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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-26534
VION PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3671221
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
4 Science Park
New Haven, Connecticut 06511
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 498-4210
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, $0.01 par value (together with associated
Common Stock Purchase Rights)
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 common stock held by non-affiliates of the
registrant as of March 19, 2002 was $96,637,534 based on the last sale price for
the common stock on that date as reported by the Nasdaq National Market.
The number of shares outstanding of the registrant's common stock as of March
19, 2002 was 28,883,209.
Portions of the Proxy Statement for the Registrant's Annual Meeting of
Stockholders to be held on June 5, 2002 are incorporated by reference in
Part III of this Form 10-K.
TABLE OF CONTENTS
FORM 10-K
Item Page
- ---- ----
PART I
1. Business........................................................................................1
2. Properties......................................................................................16
3. Legal Proceedings...............................................................................16
4. Submission of Matters to a Vote of Security Holders.............................................16
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters...........................17
6. Selected Financial Data.........................................................................18
7. Management's Discussion and Analysis of Financial Condition and Results of Operations...........18
7A. Quantitative and Qualitative Disclosures About Market Risk......................................28
8. Financial Statements and Supplementary Data.....................................................29
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............52
PART III
10. Directors and Executive Officers of the Registrant..............................................53
11. Executive Compensation..........................................................................53
12. Security Ownership of Certain Beneficial Owners and Management..................................53
13. Certain Relationships and Related Transactions..................................................53
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................54
All statements other than statements of historical fact included in this Annual
Report on Form 10-K, including without limitation statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," regarding our financial position, business strategy, and plans and
objectives of our management for future operations, are forward-looking
statements. When used in this Annual Report on Form 10-K, words such as "may,"
"will," "should," "could," "potential," "seek," "project," "predict,"
"anticipate," "believe," "estimate," "expect," "intend" and similar expressions,
as they relate to us or our management, identify forward-looking statements.
Forward-looking statements are based on the beliefs of our management as well as
assumptions made by and information currently available to our management. These
statements are subject to risks and uncertainties that may cause actual results
and events to differ significantly. A detailed discussion of risks attendant to
the forward-looking statements is included under "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The information
contained in this Annual Report on Form 10-K is believed to be current as of the
date of filing with the Securities and Exchange Commission. We do not intend to
update any of the forward-looking statements after the date of this filing to
conform these statements to actual results or to changes in our expectations,
except as required by law.
PART I
ITEM 1: Business
General
We are a biopharmaceutical company engaged in research, development and
commercialization of therapeutics and technologies for the treatment of cancer.
For the years ended December 31, 2001, 2000 and 1999, we spent $12.5 million,
$12.8 million and $11.5 million, respectively, on research, development and
clinical activities. Our product portfolio consists of one drug delivery
platform and two distinct small molecule anticancer agents.
TAPET'r' (Tumor Amplified Protein Expression Therapy), our
drug delivery system using modified Salmonella bacteria, is
designed to deliver anticancer agents directly to solid
tumors, and is currently being evaluated in Phase I human
safety trials.
Triapine'r' prevents the replication of tumor cells by
blocking a critical step in DNA synthesis and repair. Triapine
is currently being evaluated for its safety in Phase I
combination studies, and safety and efficacy in Phase II single
agent trials.
VNP40101M is a member of the Sulfonyl Hydrazine Prodrug family
and a unique DNA alkylating agent currently being evaluated in
Phase I trials.
Our product development strategy consists of two main approaches.
First, we engage in product development with respect to anticancer technologies
through in-house research and through collaboration with academic institutions.
Second, depending on the drug market conditions and required resources, we
determine the best method and/or partnership to develop, and eventually market,
our
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products. Our current research and development programs are based on
technologies that we license from Yale University (Yale).
Overview of Cancer
Cancer is the second leading cause of death in the United States,
exceeded only by heart disease. Since 1990, nearly five million Americans have
died from cancer. It is a devastating disease with tremendous unmet medical
needs. The American Cancer Society estimates that almost 1.3 million new cases
of cancer will be diagnosed this year in the United States and more than 0.5
million Americans are expected to die from cancer in 2002.
Cancer is characterized by uncontrolled cell division resulting in the
development of a mass of cells, commonly known as a tumor, as well as the
invasion and spreading of these cells. Cancerous tumors can arise in any tissue
or organ within the human body. Cancer is believed to occur as a result of a
number of factors, such as genetic predisposition, chemical agents, viruses and
irradiation. These factors result in genetic changes affecting the ability of
cells to normally regulate their growth and differentiation. When a normal cell
becomes cancerous, it can spread to various sites in the body.
Common Treatment Methods
The three most common methods of treating patients with cancer are
surgery, radiation therapy and chemotherapy. A cancer patient often receives a
combination of these methods. Surgery and radiation therapy are particularly
effective in patients where the disease is localized and has not yet spread to
other tissues or organs. Surgery involves the removal of the tumor and adjacent
tissue. In many cases where the cancer cells have not yet spread, surgery cannot
be performed because of the inaccessible location of the tumor or the danger of
removing too much normal tissue along with the cancerous tissue.
Radiation therapy involves the exposure of the tumor and surrounding
tissue to ionizing radiation. The objective of radiation therapy is to kill the
cancer cells with ionized molecules that are created in the parts of the body
exposed to the ionizing radiation. Radiation, however, also kills or damages
normal cells. Radiation therapy can have varying levels of effectiveness, and
can cause patient weakness, loss of appetite, nausea and vomiting. Radiation can
also result in loss of normal body functions, which may include bone marrow
depression, gastrointestinal complications, kidney damage and damage to the
peripheral nervous system. In some cases, radiation-induced mutations in bone
marrow cells can lead to new secondary cancers, such as leukemia, years after
treatment for other forms of cancer.
Chemotherapy is the principal approach used for tumors that have
spread. Chemotherapy seeks to interfere with the molecular and cellular
processes that control the development, growth and survival of malignant tumor
cells. Chemotherapy involves the administration of drugs designed to kill cancer
cells or the administration of hormone analogs to either reduce the production
of, or block the action of, certain hormones that affect the growth of various
tumors. Chemotherapy, however, can also result in loss of normal body functions
and can result in patient weakness, loss of appetite, nausea and vomiting. In
many cases, chemotherapy consists of the administration of several different
drugs in combination.
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Recent Advances
In recent years, there have been significant advances in molecular
biology, immunology and other related fields of biotechnology that have led to a
better understanding of how malfunctioning genes can result in the formation of
tumors. It is anticipated that these advances will lead to better ways to
diagnose cancer and to prevent tumors from forming or becoming malignant. Other
research has focused on mechanisms to efficiently deliver therapies to tumors.
Ultimately, these emerging technologies may lead to genetic-based therapies
aimed specifically at the genes that have malfunctioned and caused the cancer to
form or spread, and to therapies that can selectively deliver agents to tumors
that prevent the abnormal growth of cells.
Most current anticancer drugs, when introduced into the system by
current delivery methods, affect rapidly growing cells, both cancerous and
normal, throughout the body. The result is often significant side effects that
take a toll on a patient's health and can limit the amount of treatment a
patient may receive. Therefore, a great need exists for new therapies and more
efficient mechanisms to deliver more potent cancer treatments while reducing the
debilitating effects of toxicity to normal tissue.
We believe that, for the foreseeable future, the principal means of
combating cancer will continue to be through the surgical removal of tumors and
the destruction of malignant cells through radiation therapy and chemotherapy,
delivered systemically or in ways that make anticancer agents preferentially
more toxic to tumors. Therefore, we intend to take a balanced approach in our
research and development efforts. We will continue to develop chemically defined
small molecules based upon unique cellular targets discovered through
biotechnology, while also pursuing development of technologies to deliver
therapeutic agents to tumors.
Our Product Development Program
We are currently developing several products for the treatment of
cancer. The discussion below sets forth the development status of our core
product candidates as of December 31, 2001. 'Preclinical' indicates that the
product candidate selected for development has met predetermined criteria for
potency, specificity, manufacturability and pharmacologic activity in vitro, or
cell culture, and in vivo, or animal, models. Clinical evaluation involves a
three-phase process. 'Phase I' indicates safety and proof-of-concept testing
and determination of maximum tolerated dose in a limited patient population.
'Phase II' indicates safety, dosing and efficacy testing in a limited patient
population. 'Phase III' indicates safety, dosing and efficacy testing in a
large patient population.
Drug Delivery Platform: TAPET'r'
TAPET is a proprietary platform technology that uses bioengineered,
genetically altered Salmonella bacteria to deliver cancer-fighting drugs
preferentially to solid tumors. Extensive preclinical studies in animal models
have shown that TAPET bacteria migrate to and penetrate throughout solid tumors.
Inside the tumors, TAPET doubles in quantity every 30 to 45 minutes, achieving
very high bacterial counts, reaching ratios in tumor versus normal tissues of
1000:1. In addition, TAPET can be genetically engineered to deliver anticancer
agents continuously within the tumor. By bringing the "drug factory" to the
tumor, anticancer agents delivered by TAPET are concentrated inside the tumor
and are, therefore, expected to be more efficacious against the tumor, while at
the same time, less toxic
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to normal surrounding tissue. Furthermore, TAPET bacteria are genetically
engineered to reduce the normal, toxic reactions to these bacteria. As an
additional safety measure, TAPET bacteria remain fully sensitive to antibiotic
therapies. Extensive preclinical toxicology studies in several species,
including mice, rats, pigs, dogs and monkeys, have demonstrated these safety
measures to be effective.
Given our preclinical database demonstrating TAPET's potential efficacy
and safety profile, we believe that TAPET may prove to be an effective vector,
or delivery mechanism, for the delivery of specific cancer-fighting drugs
preferentially to solid tumors. We intend to use TAPET to deliver
Vion-developed, anticancer drugs. Some of these drugs will be generic and
non-proprietary, however, when combined with the TAPET system, they could result
in proprietary products for us. In addition, we intend to seek multiple
strategic partnerships with pharmaceutical companies to use TAPET to deliver
their proprietary anticancer drugs.
TAPET First Generation "Unarmed" Vectors: VNP20009
The safety and distribution of VNP20009, our first TAPET bacterial
candidate, is currently being evaluated in four Phase I clinical trials using
two routes of administration: intratumoral (IT) and intravenous (IV). We began a
clinical study of VNP20009, an unarmed TAPET, in November 1999 at the Cleveland
Clinic and at the Beth Israel Deaconess Medical Center, Boston. This initial
trial was designed to determine the safety and maximum tolerated dose of a
single VNP20009 injection into a tumor. The study demonstrated that VNP20009 was
safe to administer with minimal side effects, and that VNP20009 bacteria
remained in the injected tumor for a minimum of two weeks in most patients. The
study was expanded to two additional sites, Montefiore Medical Center in New
York and the Mary Crowley Research Center in Dallas, and additional patients are
being entered to assess the safety and biological effects of higher doses of
VNP20009.
In March 2000, we began the first study of TAPET by IV administration
at the National Cancer Institute (NCI) in Bethesda, Maryland and, two additional
studies were subsequently initiated, including a trial in Europe. The three
studies were of similar design, to determine the safety and maximum tolerated
dose of VNP20009 injected intravenously over 30 minutes, every 35 days. At the
same time, we signed a five-year Cooperative Research and Development Agreement
(CRADA) with the NCI, under the direct supervision of Steven A. Rosenberg, M.D.,
Ph.D., Chief of Surgery in the NCI's Division of Clinical Sciences, a renowned
cancer researcher and a leading authority on the application of cytokines, tumor
vaccines and other biologicals in cancer patients. Under the terms of the CRADA,
our scientific team will work with Dr. Rosenberg's laboratory to evaluate a
number of TAPET vectors, alone and in combination with other anticancer agents,
as well as to explore the mechanisms by which bacterial vectors cause antitumor
activity. This represents a first step in forming a strategic collaboration with
the NCI, which provides us with an excellent setting to further investigate the
safety and biologic effects of our first TAPET vector.
The preliminary results of the IV studies were encouraging. A maximum
tolerated dose was determined which could be administered safely. The bacteria
cleared quickly from the blood, and could not be detected in urine or stool at
any time. Colonization of tumors was detected in some patients. However, it was
determined that an increase in the efficacy and level of colonization would be
desirable before proceeding with later stage clinical development. Thus, in the
first half of 2001, the ongoing clinical studies were amended to explore longer
(four hours, compared to 30 minutes) VNP20009 IV
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infusions, an approach that is known to be safe based on preclinical studies. In
addition, Vion scientists have developed methods to enhance the efficiency of
tumor colonization and have also demonstrated the safety of administering more
frequent and multiple doses of VNP20009. These approaches are expected to enter
clinical testing in 2002.
TAPET-CD: The "Armed" Vector
Vion has successfully modified the TAPET base organism to permit
expression of high intratumoral levels of the enzyme cytosine deaminase.
Cytosine deaminase is an enzyme that converts the relatively nontoxic antifungal
drug 5-fluorocytosine (5-FC) into the anticancer drug 5-fluorouracil. TAPET-CD,
Vion's first armed vector containing the cytosine deaminase pro-drug converting
enzyme, entered clinical trials in January 2002. This initial study is designed
to determine the safety and maximum tolerated dose of TAPET-CD, which is
injected directly into a tumor, and 5-FC, the pro-drug that is given by mouth
beginning after the TAPET-CD injection.
Anticancer Cell Therapeutics
Triapine'r'
Triapine is a potent inhibitor of the enzyme ribonucleotide reductase,
and therefore a potent inhibitor both of DNA synthesis and of DNA repair from
the damage caused by widely used anticancer drugs. Its inhibition arrests the
growth or kills cancer cell lines and enhances the antitumor activity of several
of the standard anticancer agents.
We have completed the initial Phase I studies of Triapine, designed to
determine the safety and maximum tolerated dose of three different schedules in
patients with solid tumors. Two of the schedules, a two-hour intravenous
infusion schedule administered daily for five days, and a 96-hour intravenous
infusion schedule, were chosen for further clinical development. We selected
these schedules based on their safety and tolerability, the demonstration that
both schedules achieved relevant serum concentrations of Triapine at doses at or
below the maximum tolerated dose, and evidence of antitumor activity in several
patients with diverse types of advanced, treatment-refractory tumors (breast,
esophagus, head and neck, islet cell and endometrial cancer).
In the second half of 2001, we initiated a Phase II clinical trial of
the two-hour infusion schedule, administered five times daily every other week
in advanced or metastatic breast cancer. Additional Phase II studies are planned
for the first half of 2002 to include patients with head and neck cancer,
prostate cancer and non-small cell lung cancer.
Based on the preclinical data demonstrating substantial antitumor
activity in hematologic (blood) malignancies, two additional clinical trials of
Triapine were started in patients with treatment-refractory leukemias.
Traditionally, patients with hematologic malignancies receive higher doses of
antitumor drugs compared to solid tumor patients because of the need to induce
maximal effects on the tumor cells in the bone marrow. Therefore, these studies
will determine the maximum tolerated dose and most intense schedule possible
(limited only by toxicity to organs other than the bone marrow) for both the
five times daily and 96-hour infusion regimens.
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In preclinical studies, Triapine showed substantial potential for
enhancing the antitumor activity of various standard anticancer agents. On this
basis, in the second quarter of 2001, we initiated three clinical trials to
determine the safety and maximum tolerated doses of Triapine combined with
gemcitabine, cisplatin, and cisplatin-paclitaxel, respectively, in patients with
treatment-refractory advanced or metastatic solid tumors. The demonstration of
safety and evidence of antitumor activity in these studies will provide
information on additional, potential registration pathways for Triapine.
We are also developing both an oral dosage form and a prodrug version
of Triapine. Initial preclinical studies of the prodrug have shown that it has a
therapeutic half-life that is four to six times longer than Triapine itself.
These alternative dosage forms would be easier to administer and increase the
potential antitumor effect.
Sulfonyl Hydrazine Prodrugs
Sulfonyl Hydrazine Prodrugs (SHPs) are potent alkylating (DNA-damaging)
agents known to be among the most highly effective agents in the treatment of
cancer. Due to the differences in the mechanisms by which alkylating agents
damage DNA, they may have different spectrums of activity and toxicity. SHPs
have unique alkylating agent properties and have demonstrated broad, potent
antitumor activity in mouse models with tolerable toxicity levels.
Alkylating agents of the SHP class exert their killing effects on tumor
cells through a process of crosslinking DNA. This effect is normally a two-step
process involving an initial fast monoalkylation step followed by a slower
second alkylation step that establishes the crosslink. The main problem with
many DNA crosslinking agents is that following the initial monoalkylation event
some tumor cells are capable of repairing the monoalkylated DNA before the
crucial crosslink can be established. They do this through the action of a
protein called Alkyl Guanyl Transferase (AGT). VNP40101M, our clinical
candidate, is unique in that, simultaneously with the release of the alkylating
agent upon drug activation in the tumor, it also releases a relatively potent
inhibitor of AGT. As a result, the agent has a high level of activity against
tumors that have resisted treatment with many commonly used alkylating agents.
We have identified a lead candidate of the sulfonyl hydrazine prodrug
class, VNP40101M, with which to enter clinical development. Promising
preclinical data on VNP40101M showed broad antitumor activity against leukemia,
melanoma, lung and colon carcinomas in animal models. It has been completely
curative in all leukemia models tested to date, including those highly resistant
to standard alkylating agents. It also is very active against solid tumor
models including a xenograft model of human glioma (brain tumor) where it is
curative. The drug has been shown to be capable of crossing the blood brain
barrier with great efficiency, which has been a common obstacle in treating
brain tumors.
In June 2001, we initiated a Phase I trial of VNP40101M, administered
by 15-minute intravenous infusion every four weeks, to patients with
treatment-refractory advanced or metastatic solid tumors. The trial is active at
three sites and is designed to determine safety and the maximum tolerated dose.
An additional Phase I trial to explore a weekly administration schedule is
planned for 2002.
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Promycin'r'
Promycin is an anticancer cell therapeutic that is designed to improve
the treatment of solid tumors by attacking the hypoxic, or oxygen-depleted,
cells therein. In 1997, the Company and Boehringer Ingelheim International GmbH
(BI) entered into an exclusive worldwide licensing agreement for the development
and marketing of Promycin. The Company received $4.0 million in upfront
technology access fees and net proceeds of $2.9 million from the sale of 448,336
shares of common stock at a premium to the market price at the time of sale.
BI also reimbursed the Company for certain initial development costs and agreed
to share in future worldwide development costs. The Company was required to
use the BI license fee of $4.0 million exclusively for Promycin development
expenses. The original agreement was amended in December 1999 and BI agreed to
assume manufacturing, supply and worldwide development expenses in return for
paying reduced future royalties and milestone payments to the Company.
Vion and BI conducted a Phase III trial of Promycin in patients with
head and neck cancer that was put on hold in June 2000 as an interim evaluation
of the Phase III trial did not meet the predetermined criteria, which would
warrant continuation of accrual. Subsequently, BI confirmed the results of the
initial analyses and made the determination to cease development of Promycin. At
this time, we do not expect to incur any additional expense for costs associated
with Promycin nor do we expect to receive any additional revenues from BI
associated with Promycin.
Licensed Product and Product Candidates
MELASYN'r'
MELASYN is a synthetic form of melanin that dissolves readily in water.
Melanin is a pigment formed by cells in the skin that gives skin its color and
protects it from sun damage by absorbing ultraviolet rays. We believe that
MELASYN is the first water-soluble, synthetic version of melanin, making it a
novel and useful ingredient for formulation of skin care products and cosmetics.
The simplicity of its manufacture allows MELASYN to be produced in commercial
quantities at low cost. In addition, MELASYN blends in and conforms to a
person's skin tone without the orange color associated with most commercially
available self-tanning products.
In 1998, we agreed to be the exclusive selling agent for MELASYN and
sublicensed the MELASYN technology to San-Mar Laboratories (San-Mar). Under the
terms of the amended sublicense agreement expiring February 28, 2003, we granted
to San-Mar a worldwide, non-exclusive sublicense for the manufacture and sale of
products containing MELASYN to a specific customer. We receive a sublicense fee
from products sold by San-Mar with guaranteed minimum annual royalties of
$50,000 per year. Under the terms of the Yale license agreement, the Company
pays a license fee to Yale for products sold by us or our sublicensees.
We have also funded research projects relating to compounds to control
pigmentation and chemotherapeutic products for treating melanoma. To date, such
research has not provided any product candidates that we presently plan to
pursue.
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Novel Nucleoside Analogs
We have licensed the development of a nucleoside analog, or synthetic
molecule, known as (beta)-L-Fd4C. (beta)-L-Fd4C is an antiviral drug capable of
inhibiting the replication of the hepatitis B virus, or HBV, that has produced
preclinical results superior to those of competing antiviral drugs. We expect
(beta)-L-Fd4C to last longer and require less frequent dosage than the current
treatment, 3TC. HBV is a causative agent of both acute and chronic forms of
hepatitis that affects about 300 million people worldwide. HBV also predisposes
its victims to the development of liver cancer.
In October 1996, the U.S. Patent and Trademark Office issued a patent
to Yale covering the composition of matter and method of use of (beta)-L-Fd4C
for treating HBV, and Yale has licensed to us exclusive worldwide rights to the
patent including the use of (beta)-L-Fd4C for the treatment of HBV and AIDS. In
February 2000, we signed a licensing agreement for (beta)-L-Fd4C with Achillion
Pharmaceuticals (Achillion), a privately held biopharmaceutical company located
in New Haven, Connecticut that has commenced operations to develop and
commercialize innovative antiviral therapies. Under the terms of the license
agreement, Achillion will fund the development of (beta)-L-Fd4C, which is
currently in clinical trials. In return, we will receive potential milestone
payments, downstream royalties and a small equity position in Achillion.
Sponsored Research And License Agreements
Yale/Vion Research Agreement - July 1992
We entered into a research agreement with Yale in July 1992 to provide
funding for certain research projects performed under the supervision of Dr.
John W. Pawelek of the Department of Dermatology. Technology licensed by us from
research conducted under this agreement includes the inventions collectively
known as TAPET. We also have an option to obtain an exclusive license for any
inventions that result from research projects by Yale which are related to
synthetic melanin funded by us.
The agreement was renewed in June 1998 for a three-year term and
provided for funding of $0.9 million per year expiring June 30, 2001. In October
2000, we, in conjunction with Yale, restructured the agreement to provide a gift
to Yale of $0.7 million in October 2000 and a second gift of $0.7 million in
July 2001 to support the research projects.
Under this agreement, we have entered into five license agreements with
Yale that grant us exclusive licenses to make, use, sell and practice the
inventions covered by various patents. Each such license agreement requires us
to pay to Yale royalties based on a percentage of net sales of the products
covered and sublicensing income. In addition, four of the five licenses provide
that they are terminable in the event we do not exercise due diligence in
commercializing the licensed technology.
Yale/Vion Agreement - August 1994
Yale granted us a nontransferable worldwide exclusive license to make,
have made, use, sell and practice certain inventions and research for
therapeutic and diagnostic purposes. The term of the license is the expiration
of any patents relating to any inventions or, with respect to non-patented
inventions or research, 17 years. Yale has retained the right to make, use and
practice the inventions and research for non-commercial purposes. This agreement
also provides that if Yale, as a result of its own research,
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identifies potential commercial opportunities for the inventions and research,
Yale will give us a first option to negotiate a commercial license for such
commercial opportunities. Pursuant to this agreement, we issued to Yale 159,304
shares of our common stock and made a payment of $50,000. Yale is entitled to
royalties on sales, if any, of resulting products and sublicensing revenues and,
with regard to one patent, milestone payments based on the status of clinical
trials and regulatory approvals.
In June 1997, this license agreement and another license agreement
dated December 1995 were amended pursuant to which Yale agreed to reduce certain
amounts payable by us in exchange for 150,000 shares of our common stock issued
to Yale valued at $0.6 million. We have agreed with Yale that we will plan and
implement appropriate research and development with respect to commercialization
of products based on the licensed inventions and research. In the event that the
agreement is terminated for breach, all rights under licenses previously granted
terminate. Accordingly, a default as to one product could affect our rights in
other products. In addition, Yale, at its sole option, can terminate any
sublicenses that we grant.
Subsequent to entering into the Yale/Vion Agreement in August 1994,
we have paid approximately $9.2 million to fund certain research at Yale,
including research in the laboratory of Dr. Yung-Chi Cheng, a member of our
scientific advisory board, and of Dr. Alan Sartorelli, one of our directors.
Yale has sole discretion to use these funds to conduct research relating to
products that it desires to pursue. Additionally, to the extent that such
research results in technologies not covered by the Yale/Vion Agreement dated
August 1994, we may be unable to utilize such technologies unless we negotiate
additional license agreements.
Yale/Vion License Agreements - December 1995
In December 1995, we entered into a license agreement with Yale
pursuant to which we received a nontransferable worldwide exclusive license,
expiring over the lives of the patents, to three inventions relating to gene
therapy for melanoma. Pursuant to the license agreement, the Company paid Yale a
$0.1 million fee.
In December 1995, the Company and Yale entered into another license
agreement pursuant to which the Company received a nontransferable worldwide
exclusive license, expiring over the lives of the patents, to an invention
relating to whitening skin.
Under the licensing agreements, Yale is entitled to milestone payments
based on the status of clinical trials and regulatory approvals. In addition,
Yale is entitled to royalties on sales, if any, of resulting products and
sublicense revenues.
Cooperative Research and Development Agreement
On April 1, 2000, the Company entered into a Cooperative Research and
Development Agreement (CRADA) with the National Institutes of Health, National
Cancer Institute, Division of Clinical Sciences, Surgery Branch for "Development
of TAPET-Based Immunotherapies Targeted Against Cancer". Under the terms of the
CRADA, the Surgery Branch will provide materials and supplies for research and
development projects using CRADA funds, personnel and other resources supplied
by the Company. The Company is required to contribute $0.4 million per year for
a period of
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five years, payable quarterly, to be used for material support as well as for
work to be performed by National Cancer Institute staff.
Competition
Competition in the biopharmaceutical industry is intense and based
significantly on scientific and technological factors, the availability of
patent and other protection for technology and products, the ability to
commercialize technological developments and the ability to obtain governmental
approval for testing, manufacturing and marketing. Numerous pharmaceutical and
biotechnology companies have publicly announced their intention to develop drugs
that target the replication of tumor cells including, in some instances, the
development of agents which target ribonucleotide reductase, agents which are
alkylating agents and agents which can be described as drug delivery platforms.
These companies include, but are not limited to, Bristol-Myers Squibb Company,
Pfizer Inc., Amgen Inc., Genentech Inc., ImClone Systems Inc., OSI
Pharmaceuticals, Inc., Eli Lilly and Co., and AstraZeneca PLC. Our competitors
may have substantially greater financial, technical and human resources than
we have and may be better equipped to develop, manufacture and market products.
In addition, many of these companies have extensive experience in preclinical
testing and human clinical trials, and in obtaining regulatory approvals.
In addition, our competitors may succeed in obtaining approval for products more
rapidly than us and in developing and commercializing products that are safer
and more effective than those that we propose to develop. The existence of these
products, other products or treatments of which we are not aware or products
or treatments that may be developed in the future may adversely affect the
marketability of our products by rendering them less competitive or obsolete.
These companies, as well as academic institutions, governmental agencies and
private research organizations, also compete with us in acquiring rights to
products or technologies from universities, and recruiting and retaining highly
qualified scientific personnel and consultants.
The timing of market introduction of our potential products or of
competitors' products will be an important competitive factor. Accordingly, the
relative speed with which we can develop products, complete preclinical testing,
clinical trials and regulatory approval processes and supply commercial
quantities to market will influence our ability to bring a product to market. In
addition, we may apply for Orphan Drug designation by the U.S. Food and Drug
Administration (FDA) for our proposed products. To the extent that a competitor
of ours develops and receives Orphan Drug designation and marketing approval for
a drug to treat the same indication prior to us, we may be precluded from
marketing our product for a period of seven years.
Patents, Licenses And Trade Secrets
Our policy is to protect our technology by, among other means, filing
patent applications for technology that we consider important to the development
of our business. We intend to file additional patent applications, when
appropriate, relating to new developments or improvements in our technology and
other specific products that we develop. We also rely on trade secrets, know-how
and continuing technological innovations, as well as patents we have licensed or
may license from other parties to develop and maintain our competitive position.
Pursuant to the Yale/Vion Research Agreement dated July 1992, we are
the exclusive licensee of a number of issued patents and pending patent
applications, U.S. and foreign, relating to our TAPET
10
platform technology, which include claims for methods of diagnosing and/or
treating various solid tumor cancers, including, but not limited to, melanoma,
lung cancer, breast cancer and colon cancer. We also have rights, either by
license and/or by assignment, to pending patent applications, U.S. and foreign,
relating to our TAPET platform technology. In particular, we have currently
pending and intend to pursue a number of U.S. provisional and non-provisional
patent applications and three International patent applications related to this
technology. One of the international applications is co-owned with Memorial
Sloan Kettering Cancer Center and the remaining two are exclusively owned by us.
We are also the exclusive licensee of one issued U.S. and a number of foreign
utility patents and pending patent applications relating to synthetic melanins
and methods for using synthetic melanins, such as, for sunscreening or
self-tanning agents. The one U.S. patent and the foreign patents and patent
applications are relevant to our MELASYN products.
In connection with a collaboration with Memorial Sloan Kettering Cancer
Center, as indicated above, we have filed a U.S. non-provisional and an
international patent application relating to non-invasive methods to detect
solid tumors in vivo using attenuated tumor-targeted bacteria.
In connection with the Yale/Vion Agreement dated August 1994, we are
the exclusive licensee of ten issued patents relating to our sulfonyl hydrazine
prodrug technology, including patents relating to treatment of trypanosomiasis
and cancer and for controlling neoplastic cell growth. We are also the exclusive
licensee of a number of issued and pending U.S. and foreign patent applications
relating to:
o (beta)-L-Fd4C, its composition and its use for the treatment of HIV and HBV
infections, and its use in combination with other anti-AIDS drugs;
o the use of 3TC or mixtures containing 3TC for the treatment of HBV
infection;
o Triapine and other ribonucleotide reductase inhibitors.
We are aware that BioChem Pharma, Inc. ("BioChem Pharma") has been
granted an issued U.S. patent with claims to methods of use of a compound or a
group of compounds, including 3TC, for treating HBV. BioChem Pharma was
recently merged into a new corporation called Shire BioChem Inc. and BioChem
Pharma's rights were all transferred to this new entity. We believe that the
BioChem Pharma patent (as well as other BioChem Pharma patent applications
and/or patents) is licensed to Glaxo Wellcome Inc. Under the Yale/Vion
Agreement dated August 1994, we have rights in a patent application with claims
directed to methods for the use of 3TC or a mixture containing 3TC for
treating HBV. We requested that the U.S. Patent and Trademark Office declare
an interference (the "BioChem Interference") between the BioChem patent and
the Vion patent application. An interference is a legal proceeding held when
more than one patent application or at least one patent application and one or
more patents, owned by different parties, contain claims to the same subject
matter. An interference proceeding determines which one of the parties is
entitled to a patent containing claims to the common subject matter. On
November 23, 1999, the U.S. Patent and Trademark Office, Board of Patent
Appeals and Interference declared an interference between the Vion-licensed
patent application from Yale University and U.S. patent No. 5,532,246 assigned
to BioChem Pharma, Inc. While the BioChem Interference is ongoing, the U.S.
Patent and Trademark Office has re-declared the interference and placed the
burden of proof on Vion. On April 14, 2000, it also declared another
interference (the "Glaxo Wellcome Interference") between the Vion patent
application and a patent application relating to the use of 3TC to treat HBV
owned by Glaxo Wellcome Inc., in which it placed the burden of proof on Glaxo
Wellcome Inc. In both cases, all parties have an opportunity to argue their
respective positions during the interference proceedings, which are ongoing.
11
We expect many developments during the course of the interference
proceedings and it may be a long time until final determinations are reached.
Depending upon the length of the interference proceedings, which could be
reduced by a mutually agreed upon settlement, costs to each party could be
substantial. Determinations in interference proceedings are subject to appeal in
the appropriate United States federal courts.
Further, even if we were to prevail in both the interferences and were
to obtain a patent with claims directed to the method of use of 3TC or a mixture
containing 3TC for treating HBV, we would only have the right to go to court to
exclude any third party, for example, BioChem Pharma, from using 3TC or a
mixture containing 3TC in a method for treating HBV. It is possible, if we were
to prevail in the interferences, other parties such as BioChem Pharma might be
willing to take a license for the right to use 3TC in a method for treating HBV.
There can be no guarantee that we would be successful in licensing such rights
at acceptable terms.
It should be noted that even if we were to prevail in the
interferences, we would not have any right to make, use, sell or import 3TC in
the United States based on any patent we could obtain by prevailing in the
Interferences.
In addition, we are aware that third parties, including BioChem Pharma,
Glaxo Wellcome Inc. and Emory University, have filed patent applications, some
of which have been issued, relating to 3TC, mixtures containing 3TC, and
methods of preparation and use of 3TC or mixtures containing 3TC as an
antiviral drug. In fact, we are aware that both BioChem Pharma and Emory
University have been granted patents that have claims directed to 3TC, itself,
or a group of compounds including 3TC. Accordingly, even if we had rights to
an issued patent with claims to a method of use of 3TC to treat HBV, we would
not be able to make, use and sell or import 3TC in the United States unless we
obtained a license from one or more third parties. There can be no guarantee
that we could obtain such a license or that if available, the license would be
on acceptable terms.
We have received correspondence from F. C. Gaskin, Inc. alleging that
we may be infringing certain of their patents relating to melanin-containing
compositions and their use. We believe this assertion has no merit.
We or our licensors are prosecuting the patent applications related to
products we license both with the U.S. Patent and Trademark Office and various
foreign patent agencies, but we do not know whether any of our applications will
result in the issuance of any patents or, whether any issued patent will provide
significant proprietary protection or will be circumvented or invalidated.
During the course of patent prosecution, patent applications are evaluated for,
among other things, utility, novelty, nonobviousness and enablement. The U.S.
Patent and Trademark Office may require that the claims of an initially filed
patent application be amended if it is determined that the scope of the claims
include subject matter that is not useful, novel, nonobvious or enabled.
Furthermore, in certain instances, the practice of a patentable invention may
require a license from the holder of dominant patent rights. In cases where one
party believes that it has a claim to an invention covered by a patent
application or patent of a second party, the first party may attempt to provoke
an interference proceeding in the U.S. Patent and Trademark Office or such a
proceeding may otherwise be declared by the U.S. Patent and Trademark Office. In
general, in an interference proceeding, the U.S. Patent and Trademark Office
12
reviews the competing patents and/or patent applications to determine the
validity of the competing claims, including, but not limited to, determining
priority of invention. Any such determination would be subject to appeal in the
appropriate United States federal courts.
We cannot predict whether our or our competitors' patent applications
will result in valid patents being issued. An issued patent is entitled to a
presumption of validity. The presumption may be challenged in litigation; a
court could find any patent of ours or of our competitors invalid and/or
unenforceable. Litigation, which could result in substantial cost to us, may
also be necessary to enforce our patent and proprietary rights and/or to
determine the scope and validity of the proprietary rights of others. We may
participate in interference proceedings that may in the future be declared by
the U.S. Patent and Trademark Office to determine priority of invention.
Interference and/or litigation proceedings could result in substantial cost to
us.
The patent position of biotechnology and biopharmaceutical firms
generally is highly uncertain and involves complex legal and factual questions.
To date, no consistent policy has emerged regarding the breadth of claims
allowed in biotechnology and biopharmaceutical patents.
Government Regulation
Overview. Regulation by state and federal governmental authorities in
the United States and foreign countries is a significant factor in the
manufacture and marketing of our products and in our ongoing research and
product development activities. All of our products will require regulatory
clearances or approvals prior to commercialization. In particular, drugs,
biologicals and medical devices are subject to rigorous preclinical testing and
other approval requirements by the FDA pursuant to the Federal Food, Drug, and
Cosmetic Act and the Public Health Service Act and regulations promulgated
thereunder, as well as by similar health authorities in foreign countries.
Various federal statutes and regulations also govern or influence the testing,
manufacturing, safety, labeling, packaging, advertising, storage, registration,
listing and recordkeeping related to marketing of such products. The process of
obtaining these clearances or approvals and the subsequent compliance with
appropriate federal statutes and regulations require the expenditure of
substantial resources. We cannot be certain that any required FDA or other
regulatory approval will be granted or, if granted, will not be withdrawn.
Drugs and Biologicals. Preclinical development of diagnostic and
therapeutic drugs and biological products is generally conducted in the
laboratory to evaluate the safety and the potential efficacy of a compound by
relevant in vitro and in vivo testing. When a product is tested prospectively to
determine its safety for purposes of obtaining FDA approvals or clearances, such
testing must be performed in accordance with good laboratory practices for
nonclinical studies. The results of preclinical testing are submitted to the FDA
as part of an IND. The IND must become effective, informed consent must be
obtained from clinical subjects, and the study must be approved by an
institutional review board before human clinical trials can begin.
Regulatory approval often takes a number of years and involves the
expenditure of substantial resources. Approval time also depends on a number of
factors, including the severity of the disease in question, the availability of
alternative treatments and the risks and benefits demonstrated in clinical
trials. Typically, clinical evaluation involves a three-phase process. In Phase
I, clinical trials are conducted with a small number of subjects to determine
the tolerated drug dose, early safety profile,
13
proper scheduling and the pattern of drug distribution, absorption and
metabolism. In Phase II, clinical trials are conducted with groups of patients
afflicted with a specific disease in order to determine efficacy, dose-response
relationships and expanded evidence of safety. In Phase III, large-scale,
multi-center, controlled clinical trials are conducted in order to:
o provide enough data for statistical proof of safety and efficacy;
o compare the experimental therapy to existing therapies;
o uncover any unexpected safety problems, such as side-effects; and
o generate product labeling.
In the case of drugs for cancer and other life-threatening diseases,
the initial human testing is generally conducted in patients rather than in
healthy volunteers. Because these patients are already afflicted with the target
disease, it is possible that such studies will provide results traditionally
obtained in Phase II trials. These trials are referred to as 'Phase I/II'
trials.
Tests of our product candidates and human clinical trials may be
delayed or terminated due to factors such as unfavorable results or insufficient
patient enrollment. Furthermore, the FDA may suspend clinical trials at any time
on various grounds. Delays in tests and trials may have a material adverse
effect on our business.
The results of the preclinical and clinical testing are submitted to
the FDA either as part of a new drug application, or NDA, for drugs, or a
product license application, or PLA, for biologics, for approval to commence
commercial distribution. For a biological, the manufacturer generally must also
obtain approval of an establishment license application. In responding to an NDA
or PLA, the FDA may grant marketing approval, request additional information or
deny the application if it determines that the application does not satisfy its
regulatory approval criteria. It may take several years to obtain approval after
submission of an NDA or PLA, although approval is not assured. The FDA also
normally conducts a pre-approval inspection and other occasional inspections of
an applicant's facilities to ensure compliance with current good manufacturing
practices. Further, stringent FDA regulatory requirements continue after a
product is approved for marketing, and changes to products or labeling can
require additional approvals. If any of our products is approved for marketing,
we will be subject to stringent post-marketing requirements.
We also will be subject to widely varying foreign regulations governing
clinical trials and pharmaceutical sales. Whether or not FDA approval has been
obtained, approval of a product by the comparable regulatory authorities of
foreign countries must be obtained before marketing the product in those
countries. The approval process varies from country to country and the time may
be longer or shorter than that required for FDA approval. We intend, to the
extent possible, to rely on foreign licensees to obtain regulatory approval to
market our products in foreign countries.
Orphan Drug Designation. Under the Orphan Drug Act, a sponsor may
obtain designation by the FDA of a drug or biologic as an 'orphan' drug for a
particular indication. Orphan Drug designation is granted to drugs for rare
diseases or conditions, including many cancers, with a prevalence of less than
14
200,000 cases in the United States. The sponsor of a drug that has obtained
Orphan Drug designation and which is the first to obtain approval of a marketing
application for such drug is entitled to marketing exclusivity for a period of
seven years for the designated indication. This means that no other company can
market the same Orphan Drug for the same indication approved by the FDA for
seven years after approval unless such company proves its drug is clinically
superior or the approved Orphan Drug marketer cannot supply demand for the drug.
Legislation is periodically considered that could significantly affect the
Orphan Drug law. We received Orphan Drug designation for Promycin in September
1995 to treat head and neck cancer and in May 1997 received FDA approval of our
request for Orphan Drug status for the use of Promycin to treat cervical cancer.
We intend to seek this designation for other products where appropriate. There
can be no assurance that future changes to the Orphan Drug Act would not
diminish the value of any Orphan Drug designation obtained by us.
Drugs for Life-Threatening Illnesses. FDA regulatory procedures
established in 1988 are intended to speed further the availability of new drugs
intended to treat life-threatening and severely debilitating illnesses. These
procedures provide for early and continuous consultation with the FDA regarding
preclinical and clinical studies necessary to gain marketing approval. This
regulatory framework also provides that if Phase I results are promising, Phase
II clinical trials may be designed that obviate the need for lengthy, expensive
Phase III testing. Notwithstanding the foregoing, approval may be denied by the
FDA or traditional Phase III studies may be required. The FDA may also seek our
agreement to perform post-approval Phase IV studies, which confirm product
safety and efficacy.
Environmental Matters. We are subject to federal, state and local
environmental laws and regulations, including those promulgated by the
Occupational Safety and Health Administration (OSHA), the Environmental
Protection Agency (EPA) and the Nuclear Regulatory Commission (NRC), that govern
activities or operations that may have adverse environmental effects, such as
discharges to air and water, as well as handling and disposal practices for
solid and hazardous wastes. These laws also impose strict liability for the
costs of cleaning up, and for damages resulting from, sites of past spills,
disposals or other releases of hazardous substances and materials for the
investigation and remediation of environmental contamination at properties
operated by us and at off-site locations where we have arranged for the disposal
of hazardous substances.
Our facilities have made, and will continue to make, expenditures to
comply with current and future environmental laws. To date, we have not incurred
significant costs and are not aware of any significant liabilities associated
with our compliance with federal, state and local environmental laws and
regulations. However, environmental laws have changed in recent years and we may
become subject to stricter environmental standards in the future and may face
large capital expenditures to comply with environmental laws. We have limited
capital and are uncertain whether we will be able to pay for significantly large
capital expenditures. Also, future developments, administrative actions or
liabilities relating to environmental matters may have a material adverse effect
on our financial condition or results of operations.
All of our operations are performed under strict environmental and
health safety controls consistent with OSHA, EPA and NRC regulations. We cannot
be certain that we will be able to control all health and safety problems. If we
cannot control those problems, we may be held liable and may be required to pay
the costs of remediation. These liabilities and costs could be material.
Manufacturing and Marketing
We do not have experience in manufacturing or marketing products and
have not yet commercially introduced any products. We do not currently have the
resources to manufacture or market on a commercial scale any products that we
develop. We currently use third parties to manufacture limited quantities of our
products for use in clinical activities.
If our products are approved for sale by regulatory authorities, we
will need to develop manufacturing and marketing capability or make arrangements
with third parties to manufacture, distribute and sell our products. In the
event we decide to establish a manufacturing and distribution facility or a
marketing and sales force, we will require substantial additional funds and will
be required to hire and retain additional personnel.
15
Employees
As of December 31, 2001, we had 50 full-time employees, of which 36
were engaged in research, development and clinical development, and 14 in
administration and finance.
ITEM 2. Properties
Our principal facility consists of approximately 20,000 square feet of
leased laboratory and office space in New Haven, Connecticut. The lease expires
in October 2006. The current annual rental rate is approximately $237,000. We
believe our space is sufficient for our development, clinical and administrative
activities.
ITEM 3. Legal Proceedings
In the normal course of business, the Company may be subject to
proceedings, lawsuits and other claims. We are not a party to any legal
proceedings that may have a material adverse effect on our business.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
16
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information for Common Stock
Our common stock has traded on the Nasdaq National Market since October
25, 1999, and traded on The Nasdaq SmallCap Market'sm' from April 29, 1996 until
October 25, 1999, under the symbol "VION". From August 14, 1995 to April 26,
1996, the common stock traded on The Nasdaq SmallCap Market'sm' under the symbol
"OCRX". The following table reflects the range of high and low closing sales
prices of the common stock for each of the calendar quarters in 2001 and 2000.
This information is based on closing sales prices as reported by the Nasdaq
National Market.
2001 2000
-------------------------- -------------------------------
High Low High Low
---- --- ---- ---
First Quarter $12.1875 $3.25 $ 29.00 $5.875
Second Quarter 8.82 3.44 16.875 6.00
Third Quarter 7.97 3.25 18.00 6.625
Fourth Quarter 5.48 4.20 16.375 7.00
Recent Sales of Unregistered Securities
We made no sales of unregistered securities during the fiscal year
ended December 31, 2001.
Shelf Registration
We filed a Shelf Registration Statement on Form S-3 on April 3, 2001
with the Securities and Exchange Commission (SEC) which was declared effective
as of June 26, 2001. The Registration Statement allows us from time to time
to sell up to an aggregate of 4.7 million shares of common stock. In
August 2001, we sold 2.5 million shares of common stock at $5.00 per share,
in an underwritten public offering. The net proceeds from this offering were
approximately $11.4 million.
Holders
At March 19, 2002, there were 378 holders of record of our common
stock.
Dividends
We have never paid cash dividends on our common stock. We currently
intend to retain all earnings for use in our business and do not anticipate
paying cash dividends in the foreseeable future.
17
ITEM 6. Selected Financial Data
The following selected financial data for each of the five years in the
period ended December 31, 2001, and for the period from May 1, 1994 (inception)
through December 31, 2001, are derived from our audited financial statements.
The selected financial data should be read in conjunction with the financial
statements, related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
For the Period
From May 1, 1994
(Inception)
through December
2001 2000 1999 1998 1997 31, 2001
------------ ------------- ------------ ----------- ----------- ------------------
(In thousands, except per share data)
Statement of Operations Data:
Total revenues $ 650 $ 947 $ 3,154 $ 1,956 $ 5,271 $ 12,031
Total operating expenses 15,664 17,078 14,189 12,912 10,914 88,894
Loss from operations (15,014) (16,131) (11,035) (10,956) (5,643) (76,863)
Net loss (13,810) (14,803) (10,769) (10,478) (5,343) (72,818)
Preferred stock dividends and
accretion - (606) (710) (4,414) (1,132) (18,489)
----------------------------------------------------------------------------------
Loss applicable to common
shareholders $(13,810) $(15,409) $(11,479) $(14,892) $(6,475) $(91,307)
==================================================================================
Basic and diluted loss applicable
to common shareholders per share $(0.51) $(0.64) $(0.74) $(1.24) $(0.75)
Weighted-average number of shares
of common stock outstanding 27,212 24,089 15,544 11,977 8,671
Balance Sheet Data:
Cash, cash equivalents and
short-term investments $22,644 $24,357 $11,038 $6,416 $10,979
Working capital 20,518 22,050 9,911 5,045 10,678
Total assets 23,601 25,660 13,934 9,269 13,580
Long-term obligations and
redeemable preferred stock - - 5,185 5,035 473
Total shareholders' equity 21,098 22,657 5,853 1,504 11,959
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
We are a development stage biopharmaceutical company committed to the
discovery, development and commercialization of therapeutics and technologies
for the treatment of cancer. Our activities to date have consisted primarily of
research and product development, obtaining regulatory approval for clinical
trials, conducting clinical trials, negotiating and obtaining collaborative
agreements, and obtaining financing in support of these activities. Our revenues
currently consist of contract research grants and technology license fees. Since
inception, we have generated minimal revenues and have incurred substantial
operating losses from our activities. We expect to incur substantial operating
losses for the next several years due to expenses associated with our
activities.
Our plan of operations for the next 12 months includes the following
elements:
o Continue to conduct internal research and development with respect to our
core technologies and other product candidates that we may identify;
18
o Conduct Phase I clinical "optimization" TAPET'r' studies of the "unarmed
base vector" for further safety and "optimized" selective accumulation of
bacteria in the tumor;
o Conduct Phase I clinical studies of the "armed" TAPET vector for safety and
selective accumulation of the bacteria and the anticancer agent within
tumors;
o Conduct Phase I studies for safety and dosage of Triapine'r' in conjunction
with standard chemotherapy treatments;
o Conduct Phase II clinical studies of Triapine;
o Conduct Phase I clinical studies of VNP40101M, a member of the Sulfonyl
Hydrazine Prodrug class, for safety and dosage;
o Continue to support research and development being performed at Yale
University and by other collaborators; and
o Continue to seek collaborative partnerships, joint ventures, co-promotional
agreements or other arrangements with third parties.
Critical Accounting Policies and Estimates
The financial statements are prepared in conformity with accounting
principles generally accepted in the United States, which require us to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Our significant accounting policies are described in Note 2 to the
financial statements included in Item 8 of this Form 10-K. We believe our
critical accounting policies include revenue recognition, research and
development expenses, investments in debt and equity securities, and income
taxes.
Revenue Recognition
We record revenue from contract research grants as the costs are
incurred. We are reimbursed for allowable grant-related costs upon submission of
monthly grant reports. We are subject to annual grant audits as required by the
Department of Health and Human Services. Audits may result in adjustments to the
amount of grant revenues recorded and funds received.
We record revenue under technology license agreements with several
parties. Revenues are recorded using estimates based on historical sales by
sublicensees. Actual license fees received may vary from recorded estimated
revenues.
The effect of any change in the contract research grant revenues or
technology license fee revenues would be reflected in revenues in the period
such determination was made.
Research and Development Expenses
We record research and development expenses as incurred. We disclose
clinical trials expenses and other research and development expenses as separate
components of research and development expense in our statement of operations in
order to provide more meaningful information to our investors. The
classification of expenses into these components of research and development
expense are based, in part, on estimates of certain costs when incurred. The
effect of any change in the clinical trials expenses and other research and
development expenses would be reflected in the period such determination was
made.
Investments in Debt and Equity Securities
We account for investments in accordance with Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities ("SFAS 115"). Our investment securities are classified as
available for sale and carried at fair market value. Unrealized gains or losses
are recorded in other comprehensive income until the securities are sold or
otherwise disposed of. However, in accordance with SFAS 115, a decline in fair
market value below cost that is other than temporary would be accounted for as a
realized loss in the period such determination was made. As of December 31,
2001, the gross unrealized losses on our investment securities were
approximately $58,000.
Income Taxes
We account for income taxes under the liability method in accordance
with Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Under this method, deferred income taxes are recognized for the future
tax consequences of temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities, as well as
operating loss and tax credit carryforwards. We have not recorded a provision or
benefit for income taxes in the financial statements due to recurring
historical losses and based on judgments regarding the timing of future
profitability. Accordingly, we have provided a full valuation allowance against
our deferred tax asset as of December 31, 2001. In the event we were to
determine that we would be able to realize deferred tax assets in the future,
an adjustment to the deferred tax asset would increase income in the period
such determination was made.
Results of Operations
Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000
Revenues. Revenues for the year ended December 31, 2001 were $0.7
million as compared to $0.9 million for 2000. The decrease was due primarily to
lower 2001 revenues from Small Business Innovation and Research ("SBIR") and
other research grants partially offset by higher technology license fee
revenues. Technology license fee revenue increased to $0.2 million for the year
ended December 31, 2001, from $0.1 million for 2000. The Company reported $0.1
million in 2000 for revenue from laboratory support services no longer rendered
after September 2000.
Research and Development. Total research and development expenses were
$12.5 million for the year ended December 31, 2001, compared to $12.8 million
for 2000. Clinical trials expenses were $3.9 million for the year ended December
31, 2001 as compared to $3.3 million for 2000. The increase in 2001 was due to
costs associated with patient enrollment and drug production for expanded
clinical trials of TAPET and Triapine and the initiation of clinical trials for
VNP40101M. Other research and development expenses decreased to $8.6 million for
the year ended December 31, 2001 from $9.6 million for 2000. The decrease was
due primarily to lower research support provided to Yale University under a
funding arrangement, which was restructured in the fourth quarter of 2000.
General and Administrative. General and administrative expenses were
$3.1 million for the year ended December 31, 2001, as compared to $4.3 million
in 2000. The decrease in 2001 was due to lower professional and patent-related
fees and, to a lesser extent, lower officer bonuses.
Interest Income and Expense. Interest income was $1.2 million for the
year ended December 31, 2001, compared to $1.3 million for 2000. The decrease
was due to lower levels of invested funds.
19
Preferred Stock Dividends and Accretion. Preferred stock dividends and
accretion for the year ended December 31, 2001 were $0 as compared to $0.6
million for the comparable 2000 period. Dividends and accretion primarily
represented non-cash dividends and the accretion of dividends related to the
Company's preferred stock. During 2000, all outstanding shares of preferred
stock were converted or redeemed.
Loss Applicable to Common Shareholders. The loss applicable to common
shareholders was $13.8 million, or $0.51 per share on a higher number of shares
outstanding, for the year ended December 31, 2001 as compared to $15.4 million,
or $0.64 per share, for 2000 as a result of the net loss and preferred dividends
and accretion reported.
Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999
Revenues. Revenues for the year ended December 31, 2000 were $0.9
million as compared to $3.2 million for 1999. The decrease was primarily due to
non-recurring revenues of $2.6 million in 1999 from reimbursed Promycin'r'
development costs under the terms of a collaboration agreement with Boehringer
Ingelheim International GmbH ("BI"), which was revised in December 1999. Under
the revised contractual arrangements, BI assumed all development costs for the
drug Promycin beginning in 2000, while continuing to pay Vion for certain
laboratory support services through September 2000. 2000 revenues from Small
Business Innovation and Research ("SBIR") and other research grants increased to
$0.8 million as compared to $0.3 million for the comparable 1999 period due to
additional research grants received in 2000. Technology license fee revenue
decreased to $78,000 for the year ended December 31, 2000, from $155,000 for
1999. The Company recorded approximately $82,000 in laboratory support service
revenue for the year ended December 31, 2000 as compared to $35,000 for 1999.
Research and Development. Total research and development expenses were
$12.8 million for the year ended December 31, 2000, compared to $11.5 million
for 1999. Clinical trials expenses were $3.3 million for the year ended December
31, 2000, compared to $4.1 million for 1999. The decrease was due to BI's
assumption of Promycin development costs beginning in 2000 under the revised
contractual arrangements for which the Company recorded expenses of $3.4 million
in 1999, partially offset by increased costs of $2.6 million associated with
patient accumulation for clinical trials of TAPET and Triapine. Other research
and development expenses increased to $9.6 million for the year ended December
31, 2000 from $7.4 million for 1999. The increase was primarily due to
scientific personnel hired in 2000, preclinical activities related to the
Company's Sulfonyl Hydrazine Prodrug technology and other research support
related to a cooperative research agreement ("CRADA") with the National Cancer
Institute and a research gift to Yale University ("Yale").
General and Administrative. General and administrative expenses were
$4.3 million as compared to $2.7 million in 1999. The increase was primarily due
to higher professional and patent-related fees.
Interest Income and Expense. Interest income increased to $1.3 million
for the year ended December 31, 2000, from 1999 interest income of $0.3 million.
The increase was due to higher levels of
20
invested funds as a result of net proceeds received from a public offering in
October 1999 and from option and warrant exercises in 2000.
Preferred Stock Dividends and Accretion. Preferred stock dividends and
accretion for the year ended December 31, 2000, decreased to $0.6 million from
$0.7 million for the comparable 1999 period. Dividends and accretion primarily
represent non-cash dividends and the accretion of dividends related to the
Company's preferred stock. During 2000, all outstanding shares of preferred
stock were converted or redeemed.
Loss Applicable to Common Shareholders. The loss applicable to common
shareholders increased to $15.4 million, or $0.64 per share on a higher number
of shares outstanding, for the year ended December 31, 2000, from $11.5 million,
or $0.74 per share, for 1999 as a result of the net loss and preferred dividends
and accretion reported.
Liquidity and Capital Resources
At December 31, 2001, we had cash, cash equivalents and short-term
investments of $22.6 million, compared to $24.4 million at December 31, 2000.
The decrease in cash, cash equivalents and short-term investments in 2001 was
primarily the result of cash used to fund operating activities of $13.6 million
partially offset by net proceeds to the Company of $11.4 million from a public
offering of its common stock. In August 2001, the Company completed the sale of
2.5 million newly issued shares of common stock at $5.00 per share, in an
underwritten public offering.
During the year ending December 31, 2002, the Company is required to
make payments totaling $0.4 million under the CRADA agreement and will
contribute $0.4 million for the balance of the Yale research gifts.
We lease our facility for laboratory and office use in New Haven,
Connecticut. The lease agreement requires annual lease payments of approximately
$0.2 million per year increasing to approximately $0.3 million per year during
the original term, which expires in October 2006. The lease also requires us to
pay real estate taxes and common area maintenance charges of approximately $0.1
million per year. In addition to the operating lease for our facility, we also
have operating leases for various office and laboratory equipment.
Capital expenditures for the year ended December 31, 2001 were
approximately $0.3 million. Capital expenditures for 2002 are not expected to
exceed $0.3 million.
We currently estimate that our existing cash, cash equivalents and
short-term investments totaling $22.6 million at December 31, 2001, will be
sufficient to fund our planned operations into the second quarter of 2003. As
of December 31, 2001, we estimate that we will need approximately $17
million for the next twelve months to fund all our operations net of cash
inflows from research grants, technology licenses, interest and stock option
exercises. However, our cash requirements may vary materially from those
now planned because of the results of research, development, clinical trials
and product testing, relationships with strategic partners, changes in focus and
direction of our research and development programs, competitive and
technological advances, the regulatory process in the United States and abroad,
and other factors. In the future, we will need to complete our product
development and clinical trials and raise substantial capital to fund
operations, however, there is no assurance about raising additional capital or
what the terms may be.
Risk Factors
This Annual Report on Form 10-K contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below, as well as those discussed elsewhere in this Annual Report on Form 10-K,
including the documents incorporated by reference.
21
If we continue to incur operating losses, we may be unable to continue our
operations.
We have incurred losses since inception. As of December 31, 2001, we
had an accumulated deficit of approximately $91.6 million. If we continue to
incur operating losses and fail to become a profitable company, we may be unable
to continue our operations. Since we began our business, we have focused on
research and development of product candidates. We expect to continue to operate
at a net loss for at least the next several years as we continue our research
and development efforts, continue to conduct clinical trials and develop
manufacturing, sales, marketing and distribution capabilities. Our future
profitability depends on our receiving regulatory approval of our product
candidates and our ability to successfully manufacture and market approved
drugs. The extent of our future losses and the timing of our profitability are
highly uncertain.
If we fail to obtain the capital necessary to fund our operations, we will be
unable to continue or complete our product development.
We will need to raise substantial additional capital to fund operations
and complete our product development. As of December 31, 2001, we had $22.6
million in cash, cash equivalents and short-term investments to fund our
operations and continue our product development. We believe that we will need
approximately $17 million for the next twelve months to fund all our operations
net of cash inflows from research grants, technology licenses, interest and
stock option exercises. We will not have an approved and marketable product at
that time. As we will not have a product that generates significant revenues,
we will need additional financing to sustain our operations.
We may not get funding when we need it or on favorable terms. If we
cannot raise adequate funds to satisfy our capital requirements, we may have to
delay, scale-back or eliminate our research and development activities or future
operations. We might have to license our technology to others. This could result
in sharing revenues which we might otherwise retain for ourselves. Any of these
actions may harm our business, financial condition and results of operations.
The amount of capital we may need depends on many factors, including:
- - the progress, timing and scope of our research and development programs;
- - the progress, timing and scope of our preclinical studies and clinical
trials;
- - the time and cost necessary to obtain regulatory approvals;
- - the time and cost necessary to further develop manufacturing processes,
arrange for contract manufacturing or build manufacturing facilities and
obtain the necessary regulatory approvals for those facilities;
- - the time and cost necessary to develop sales, marketing and distribution
capabilities; and
- - any new collaborative, licensing and other commercial relationships that we
may establish.
22
If we do not obtain regulatory approval for our products, we will not be able to
sell our products and the value of our company and our financial results will be
harmed.
We cannot sell or market our drugs without regulatory approval. If we
cannot obtain regulatory approval for our products, the value of our company and
our financial results will be harmed. In the United States, we must obtain
approval from the U.S. Food and Drug Administration, or FDA, for each drug that
we intend to sell. The current status of our products is as follows:
- - VNP20009, TAPET bacteria without an anticancer agent, is currently in human
trials;
- - TAPET, with cytosine deaminase, an enzyme that can activate an inactive
form of an anticancer agent, is currently in human trials;
- - Triapine is currently being evaluated in solid tumors both as a single
agent and in combination with standard therapies. Triapine is also being
evaluated in leukemia which is a blood type (non-solid) cancer. As a
single agent, Triapine is currently in one second phase trial in breast
cancer with three additional second phase trials planned for 2002 in head
and neck, non-small cell lung and prostate cancer. In combination with
other standard therapies, Triapine is currently in three first phase
trials. In leukemia, Triapine is being evaluated in two trials, one of
which is a first phase and the other is a first/second phase
trial; and
- - Human safety trials of VNP40101M have commenced at hospital test sites.
If and when we complete the several phases of clinical testing for each drug
candidate, we will submit our test results to the FDA. FDA review may generally
take up to two years and approval is not assured. Foreign governments also
regulate drugs distributed outside the United States. A delay in obtaining
regulatory approvals for any of our drug candidates will also have a material
adverse effect on our business.
If our drug trials are delayed or achieve unfavorable results, we will not be
able to obtain regulator approvals for our products.
We must conduct extensive testing our of our product candidates before
we can obtain regulatory approval for our products. We need to conduct human
clinical trials. These tests and trials may not achieve favorable results. We
would need to reevaluate any drug that did not test favorably and either alter
the drug or dose, or abandon the drug development project. In such
circumstances, we would not be able to obtain regulatory approval on a timely
basis, if ever.
Factors that can cause delay or termination in our clinical trials
include:
- - slow patient enrollment;
- - long treatment time required to demonstrate safety and effectiveness;
- - lack of sufficient supplies of the product candidate;
- - adverse medical events or side effects in treated patients;
- - lack of effectiveness of the product candidate being tested; and
- - lack of sufficient funds.
23
If our TAPET technology causes unacceptable side effects, we will not be able to
commercialize TAPET.
TAPET uses genetically altered Salmonella bacteria for delivery of
genes or gene products to tumors. The use of bacteria in general, or Salmonella
in particular, to deliver genes or gene products is a new technology, and
existing preclinical and clinical data on the safety and efficacy of this
technology are very limited. Unacceptable side effects may be discovered during
preclinical and clinical testing of our potential products utilizing TAPET.
While certain formulations of TAPET have been tested in limited human clinical
trials, the results of preclinical studies and the limited human clinical trials
performed to date may not be predictive of safety or efficacy in humans.
Possible serious side effects of TAPET include bacterial infections,
particularly the risk of septic shock, a serious and often fatal result of
bacterial infection of the blood. If side effects of TAPET are determined
unacceptable, we will not be able to commercialize TAPET.
If we are found to be infringing on patents or trade secrets owned by others, we
may be forced to cease or alter our drug development efforts, obtain a license
to continue the development or sale of our products and/or pay damages.
Our processes and potential products may conflict with patents that
have been or may be granted to competitors, universities or others, or the trade
secrets of those persons and entities. As the biopharmaceutical industry expands
and more patents are issued, the risk increases that our processes and potential
products may give rise to claims that they infringe the patents or trade secrets
of others. These other persons could bring legal actions against us claiming
damages and seeking to enjoin clinical testing, manufacturing and marketing of
the affected product or process. If any of these actions are successful, in
addition to any potential liability for damages, we could be required to obtain
a license in order to continue to conduct clinical tests, manufacture or market
the affected product or use the affected process. Required licenses may not be
available on acceptable terms, if at all, and the results of litigation are
uncertain. If we become involved in litigation or other proceedings, it could
consume a substantial portion of our financial resources and the efforts of our
personnel.
We rely on confidentiality agreements to protect our trade secrets. If these
agreements are breached by our employees or other parties, our trade secrets may
become known to our competitors.
We rely on trade secrets that we seek to protect through
confidentiality agreements with our employees and other parties. If these
agreements are breached, our competitors may obtain and use our trade secrets to
gain a competitive advantage over us. We may not have any remedies against thse
competitors and any remedies that may be available to us may not be adequate to
protect our business and compensate us for the damaging disclosure. In addition,
we may have to expend resources to protect our interests from possible
infringement by others.
If we fail to recruit and retain key personnel, our research and development
programs may be delayed.
We are highly dependent upon the efforts of our senior management and
scientific personnel, particularly, Alan Kessman, our president, chief executive
officer and director; Mario Sznol, M.D., our vice president, clinical affairs;
Terrence W. Doyle, Ph.D., our vice president of research and
24
development; Bijan Almassian, Ph.D., our vice president of development; and Ivan
King, Ph.D., our vice president of research. There is intense competition in the
biotechnology industry for qualified scientific and technical personnel. Since
our business is very technical and specialized, we need to continue to attract
and retain such people. We may not be able to continue to attract and retain
the qualified personnel necessary for developing our business. We have no key
man insurance policies on any of the officers listed above and we only have
an employment agreement with Mr. Kessman. If we lose the services of our
management and scientific personnel or fail to recruit other scientific and
technical personnel, our research and product development programs would be
significantly and detrimentally affected.
We face intense competition in the market for anticancer products, and if we are
unable to compete successfully, our business will suffer.
Numerous pharmaceutical and biotechnology companies have publicly
announced their intention to develop drugs that target the replication of tumor
cells including, in some instances, the development of agents which target
ribonucleotide reductase, agents which are alkylating agents and agents which
can be described as drug delivery platforms. These companies include, but are
not limited to, Bristol-Myers Squibb Company, Pfizer Inc., Amgen Inc., Genentech
Inc., ImClone Systems Inc., OSI Pharmaceuticals, Inc., Eli Lilly and Co., and
AstraZeneca PLC. These and other large pharmaceuticals companies have
substantially greater financial and other resources and development capabilities
than we do and have substantially greater experience in undertaking preclinical
and clinical testing of products, obtaining regulatory approvals, and
manufacturing and marketing pharmaceutical products. In addition, our
competitors may succeed in obtaining approval for products more rapidly than
us and in developing and commercializing products that are safer and more
effective than those that we propose to develop. The existence of these
products, other products or treatments of which we are not aware or products
or treatments that may be developed in the future may adversely affect the
marketability of our products by rendering them less competitive or obsolete.
In addition to competing with universities and other research institutions in
the development of products, technologies and processes, we may compete with
other companies in acquiring rights to products or technologies from
universities.
If the testing or use of our potential products harms people, we could be
subject to costly and damaging product liability claims.
Our business exposes us to potential product liability risks that are
inherent in the testing, manufacturing and marketing of drug products including,
but not limited to, unacceptable side effects. These risks are particularly
inherent in human trials of our proposed products. Side effects and other
liability risks could give rise to viable product liability claims against us.
While we have obtained insurance coverage for patients enrolled in clinical
trials, we may not be able to maintain this product liability insurance on
acceptable terms, insurance may not provide adequate coverage against potential
liabilities and we may need additional insurance coverage for expanded clinical
trials and commercial activity. As a result, product liability claims, even if
successfully defended, could have a material adverse effect on our business,
financial condition and results of operations.
25
If our corporate partners, licensors, licensees, collaborators at research
institutions and others do not conduct activities in accordance with our
arrangements, our research and development efforts may be delayed.
Our strategy for the research, development and commercialization of our
products entails entering into various arrangements with corporate partners,
licensors, licensees, collaborators at research institutions and others. We
currently depend on the following third parties:
- - Yale University for collaborative research and for technologies that are
licensed by Yale to us.
- - Healthcare facilities in the United States and overseas to perform human
safety trials of our products, including the Albert Einstein College of
Medicine/Montefiore Medical Center, Beth Israel Deaconess Medical Center
and Cleveland Clinical Foundation.
- - National Cancer Institute under a cooperative research and development
agreement for the development of TAPET-based immunotherapies targeted
against cancer.
If the third parties do not conduct activities in accordance with the
arrangements we have with them, our research and development efforts may be
delayed. We may also rely on other collaborative partners to obtain regulatory
approvals and to manufacture and market our products. The amount and timing of
resources to be devoted to these activities by these other parties may not be
within our control.
If Yale University does not conduct research relating to products we would like
to pursue, we may never realize any benefits from our funding provided to Yale.
We had previously agreed to reimburse Yale University, or Yale, for its
costs in connection with certain research projects in an amount equal to
$1.1 million per year. Technology licensed by us from research conducted under
this agreement includes TAPET. This arrangement was restructured effective
October 1, 2000 to provide a gift of $0.7 million to support Yale's research
projects for each of the years ending September 30, 2002 and 2001. In addition,
we provided a gift to Yale of $0.2 million payable in four quarterly
installments beginning April 2001.
Through December 31, 2001, we have paid over $9.2 million in total to
Yale, and we may continue to support Yale's research projects. We generally do
not have the right to control the research that Yale is conducting pursuant to
our agreement, and our funds may not be used to conduct research relating to
products that we would like to pursue. Additionally, if the research being
conducted by Yale results in technologies that Yale has not already licensed or
agreed to license to us, we may need to negotiate additional license agreements
or we may be unable to utilize those technologies.
If environmental laws become stricter in the future, we may face large capital
expenditures in order to comply with environmental laws.
We cannot accurately predict the outcome or timing of future
expenditures that we may be required to expend to comply with comprehensive
federal, state and local environmental laws and regulations. We must comply with
environmental laws that govern, among other things, all emissions, waste water
discharge and solid and hazardous waste disposal, and the remediation of
contamination associated with generation, handling and disposal activities. To
date, we have not incurred significant costs and are not aware of any
significant liabilities associated with our compliance with federal, state and
local laws and regulations. However, environmental laws have changed in recent
years and we may
26
become subject to stricter environmental standards in the future and may face
large capital expenditures to comply with environmental laws. We have limited
capital and are uncertain whether we will be able to pay for significantly large
capital expenditures. Also, future developments, administrative actions or
liabilities relating to environmental matters may have a material adverse effect
on our financial condition or results of operations.
All of our operations are performed under strict environmental and
health safety controls consistent with the Occupational Safety and Health
Administration, the Environmental Protection Agency and the Nuclear Regulatory
Commission regulations. We cannot be certain that we will be able to control all
health and safety problems. If we cannot control those problems, we may be held
liable and may be required to pay the costs of remediation. These liabilities
and costs could be material.
Even if we obtain regulatory approval for our products, we currently lack the
ability and resources to commercialize the products.
If our products are approved for sale by regulatory authorities, we
will need to develop manufacturing and marketing capability or make arrangements
with third parties to manufacture, distribute and sell our products. We do not
currently have and are not seeking arrangements for manufacturing or marketing
products on a commercial basis.
The rights that have been and may in the future be granted to our stockholders
may allow our Board and management to deter a potential acquisition in which the
Board and management are to be replaced.
We have in place a stockholder rights plan, or "poison pill", which
enables our board of directors to issue rights to purchase common stock when
someone acquires 20% or more of the outstanding shares of our common stock. As a
result of the plan, anyone wishing to take over the company would most likely be
forced to negotiate a transaction with our Board and management in order not to
trigger the pill. The need to negotiate with the Board or management could
frustrate a proposed takeover particularly where the Board and management wish
to remain entrenched. This would prevent our stockholders from participating in
a takeover or tender offer, which might be of substantial value to them.
There may be an adverse effect on the market price of our common stock as a
result of shares being available for sale in the future.
Sales of a substantial amount of common stock in the public market, or
the perception that these sales may occur, could adversely affect the market
price of our common stock prevailing from time to time. This could also impair
our ability to raise additional capital through the sale of our equity
securities. We had approximately 28.9 million shares of common stock outstanding
as of March 19, 2002. Options and warrants to purchase approximately 1.6 million
shares were exercisable at December 31, 2001 and the remaining options to
purchase approximately 2.3 million shares become exercisable at various times
through 2005.
27
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
We account for investments in debt and equity securities
in accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("SFAS
115"). Our investments are treated as available-for-sale under SFAS 115.
Our exposure to market risk is primarily confined to our cash
equivalents and investments, which mature in twelve months or less. Investments
in fixed-rate, interest-earning instruments carry a degree of interest rate
risk. Fixed rate securities may have their fair market value adversely impacted
due to a rise in interest rates. Due in part to these factors, our future
investment income may fall short of expectations due to changes in interest
rates or we may suffer losses in principal if forced to sell securities that
have declined in market value due to changes in interest rates. Our investments
are held for purposes other than trading and we believe that we currently have
no material adverse market risk exposure.
28
ITEM 8. Financial Statements and Supplementary Data
Report of Independent Auditors
The Board of Directors and Shareholders
Vion Pharmaceuticals, Inc.
We have audited the accompanying balance sheet of Vion Pharmaceuticals, Inc. (a
development stage company) as of December 31, 2001 and 2000, and the related
statements of operations, changes in shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001 and the period
from May 1, 1994 (inception) to December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vion Pharmaceuticals, Inc. at
December 31, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001 and the period
from May 1, 1994 (inception) to December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Stamford, Connecticut
January 17, 2002
29
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Balance Sheet
December 31,
(In thousands, except share and per share data) 2001 2000
- ------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 6,645 $ 6,197
Short-term investments 15,999 18,160
--------------------
Total cash, cash equivalents and short-term investments 22,644 24,357
Interest receivable 193 300
Accounts receivable 54 145
Other current assets 130 251
--------------------
Total current assets 23,021 25,053
Property and equipment, net 550 577
Security deposits 30 30
--------------------
Total assets $23,601 $25,660
====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 2,503 $ 2,997
Obligation under capital leases -- 6
----------------------
Total current liabilities 2,503 3,003
----------------------
Redeemable Preferred Stock:
5% convertible preferred stock Series 1998, $0.01 par value, authorized:
15,000 shares; issued and outstanding: none - -
Shareholders' Equity:
Preferred stock, $0.01 par value, authorized: 5,000,000 shares;
issued and outstanding: none - -
Common stock, $0.01 par value, authorized: 100,000,000 shares;
issued and outstanding: 28,873,373 and 26,167,642 shares
at December 31, 2001 and 2000, respectively 289 262
Additional paid-in capital 112,377 100,027
Accumulated other comprehensive (loss) income (6) 120
Accumulated deficit (91,562) (77,752)
--------------------
21,098 22,657
--------------------
Total liabilities and shareholders' equity $23,601 $25,660
====================
The accompanying notes are an integral part of these financial statements.
30
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Statement of Operations
For the Period
from May 1, 1994
(Inception)
For the Year Ended through
December 31, December 31,
(In thousands, except share and per share data) 2001 2000 1999 2001
- ----------------------------------------------------------------------------------------------------------------------------
Revenues:
Contract research grants $ 481 $ 787 $ 336 $ 2,013
Technology license fees 169 78 155 4,403
Laboratory support services - 82 35 117
Research support - - 2,628 5,498
---------------------------------------------------------------------------
Total revenues 650 947 3,154 12,031
---------------------------------------------------------------------------
Operating expenses:
Research and development 8,638 9,568 7,387 52,959
Clinical trials 3,891 3,259 4,109 16,470
---------------------------------------------------------------------------
Total research and development 12,529 12,827 11,496 69,429
General and administrative 3,135 4,251 2,693 19,465
---------------------------------------------------------------------------
Total operating expenses 15,664 17,078 14,189 88,894
Interest income (1,204) (1,341) (301) (4,253)
Interest expense - 13 35 208
---------------------------------------------------------------------------
Net loss (13,810) (14,803) (10,769) (72,818)
Preferred stock dividends and accretion - (606) (710) (18,489)
---------------------------------------------------------------------------
Loss applicable to common shareholders
$(13,810) $(15,409) $(11,479) $(91,307)
===========================================================================
Basic and diluted loss applicable to common
shareholders per share $(0.51) $(0.64) $(0.74)
---------------------------------------------------------------------------
Weighted-average number of shares of common stock
outstanding 27,212,034 24,089,164 15,543,701
---------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
31
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Statement of Changes in Shareholders' Equity
Class A Class B
Convertible Convertible
Preferred Stock Preferred Stock Common Stock
(In thousands, except share and per -----------------------------------------------------------
share data) Shares Amount Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------
Common stock issued for cash - July 1994 - $ - - $- 2,693,244 $27
Common stock issued for services -
August 1994 159,304 2
Net loss
-----------------------------------------------------------
Balance at December 31, 1994 - $ - - $- 2,852,548 $29
-----------------------------------------------------------
Stock options issued for compensation -
February 1995
Reverse acquisition of MelaRx
Pharmaceuticals, Inc. - April 1995 2,000,000 20
Shares repurchased pursuant to
employment agreements - April 1995 (274,859) (3)
Private placement of common stock -
April 1995 76,349 -
Warrants issued with bridge notes -
April 1995
Initial public offering of units of one
common share, one Class A warrant
and one Class B warrant at $4.00 per
unit - August 1995 and September 1995 2,875,000 29
Issuance of common stock 1,250 -
Receipts from sale of unit purchase
option
Net loss
-----------------------------------------------------------
Balance at December 31, 1995 - $ - - $- 7,530,288 $75
-----------------------------------------------------------
Issuance of Class A convertible
preferred stock 1,250,000 13
Conversion of Class A convertible
preferred stock (164,970) (1) 458,255 5
Class A convertible preferred stock
dividend 21,998 -
Issuance of common stock 29,418 -
Compensation associated with stock
option grants
Amortization of deferred compensation
Net loss
-----------------------------------------------------------
Balance at December 31, 1996 1,107,028 $12 - $- 8,017,961 $80
-----------------------------------------------------------
Conversion of Class A convertible
preferred stock (396,988) (4)