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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-21699
VIROPHARMA INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER.)
DELAWARE 94-2347624
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
76 GREAT VALLEY PARKWAY 19355
MALVERN, PENNSYLVANIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 610-651-0200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which
None registered:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.002
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: YES X NO
Indicate by check mark 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. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $39,513,251 as of February 28, 1997, based upon
the closing sale price per share of the Common Stock, as quoted on The Nasdaq
Stock Market. This amounts excludes 6,067,729 shares of Common Stock held by
directors, officers and stockholders with representatives on the board of
directors whose ownership exceeded five percent of the Common Stock outstanding
at February 28, 1997. Exclusion of shares held by any person should not be
construed to indicate that such person possesses the power, direct or indirect,
to direct or cause the direction of the management or policies of the
registrant, or that such person is controlled by or under common control with
the registrant.
The number of shares of the registrant's Common Stock outstanding as of
February 28, 1997 was 9,077,116.
DOCUMENTS INCORPORATED BY REFERENCE
As stated in Part III of this Annual Report on Form 10-K, portions of the
registrant's definitive proxy statement (the "Proxy Statement") for the
registrant's 1997 Annual Meeting of Stockholders to be held on May 28, 1997 are
incorporated by reference in Part III of this Annual Report on Form 10-K.
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DOCUMENTS INCORPORATED BY REFERENCE
As stated in Part III of this Annual Report on Form 10-K, portions of the
registrant's definitive proxy statement (the "Proxy Statement") for the
registrant's 1997 Annual Meeting of Stockholders to be held on May 28, 1997 are
incorporated by reference in Part III of this Annual Report on Form 10-K.
VIROPHARMA INCORPORATED
FORM 10-K ANNUAL REPORT
For Fiscal Year Ended December 31, 1996
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business ....................................................... 1
Item 2. Properties ..................................................... 18
Item 3. Legal Proceedings .............................................. 18
Item 4. Submission of Matters to a Vote of Security Holders ............ 18
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters ................................. 21
Item 6. Selected Financial Data......................................... 22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 23
Item 8. Financial Statements and Supplementary Data .................... 25
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ...................... 25
PART III
Item 10. Directors and Executive Officers of the Registrant ............. 25
Item 11. Executive Compensation ......................................... 25
Item 12. Security Ownership of Certain Beneficial
Owners and Management ....................................... 25
Item 13. Certain Relationships and Related Transactions ................. 25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ......................................... 26
Index to Financial Statements and Schedules ............................... F-1
This Annual Report on Form 10-K contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in forward-looking statements. Factors
that might cause or contribute to such differences include, but are not limited
to, those discussed in "Important Factors Regarding Forward-Looking Statements"
attached hereto as Exhibit 99.
Unless the context indicates otherwise, the terms "ViroPharma" and
Company refer to ViroPharma Incorporated. "ViroPharma" is a trademark and
service mark of the Company. The Company has filed applications to register the
trademark and service mark in the United States and Canada. All other brand
names or trademarks appearing in this Annual Report on Form 10-K are the
property of their respective owners.
-i-
PART I
BUSINESS
Overview
ViroPharma is engaged in the discovery and development of proprietary
antiviral pharmaceuticals for the treatment of diseases caused by RNA viruses.
The Company has focused its current drug development and discovery activities
on a number of RNA virus diseases including viral meningitis, hand-foot-and-
mouth disease, "summer flu," the common cold, influenza, hepatitis C and viral
pneumonia. Each year, the majority of the world's population is afflicted by
at least one of these diseases, for which antiviral therapies are currently
either inadequate or unavailable. The Company's most advanced compound,
pleconaril, is currently being developed for the treatment of four of these
diseases. ViroPharma has completed a Phase IIa clinical trial which
demonstrated that all disease measures were significantly reduced for the
pleconaril treated group in "summer flu." The Company is conducting a Phase
IIb clinical trial with pleconaril for viral meningitis, has initiated a Phase
II clinical trial for hand-foot-and-mouth disease and anticipates initiating a
Phase II clinical trial for the common cold in patents with asthma and an
additional Phase II clinical trial for "summer flu" in late 1997. The Company
has additional compounds in research and preclinical stages of development for
treatment of influenza, hepatitis C and viral pneumonia. ViroPharma believes
its drug discovery and development technologies and expertise have potential
applicability to a broad range of diseases caused by RNA viruses.
RNA viruses are responsible for the majority of human viral diseases,
causing illnesses ranging from acute and chronic ailments to fatal infections.
RNA viruses continue to emerge, spreading from rural and developing regions of
the world to urbanized centers. Despite efforts by the scientific and medical
communities to develop vaccines and pharmaceuticals to prevent and treat
certain of these diseases, medicines are currently inadequate or are not
available for the majority of RNA virus diseases. The Company believes the
significance and prevalence of RNA virus diseases, and the limited
availability and effectiveness of current antiviral therapeutics, has created
a compelling need for antiviral pharmaceuticals to treat these diseases.
Diseases Caused By RNA Viruses
Viruses are intracellular parasites that require a living host cell
within which to reproduce. They are composed of genetic material enclosed in a
protective protein coat. The genetic material of a virus, which may be in the
form of either deoxyribonucleic acid ("DNA") or ribonucleic acid ("RNA"), is
unique and characteristic of that virus and provides the blueprint for virus
reproduction.
There are three fundamental classes of viruses: DNA viruses, retroviruses
and RNA viruses. DNA viruses store their genetic material as DNA and replicate
their DNA in a manner similar to human cells. Retroviruses and RNA viruses
store their genetic material as RNA. Retroviruses reproduce by first
converting their RNA into DNA in infected cells, then converting this DNA back
into RNA. RNA viruses, on the other hand, have the unique ability to directly
reproduce their RNA to create new RNA virus offspring through a process known
as RNA replication. This ability to directly replicate RNA distinguishes RNA
viruses from DNA viruses, retroviruses and human cells.
Infection by viruses, and their ensuing replication, can lead to disease.
Viral epidemics, pandemics, acute outbreaks and chronic diseases continue to
cause an enormous amount of human suffering and death. DNA viruses cause
diseases such as herpes, hepatitis B and papillomas (warts). The retrovirus
HIV (human immunodeficiency virus) causes AIDS. RNA viruses, however, are
responsible for the majority of human viral diseases, causing a multitude of
illnesses ranging from acute and chronic ailments to fatal infections.
-1-
The following is a list of selected diseases caused by RNA viruses:
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RNA Virus Diseases
Bronchiolitis Enterovirus meningitis Myocarditis
Dengue fever Hantavirus pulmonary Pneumonia
Diarrhea diseases syndrome Rabies
Ebola fever Hemorrhagic conjunctivitis Rhinovirus common cold
Encephalitis Hemorrhagic fevers Rubella
Enterovirus "summer flu" Hepatitis C, A, D and E Tick fevers
Enterovirus Influenza Yellow fever
hand-foot-and-mouth Measles
The Company has focused its current drug development and discovery activities
on the italicized diseases.
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[Please note that the italicized diseases are: Enterovirus "summer flu,"
Hepatitis C, Influenza, Enterovirus meningitis, Pneumonia and Rhinovirus common
cold. The language in these brackets is for purposes of the EDGAR filing only
and will not appear in the printed copy of this report.]
The medical community has attempted to address several of these diseases
with vaccines, which are prophylactic in nature and intended to prevent
disease, and antiviral pharmaceuticals, which are therapeutic in nature and
intended to treat disease. For most RNA virus diseases, however, medicines are
either inadequate or simply not available.
Vaccines are designed to prevent disease by eliciting a protective
antiviral immune response in vaccinated individuals. This response involves
the production by the body of specific antibodies and white blood cells, both
of which attempt to destroy the virus and virus-infected cells. Vaccines do
not exist for most RNA virus diseases. Of those that are available, most are
unable to effectively control disease for one or more reasons. Many viruses
constantly and rapidly change their outer surface, thereby rendering existing
vaccines obsolete. Moreover, many individuals at greatest risk for serious
disease, including the young, the elderly and the immunocompromised, fail to
respond to vaccines. Finally, existing vaccines are not readily available to
certain susceptible populations and, even when available, are often not widely
used.
Antiviral pharmaceuticals to treat RNA virus diseases are limited. While
there are, in some cases, medicines available to reduce disease symptoms,
there are few drugs to effectively treat the underlying disease. Of these,
amantadine and the related drug rimantadine are used for influenza, ribavirin
has been used for viral pneumonia due to respiratory syncytial virus ("RS
virus"), and interferon alfa ("IFN") is currently used to treat hepatitis due
to hepatitis C virus ("HCV"). Additionally, immunoglobulin products are
occasionally used for treatment of some RNA virus diseases.
Based on the significance and prevalence of disease associated with RNA
virus infections and the limited means to prevent or treat these diseases, the
Company believes that there is a significant market opportunity for the
development of effective therapeutics for RNA virus diseases. Moreover, the
continued emergence of RNA virus diseases and the recent spread of RNA viruses
from rural and developing regions of the world to urbanized centers
underscores the compelling need for new antiviral pharmaceuticals.
Treating RNA Virus Diseases
The RNA Virus Replication Process
Essential to the discovery and development of antiviral pharmaceuticals
is the ability to analyze the virus in a laboratory setting and to dissect the
molecular and biochemical events critical to virus replication. The
manipulation of RNA viruses and, in particular, the virus's RNA genome,
requires special techniques and skills. Historically, technical limitations
have hampered investigation of RNA virus replication. Consequently, the
scientific community's understanding of the molecular events of RNA virus
replication is incomplete. However, significant recent
-2-
advancements in biological and molecular technologies related to the
manipulation of RNA and RNA viruses have enabled the Company to pursue the
discovery and development of effective treatments for RNA virus diseases.
The Company believes that the process of viral RNA uncoating and
replication represents an extremely attractive target for the therapeutic
intervention in disease caused by RNA viruses. For RNA viruses to cause
disease, they must replicate. This process of RNA replication is depicted in
the following diagram.
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RNA Virus Replication
[The following is required for the EDGAR filing and will not appear in the
printed report: This diagram depicts schematically the life cycle of a generic
RNA virus. The diagram is centered with a light gray oval figure representing
a generic cell. Overlaid on this oval figure are six arrows, numbers 1 through
6, traversing the oval figure from the upper left to the lower right.
Preceding the first arrow numbered "1" and outside the oval figure is a single
virus particle depicted schematically as a 10-sided icosahedral shape. Beyond
arrow 1, just inside the oval figure and in front of arrow "2" is an identical
10-sided icosahedral shaped virus. Beyond arrow 2 and in front of arrow "3" is
a vertical single helical ribbon depicting viral RNA, at the bottom of which
are several small solid circular shapes depicting proteins attached to the
helical ribbon. Beyond arrow 3 and in front of arrow "4" is a vertical double
helical ribbon depicting two intertwined strands of viral RNA, at the bottom
of which are several small solid circular shapes depicting proteins attached
to the double helical ribbon. Beyond arrow 4 and in front of arrow "5" is a
vertical single helical ribbon depicting viral RNA, at the bottom of which is
a partially assembled 10-sided shape into which the ribbon appears to be
entering and at the top of which are several small solid circular shapes
depicting proteins attached to the helical ribbon. Beyond arrow 5 and in front
of arrow "6" near to, but within, the lower right border of the oval cell
figure are several identical and intact 10-sided icosahedral shaped viruses.
Beyond arrow "6" are numerous identical 10-sided icosahedral shaped viruses
emanating from the lower right portion of the oval cell figure and also
outside the oval cell figure in the lower right portion of the diagram.]
WHEN AN RNA VIRUS ENTERS A CELL (1), ITS RNA IS RELEASED FROM THE VIRUS'S
COAT (2), ALLOWING THE UNIQUE MULTI-STEP PROCESS OF RNA REPLICATION TO
PROCEED (3-4), AFTER WHICH NEW RNA VIRUS OFFSPRING ARE CREATED (5) AND
SUBSEQUENTLY RELEASED FROM THE INFECTED CELL (6). EACH RNA VIRUS OFFSPRING THAT
INFECTS A NEW CELL REPEATS THIS REPLICATION PROCESS.
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Inhibiting RNA virus replication can prevent, limit or stop disease. In
addition to thwarting disease, the direct inhibition of viral RNA uncoating
and replication will reduce the possibility for generation of drug-resistant
virus offspring and decrease virus transmission from infected individuals to
healthy persons. RNA replication is a complicated process involving several
viral proteins that must act together in a coordinated fashion. Due to the
nature of this process, changes or mutations in these proteins are not readily
tolerated. Consequently, viral proteins required for RNA replication are not
only specific to the virus, they are among the least variable proteins of the
virus. This is in contrast to the highly variable viral surface proteins
generally involved in immune responses to virus infections. This invariability
of the viral proteins responsible for viral RNA replication represents an
important attribute in their selection as molecular targets for antiviral drug
discovery and development.
The ViroPharma Approach
ViroPharma, based on its number of experienced RNA virologists and its
exclusive focus on RNA virology, believes that it is a leader in RNA virology
and RNA antiviral drug discovery and development. As a result of its focus on,
and expertise in, RNA virus replication, unique molecular target selection and
assay development technologies, and its development and possession of
proprietary chemical inhibitors and its specialized chemical library, the
Company believes that it is well-positioned to develop effective antiviral
pharmaceuticals for RNA virus diseases.
While the RNA replication process is common among all RNA viruses, the
detailed molecular and biochemical mechanisms of RNA replication are currently
not fully understood. However, the Company has used its experience in RNA
virology, RNA virus uncoating and RNA replication, along with recent advances
in biological, molecular and informatics technologies, to gain an
understanding of several aspects of the RNA virus uncoating and replication
process. Company scientists have elucidated fundamental processes involved in
virus uncoating and used this knowledge
-3-
to design compounds to inhibit these processes. They have also succeeded in
discovering new virus enzyme activities that are essential to RNA replication,
which are the subject of a U.S. patent application filed by the Company.
Company scientists have further characterized several RNA virus replication
activities and used the resulting information to develop novel drug screening
assays. The Company's assays are optimized for high sensitivity and
specificity and are validated for reproducibility. These assays are automated
using state-of-the-art robotics technologies to facilitate the high throughput
screening of large chemical libraries. Using its novel assays, the Company has
discovered proprietary small molecule compounds that inhibit the targeted
virus-specific activities. Once active compounds are identified, the Company
advances such compounds to clinical drug candidates through a process of
chemical optimization. This process involves the rapid generation of an
expanded chemical analog series based on the initial active compounds and
utilizes an array of technologies including computer-assisted pharmacophore
modeling and drug design techniques, two-dimensional and three-dimensional
structure and substructure chemical database searches and conventional
medicinal chemistry, combinatorial chemistry and automated high capacity
chemical synthetic methods. The Company then evaluates analog series in
various biochemical and biological assays that assess compound selectivity,
potency, safety and bioavailability. Importantly, the Company chemically
optimizes active compounds for these four key parameters in parallel, not
sequentially. The Company believes that its combination of chemical and
biological technologies and parallel compound optimization process allows it
to accelerate drug discovery and development. The generation of large numbers
of specific chemical analogs by the Company also enables it to rapidly expand
its valuable chemical library that is biased toward inhibitors of enzymes and
activities essential to RNA replication. The Company believes that this
library provides a significant advantage in its efforts to discover inhibitors
for additional RNA virus diseases. The Company believes that the technologies
used by the Company have never been applied to develop an approved
pharmaceutical product.
Strategy
The Company's objective is to become the leading discoverer, developer
and marketer of proprietary antiviral pharmaceuticals for RNA virus diseases.
The Company seeks to achieve this objective through the implementation of the
following strategies:
. Focus on RNA Virus Diseases. RNA viruses cause the majority of
human viral diseases, yet few effective antiviral drugs are
available to address these diseases. Based on the significance and
prevalence of disease associated with RNA viruses and the limited
means to effectively prevent or treat these diseases, the Company
believes there is a significant market opportunity for the
development of effective therapeutics for RNA virus diseases. The
Company has focused its resources to capitalize on this market
opportunity.
. Broadly Apply Technological Expertise in RNA Virology. The Company
has leading expertise in RNA antiviral drug discovery, focusing on
RNA replication and involving the selection of specific molecular
targets and the development of novel drug screening assays,
proprietary chemical inhibitors and a specialized chemical library.
Since RNA replication is unique to RNA viruses, yet common to all
RNA viruses, this process provides a broadly applicable platform
for drug discovery. The Company intends to continue to expand and
apply its expertise in RNA virology, RNA replication, chemical
synthesis methodologies and antiviral drug design.
. Conduct Parallel Drug Discovery Assessments. The key parameters in
the drug discovery process are selectivity, potency, safety and
bioavailability. The Company accelerates and enhances the
efficiency of its drug discovery programs by simultaneously
optimizing chemical compounds for each of these parameters during
the drug discovery process.
. Pursue Indications for Rapid Demonstration of Efficacy. In order to
expedite drug development, the Company initially targets disease
indications based upon the likelihood for rapid demonstration of
efficacy in clinical trials. The Company then pursues follow-on
clinical development for expanded disease indications.
-4-
. Pursue Strategic Relationships by Leveraging RNA Virology
Expertise. The Company leverages its leadership position in RNA
virus antiviral drug discovery and development through strategic
relationships with pharmaceutical companies, specialized technology
companies and academic institutions. With these relationships, the
Company enhances its drug discovery capabilities and in-licensing
opportunities and facilitates the commercialization of its
potential products.
Product Development and Research
The Company has focused its current drug discovery and development
activities on a number of RNA virus diseases including viral meningitis, hand-
foot-and-mouth disease, "summer flu," the common cold, influenza, hepatitis C
and viral pneumonia. The Company has drug candidates in various stages of
research and development for each of these RNA virus diseases. The following
chart sets forth the target disease indications and the status of the
Company's lead product candidates:
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Disease Indication Product Candidate Development Status(1)
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Viral Meningitis Pleconaril (oral) Phase IIb clinical trial
commenced June 1996
Hand-Foot-and-Mouth Disease Pleconaril (oral) Phase II clinical trial
commenced March 1997
"Summer Flu" Pleconaril (oral) Phase IIa clinical trial
completed April 1996;
Phase IIb clinical trial
anticipated late 1997
Common Cold Pleconaril (oral) Phase II clinical trial
in asthmatics anticipated
in late 1997
Pleconaril Preclinical; IND
(intranasal) anticipated late 1997
Influenza VP 14221 series Preclinical safety and
pharmacokinetics studies
Hepatitis C VP 31593 series Chemical optimization
Viral Pneumonia VP 36676 series Chemical optimization
_______________
(1) For a discussion of preclinical testing and the phases of human clinical
trials, see "-- Government Regulation."
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The Company's most advanced product candidate, pleconaril, based on
preclinical studies, is a potent, broad spectrum, orally active inhibitor of
enteroviruses and rhinoviruses. Enteroviruses and rhinoviruses are closely
related members of a large, very prevalent group of RNA viruses that are
responsible for widespread human disease. According to the Centers for Disease
Control (the "CDC"), there are 10 to 15 million enterovirus infections every
year in the United States. Enteroviruses cause viral meningitis, hand-foot-
and-mouth disease, "summer flu," myocarditis, pericarditis, encephalitis,
herpangina, otitis media and perinatal enteroviral disease. Rhinoviruses are
responsible for up to 50% of all acute respiratory illnesses and are the
leading cause of the common cold.
The Company is developing pleconaril for four indications: viral
meningitis, hand-foot-and-mouth disease, "summer flu" and the common cold.
While antibiotics are commonly prescribed by physicians to patients with these
diseases, they are ineffective at treating these virus infections.
Prescription and over-the-counter cough and cold remedies, analgesics and
antipyretics are also used to reduce symptoms of hand-foot-and-mouth disease,
"summer flu"
-5-
and the common cold, but do not treat the underlying diseases. Currently,
there are no antiviral therapies available for any of the diseases caused by
enteroviruses or rhinoviruses. Pleconaril is not expected to be commercially
available for at least three years, if at all.
ViroPharma scientists have demonstrated that pleconaril inhibits
enterovirus and rhinovirus replication by a novel, virus-specific mode of
action. The compound binds to a specific site inside the coat protein of the
virus, thereby preventing the release of the viral RNA inside the cell and
blocking the initiation of the RNA replication process. In preclinical studies
conducted by the Company, pleconaril was shown to effectively inhibit the cell
culture replication of 96% of the rhinoviruses and enteroviruses isolated from
332 human patients. The patient population from which these viruses were
isolated exhibited the complete range of diseases caused by these viruses,
including a number of fatal infections. Moreover, orally administered
pleconaril protected mice from lethal infection by enteroviruses in three
distinct animal model systems and was effective even when therapy was
initiated after infection in these models. Based on these results, the Company
believes that pleconaril will be effective against a broad spectrum of
rhinoviruses and enteroviruses. There can be no assurance that pleconaril will
be clinically efficacious against diseases caused by these viruses. See
"Important Factors Regarding Forward-Looking Statements--Uncertainty Regarding
Clinical Trials" attached in Exhibit 99 to this Annual Report on Form 10-K.
In Phase I single ascending dose studies with a capsule formulation of
pleconaril, plasma concentrations of drug increased proportionally to the oral
dose administered up to the highest dose tested (1000 mg). Maximum drug plasma
levels 20 times that required to inhibit the replication of the majority of
the clinical virus isolates referred to above were achieved with a single 200
mg dose. In Phase I multidose studies conducted by the Company, doses up to
400 mg administered three times per day for seven consecutive days were well-
tolerated by all subjects in the study. No serious adverse events attributable
to the drug were observed in the 50 subjects who received pleconaril during
the course of these Phase I studies. There can be no assurance that
unacceptable toxicities or side effects will not occur during development or
that any product will be effective or safe when administered to patients. The
Company has developed an oral liquid formulation of pleconaril, which the
Company has demonstrated is bioequivalent to the capsule formulation used in
Phase I studies. The liquid formulation is self-preserving, stable and
contains only GRAS (Generally Regarded As Safe) ingredients. This formulation
provides considerable flexibility in dosing and is being used in clinical
trials for the viral meningitis and hand-foot-and-mouth disease indications
and will be used in clinical trials for the "summer flu" and common cold
disease indications. The Company is also developing an intranasal formulation
of pleconaril for use in the common cold indication. Currently, the Company is
exploring delivery systems for its intranasal formulation.
The Company has initiated a compassionate use, open-label protocol to
provide pleconaril to patients with chronic enterovirus meningoencephalitis
and acute enterovirus myocarditis. Patients with chronic meningoencephalitis
are unable to develop an antibody response to enterovirus central nervous
system infections and suffer progressive neurological deterioration which can
lead to seizures, paralysis and death. Acute enteroviral myocarditis is an
infection of the heart muscle which may eventuate in congestive heart failure.
The Company believes that there are less than 500 patients infected with these
viruses worldwide.
The Company has entered into an agreement with Sanofi S.A. under which it
has received exclusive rights to develop and market all products relating to
pleconaril, and related compounds for use in enterovirus and rhinovirus
disease indications in the United States and Canada, as well as a right of
first refusal in respect of any other indications. Pleconaril was discovered
at Sanofi by scientists now with ViroPharma. See "--Strategic Relationships--
Sanofi S.A." and "--Patents." Pleconaril has been approved as a generic name
for the Company's compound VP 63843 by the United States Names Council (USAN)
and is awaiting final approval from the World Health Organization ("WHO").
Viral Meningitis
Infection of the central nervous system by enteroviruses can cause
meningitis, which is characterized by a severe headache, stiffness of the neck
or back, fever, nausea and malaise. The disease is typically severe and
requires emergency medical care. The disease occasionally progresses to
serious neurologic sequelae, particularly among infants
-6-
infected before age one year. There is currently no antiviral pharmaceutical
for viral meningitis.
In order to establish the incidence and clinical course of enteroviral
meningitis and assess potential clinical endpoints for future drug efficacy
studies, the Company conducted an Adult Viral Meningitis Observational Study
at three medical centers (the University of Colorado, the University of
Pennsylvania and the University of Virginia) during the 1995 summer
enterovirus season. The results of this study demonstrated the severity and
duration of the illness. Adults presenting at emergency rooms complaining of
severe headaches were confirmed to be enterovirus-infected by detection of
viral RNA in their cerebrospinal fluid. Approximately 80% of these
enterovirus-infected patients required hospitalization, with an average stay
of four days. Patients were unable to resume full normal activities for an
average of 16 days. All subjects received some form of analgesic (70% received
a narcotic) for an average of seven days to manage their severe headache pain.
From this study, the Company estimates that 500,000 Americans contract
enteroviral meningitis annually.
Based on the results of two Phase I studies and the Phase IIa Enterovirus
Challenge Study described below, the Company is currently evaluating the oral
liquid formulation of pleconaril in an international multi-center, double
blind, placebo controlled Phase IIb trial for treatment of viral meningitis.
The Company initiated this study at sites in the United States in June 1996
and in Australia and South Africa in November 1996. There can be no assurance
that this trial will be successfully completed or completed in a timely
manner. See "Important Factors Regarding Forward-Looking Statements--Absence
of Products; Product Development Risks," "--Dependence on Most Advanced Drug
Candidate" and "--Uncertainty Regarding Clinical Trials" attached in Exhibit
99 to this Annual Report on Form 10-K.
Hand-Foot-and-Mouth Disease
Hand-foot-and-mouth disease is a highly communicable enterovirus syndrome
affecting all age groups, but predominantly children and adolescents.
Following initial symptoms of fever, malaise and respiratory or abdominal
complaints, painful ulcerative lesions develop in the mouth and on the palms
and soles of the hands and feet. Affected individuals may have substantial
difficulty drinking and eating, which may necessitate hospitalization. The
Company initiated a placebo controlled exploratory safety and efficacy trial
in children with hand-foot-and-mouth disease in South Africa in March 1997.
There can be no assurance that this trial will be successfully completed or
completed in a timely manner. See "Important Factors Regarding Forward-Looking
Statements--Absence of Products; Product Development Risks," "--Dependence on
Most Advanced Drug Candidate" and "--Uncertainty Regarding Clinical Trials"
attached in Exhibit 99 to this Annual Report on Form 10-K.
"Summer flu" (Enterovirus respiratory disease)
"Summer flu", or enterovirus respiratory disease, is an upper respiratory
illness caused by enteroviruses and characterized initially by a sore throat
and cough, followed by a general influenza-like syndrome. While this disease
occurs throughout the year, it is most prevalent in the summer. The clinical
illness can persist for several weeks and typically results in a physician
visit. According to the CDC, there are an estimated 10 to 15 million cases of
enterovirus infection each year in the United States, many of which result in
"summer flu." There is currently no antiviral pharmaceutical for the
treatment of "summer flu."
During the spring of 1996, the Company conducted a Phase IIa Enterovirus
Challenge Study with pleconaril. In this double blind, placebo controlled
"summer flu" disease model, the oral capsule formulation of pleconaril
demonstrated that all disease measures were significantly reduced for the
pleconaril treated group in "summer flu." Eight hours after the randomized
administration of either placebo or pleconaril, 33 volunteers were infected
with the enterovirus coxsackievirus A21. Subjects were then administered
either placebo or a 200 mg dose of pleconaril twice daily for seven days.
Placebo-treated subjects developed notable cold symptoms, while pleconaril-
treated volunteers showed pronounced and clinically significant reductions in
disease measures, including symptoms and virus load. Assessment of clinical
disease by five measures (subject and physician rating of disease symptoms,
nasal mucus production, fever and virus load in nasal secretions) showed, in
all cases, a significant reduction in the pleconaril-treated group. Depicted
in the graph below are the results of these disease measures for both the
placebo-treated (light bars) and pleconaril-treated (dark bars) subjects.
-7-
- - --------------------------------------------------------------------------------
Phase IIa Study - Disease Measure
[The following is required for the EDGAR filing and will not appear in the
printed report: This histogram-format graph contains five two-column sets
along the horizontal axis. The left column of each set, depicted in light
gray, represents disease measure data for test subjects from the
"Placebo"-treated group, the right column of each set depicted in dark gray,
represents disease measure data for test subjects from the
"Pleconaril"-treated group. Below the column sets are the following five
captions: "Subject Rating", "Physician Rating", "Mucus Weight", "Fever" and
"Virus Load". The vertical axis is indicated at "% of Subjects Exceeding
Disease Measure Threshold" and ranges from 0% to 100%. These Disease Measure
Thresholds are defined in the legend to the graph as follows: "Subject Rating
Greater than or Equal to 5 (Scale: 0-10), Physician Rating Greater than or
Equal to 10 (Scale: 0-33), Mucus Weight Greater than or Equal to 10g (Range:
0-54g), Fever Greater than or Equal to 100 degrees F (Range: normal - 102.3
degrees F), Virus Load Greater than or Equal to 4 log/10/ (Range: 0-6.3
log/10/)." The values for the "Subject Rating" columns are 67% and 13% for the
Placebo and Pleconaril groups, respectively. The values for the "Physician
Rating" columns are 53% and 0% for the Placebo and Pleconaril groups,
respectively. The values for the "Mucus Weight" columns are 67% and 0% for the
Placebo and Pleconaril groups, respectively. The values for the "Fever"
columns are 40% and 7% for the Placebo and Pleconaril groups, respectively.
The values for the "Virus Load" columns are 93% and 13% for the Placebo and
Pleconaril groups, respectively.]
- - --------------------------------------------------------------------------------
The Company anticipates advancing the pleconaril oral liquid formulation
into a Phase IIb multicenter, placebo controlled, dose ranging clinical
efficacy trial for the "summer flu" indication in late 1997. There can be no
assurance that this trial will be initiated, successfully completed or
completed in a timely manner. See "Important Factors Regarding Forward-Looking
Statements--Absence of Products; Product Development Risks," "--Dependence on
Most Advanced Drug Candidate" and "--Uncertainty Regarding Clinical Trials"
attached in Exhibit 99 to this Annual Report on Form 10-K.
Common Cold
Rhinoviruses are the leading cause of the common cold. Many people
experience two or three colds per year with the accompanying symptoms of
sneezing, nasal obstruction, nasal discharge, headache and general malaise.
The median duration of illness is seven days, with symptoms persisting for two
weeks in approximately 25% of persons. Complications associated with
rhinovirus infections include otitis media, pneumonia and asthmatic
exacerbations resulting in serious respiratory distress. Although there are
cold remedies, analgesics and antipyretics that may reduce cold symptoms,
there is no antiviral pharmaceutical to treat the common cold.
The Company's clinical development plan for the oral and intranasal
formulations of pleconaril contemplates initially treating patients with
asthma and upper respiratory tract rhinovirus infections. These individuals
often develop a concurrent lower respiratory tract rhinovirus infection, which
can lead to pronounced lower airway dysfunction lasting for weeks to months.
Treatment of this patient population provides an opportunity for both
prophylactic and therapeutic dosing. Should the product be approved for use in
this patient population, the Company would expect to expand clinical
development to include the general population.
The Company plans to select a manufacturer for the intranasal formulation
of pleconaril in 1997. The Company anticipates filing an Investigational New
Drug ("IND") application for the intranasal formulation of pleconaril for the
common cold indication in late 1997. There can be no assurance that these
activities will be initiated, successfully completed or completed in a timely
manner. See "Important Factors Regarding Forward-Looking Statements--Absence
of Products; Product Development Risks, "--Dependence on Most Advanced Drug
Candidate" and "--Uncertainty Regarding Clinical Trials" attached in Exhibit
99 to this Annual Report on Form 10-K.
-8-
Influenza
Influenza virus is a major cause of human illness. In the United States,
approximately 10% to 20% of the population is infected with the influenza
virus each year. This disease is characterized by the sudden onset of
headache, chills and a dry cough, which is rapidly followed by fever,
significant myalgias and malaise. Fever and upper respiratory tract symptoms
generally last for three to five days, while the cough and weakness persist
for an additional one to two weeks. Influenza can also be fatal. According to
the WHO, approximately 10,000 to 40,000 deaths occur each year in the United
States as a result of influenza. The very young, elderly and
immunocompromised, and those with medical conditions such as cardiovascular
disease, pulmonary disease and pregnancy, are at greatest risk for serious or
fatal complications associated with influenza virus infections. The National
Science and Technology Council currently estimates that the direct medical
costs due to influenza in the United States are $5 billion per year.
Immunization for influenza has demonstrated only limited success in
controlling the disease. Due to the highly variable nature of the influenza
virus surface proteins, vaccines used one year are ineffective and obsolete
the next. New vaccines with components predicted to be important in the next
year's influenza season must be developed, manufactured and administered each
year. Even when forecasts result in vaccines with components closely matching
that year's actual circulating influenza virus strain, the immunity induced by
these vaccines is incomplete and short-lived. Reinfection with the same virus
strain or a variant strain can occur and result in disease in previously
immunized individuals. Finally, compliance with national immunization
campaigns has generally been insufficient to prevent epidemics.
The Company's principal molecular target in its influenza virus program
is the viral RNA transcriptase complex, which is required by the virus for RNA
replication. The Company has developed a quantitative high throughput drug
screening assay that simultaneously measures several essential virus-encoded
replication activities. Using this assay, ViroPharma scientists have
discovered several specific inhibitors of influenza virus replication. The
Company has applied its chemical optimization process to establish structure-
activity relationships for these inhibitors with respect to potency and
selectivity. The Company's preclinical acute safety studies conducted to date
indicate that several of its lead compounds, currently designated the VP 14221
Series, are well tolerated and are orally bioavailable. In addition,
ViroPharma has filed two patent applications with the PTO and one application
in certain foreign jurisdictions related to its active influenza virus
compounds and is preparing additional patent applications for influenza virus
compounds. There can be no assurance that clinical trials for this compound
series will be initiated or, if initiated, will lead to a determination that
the compound is safe and efficacious. No assurance can be given that such
patents will issue. See "Important Factors Regarding Forward-Looking
Statements--Absence of Products; Product Developments Risks," "--Uncertainty
Regarding Clinical Trials" and "--Uncertain Ability to Protect Patents and
Proprietary Technology and Information" attached in Exhibit 99 to this Annual
Report on Form 10-K and "--Patents."
Hepatitis C
HCV, first identified in 1989, is recognized as a major cause of chronic
hepatitis worldwide. According to the CDC, there are currently approximately
3.5 million HCV infected individuals in the United States, with 150,000 new
cases identified each year. The WHO estimates that an additional 10 million
individuals are infected with HCV in Europe and a total of 100 million people
are infected worldwide. Populations in some geographic areas, such as Japan,
Spain, Hungary, Saudi Arabia, Southern Italy and Egypt, have particularly high
rates of infection. One study of Egyptian blood donors has shown an infection
rate of 19.2%. Approximately 80% of HCV infected persons will develop chronic
hepatitis, of which 20% will progress to liver cirrhosis. Chronic HCV
infection can also lead to the development of hepatocellular carcinoma and
liver failure.
There is currently no vaccine for HCV. HCV is an immunologically diverse
virus, with many naturally occurring variants in circulation. Such diversity,
in combination with HCV's ability to change its surface proteins, may
represent the mechanism by which the virus escapes attack by the immune system
and establishes persistent infections.
-9-
IFN is currently the only approved drug in the United States for
treatment of hepatitis due to HCV. While IFN treatment has been reported to
improve serum liver enzyme response in 20% to 40% of patients, the remainder
do not respond to IFN treatment. For patients who do respond, a sustained
improvement of liver function reportedly is seen in only 10% to 20% of
patients; the majority of patients relapse upon cessation of IFN treatment.
Thus, while IFN represents the first treatment for chronic hepatitis C, its
effectiveness is limited and its cure rate is low. Nevertheless, the Company
estimates the current market for IFN use in the treatment of hepatitis C to be
over $1 billion worldwide.
The Company focuses on key enzyme targets involved in the HCV RNA
replication process. Company scientists have discovered several key enzyme
activities associated with particular HCV proteins. These activities have been
characterized and used to establish validated high throughput assays. The HCV
RNA helicase activity represents one such target. As a result of screening
compounds in the HCV RNA helicase assay, the Company has identified several
active and selective compounds, currently designated the VP 31593 Series, and
has begun chemical optimization on such compounds. Based on its RNA helicase-
related technology, the Company has established a collaborative drug discovery
and development agreement with Boehringer Ingelheim Pharmaceuticals, Inc.
("Boehringer Ingelheim"). The Company is also developing assays for additional
HCV molecular targets. The Company has filed two patent applications related
to the HCV inhibitor compound series, has received a Notice of Allowance from
the PTO in respect of one of these applications and anticipates that it will
file additional patent applications within the next year. No assurance can be
given that such patents will issue. See "Important Factors Regarding Forward-
Looking Statements--Dependence on Corporate Collaborations; Potential Need for
Additional Collaborators," and "--Uncertain Ability to Protect Patents and
Proprietary Technology and Information," attached in Exhibit 99 to this Annual
Report on Form 10-K, "--Strategic Relationships--Boehringer Ingelheim
Pharmaceuticals, Inc." and "--Patents."
Viral Pneumonia
RS virus is the major pediatric viral respiratory tract pathogen, causing
pneumonia and bronchiolitis in infants and young children. During seasonal
epidemics, approximately 250,000 infants contract RS virus pneumonia, and up
to 35% are hospitalized. Of those hospitalized, mortality rates of up to 5%
have been reported. Children with underlying conditions such as prematurity,
congenital heart disease, bronchopulmonary dysplasia and various congenital or
acquired immunodeficiency syndromes are at greatest risk of serious RS virus
morbidity and mortality. RS virus is also implicated as a significant cause of
mortality in the elderly.
Vaccines are not currently available for prevention of RS virus disease.
Recently, the prophylactic use of an intravenous hyperimmune globulin infusion
was approved for RS virus disease in certain high risk infants. Ribavirin,
administered by aerosol to minimize the drug's adverse effects, is generally
reserved for only the most serious cases of RS virus pneumonia and
bronchiolitis. In both cases, drug administration can be difficult and
inconvenient in young patients.
The Company has developed a high throughput drug screening assay for RS
virus replication. Company scientists have discovered several inhibitory
compounds, currently designated the VP 36676 Series, with high potency and
selectivity in initial profiling evaluations. The Company has initiated
chemical optimization of these compounds. There can be no assurance that such
chemical optimization will be successfully completed or completed in a timely
manner. See "Important Factors Regarding Forward-Looking Statements--Absence
of Products; Product Development Risks," "--Dependence on Most Advanced Drug
Candidate" and "--Uncertainty Regarding Clinical Trials" attached in Exhibit
99 to this Annual Report on Form 10-K.
Other Potential RNA Virus Disease Targets
The Company believes that its drug discovery technologies and development
expertise are potentially applicable to a broad range of RNA virus diseases.
The Company also believes that certain RNA virus diseases represent immediate
extensions of the Company's current research and development programs. In
addition to viral meningitis, hand-foot-and-mouth disease, "summer-flu,"
chronic meningoencephalitis and myocarditis, enteroviruses cause a broad
range of diseases for which the Company's most advanced drug candidate,
pleconaril, may be effective. Of these, the
-10-
Company is currently considering exploratory clinical trials for pleconaril
for enterovirus neonatal sepsis. There can be no assurance that the Company
will pursue this indication or, if the Company does pursue this indication,
that the Company will be able to successfully demonstrate clinical efficacy .
See "Important Factors Regarding Forward-Looking Statements--Absence of
Products; Product Development Risks" and "--Uncertainty Regarding Clinical
Trials" attached in Exhibit 99 to this Annual Report on Form 10-K.
Similarly, the Company's lead anti-influenza compound series acts by a
virus-specific mechanism that may make it potentially applicable to a large
family of viruses called bunyaviruses. Bunyaviruses cause widespread disease
globally including encephalitis, hemorrhagic fevers and the recently
identified hantavirus pulmonary syndrome. In the midwestern United States
alone, there are approximately 300,000 infections of La Crosse encephalitis
virus annually resulting in approximately 900 deaths. In Asia and Eastern
Europe, a bunyavirus called hantavirus is responsible for Korean hemorrhagic
fever, a serious influenza-like illness in which approximately 33% of the
affected individuals develop hemorrhagic disease and 5% to 10% die. In 1993,
in the southwest United States, a new hantavirus emerged that causes
hantavirus pulmonary syndrome, a serious respiratory disease that is fatal in
approximately 50% of cases. This new virus has now been detected in more than
20 states in the United States and has recently appeared in Argentina, Brazil
and Canada.
Assays and inhibitor compounds derived from the Company's HCV program may
accelerate antiviral drug discovery for the related virus group called
flaviviruses. There are 38 flaviviruses associated with human disease,
including the dengue fever viruses, yellow fever virus and Japanese
encephalitis virus. Importantly, the epidemiology of these diseases is
changing. For example, with global urbanization, the incidence of dengue fever
has increased dramatically. Dengue fever viruses typically cause a severe
influenza-like illness and, in a more serious form, can cause a fatal
hemorrhagic disease. Prior to 1970, only nine countries reported outbreaks of
fatal dengue hemorrhagic fever. Presently, at least 38 countries have reported
incidences of this serious form of dengue fever virus disease. The WHO
estimates that there are 20 million cases of dengue fever each year, of which
500,000 require hospitalization.
There are currently no approved antiviral pharmaceuticals for any of the
diseases mentioned above.
Strategic Relationships
ViroPharma pursues strategic relationships by leveraging its RNA virology
expertise, while seeking to maintain independence and flexibility in the
development and commercialization of its products. The Company has entered
into several development and licensing agreements and research collaborations
and continues to seek opportunities to enhance its ability to discover,
develop and commercialize RNA antiviral drugs. There can be no assurance that
the Company will be able to enter into additional beneficial relationships or
maintain its current relationships.
Currently, the Company is a party to a licensing and co-marketing
agreement with one multinational pharmaceutical company, a drug discovery and
development agreement with another multinational pharmaceutical company and
several licensing and collaborative agreements with various pharmaceutical and
technology companies and academic institutions for certain biological and
chemical technologies. From time to time, the Company engages in discussions
regarding additional strategic relationships. Currently, the Company does not
have any understandings, agreements or commitments to enter into any
additional strategic relationships.
Sanofi S.A.
In December 1995, the Company entered into an agreement with Sanofi S.A.
("Sanofi") under which it received exclusive rights to develop and market all
products relating to pleconaril and related compounds for use in enterovirus
and rhinovirus disease indications in the United States and Canada, as well as
a right of first refusal in respect of any other indications. The Company's
rights include rights to use all of Sanofi's patents, know-how and trademarks
relating to pleconaril. The Company paid Sanofi a licensing fee of $1,000,000
in February 1996 and is obligated to make a milestone payment of up to
$2,000,000 upon the earlier of enrollment of the first patient in a Phase III
trial or December 22, 1998. In addition, the Company is required to make
milestone payments upon the achievement of certain other development
milestones and, until the expiration of the last patent on pleconaril or any
related drug,
-11-
royalty payments on any sales of products developed under the agreement in the
United States and Canada. Sanofi is required to pay the Company royalties on
sales in all other territories of the world during the term of the agreement
(as described below) and must reimburse certain of the milestone fees
previously paid by the Company upon submission of pleconaril for regulatory
approval in Japan. The Company believes that the royalty rates payable by both
the Company and Sanofi are comparable to the rates generally payable by other
companies under similar arrangements. See "--Patents."
Upon the completion of data analysis from the Company's Phase II trials,
Sanofi has the option to co-develop the drug in the European Union. If Sanofi
chooses to co-develop, Sanofi must make certain royalty payments to the
Company based on sales in the European Union. If Sanofi does not choose to co-
develop, it must make royalty payments to the Company based on such sales at a
higher royalty rate and will be required to reimburse a percentage of all
previously paid milestone fees and reduce future milestone fees by the same
percentage.
The Sanofi agreement terminates on the later of the expiration of the
last patent on pleconaril or any related drug in the United States or Canada
or ten years following the commencement of the Company's sale of the drug in
the United States or Canada, or earlier under certain circumstances. The term
automatically renews for successive five year terms unless six months' prior
written notice of termination is given by either party. Pursuant to the
agreement, the Company is required to purchase its entire supply of pleconaril
drug substance from Sanofi. The Company has the right to manufacture, or
contract with third parties to manufacture, any drug product derived from the
pleconaril drug substance. See "--Manufacturing."
Boehringer Ingelheim Pharmaceuticals, Inc.
In July 1996, the Company entered into a collaborative drug discovery and
development agreement with Boehringer Ingelheim for one hepatitis C target
identified by ViroPharma. Under this agreement, the Company granted to
Boehringer Ingelheim the exclusive worldwide rights to develop and
commercialize compounds discovered under the agreement. In return, Boehringer
Ingelheim paid a technology access fee of $1,000,000 to the Company and is
required to make research and milestone payments to the Company in connection
with the Company's transfer of HCV screening and assay technology and at
various stages in the development of compounds under this agreement. In
February 1997, ViroPharma achieved its first scientific milestone under this
agreement, for which it received a milestone payment from Boehringer
Ingelheim. In addition, Boehringer Ingelheim is required to make royalty
payments to the Company on sales of products developed and marketed under this
agreement beginning on the date a given product is first sold in a given
country and ending on the date that the last patent covering such product in
such country expires (or 12 years from the first sales in such country if a
patent is never issued for such product in such country). The amounts of
required royalty payments vary depending on which party originated the
compound for the product. The Company believes that the royalty rates payable
under this agreement are comparable to royalty rates generally payable by
other companies under similar agreements. The term of the agreement is two
years.
Other Collaborative Agreements
The Company is a party to collaborative drug discovery agreements with
various pharmaceutical and technology companies, including 3-Dimensional
Pharmaceuticals, Inc. and NPS Pharmaceuticals, Inc. Generally, under these
agreements, the collaborators make available enabling technologies and
compounds from their chemical libraries, and ViroPharma applies such
technology and compounds to RNA virus diseases using the Company's proprietary
RNA replication assays. If a successful drug is discovered, these agreements
typically provide for good faith negotiations to establish the terms and
conditions of a mutually acceptable collaboration agreement. Generally, any
such resulting collaborative agreement will base the economic benefits to the
parties upon the relative contribution by each party to a drug's discovery and
development.
The Company has established material transfer and licensing agreements
and research collaborations with academic institutions and their affiliates,
including the Academy of Sciences of the Czech Republic, Northwestern
University, Pennsylvania State University, Renssalear Polytechnic Institute,
the University of Florida and Washington
-12-
University. Generally, these agreements provide for the licensing to the
Company of materials for either (i) an initial fee and certain other fees
payable by the Company, with no future commercial rights for the institution
or (ii) an initial fee payable by the Company and certain rights to negotiate
collaborative agreements for drug development and commercialization.
Patents
ViroPharma believes that patent protection and trade secret protection
are important to its business and that the Company's future will depend, in
part, on its ability to maintain its technology licenses, maintain trade
secret protection, obtain patents and operate without infringing the
proprietary rights of others both in the United States and abroad. The Company
currently has filed with the PTO a patent application for technology for
identifying inhibitors of RNA viruses, a patent application covering compounds
active against pestivirus infection and associated RNA virus diseases, two
patent applications covering compounds active against HCV and two patent
applications covering compounds active against influenza viruses. The Company
also has filed a patent application for technology for identifying inhibitors
of RNA viruses, two patent applications covering compounds active against HCV
and a patent application covering compounds active against influenza viruses
in certain foreign jurisdictions. The Company has also obtained a license from
Sanofi, which grants the Company exclusive rights under two issued United
States patents and two related Canadian patent applications to develop,
manufacture and market antiviral compounds in the United States and Canada.
Pleconaril, which is currently in clinical trials, is covered by one of the
licensed United States patents, which expires in 2012, and one of the licensed
Canadian patent applications. The Company will be dependent on Sanofi to
prosecute such patent applications and may be dependent on Sanofi to protect
such patent rights. As patent applications in the United States are maintained
in secrecy until patents issue and as publication of discoveries in the
scientific or patent literature often lag behind the actual discoveries, the
Company cannot be certain that it was the first to make the inventions covered
by each of its pending patent applications or that it was the first to file
patent applications for such inventions. Furthermore, the patent positions of
biotechnology and pharmaceutical companies are highly uncertain and involve
complex legal and factual questions, and, therefore, the breadth of claims
allowed in biotechnology and pharmaceutical patents or their enforceability
cannot be predicted. There can be no assurance that patents will issue from
any of the Company's patent applications or, should patents issue, that the
Company will be provided with adequate protection against potentially
competitive products. Furthermore, there can be no assurance that should
patents issue, they will be of commercial value to the Company, or that
private parties, including competitors, will not successfully challenge the
Company's patents or circumvent the Company's patent position in the United
States or abroad. In the absence of adequate patent protection, the Company's
business may be adversely affected by competitors who develop comparable
technology or products. Moreover, pursuant to the terms of the Uruguay Round
Agreements Act, patents filed on or after June 8, 1995 have a term of twenty
years from the date of such filing, irrespective of the period of time it may
take for such patent to ultimately issue. This may shorten the period of
patent protection afforded to the Company's products as patent applications in
the biopharmaceutical sector often take considerable time to issue. Under the
Drug Price Competition and Patent Term Restoration Act of 1984, a patent which
claims a product, use or method of manufacture covering drugs and certain
other products may be extended for up to five years to compensate the patent
holder for a portion of the time required for the United Stated Food and Drug
Administration (the "FDA") review of the product. This law also establishes a
period of time, following New Drug Application ("NDA") approval, during which
the FDA may not accept or approve applications for certain similar or
identical drugs from other sponsors unless those sponsors provide their own
safety and effectiveness data. There can be no assurance that the Company will
be able to take advantage of either the patent term extension or marketing
exclusivity provisions of this law.
In order to protect the confidentiality of the Company's technology,
including trade secrets and know-how and other proprietary technical and
business information, the Company requires all of its employees, consultants,
advisors and collaborators to enter into confidentiality agreements that
prohibit the use or disclosure of information that is deemed confidential. The
agreements also oblige the Company's employees, consultants, advisors and
collaborators to assign to the Company ideas, developments, discoveries and
inventions made by such persons in connection with their work with the
Company. There can be no assurance that confidentiality will be maintained or
disclosure prevented by these agreements or that the Company's proprietary
information or intellectual property will be protected thereby or that
-13-
others will not independently develop substantially equivalent proprietary
information or intellectual property.
The pharmaceutical industry is highly competitive and patents have been
applied for by, and issued to, other parties relating to products competitive
with those being developed by the Company. Therefore, the Company's drug
candidates may give rise to claims that they infringe the patents or
proprietary rights of other parties existing now and in the future.
Furthermore, to the extent that ViroPharma or its consultants or research
collaborators use intellectual property owned by others in work performed for
the Company, disputes may also arise as to the rights in such intellectual
property or in related or resulting know-how and inventions. An adverse claim
could subject the Company to significant liabilities to such other parties
and/or require disputed rights to be licensed from such other parties. There
can be no assurance that any license required under any such patents or
proprietary rights would be made available on terms acceptable to the Company,
if at all. If the Company does not obtain such licenses, it may encounter
delays in product market introductions, or may find that the development,
manufacture or sale of products requiring such licenses may be precluded. In
addition, the Company could incur substantial costs in defending itself in
legal proceedings instituted before the PTO or in a suit brought against it by
a private party based on such patents or proprietary rights, or in suits by
the Company asserting its patent or proprietary rights against another party,
even if the outcome is not adverse to the Company. The Company has not
conducted any searches or made any independent investigations of the existence
of any patents or proprietary rights of other parties. See "Important Factors
Regarding Forward-Looking Statements--Uncertain Ability to Protect Patents and
Proprietary Technology and Information" attached in Exhibit 99 to this Annual
Report on Form 10-K.
Manufacturing
The Company does not currently have manufacturing capabilities, nor does
the Company intend to develop such capabilities for any products in the near
future. The Company believes that internal manufacturing capabilities will not
be necessary to successfully commercialize its products. Pleconaril drug
substance is prepared from readily available materials using well-established
synthetic processes. Technology involved in the production of pleconaril is
proprietary and covered by a patent licensed to the Company by Sanofi. The
Company has an agreement with Sanofi for the supply of pleconaril drug
substance for clinical trials. Sanofi is required to supply the Company's
needs at cost during drug development and at cost plus a reasonable mark-up
for any commercial sales in the United States and Canada. The Company is
obligated to purchase pleconaril drug substance exclusively from Sanofi. In
the event that Sanofi is unable to satisfy the Company's requirements and the
Company is required to find an additional or alternative source, there may be
additional cost and delay in product development or commercialization. The
Company anticipates that its current supply of pleconaril drug substance will
be sufficient to complete its ongoing clinical trials for viral meningitis and
hand-foot-and-mouth disease, and its planned clinical trial for "summer flu."
The Company may require additional quantities of pleconaril drug substance to
complete its planned clinical trial for the common cold. The Company believes
that it will be able to obtain drug substance from Sanofi and, if necessary,
other manufacturers for the production of pleconaril drug product on terms
acceptable to the Company. The Company intends to contract third party
manufacturers for the preparation of other compounds and drug substances and
products for preclinical research and commercial production. See "Important
Factors Regarding Forward-Looking Statements--Absence of Manufacturing
Capabilities" attached in Exhibit 99 to this Annual Report on Form 10-K and "-
-Strategic Relationships--Sanofi S.A." The Company is currently negotiating
with several contractors for the commercial manufacture of the liquid
formulation of pleconaril drug product. The Company has established quality
control guidelines, which require that third party manufacturers under
contract produce the drug product in accordance with the FDA's Good
Manufacturing Practices ("GMP") requirements. The Company maintains
confidentiality agreements with potential and existing manufacturers in order
to protect its proprietary rights related to pleconaril.
Marketing
ViroPharma does not currently have a sales and marketing organization.
Under its agreement with Sanofi, the Company has the right to market and sell
pleconaril for all enterovirus and rhinovirus indications in the United States
and Canada. Because patients with viral meningitis typically present in a
hospital emergency room setting, the Company is contemplating establishing a
focused sales force to service this concentrated, hospital-based market. There
can be no
-14-
assurance that the Company will be successful in developing a sales force,
penetrating the markets for any proposed products or achieving market
acceptance of its products. The success and commercialization of the Company's
other potential products will be dependent, in part, upon the ability of the
Company to maintain its existing arrangement with Boehringer Ingelheim, which
governs marketing of the Company's proposed product for hepatitis C, and to
enter into additional collaborative agreements for other potential products.
The Company presently intends to co-market and co-promote products developed
for hand-foot-and-mouth disease, "summer flu" and the common cold indications
in the United States and Canada, if and when such products are approved by
regulatory agencies. There can be no assurance that any such marketing
arrangements will be available on terms acceptable to the Company, if at all,
that such third parties would perform adequately their obligations as
expected, or that any revenue would be derived from such arrangements. See
"Important Factors Regarding Forward-Looking Statements--Absence of Marketing
and Sales Capability" and "--No Assurance of Market Acceptance" attached in
Exhibit 99 to this Annual Report on Form 10-K and "-- Strategic
Relationships."
Government Regulation
Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the Company's ongoing research and
product development activities and in the manufacturing and marketing of the
Company's drug candidates. All of the Company's products will require
regulatory approval by governmental agencies, principally the FDA, prior to
commercialization. In particular, therapeutic products for human use are
subject to rigorous preclinical and clinical testing and other approval
requirements by the FDA and similar health authorities in foreign countries.
Various federal statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, recordkeeping and marketing of such
products. The process of obtaining these approvals and the subsequent
compliance with appropriate statutes and regulations require the expenditure
of substantial resources. Any failure by the Company or its collaborators,
licensors or licensees to obtain, or any delay in obtaining, regulatory
approval could adversely affect the marketing of products then being developed
by the Company and its ability to receive product or royalty revenues.
The steps required before a new drug may be commercially distributed in
the United States include (i) conducting appropriate preclinical laboratory
and animal tests, (ii) submitting to the FDA an IND application which must be
approved before clinical trials may commence, (iii) conducting controlled
human clinical trials that establish the safety and efficacy of the drug
product, (iv) filing an NDA with the FDA and (v) obtaining FDA approval of the
NDA prior to any commercial sale or shipment of the drug. This process can
take a number of years and involve the expenditure of substantial resources.
The results of preclinical studies and initial clinical trials are not
necessarily predictive of the results from large-scale clinical trials, and
clinical trials may require substantial additional funds, delays or
modifications due to, among other factors, difficulty in obtaining sufficient
patient populations, clinicians or support. In addition to obtaining FDA
approval for each indication to be treated with each product, each domestic
drug manufacturing establishment must register with the FDA, list its drug
products with the FDA, comply with GMP requirements and be subject to
inspection by the FDA. Moreover, the submission of applications for approval
may require additional time to complete manufacturing stability studies.
Foreign manufacturing establishments distributing drugs in the United States
also must comply with GMP requirements and list their products with the FDA.
They are subject to periodic inspection by the FDA or by local authorities
under agreement with the FDA. See "Important Factors Regarding Forward-Looking
Statements--Government Regulation; No Assurance of Regulatory Approval"
attached in Exhibit 99 to this Annual Report on Form 10-K.
Upon approval in the United States, a drug may only be marketed for the
approved indications in the approved dosage forms and dosages. The FDA also
may require post-marketing testing and surveillance to monitor safety and
efficacy history of the approved product and continued compliance with
regulatory requirements. Adverse experiences with the product must be reported
to the FDA. Product approvals may be withdrawn if compliance with regulatory
requirements is not maintained or if problems concerning safety or efficacy of
the product occur following approval.
The FDA also mandates that drugs be manufactured in conformity with GMP
regulations. In complying with the GMP regulations, manufacturers must
continue to expend time, money and effort in production, recordkeeping and
quality control to ensure that the product meets applicable specifications and
other requirements. The FDA periodically inspects drug manufacturing
facilities to ensure compliance with applicable GMP requirements. Failure to
comply
-15-
subjects the manufacturer to possible FDA action, such as warning letters,
suspension of manufacturing, seizure of the product, voluntary recall of a
product or injunctive action. The Company currently relies on, and intends to
continue to rely on, third parties to manufacture compounds and products. Such
third parties will be required to comply with GMP requirements.
Even after FDA approval has been obtained, and often as a condition to
expedited approval, further studies, including post-marketing studies, may be
required. Results of post-marketing studies may limit or expand the further
marketing of the products. Further, if there are any modifications to the
drug, including changes in indication, manufacturing process, manufacturing
facility or labeling, an NDA supplement may be required to be submitted to the
FDA.
Products marketed outside the United States which are manufactured in the
United States may be subject to certain FDA regulations, as well as regulation
by the country in which the products are to be sold. If products are marketed
abroad, the Company will also be subject to foreign regulatory requirements
governing clinical trials and pharmaceutical sales, which may vary from
country to country. In connection with certain of its strategic relationships,
the Company's collaborators may be responsible for the foreign regulatory
approval process of the Company's drugs, although the Company may be legally
liable for noncompliance.
The Company is also subject to various federal, state and local laws,
rules, regulations and policies relating to safe working conditions,
laboratory and manufacturing practices, the experimental use of animals and
the use and disposal of hazardous or potentially hazardous substances,
including radioactive compounds and infectious disease agents, used in
connection with the Company's research work. The extent of government
regulation which might result from future legislation or administrative action
cannot be accurately predicted. Moreover, although the Company believes that
its safety procedures for handling and disposing of such materials comply with
current federal, state and local laws, rules, regulations and policies, the
risk of accidental injury or contamination from these materials cannot be
entirely eliminated.
Moreover, the Company anticipates that Congress, state legislatures and
the private sector will continue to review and assess controls on health care
spending. Any such proposed or actual changes could cause the Company or its
collaborators to limit or eliminate spending on development projects and may
otherwise impact the Company. Additionally, in both domestic and foreign
markets, sales of the Company's proposed products will depend, in part, upon
the availability of reimbursement from third-party payors, such as government
health administration authorities, managed care providers, private health
insurers and other organizations. Significant uncertainty often exists as to
the reimbursement status of newly approved health care products. In addition,
third-party payors are increasingly challenging the price and cost
effectiveness of medical products and services. There can be no assurance that
the Company's proposed products will be considered cost effective or that
adequate third-party reimbursement will be available to enable the Company to
maintain price levels sufficient to realize an appropriate return on its
investment in product research and development. See "Important Factors
Regarding Forward-Looking Statements--Uncertainty of Pharmaceutical Pricing
and Related Matters; Need for Reimbursement" attached in Exhibit 99 to this
Annual Report on Form 10-K.
Competition
The pharmaceutical and biopharmaceutical industries are intensely
competitive and are characterized by rapid technological progress. Certain
pharmaceutical and biopharmaceutical companies and academic and research
organizations currently engage in, or have engaged in, efforts related to the
discovery and development of new antiviral medicines. Significant levels of
research in chemistry and biotechnology occur in universities and other
nonprofit research institutions. These entities have become increasingly
active in seeking patent protection and licensing revenues for their research
results. They also compete with the Company in recruiting skilled scientific
talent. Many companies are developing therapies to treat viral diseases and,
in this regard, are in competition with the Company. The Company believes
that its ability to compete successfully will be based on its ability to
create and maintain scientifically advanced technology, develop proprietary
products, attract and retain scientific personnel, obtain patent or other
protection for
-16-
its products, obtain required regulatory approvals and manufacture and
successfully market its products either alone or through outside parties.
Some of the Company's competitors have substantially greater financial,
research and development, manufacturing, marketing and human resources and
greater experience in drug discovery, development, clinical trial management,
FDA regulatory review, manufacturing and marketing than ViroPharma. Moreover,
the Company believes that the technologies used by the Company have never been
applied to develop an approved pharmaceutical product. See "Important Factors
Regarding Forward-Looking Statements--Competition" and "--Rapid Technological
Change and Uncertainty" attached in Exhibit 99 to this Annual Report on Form
10-K.
Human Resources
As of February 28, 1997, ViroPharma had 37 full-time employees, including
12 persons with Ph.D. or M.D. degrees. Twenty-nine of ViroPharma's employees
are engaged in research and development activities at the Company's laboratory
facility in Malvern, Pennsylvania. A significant number of the Company's
management and professional employees have had prior experience with
pharmaceutical, biotechnology or medical products companies. None of the
Company's employees is covered by collective bargaining agreements. The
Company believes that its relations with its employees are good. There can be
no assurance that the Company will be able to continue to attract and retain
qualified personnel, and the Company does not maintain "key man" life
insurance on any of its employees. See "Important Factors Regarding Forward-
Looking Statements--Dependence on Key Personnel" attached in Exhibit 99 to
this Annual Report on Form 10-K.
Scientific Advisory Board
The Company has assembled a Scientific Advisory Board consisting of
individuals with demonstrated expertise in particular fields who periodically
advise the Company on matters relating to long-term scientific planning,
research and development activities and technological matters. Several of the
advisors have had previous scientific working relationships with members of
the Company's management team.
The members of the Company's Scientific Advisory Board are as follows:
Hugh E. Black, D.V.M., Ph.D. is President of Hugh E. Black & Associates,
Inc. In 1994, Dr. Black retired from Schering-Plough Research Institute where
he served as Vice President, Drug Safety and Metabolism. Dr. Black received
his D.V.M. degree from the University of Toronto and his Ph.D. degree in
veterinary pathology from Ohio State University.
Gary L. Davis, M.D., is Professor of Medicine and the Director of the
Hepatobiliary Diseases Section of the Gastroenterology, Hepatology, and
Nutrition Division at the University of Florida College of Medicine in
Gainesville. Dr. Davis received his M.D. degree from the University of
Minnesota.
James B. Flanegan, Ph.D., is Professor of Molecular Genetics and
Microbiology at the University of Florida College of Medicine in Gainesville.
Dr. Flanegan received his Ph.D. degree in biochemistry from the University of
Michigan.
Frederick G. Hayden, M.D., is the S. Stuart Richardson Professor of
Clinical Virology in Internal Medicine and Professor of Internal Medicine and
Pathology at the University of Virginia School of Medicine in Charlottesville.
Dr. Hayden received his M.D. degree from Stanford University School of
Medicine.
Michael D. Hayre, D.V.M., is Director of the Laboratory Animal Research
Center, The Rockefeller University in New York. Dr. Hayre received his D.V.M.
degree from Tuskegee University.
Robert A. Lamb, Ph.D., Sc.D., is the John Evans Professor of Molecular
and Cell Biology at Northwestern University and a Howard Hughes Medical
Institute Investigator. Dr. Lamb received his Ph.D. in virology and Sc.D.
degree from the University of Cambridge, England.
-17-
Charles M. Rice, Ph.D., is Professor in the Department of Molecular
Microbiology at Washington University School of Medicine in St. Louis,
Missouri. Dr. Rice received his Ph.D. degree in biochemistry from the
California Institute of Technology.
Michael G. Rossmann, Ph.D., is the Hanley Professor of Biological
Sciences at Purdue University in West Lafayette, Indiana. Dr. Rossmann
received his Ph.D. degree in chemical crystallography from the University of
Glasgow.
Harley A. Rotbart, M.D. is Professor in the Departments of Pediatrics and
Microbiology at the University of Colorado Health Science Center in Denver.
Dr. Rotbart received his M.D. degree from Cornell University Medical College.
Richard Whitley, M.D., is the Loeb Eminent Scholar and Professor of
Pediatrics, Microbiology and Medicine at University of Alabama at Birmingham.
Dr. Whitley received his M.D. degree from George Washington University School
of Medicine.
Members of the Scientific Advisory Board receive consulting fees for
their services. In addition, to date, the Company has granted an aggregate of
66,300 options to members of the Scientific Advisory Board, of which 2,550
have been exercised.
ITEM 2. PROPERTIES
The Company's principal facility consists of approximately 17,000 square
feet of leased laboratory and office space in Malvern, Pennsylvania. The
lease expires in October 1998. The Company believes its present facilities
will be adequate for operations through 1998. The Company is currently
negotiating with several third parties for laboratory and office space and
believes it can obtain adequate laboratory and office space on acceptable
terms in the Malvern area.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to a written Consent of Holders of Preferred Stock and a written
Consent of Holders of Common Stock, each dated November 5, 1996, the
stockholders of the Company approved a .51 for 1 reverse stock split of the
Company's Common Stock, adopted the Company's Second Amended and Restated
Certificate of Incorporation, and confirmed the number of authorized shares of
Common Stock and the number of shares of Common Stock issuable under the
Company's 1995 Stock Option Plan. On a pre-split basis, the holders of
8,280,497 shares of Preferred Stock (out of a total of 10,957,222 shares) and
the holders of 1,625,000 shares of Common Stock (out of a total of 1,767,000
shares) approved the foregoing actions. The remaining stockholders of the
Company were notified of these actions as required by Section 228(d) of the
Delaware General Corporation Law.
-18-
Executive Officers of the Registrant
The executive officers of the Company and their respective ages and
positions with the Company are as follows:
Name Age Position
---- --- --------
Claude H. Nash, Ph.D....... 54 Chief Executive Officer, President and
Chairman of the Board of Directors
Mark A. McKinlay, Ph.D..... 45 Vice President, Research & Development
Marc S. Collett, Ph.D...... 45 Vice President, Discovery Research
Johanna A. Griffin, Ph.D... 52 Vice President, Business Development
Guy D. Diana, Ph.D......... 61 Vice President, Chemistry Research
Jon M. Rogers, M.D......... 45 Vice President, Clinical Research
Vincent J. Milano.......... 33 Vice President, Finance & Administration and Treasurer
Thomas F. Doyle............ 36 Executive Director, Counsel and Secretary
Claude H. Nash, Ph.D., a co-founder of the Company, has served as
Chairman of the Board of Directors since February 1997, and as Chief Executive
Officer, President and director since the Company's commencement of operations
in December 1994. From 1983 until 1994, Dr. Nash served as Vice President,
Infectious Disease and Tumor Biology at Schering-Plough Research Institute,
where he was responsible for discovery research strategy and advancing new
compounds into clinical development. Dr. Nash received his Ph.D. from
Colorado State University.
Mark A. McKinlay, Ph.D., a co-founder of the Company, has served as Vice
President, Research & Development since the Company's commencement of
operations in December 1994, and served as Secretary from December 1994 until
February 1997. From 1989 through 1994, Dr. McKinlay served in several
positions, including Senior Director, at Sterling Winthrop Pharmaceuticals
Research Division, where he was responsible for developing strategy and
implementing plans for the development of several compounds. Dr. McKinlay
received his Ph.D. from Rensselear Polytechnic Institute.
Marc S. Collett, Ph.D., a co-founder of the Company, has served as Vice
President, Discovery Research of the Company since the Company's commencement
of operations in December 1994. From 1993 until he co-founded the Company, he
served as Senior Director, Viral Therapeutics at PathoGenesis Corporation,
where, among other things, he established an anti-viral discovery program.
Prior to joining PathoGenesis Corporation, Dr. Collett served as Director,
Virology & Antibody Engineering and Director, Biochemical Virology at
MedImmune, Inc., where he was employed from 1988 to 1993. Dr. Collett
received his Ph.D. from the University of Michigan.
Johanna A. Griffin, Ph.D., a co-founder of the Company, has served as
Vice President, Business Development since June 1995 and, from the Company's
commencement of operations in December 1994 until June 1995, served as
Executive Director, Business Development. From 1990 until she joined the
Company, Dr. Griffin served as Director of Molecular Biology at Boehringer
Ingelheim Pharmaceuticals, Inc. where she participated in the clinical
development of antiviral drugs and the promotion of international
pharmaceutical and biotechnology relationships. Dr. Griffin received her
Ph.D. from the University of Alabama at Birmingham.
-19-
Guy D. Diana, Ph.D., a co-founder of the Company, has served as Vice
President, Chemistry Research since June 1995 and, from the Company's
commencement of operations in December 1994 until June 1995, as Executive
Director, Chemistry Research. Prior to joining ViroPharma, he worked at
Sterling Winthrop for 33 years, most recently as a Senior Fellow in Medicinal
Chemistry, where he participated in the design and synthesis of antiviral
agents and led the team that discovered pleconaril. Dr. Diana received his
Ph.D. from Rice University.
Jon M. Rogers, M.D., has served as Vice President, Clinical Research
since joining ViroPharma in June 1996. From February 1995 until he joined the
Company, Dr. Rogers was Vice President of Medical and Scientific Affairs for
the pharmaceuticals and diagnostics divisions of Boehringer Mannheim
Corporation, where his responsibilities included the development of
pharmaceuticals and diagnostics products. From August 1989 through February
1995, Dr. Rogers served in various positions at Sterling Winthrop, the latest
being Senior Director of Clinical Research. At Sterling Winthrop, Dr. Rogers
was responsible for the development of cardiovascular, central nervous system,
pulmonary and antithrombotic pharmaceutical products. Dr. Rogers received his
M.D. from the University of Cincinnati College of Medicine.
Vincent J. Milano has served as Vice President, Finance & Administration
of the Company since February 1997, as Treasurer since July 1996, and as
Executive Director, Finance & Administration from joining ViroPharma in April
1996 until February 1997. From 1985 until he joined the Company, Mr. Milano
was with KPMG Peat Marwick LLP, where he was Senior Manager since 1991. At
KPMG Peat Marwick LLP, Mr. Milano specialized in public offerings and other
Securities and Exchange Commission filings, strategic alliances and mergers
and acquisitions, principally for life sciences companies. Mr. Milano is a
Certified Public Accountant. Mr. Milano received his B.S. in accounting from
Rider College.
Thomas F. Doyle has served as Secretary since February 1997 and as
Executive Director, Counsel since joining the Company in November 1996. From
1990 until he joined the Company, Mr. Doyle was a corporate attorney with the
law firm of Pepper, Hamilton & Scheetz, where he specialized in intellectual
property, venture capital financing and strategic alliances for technology
based companies. Mr. Doyle received his J.D. from Temple University School of
Law. Prior to attending Temple University, Mr. Doyle was a Certified Public
Accountant. Mr. Doyle received his B.S. in accounting from Mt. St. Mary's
College.
-20-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
The Company's Common Stock is traded on the National Market segment of
The Nasdaq Stock Market under the symbol "VPHM." The Company commenced
trading on The Nasdaq Stock Market on November 19, 1996. The following table
sets forth the high and low sale prices as quoted on The Nasdaq Stock Market.
High Low
Fourth Quarter, 1996 ........................ $ 8.75 $ 7.00
January 1, 1997 through February 28, 1997 ... $13.50 $9.375
Holders and Dividends
There were approximately forty-two record-holders of the Company's Common
Stock as of February 28, 1997. The Company has not declared or paid cash
dividends on its Common Stock since its inception and does not intend to do so
in the foreseeable future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation" in Item 7 of this Annual Report
on Form 10-K.
Recent Sales of Unregistered Securities
In May 1996, the Company sold 3,222,222 shares of Series C Convertible
Preferred Stock for an aggregate of $7,249,999.50, or $2.25 per share, to
private investors and the executive officers of the Company. All such shares
of Series C Convertible Preferred Stock converted into an aggregate of
1,643,333 shares of Common Stock upon the closing of the Company's initial
public offering on November 22, 1996.
Options to purchase 21,420 shares of Common Stock were exercised during
1996. Pursuant to a right granted in December 1994, Dr. Frank Baldino, Jr., a
director of the Company, purchased 51,000 shares of Common Stock in January
1996.
-21-
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below under the caption "Balance
Sheet Data" as of December 31, 1994, 1995 and 1996, and under the caption
"Statement of Operations Data" for the period from December 5, 1994
(inception) through December 31, 1994 and the years ended December 31, 1995
and December 31, 1996 are derived from financial statements of the Company
which have been audited by KPMG Peat Marwick LLP, independent certified public
accountants. The data set forth below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the Financial Statements and the Notes thereto and the other
financial information included elsewhere in this Report. The Company is
considered a "development stage company" as described in Note 1 of the
Company's Financial Statements.
Period from
December 5,
1994
(inception)
through Year Ended Year Ended
December 31, December 31, December 31,
1994 1995 1996
------------ -------------- ------------
Statement of Operations
Data:
License fee................. -- -- $ 1,000,000
Grant revenue............... $ -- $ 90,813 436,081
----------- ----------- -----------
Total revenues.............. -- 90,813 1,436,081
----------- ----------- -----------
Operating expenses:
Research and development.... 75,779 2,930,106 6,694,703
General and administrative.. 243,318 1,091,299 1,421,524
----------- ----------- -----------
Total operating expenses.... 319,097 4,021,405 8,116,227
Interest income, net........ -- 75,730 285,142
----------- ----------- -----------
Net loss.................... $ (319,097) $(3,854,862) $(6,395,004)
=========== =========== ===========
Pro forma net loss per
share(1)................... $ (.98) $ (.93)
Shares used in computing
pro forma net loss per
share(1)................... 3,931,743 6,839,674
December 31,
-------------------------------------------------
1994 1995 1996
------------ -------------- ------------
Balance Sheet Data:
Cash, cash equivalents and
short-term investments..... $ 22,870 $ 4,713,426 $22,547,679
Working capital (deficit)... (243,172) 3,270,375 20,001,703
Total assets................ 24,870 4,873,845 23,452,879
Long-term capital leases.... -- -- 104,571
Mandatorily redeemable
convertible preferred
stock...................... 60,000 7,416,604 --
Total stockholders' equity
(deficit).................. (303,172) (4,089,758) 20,605,161
- - ----------------
(1) See Note 2 of Notes to Financial Statements.
-22-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion contains forward-looking statements which involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in forward-looking statements. Factors that might cause
or contribute to such differences include, but are not limited to, those
discussed in "Important Factors Regarding Forward-Looking Statements" attached
hereto as Exhibit 99.
Since inception, the Company has devoted substantially all of its
resources to its research and product development programs. ViroPharma has
generated no revenues from product sales and has been dependent upon funding
primarily from equity financing. The Company does not expect any revenues
from product sales for at least the next three year period. The Company has
not been profitable since inception and has incurred a cumulative net loss of
$10,568,963 through December 31, 1996. Losses have resulted principally from
costs incurred in research and development activities and general and
administrative expenses. The Company expects to incur additional operating
losses over at least the next several years. The Company expects such losses
to increase over historical levels as the Company's research and development
expenses increase due to further clinical trials and preclinical development
of the Company's most advanced drug candidate, pleconaril, and further
research and development related to other product candidates. The Company's
ability to achieve profitability is dependent on developing and obtaining
regulatory approvals for its product candidates, successfully commercializing
such product candidates, which may include entering into collaborative
agreements for product development and commercialization, and securing
contract manufacturing services.
Results of Operations
Years ended December 31, 1996 and 1995
The Company received a non-refundable technology access fee of $1,000,000
from Boehringer Ingelheim and earned $436,081 of grant revenue for the year
ended December 31, 1996. The Company earned $90,813 in grant revenues during
the year ended December 31, 1995. Net interest income increased to $285,142
for the year ended December 31, 1996 from $75,730 for the year ended December
31, 1995, principally due to larger invested balances provided by the proceeds
of the Company's initial public offering.
Research and development expenses increased to $6,694,703 for the year
ended December 31, 1996 from $2,930,106 for the year ended December 31, 1995.
The increase was principally due to clinical trials related to pleconaril, a
milestone payable to Sanofi and the advancement of drug candidates for the
Company's influenza, hepatitis C and viral pneumonia programs.
General and administrative expenses increased to $1,421,524 for the year
ended December 31, 1996 from $1,091,299 for the year ended December 31, 1995.
The increase was principally due to increased salary expenses and facilities
costs, as well as to increased costs associated with the pursuit of corporate
collaborations.
The net loss increased to $6,395,004 for the year ended December 31, 1996
from $3,854,862 for the year ended December 31, 1995.
Year ended December 31, 1995 and period ended December 31, 1994
The Company commenced operations on December 5, 1994. Therefore, the
period ended December 31, 1994 was 26 days long. Comparisons between such
period and the complete year 1995 may not be meaningful.
Grant revenue for the year ended December 31, 1995 was $90,813. The
Company earned no revenues for the period ended December 31, 1994. Interest
income aggregated $75,730 in 1995. There was no interest income in 1994.
-23-
Research and development expenses increased to $2,930,106 for the year
ended December 31, 1995 from $75,779 for the period ended December 31, 1994.
The increase was due to 12 months of expenses being reflected in 1995, a
milestone payable to Sanofi, expenses related to the commencement of clinical
development of pleconaril and increased spending related to the Company's drug
discovery efforts.
General and administrative expenses increased to $1,091,299 for the year
ended December 31, 1995 from $243,318 for the period ended December 31, 1994.
The increase was due to 12 months of expenses being reflected in 1995, as well
as to increased salary costs, facilities costs and costs associated with the
pursuit of corporate collaborations.
Net loss for the year ended December 31, 1995 was $3,854,862. Net loss
for the period ended December 31, 1994 was $319,097.
Liquidity and Capital Resources
The Company commenced operations in December 1994. The Company is a
development stage company and to date has not generated revenues from product
sales. The cash flows used in operations are for research and development
activities and the supporting general and administrative expenses. Through
December 31, 1996, the Company has used approximately $7.8 million in
operating activities. The Company invests its cash in short-term investments.
Through December 31, 1996, the Company has used approximately $12.4 million in
investing activities, primarily for short-term investments. Through December
31, 1996, the Company has financed its operations primarily through an initial
public offering of Common Stock and private placements of redeemable
preferred stock and Common Stock totaling approximately $32.7 million. At
December 31, 1996, the Company had cash and cash equivalents and short-term
investments aggregating approximately $22.5 million.
The Company leases its corporate and research and development facilities
under an operating lease expiring in 1998. The Company is currently
negotiating with several third parties for laboratory and office space and
believes that it can secure adequate facilities on terms acceptable to the
Company after the current operating lease expires. The Company has financed
substantially all of its equipment under two master lease agreements and one
bank loan. The bank loan, which was consummated in February 1997, is for
$600,000, is payable in equal annual installments over 72 months and bears
interest at approximately 9%. The Company is required to repay amounts
outstanding under the two leases within periods ranging from 32 to 48 months.
As of February 28, 1997, outstanding borrowings under these arrangements are
approximately $1.7 million. The Company is required to make a milestone
payment to Sanofi of up to $2 million upon the earlier of a future milestone
event as defined in the agreement with Sanofi or December 1998. In addition,
the Company would also be required to make certain significant additional
payments, including royalties, as defined, should agreed-upon future
milestones be attained.
The Company has incurred losses from its operations since inception. The
Company expects to incur additional operating losses over at least the next
several years. The Company expects such losses to increase over historical
levels as the Company's research and development expenses increase due to
further clinical trials and preclinical development of the Company's most
advanced drug candidate, pleconaril, and further research and development
related to other product candidates. The Company will require additional
financing for operations and expansion of its facilities prior to achieving
positive cash flows from its commercial activities. The Company expects that
it will need additional financing to complete all clinical studies for
pleconaril and other development and required testing for any other of the
Company's product candidates. To obtain this financing, the Company may seek
to access the public or private equity markets or enter into additional
arrangements with corporate collaborators. To the extent the Company raises
additional capital by issuing equity securities, ownership dilution to
existing stockholders may result. There can be no assurance, however, that
additional financing will be available on acceptable terms from any source.
-24-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company required by this item are
attached to this Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors and regarding
compliance with Section 16 of the Securities Exchange Act of 1934 required by
this Item will be set forth in the Company's definitive Proxy Statement, to be
filed within 120 days after the end of the fiscal year covered by this Annual
Report on Form 10-K, and is incorporated by reference to the Company's Proxy
Statement.
The information concerning the Company's executive officers required by
this Item is incorporated by reference herein to the section of this Report in
Part I, Item 4 entitled "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be set forth in the Company's
definitive Proxy Statement, to be filed within 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K, and is incorporated by
reference to the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be set forth in the Company's
definitive Proxy Statement, to be filed within 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K, and is incorporated by
reference to the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be set forth in the Company's
definitive Proxy Statement, to be filed within 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K, and is incorporated by
reference to the Company's Proxy Statement.
-25-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
(1) Financial Statements. The Financial Statements listed in
--------------------
the accompanying Index to Financial Statements appearing on page F-1 are filed
as part of this annual report on Form 10-K.
(2) Financial Statement Schedules. All schedules are omitted
-----------------------------
because they are not applicable, or not required, or because the required
information is included in the Financial Statements or notes thereto.
(3) Exhibits. The following is a list of Exhibits filed as part
--------
of this annual report on Form 10-K. Where so indicated by footnote, Exhibits
which were previously filed are incorporated by reference. For Exhibits
incorporated by reference, the location of the Exhibit in the previous filing
is indicated in parentheses.
Exhibit No. Description
----------- -----------
3.1 Second Amended and Restated Certificate of Incorporation of
the Company.(1) (Exhibit 3.1)
3.2 By-Laws of the Company, as amended.(1) (Exhibit 3.2)
10.1++ 1995 Stock Option Plan.(1) (Exhibit 10.1)
10.2++ ViroPharma 401(k) Employee Savings Plan, effective July
1, 1995. (1) (Exhibit 10.2)
10.3 Lease dated September 19, 1995 between the Company and
Centocor Property Management Corp. (1) (Exhibit 10.3)
10.4 Master Lease Agreement dated September 13, 1995 between the
Company and Comdisco, Inc. (1) (Exhibit 10.4)
10.5 Master Equipment Lease No. 053-0005 dated December 1, 1995
between the Company and Phoenix Leasing Incorporated. (1)
(Exhibit 10.5)
10.6+ Agreement dated December 22, 1995 between the Company and
Sanofi. (1) (Exhibit 10.6)
10.7+ Collaborative Research Agreement dated as of July 23, 1996
between the Company and Boehringer Ingelheim
Pharmaceuticals, Inc. (1) (Exhibit 10.7)
10.8 Form of Employment Agreement. (1) (Exhibit 10.8)
10.9 Form of Indemnification Agreement. (1) (Exhibit 10.9)
10.10 Form of Employee Stock Purchase Agreement. (1)
(Exhibit 10.10)
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10.11 Restricted Stock Purchase Agreement dated as of January 17,
1996, by and between the Company and Frank Baldino, Jr. (1)
(Exhibit 10.11)
10.12 Series B Convertible Preferred Stock Purchase Agreement
dated as of June 16, 1995 among the Company and each of the
entities on the "Schedule of Purchasers" attached thereto
as Schedule A. (1) (Exhibit 10.12)
10.13 Series C Convertible Preferred Stock Purchase Agreement
dated as of May 30, 1996 among the Company and each of the
individuals and entities on the "Schedule of Purchasers"
attached thereto as Schedule A. (1) (Exhibit 10.13)
10.14 Form of Warrants to Purchase Series B Preferred Stock dated
March 3, 1995 and May 12, 1995. (1) (Exhibit 10.14)
10.15 Warra