented from issuing such shares because of the Exchange Cap. In May 2004, the
Debenture holders agreed to amend the provisions of these Debentures and
Warrants to limit the maximum amount of funds that the holders could receive in
lieu of shares upon conversion of the Debentures and/or exercise of the Warrants
in the event that the Exchange Cap was reached to 119.9% of the conversion price
of the relevant Debentures and 19.9% of the relevant Warrant exercise price.
As of December 31, 2004, the investors have converted $13,062,329
principal amount of debt from the Debentures issued in March, July and October
2003 and January 2004 into 8,026,606 shares of our common stock. $777,777 of
principal was repaid with the issuance of 358,932 shares of stock. The March and
July Debentures have been fully converted. The remaining principal balance on
the outstanding Debentures is convertible into shares of our stock at the option
of the investors at any time, through the maturity date. In addition, we have
paid $1,300,000 into the debenture cash collateral account as required by the
terms of the October 2003 Debentures. The amounts paid through December 31, 2004
have been accounted for as advances receivable and are reflected as such on the
accompanying balance sheet as of December 31, 2004. The cash collateral account
provides partial security for repayment of the outstanding Debentures in the
event of default.
By agreement with Cardinal Securities, LLC, for general financial
advisory services and in conjunction with the private debenture placements in
July and October 2003 and in January, May and July 2004, we paid Cardinal
Securities, LLC an investment banking fee equal to 7% of the investments made by
the two Debenture holders and issued to Cardinal the following common stock
purchase warrants: (i) 112,500 exercisable at $2.57 per share; (ii) 87,500
exercisable at $2.42 per share; and (iii) 100,000 exercisable at $3.04 per
share. The $2.57 warrants expire on July 10, 2008, the $2.42 warrants expire on
October 29, 2008 and the $3.04 warrants expire on January 5, 2009. With regard
to the exercise of the June 2008 Warrants and issuance of the May 2009 Warrants,
Cardinal received an investment banking fee of 7%, half in cash and half in
shares. With regard to the exercise of the Additional Investment Rights, the
July 2008 and October 2008 Warrants and issuance of the July 2009 Warrants,
Cardinal received an investment banking fee of 7%, 146,980 in cash and 22,703 in
shares as well as 50,000 warrants exercisable at $4.07 expiring on July 12,
2009. By agreement with Cardinal, we have registered all of the foregoing shares
and shares issuable upon exercise of the above mentioned warrants for public
sale and we have agreed to register the balance. As a result of all of the
transactions discussed above, we recorded $1,430,000 as additional debt
discount.
Section 713 of the American Stock Exchange ("AMEX") Company Guide
provides that we must obtain stockholder approval before issuance, at a price
per share below market value, of common stock, or securities convertible into
common stock, equal to 20% or more of our outstanding common stock (the
"Exchange Cap"). Taken separately, the July 2003, October 2003 and January 2004
Debenture transactions do not trigger Section 713. However, the AMEX took the
25
position that the three transactions should be aggregated and, as such,
stockholder approval was required for the issuance of common stock for a portion
of the potential exercise of the warrants and conversion of the Debentures in
connection with the January 2004 Debentures. The amount of potential shares that
we could exceed the Exchange Cap amounted to approximately 1,299,000. In
accordance with EITF 00-19, Accounting For Derivative Financial Instruments
Indexed to and Potentially Settled in a Company's Own Stock, we recorded on
January 26, 2004, a redemption obligation of approximately $1,244,000. This
liability represented the fair market value of the warrants and beneficial
conversion feature related to the 1,299,000 shares.
In addition, in accordance with EITF 00-19, we revalued this redemption
obligation associated with the beneficial conversion feature and warrants as of
March 31, 2004. We recorded an additional redemption obligation and finance
charge of $947,000 as a result of this revaluation. Upon stockholder approval,
our redemption obligation was recorded as additional paid in capital as of the
date approval was received.
The requisite stockholder approval was obtained at our Annual Meeting
of Stockholders on June 23, 2004. In accordance with EITF 00-19, we revalued
this redemption obligation associated with the beneficial conversion feature and
warrants as of June 23, 2004. We recorded a reduction in the value of the
redemption obligation and financing charge of $260,000 as a result of this
revaluation. In addition, upon receiving the requisite stockholder approval,
this redemption obligation was reclassified as additional paid in capital as of
the date the approval was received or June 23, 2004.
On July 13, 2004, the Debenture holders exercised all of the July 2003
and October 2003 Warrants and the Additional Investment Rights amounting to
approximately $4,198,980 in gross proceeds to us. We issued to these holders
warrants (the "June 2009 Warrants") to purchase an aggregate of 1,300,000 shares
of common stock. The issuance of these warrants resulted in an additional debt
discount to the note of 1,320,000 as explained below and a financing charge of
$2,351,000.
The June 2009 Warrants are to acquire at any time commencing on January
13, 2005 through June 30, 2009 an aggregate of 1,300,000 shares of common stock
at a price of $3.75 per share. On July 13, 2005, the exercise price of these
June 2009 Warrants will reset to the lesser of the exercise price then in effect
or a price equal to the average of the daily price of the common stock between
July 14, 2004 and July 12, 2005. The exercise price (and the reset price) under
the June 2009 Warrants also is subject to adjustments for anti-dilution
protection similar to those in the other Warrants. Notwithstanding the
foregoing, the exercise price as reset or adjusted for anti-dilution, will in no
event be less than $3.33 per share. Upon completion of the August 2004 Private
Placement (see below), the exercise price was lowered to $3.33 per share. This
transaction was subject to a non-cash financing charge of $1,320,000 to be
amortized over the remaining life of the October 2003 Debentures. We agreed to
register the shares issuable upon exercise of the June 2009 Warrants pursuant to
substantially the same terms as the registration rights agreements between us
and the holders. Pursuant to this obligation, we have registered the shares.
On August 5, 2004, we closed a private placement with select
institutional investors of approximately 3,617,300 shares of our Common Stock
and warrants to purchase an aggregate of up to approximately 1,085,200 shares of
its Common Stock. Jefferies & Company, Inc. acted as Placement Agent for which
26
it received a fee and Common Stock Purchase Warrants. We raised approximately
$7,524,000 ($6,984,000, net) in gross cash proceeds from this private offering.
The Warrant issued to each purchaser is exercisable for up to 30% of
the number of shares of Common Stock purchased by such Purchaser, at an exercise
price equal to $2.86 per share. Each Warrant has a term of five years and is
fully exercisable from the date of issuance.
Pursuant to the Registration Rights Agreement, made and entered into as
of August 5, 2004 (the "Rights Agreement"), we have registered the resales of
the shares issued to the Purchasers and shares issuable upon the exercise of the
Warrants.
Closing of the August 2004 Private Placement triggered the
anti-dilution provisions of the January 2004 Debentures and the July 2004
Debentures and the July 2009 Warrants and the June 2009 Warrants. The conversion
price adjustment for the Debentures noted above resulted in an adjustment of
$1,320,000 in the third quarter 2004 to the Debenture discount and additional
paid-in-capital. Any adjustment to the Debenture discount will be amortized over
the remaining life of the Debentures. The exercise price adjustment for the
above warrants resulted in a non-cash financing adjustment in the third quarter
2004 upon revaluing the warrants at the new anti-dilution pricing using the
Black-Scholes Method.
As of December 31, 2004, the Company was in violation of one minor debt
covenant contained within its debenture agreement. Subsequently, the Company
obtained a letter of waiver from the debenture holders with respect with this
matter.
In connection with the Debenture agreements, we have outstanding
letters of credit of $1 million as additional collateral.
Prior to our annual meeting of stockholders in September 2003, we had a
limited number of shares of Common Stock authorized but not issued or reserved
for issuance upon conversion or exercise or outstanding convertible and
exercisable securities such as debentures, options and warrants. Prior to the
meeting, to permit consummation of the sale of the July 2003 Debentures and the
related warrants, Dr. Carter agreed that he would not exercise his warrants or
options unless and until our stockholders approve an increase in our authorized
shares of common stock. For Dr. Carter's waiver of his right to exercise certain
options and warrants prior to approval of the increase in our authorized shares,
and for Dr. Carter's entering into a $250,000 letter of credit benefiting the
Debenture holders in the event of a default, we agreed to compensate Dr. Carter
with 1,450,000 warrants to purchase common stock at $2.20 per share. This
resulted in compensation expense of $1,769,000 which was charged to operations.
On March 11, 2003, we acquired from ISI, ISI's inventory of ALFERON N
Injection(R) and a limited license for the production, manufacture, use,
marketing and sale of this product. As partial consideration, we issued 487,028
shares of our common stock to ISI Pursuant to our agreements with ISI, we
registered these shares for public sale and ISI has reported that it has sold
all of these shares. We also agreed to pay ISI 6% of the net sales of ALFERON N
Injection(R).
On March 11, 2003, we also entered into an agreement to purchase from
ISI all of its rights to the product and other assets related to the product
including, but not limited to, real estate and machinery. For these assets, we
agreed to issue to ISI an additional 487,028 shares and to issue 314,465 shares
and 267,296 shares, respectively to the American National Red Cross and GP
27
Strategies Corporation, two creditors of ISI. We guaranteed the market value of
all but 62,500 of these shares to be $1.59 per share on the termination date. As
discussed below, we issued all of these shares and ISI, GP Strategies and the
American National Red Cross have reported that they have sold all of their
shares.
We also agreed to satisfy other liabilities of ISI which were past due
and secured by a lien on ISI's real estate and to pay ISI 6% of the net sales of
products containing natural alpha interferon.
On May 30, 2003, we issued the shares to GP Strategies and the American
National Red Cross. Pursuant to our agreements with ISI and these two creditors,
we registered the foregoing shares for public sale. We guaranteed the market
value all but 62,500 of these shares to be $1.59 per share. As a result at
December 31, 2003 the guaranteed value of these shares ($491,000), which had not
been sold by these two creditors, were reclassified to redeemable common stock.
At December 31, 2004 all shares had been sold by these two creditors and the
redeemable common stock was reclassified to equity.
On November 6, 2003, we acquired, and subsequently paid the outstanding
ISI property tax lien certificates in the aggregate amount of $457,000 from
certain investors. These tax liens were issued for property taxes and utilities
due for 2000, 2001 and 2002.
In March 2004, we issued 487,028 shares to ISI to complete the
acquisition of the balance of ISI's rights to market its product as well its
production facility in New Brunswick, New Jersey. ISI has sold all of its
shares.
The aggregated cost of the land and buildings in New Brunswick, New
Jersey was approximately $3,316,000. The cost of the land and buildings was
allocated as follows:
Land $ 423,000
Buildings 2,893,000
---------
Total cost $ 3,316,000
===========
We accounted for these transactions as a Business Combination under
Statement of Financial Accounting Standards ("SFAS") No. 141 Accounting for
Business Combinations.
On March 13, 2003, we issued 347,445 shares of our common stock to
Provesan SA, an affiliate of Esteve, in exchange for 1,000,000 Euros of
convertible preferred equity certificates of Hemispherx Biopharma Europe, S.A.,
owned by Esteve, and all dividends earned and to be earned through September 30,
2003. We agreed to register the shares issued to Provesan SA, and we have
registered these shares for public sale.
As of December 31, 2004, we had approximately $16,737,000 in cash and
short term investments. These funds should be sufficient to meet our operating
cash requirements including debt service for the near term. However, we may need
to raise 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 including the commercializing of Ampligen(R)
products. There can be no assurances that we will raise adequate funds from
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these or other sources, which may have a material adverse effect on our ability
to develop our products. Also, we have the ability to curtail discretionary
spending, including some research and development activities, if required to
conserve cash.
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.
RISK FACTORS
The following cautionary statements identify important factors that could cause
our actual result to differ materially from those projected in the
forward-looking statements made in this Form 10-K. Among the key factors that
have a direct bearing on our results of operations are:
No assurance of successful product development
Ampligen(R) and related products. The development of Ampligen(R) and
our other related products is subject to a number of significant risks.
Ampligen(R) 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 right of third parties. Our products are in
various stages of clinical and pre-clinical development and, require further
clinical studies and appropriate regulatory approval processes before any such
products can be marketed. We do not know when, if ever, Ampligen(R) 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 U.S. Food and Drug Administration ("FDA") for
commercial sale.
ALFERON N Injection(R). Although ALFERON N Injection(R) is approved for
marketing in the United States for the intralesional treatment of refractory or
recurring external genital warts in patients 18 years of age or older, to date
it has not been approved for other indications. We face many of the risks
discussed above, with regard to developing this product for use to treat other
ailments such as multiple sclerosis and cancer.
Our drug and related technologies are investigational and subject to regulatory
approval. If we are unable to obtain regulatory approval, our operations will be
significantly affected.
All of our drugs and associated technologies other than ALFERON N Injection(R)
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. At present, ALFERON N
Injection(R) is only approved for the intralesional treatment of refractory or
recurring external genital warts in patients 18 years of age or older. Use of
ALFERON N Injection(R) for other indications will require regulatory approval.
29
In this regard, Interferon Sciences, Inc. ("ISI"), the company from which we
obtained our rights to ALFERON N Injection(R), conducted clinical trials related
to use of ALFERON N Injection(R) for treatment of HIV and Hepatitis C. In both
instances, the FDA determined that additional studies were necessary in order to
fully evaluate the efficacy of ALFERON N Injection(R) in the treatment of HIV
and Hepatitis C diseases. We have no obligation or immediate plans to conduct
these additional studies at this time.
Our products, including Ampligen(R), are subject to extensive regulation by
numerous governmental authorities in the U.S. and other countries, including,
but not limited to, the FDA in the U.S., the Health Protection Branch ("HPB") of
Canada, and the European Medical Evaluation Agency ("EMEA") 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(R) or any other proposed product and receive product revenues or
royalties. We cannot assure you that Ampligen(R) will ultimately be demonstrated
to be safe or efficacious. In addition, while Ampligen(R) 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(R) or one of our other products does
not receive regulatory approval in the U.S. or elsewhere, our operations most
likely will be materially adversely affected.
We may continue to incur substantial losses and our future profitability is
uncertain.
We began operations in 1966 and last reported net profit 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, 2004 our accumulated deficit was approximately $137,983,000. 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
be profitable.
We may require additional financing which may not be available.
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.
As of December 31, 2004, we had approximately $16,737,000 in cash and cash
equivalents and short-term investments. We believe that these funds should be
sufficient to meet our operating cash requirements including debt service during
the next 24 months. We may need to raise 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 Ampligen(R) products. There can be no assurances that we will
30
raise adequate funds from these or other sources, which may have a material
adverse effect on our ability to develop our products.
We may not be profitable unless we can protect our patents and/or receive
approval for additional pending patents.
We need to preserve and acquire enforceable patents covering the use of
Ampligen(R) for a particular disease in order to obtain exclusive rights for the
commercial sale of Ampligen(R) for such disease. We obtained all rights to
ALFERON N Injection(R), and we plan to preserve and acquire enforceable patents
covering its use for existing and potentially new diseases. Our success depends,
in large part, on our ability to preserve and obtain patent protection for our
products and to obtain and preserve our trade secrets and expertise. Certain of
our know-how and technology is not patentable, particularly the procedures for
the manufacture of our drug product which are carried out according to standard
operating procedure manuals. We have been issued certain patents including those
on the use of Ampligen(R) and Ampligen(R) in combination with certain other
drugs for the treatment of HIV. We also have been issued patents on the use of
Ampligen(R) 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(R) in patients with Chronic Fatigue Syndrome.
We have not yet been issued any patents in the United States for the use of
Ampligen(R) as a sole treatment for any of the cancers, which we have sought to
target. With regard to ALFERON N Injection(R), we have acquired from ISI its
patents for natural alpha interferon produced from human peripheral blood
leukocytes and its production process. We cannot assure that our competitors
will not seek and obtain patents regarding the use of similar products in
combination with various other agents, for a particular target indication prior
to our doing such. If we cannot protect our patents covering the use of our
products for a particular disease, or obtain additional patents, we may not be
able to successfully market our products.
The patent position of biotechnology and pharmaceutical firms is highly
uncertain and involves comp