UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-K

 

(Mark One)

ý           Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2003.

 

Or

 

o           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:  000-21088

 

VICAL INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:  (858) 646-1100

 

Securities registered pursuant to Section 12(b) of the Act:  None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, $0.01 par value

(Title of Class)

 

 

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 ý   No o

 

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. ý

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes ý   No o

 

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the last sale price of the Common Stock reported on the National Association of Securities Dealers Automated Quotation National Market System on June 30, 2003, was approximately $78,930,202. Shares of Common Stock held by each officer and director and by each person who owns 10% or more of the outstanding Common Stock of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

The number of shares of Common Stock outstanding as of March 1, 2004, was 20,095,244.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Specified portions of our Definitive Proxy Statement to be filed with the Securities and Exchange Commission, or SEC, pursuant to Regulation 14A in connection with the solicitation of proxies for our 2004 Annual Meeting of Stockholders to be held on May 10, 2004, are hereby incorporated by reference into Part III of this report.

 

FORWARD-LOOKING STATEMENTS

 

The statements incorporated by reference or contained in this report discuss our future expectations, contain projections of our results of operations or financial condition, and include other “forward-looking” information within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Our actual results may differ materially from those expressed in forward-looking statements made or incorporated by reference in this report. Forward-looking statements that express our beliefs, plans, objectives or assumptions, or that describe future events or performance, may involve estimates, assumptions, risks and uncertainties. Therefore, our actual results and performance may differ materially from those expressed in the forward-looking statements. Forward-looking statements often, although not always, include words or phrases such as the following, or the negative of such words, or other comparable terminology:

 

•      “Will likely result,”

•      “Are expected to,”

•      “Will continue,”

•      “Is anticipated,”

•      “Estimate,”

•      “Believe,”

•      “Predict,”

•      “Potential,”

•      “Intends,”

•      “Plans,”

•      “Projection,” and

•      “Outlook.”

 

You should not unduly rely on forward-looking statements contained or incorporated by reference in this report. Actual results or outcomes may differ materially from those predicted in our forward-looking statements due to the risks and uncertainties inherent in our business, including risks and uncertainties related to:

 

•      Progress of our preclinical and clinical product development programs,

•      Clinical trial results,

•      Obtaining and maintaining regulatory approval,

•      Market acceptance of and continuing demand for our products,

•      The attainment and defense of patent protection for any of these products,

•      The impact of competitive products, pricing and reimbursement policies,

•      Our ability to obtain additional financing to support our operations,

•      The continuation of our corporate collaborations and licenses,

•      Our ability to enter into new corporate collaborations and licenses,

•      Changing market conditions, and

•      Other risks detailed below.

 

You should read and interpret any forward-looking statements together with the following documents:

 

•      Our Quarterly Reports on Form 10-Q,

•      The risk factors contained in this report under the caption “Additional Business Risks,” and

•      Our other filings with the SEC.

 

Any forward-looking statement speaks only as of the date on which that statement is made. We disclaim any duty to update any forward-looking statement to reflect events or circumstances that occur after the date on which such statement is made.

 

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PART I

 

ITEM 1.

BUSINESS

 

Overview

 

We were incorporated in Delaware in 1987. We research and develop biopharmaceutical products based on our patented DNA delivery technologies for the prevention and treatment of serious or life-threatening diseases. In addition, we have gained access to enhancing technologies through licensing and collaborative agreements. We believe the following areas of research offer the greatest potential for our product development efforts:

 

•      Vaccines for use in high-risk populations for infectious disease targets for which there are significant U.S. needs,

•      Vaccines for general pediatric or adult populations for infectious disease applications for which a challenge model or accepted surrogate marker are available, and

•      Cancer vaccines or immunotherapies which complement our existing programs and core expertise.

 

For opportunities outside these areas, we plan to continue leveraging our patented technology through licensing and collaborations. In addition, we plan to use our expertise, infrastructure, and financial strength to explore in-licensing or acquisition opportunities.

 

We have established relationships through licensing our technology to a number of commercial entities, including:

 

•      Merck & Co., Inc.,

•      Two divisions of Aventis S.A.:

•      Aventis Pasteur, and

•      Aventis Pharma S.A.,

•      Merial,

•      Aqua Health Ltd., an affiliate of Novartis Animal Health Inc.

•      Invitrogen Corporation,

•      Human Genome Sciences, Inc., and

•      Corautus Genetics Inc., formerly Vascular Genetics Inc.

 

We have also licensed complementary technologies from:

 

•      The University of Michigan,

•      CytRx Corporation,

•      Genetronics Biomedical Corporation,

•      The National Institutes of Health,

•      The U.S. Centers for Disease Control and Prevention,

•      The Ohio State University, and

•      The City of Hope National Medical Center.

 

Our Core Technology

 

The key discovery leading to our patented core technology was that muscle tissues can take up polynucleotide genetic material, such as DNA or RNA, directly, without the use of viral components or other delivery vehicles, and subsequently express the proteins encoded by the genetic material for periods ranging from weeks to more than a year. We often describe our approach as “DNA delivery technology” because it typically involves designing and constructing closed loops of DNA called plasmids. These plasmids contain a DNA segment encoding the protein of interest, as well as short segments of DNA that control protein expression. We are able to use uniform methods of fermentation and processing that are

 

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applicable to all plasmids. This could result in faster development times than technologies that require development of product-specific manufacturing processes.

 

Since the initial discovery of our DNA delivery technology, our researchers have improved the design of our plasmids to provide increases in efficiency of gene expression and immunogenicity. In addition, we are developing other formulation and delivery technologies, including the use of lipid molecules, synthetic polymers called poloxamers, and other approaches, to enhance DNA expression or increase the immune response in DNA vaccine applications. We own broad rights to certain non-viral polynucleotide delivery technologies through our series of core patents. Benefits of our DNA delivery technology may include the following, which may enable us to offer novel treatment alternatives for diseases that are currently poorly addressed:

 

•      Broad Applicability. Our DNA delivery technology may be useful in developing DNA vaccines for infectious diseases, in which the expressed protein induces an immune response; novel therapies for cancer, in which the expressed protein is an immune system stimulant or cancer-killing agent; and DNA therapeutic protein delivery, in which the expressed protein is a therapeutic agent;

 

•      Convenience. Our DNA-based biopharmaceutical product candidates are intended to be administered on an outpatient basis;

 

•      Safety. Our product candidates contain no viral components that may cause unwanted immune responses, infections, or malignant and permanent changes in the cell’s genetic makeup;

 

•      Repeat Administration. Our product candidates contain no viral components that may preclude multiple dosing with a single product or use in multiple products;

 

•      Ease of Manufacturing. Our product candidates are manufactured using straightforward fermentation and purification procedures; and

 

•      Cost-Effectiveness. Our DNA delivery technology may be more cost-effective than other approaches. It may also cause fewer potential side effects, which itself may reduce per patient treatment costs.

 

Business Strategy

 

There are four basic elements to our business strategy:

 

Develop Products Independently

 

We currently focus our resources on the independent development of DNA vaccines for infectious diseases and cancer therapeutics. We intend to retain significant participation in the commercialization of our proprietary DNA vaccine and cancer products, although we may choose to enlist the support of marketing partners to accelerate market penetration.

 

Vaccines. Vaccines are perceived by government and medical communities as an efficient and cost-effective means of healthcare. According to the U.S. Centers for Disease Control and Prevention, or CDC, “Vaccines are among the very best protections we have against infectious diseases.” We believe our technology may lead to the development of novel preventive or therapeutic vaccines for infectious disease targets because:

 

•      DNA vaccines may help combat diseases for which conventional vaccine methods have been unsuccessful;

 

•      DNA vaccines may be safer than conventional vaccines; and

 

•      DNA vaccines use straightforward manufacturing processes that may be simpler, more cost-efficient, and more generally applicable across a range of products than conventional vaccine production methods.

 

Cancer. In the cancer area, we have focused our resources on the development of Allovectin-7^® as a potential treatment for metastatic melanoma, an aggressive form of skin cancer, to best apply the expertise and relationships we have established through prior development and testing in this area. We have no other potential cancer products currently under independent clinical development, but we are exploring additional opportunities.

 

Enhance and Expand Our Technologies

 

We are actively pursuing the refinement of our plasmids and formulations, the evaluation of potential enhancements to our core technologies and the exploration of additional DNA delivery technologies. We are developing future product

 

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candidates based on these technologies through preclinical and clinical testing to determine their safety and effectiveness. We also seek to develop additional applications for our technologies by testing new approaches to disease control or prevention. These efforts could lead to further independent product development or additional licensing opportunities. In addition, we continually evaluate compatible technologies or products that may be of potential interest for in-licensing or acquisition. We license intellectual property from companies holding complementary technologies in order to leverage the potential of our own DNA delivery technology and to further the discovery of innovative new therapies for internal development.

 

Expand the Applications of Our Technologies Through Strategic Collaborations

 

We collaborate with major pharmaceutical and biotechnology companies and government agencies, providing us access to complementary technologies or greater resources. These collaborations provide us with mutually beneficial opportunities to expand our product pipeline and serve significant unmet medical needs. We license our intellectual property to other companies in order to leverage our technologies for applications that may not be appropriate for our independent product development efforts.

 

Contract Manufacturing

 

In addition, we pursue contract manufacturing opportunities to leverage our infrastructure and expertise in plasmid manufacturing, and to provide revenues that contribute to our independent research and development efforts. We currently have contract manufacturing agreements with the Dale and Betty Bumpers Vaccine Research Center, or VRC, of the National Institutes of Health, or NIH, and the International AIDS Vaccine Initiative, or IAVI.

 

Product Development

 

We are focused on the development of biopharmaceutical product candidates based on our patented DNA delivery technology. We, together with our licensees and collaborators, are currently developing a number of vaccine and therapeutic protein product candidates for the prevention or treatment of infectious diseases, cancer, and cardiovascular diseases. Our current independent development focus is on novel DNA vaccines for cytomegalovirus, or CMV, and anthrax, as well as our cancer immunotherapeutic, Allovectin-7^®. The table below summarizes our independent, collaborative and out-licensed product development programs.

 

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Product Area		Project Target and Indication(s)		Development Status(1)		Development Rights(3)
INFECTIOUS DISEASES
Infectious disease vaccines		Plasmodium falciparum (malaria)		Phase 1/2		Vical
		Cytomegalovirus		Preclinical		Vical
		Bacillus anthracis (anthrax)		Preclinical		Vical
		Ebola		Phase 1		Vical/NIH
		West Nile Virus		Preclinical		Vical/NIH
		HIV – preventive		Phase 1		Merck & Co., Inc.
		HIV – therapeutic		Phase 1		Merck & Co., Inc.
		Hepatitis B virus – preventive		Research		Merck & Co., Inc.
		Hepatitis B virus – therapeutic		Research		Merck & Co., Inc.
		Hepatitis C virus – preventive		Research		Merck & Co., Inc.
CANCER
Immunotherapeutic vaccine		High–dose Allovectin–7® for metastatic melanoma		Phase 2		Vical
Tumor-associated antigen		Unspecified cancer(2)		Research		Aventis Pasteur
therapeutic vaccines		Unspecified cancer(2)		Research		Merck & Co., Inc.
CARDIOVASCULAR
Angiogenic growth factors		VEGF-2		Phase 2		Corautus Genetics Inc.
		FGF-1		Phase 2		Gencell S.A., a subsidiary of Aventis Pharma S.A.
VETERINARY
Preventive vaccines		Various undisclosed(2)		Research-Clinical		Merial
		Undisclosed(2)		Clinical		Aqua Health Ltd.

 

(1)   “Research” indicates exploration and/or evaluation of a potential product candidate in a nonclinical setting. “Preclinical” indicates that a specific product candidate in a nonclinical setting has shown functional activity that is relevant to a targeted medical need, and is undergoing toxicology testing in preparation for filing an Investigational New Drug, or IND, application. “Phase 1” clinical trials mark the first time a new drug or treatment is administered to humans and are normally conducted to determine the safety profile of a new drug. “Phase 2” clinical trials are conducted in order to determine preliminary effectiveness, or efficacy, optimal dosage, and to confirm the safety profile. At times, a single trial may incorporate elements from different phases of development. An example might be a trial designed to determine both safety and initial efficacy. Such a trial may be referred to as a “Phase 1/2” clinical trial. For non-human indications, “Clinical” indicates testing in the target species.

(2)   Pursuant to our collaborative agreements, we are bound by confidentiality obligations to our collaborators that prevent us from publicly disclosing these targets and indications unless such information has been made generally available to the public. Additionally, some project targets and indications cannot currently be disclosed because they have not yet been selected by our collaborators.

(3)   See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Other Matters” for costs associated with Vical independent product development programs.

 

Cancer Therapies

 

Cancer is a disease of uncontrolled cell growth. When detected early and still confined to a single location, surgery or irradiation can often be curative. However, neither surgery nor irradiation is considered curative for cancer that has spread throughout the body. Chemotherapy can sometimes treat cancer that has spread throughout the body; however, a number of non-cancerous cells, such as bone marrow cells, are also highly susceptible to chemotherapy. As a result, chemotherapy often has fairly significant side effects. Finally, because each of these treatments only acts for a short period of time, it is common to see cancer return after apparently successful treatment.

 

Immunotherapy, using the patient’s own immune system, may have advantages over surgery, irradiation, and chemotherapy in the treatment of cancer. Many cancers appear to have developed the ability to “hide” from the immune system. A treatment that can augment the immune response against tumor cells by making the cancer more “visible” to the immune system would likely represent a significant improvement in cancer therapy. Immune-enhancing proteins such as

 

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interleukin-2, or IL-2, and interferon-alpha, or IFN-α, have shown encouraging results. However, these agents often require frequent doses that regularly result in severe side effects.

 

We have researched delivery enhancements that may complement our core DNA delivery technology. Our current clinical-stage approach consists of injecting immune stimulating segments of DNA complexed with a cationic lipid-based delivery system, DMRIE/DOPE, directly into malignant tumors. Following injection, the lipid system also facilitates uptake of the DNA into tumor cells, where it directs the production of protein.

 

In addition, cancer therapies using non-viral DNA delivery may offer an added margin of safety compared to viral-based delivery, as no viral particles are contained in the formulation. The ease of manufacture, routine treatment administration performed in the clinic with minimal discomfort, and the excellent toxicity profile suggest that cancer therapies using non-viral DNA delivery may offer advantages over current modalities of therapy.

 

Preclinical studies in animals have demonstrated the safety and potential efficacy of this approach. Subsequently, in human studies, a very low incidence of treatment-related adverse events has been observed. Our lead non-viral cancer immunotherapeutic under development is Allovectin-7^®, reviewed below.

 

Allovectin-7^®

 

Allovectin-7^® is a DNA plasmid/lipid complex containing the DNA sequences encoding HLA-B7 and β2 microglobulin, which together form a Class I Major Histocompatibility Complex, or MHC-I antigen. Injection of Allovectin-7^® directly into tumors, or intratumoral injection, may augment the immune response to both local and metastatic tumors by one or more mechanisms. In HLA-B7 negative recipients, a T-cell response may be initiated by the introduction of a foreign HLA, similar to that observed in tissue transplant rejections. In HLA-B7 positive recipients, enhanced HLA-B7 and b2 microglobulin surface expression by injected tumor cells could increase antigen presentation to tumor specific T-cells. In any recipient, a pro-inflammatory anti-tumor response may occur following intratumoral injection of the plasmid DNA/lipid complex, as demonstrated in preclinical animal tumor models.

 

Metastatic Melanoma. The American Cancer Society, estimates approximately 55,100 new diagnoses of, and 7,910 deaths from, melanoma in 2004 in the United States. Currently, there are no consistently effective therapies for advanced cases of malignant melanoma where the cancer has spread to other parts of the body, or metastasized. Treatment for these patients normally includes a combination of chemotherapy, radiation therapy, and surgery. In patients with metastatic melanoma, median survival typically ranges from six to eleven months. The toxicity associated with U.S. Food and Drug Administration, or FDA, approved treatments such as IL-2 or IFN-α is often significant, resulting in serious or life-threatening side effects in many of the patients treated.

 

In February 2001, we began a high-dose Phase 2 trial evaluating the Allovectin-7^® gene-based immunotherapeutic for patients with Stage III or IV melanoma, who have few other treatment options. We presented unaudited data at the annual meeting of the American Society of Clinical Oncology, or ASCO, in May 2003 from interim analyses performed in early March 2003 for the first 91 patients in the high-dose cohort, indicating an objective response rate of 13 percent with continued excellent safety and tolerability. An update in July 2003 yielded an estimated median duration of response of at least 6.4 months. Patient enrollment was completed in July 2003 with a total of 133 patients, including 6 in an initial dose-escalation cohort and 127 in the high-dose cohort.

 

We continue to be encouraged by the results in our high-dose Allovectin-7^® program. We assembled a panel of leading melanoma experts with both clinical and regulatory expertise to provide guidance on the Allovectin-7^® program. This panel reviewed the safety and efficacy data from our high-dose and low-dose trials, including individual patient histories of the responding high-dose patients. Based on this review, we decided to seek FDA guidance on the potential for accelerated approval of Allovectin-7^®.

 

We have initiated discussions with the FDA regarding whether the results from our high-dose Phase 2 trial could potentially support accelerated approval for marketing Allovectin-7^® for use in certain patients with recurrent and/or otherwise treatment-intolerant metastatic melanoma. We expect these discussions will lead to two formal End-of-Phase 2, or EOP2, meetings shortly, but in any event within the next 60 days. The Product EOP2 meeting would focus on manufacturing and other product-related topics. The Clinical EOP2 meeting would focus on clinical and non-clinical data supporting claims of efficacy and safety. In preparation for the Clinical EOP2 meeting, we took a snapshot, in November 2003, of the efficacy data from the complete high-dose cohort after all enrolled patients had an opportunity to complete two cycles of Allovectin-7^® therapy.

 

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Based on the outcome of these two meetings, by the end of the second quarter of 2004, we expect to finalize our approach to seeking market approval of Allovectin-7^®. Key clinical data on the full high-dose cohort are expected to be presented in a scientific meeting in June 2004.

 

Out-licensing of Cancer Targets

 

Details of our collaborations regarding cancer targets with Aventis Pasteur and Merck & Co., Inc., or Merck, can be found in “Collaboration and Licensing Agreements—Corporate Collaborators—Out-licensing.”

 

DNA Vaccines for Infectious Diseases

 

DNA vaccines use portions of the genetic code of a pathogen to cause the host to produce proteins of the pathogen that may induce an immune response. This method potentially offers superior safety, ease and reliability of manufacturing, as well as convenient storage and handling characteristics, compared with conventional vaccines that use live, weakened, or dead pathogens to produce an immune response. DNA vaccines have the ability to induce potent T-cell responses against target pathogens as well as to trigger production of antibodies. Over the past decade, many scientific publications have documented the effectiveness of DNA vaccines in contributing to immune responses in dozens of species, including fish, nonhuman primates and humans.

 

Vaccines are generally recognized as the most cost-effective approach for infectious disease healthcare. However, the technical limitations of conventional vaccine approaches have constrained the development of effective vaccines for many diseases. Development of vaccines based on conventional methods requires significant infrastructure in research and manufacturing. In addition, the safety risks associated with conventional vaccines may offset the potential benefits. We believe our potential vaccine products should be simpler to manufacture than vaccines made using chemical conjugation of polysaccharides and protein carriers or protein purification and refolding techniques involving mammalian, avian or insect cell, or egg-based, culture procedures and live viruses. In addition, our DNA delivery technology may accelerate certain aspects of vaccine product development such as nonclinical evaluation and manufacturing, and has demonstrated a favorable safety profile.

 

In the broader vaccine marketplace, it is important to note a changing dynamic. Traditionally, vaccines have been predominantly focused on the pediatric market, intended to protect children from diseases that could cause them serious harm. Today, there is a growing interest in vaccines against diseases that may affect adolescents and adults, which include both sexually transmitted diseases and infections that strike opportunistically, such as during pregnancy or in immunocompromised individuals, including the geriatric population. We believe our technology, because of its safety and development timeline advantages, could be ideally suited for the development of this new generation of vaccines.

 

The selection of targets for our infectious disease programs is driven by three key criteria:  the complexity of the product development program, competition, and commercial opportunities.

 

Cytomegalovirus

 

In February 2003, we announced our first independent development program focused on infectious diseases, a DNA-based immunotherapeutic vaccine against cytomegalovirus, or CMV. Currently, there is no approved vaccine or even a late-stage vaccine development program for CMV.

 

The Institute of Medicine, or IOM, of the National Academy of Sciences estimated the cost of treating the consequences of CMV infection in the United States at more than $4 billion per year in a 1999 report, and placed a CMV vaccine in its first priority category on the basis of cost-effectiveness. Our initial focus on the transplantation indication should allow proof of concept that could then lead to the opportunity to develop a CMV vaccine for other groups such as immunocompromised individuals and women of reproductive age.

 

Our CMV immunotherapeutic vaccine program is based on:

 

•      CMV genes that encode highly immunogenic proteins associated with protective antibody and cellular immune responses,

 

•      Our DNA vaccine technologies that have the ability to induce potent cellular immune responses and trigger production of antibodies without the safety concerns that conventional attenuated vaccines have posed for immunocompromised patients, and

 

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•      A focused clinical development plan that is designed to allow us to quickly establish proof of concept in transplant patients.

 

The initial clinical development plan includes vaccination of both donors and recipients in hematopoietic cell transplants, including bone marrow transplants. We made significant preclinical progress in 2003 with our CMV vaccine and expect to begin clinical testing in the next few months in support of an initial application in hematopoietic cell transplant patients. The majority of the required preclinical testing has been completed; a bivalent vaccine encoding two known immunogenic CMV proteins has been formulated with a poloxamer; and clinical supplies have been manufactured. We have established working relationships with some of the country’s leading transplant centers, which have contributed to trial design and may participate in upcoming CMV vaccine trials. We also have secured intellectual property rights to the selected gene sequences.

 

Our lead vaccine configuration consists of two plasmid constructs, one encoding the surface antigen, glycoprotein B, and the other a potent T-cell target, phosphoprotein 65, or pp65. These constructs have been tested individually and in combination in our own laboratories. We have verified in preclinical studies that these immunogens elicit potent immune responses, generating both antibodies and T-cell responses.